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My point of view on the corn market

4 Apr 2018,

Today we look at corn. Last week the price has ended very wildly. A lot of spread traders, including me, are holding bear spreads, so I’m going to describe my current situation today.

 

Technical analysis

The last trading day before Easter the price went up and closed over 396 cents. However, our Spread Report customers were not surprised by these prices. In the last report I have described exactly this scenario when corn might look again closer to $ 4. Either it will create a lower local maximum or a double peak. So, I’m not surprised.

Prospective plantings report

The reason for this rapid growth was the report of expected planted area of corn for further harvest. The message was very negative, respectively positively for the price. It is not only expected that less areas will be planted compared to the last year, but this prediction is also lower compared to market expectations. Please see the specific numbers:

Published estimate of planted areas for next harvest: 88 million acres

Average expectation before release: 89.42 million acres

Planted area of ​​the previous harvest: 90.167 million acres

 

Impact on the market

As can be seen from the price of corn, market has responded to this information in the short term with a strong growth. But I think the reaction was too violent. The impact of these reports on the market is limited in this part of the year. It is only an estimate that has more a long-term impact. This is not so bad thing, such as unfavorable weather.

Grain prices are very low in the long run. Therefore, we might expect that the planted areas will be decrease. So, it is not such big surprise for the market, and therefore I am rather expecting a decreasing panic.

It is also important not to focus too much on one single information, but to perceive the market as a whole. There is one more substantial fundament for the price, that has exactly the opposite meaning. I am referring to the introduction of customs fees on imported pork into China. First, it caused a sharp drop in pork prices, but it also has an impact on corn. Corn is the main source for feeding pigs. And this step can push the corn price down.

COT analysis

The situation on the corn market is therefore not just black and white. At this point it is hard to decide which fundament will be dominant. At this stage, it is unnecessary to follow these fundamentals too much in details. We can hardly filter the noise from reality. It’s not as important to me what farmers say, but what they actually do. Their current behavior is tracked through a COT report, which clearly shows that farmers are heavily hedging themselves on current prices. Prices are interesting for them, and it is paying off to hedge their future production.

For the complete COT analysis, the COT index of the large speculators is also added. Their positions are reversed, but the conclusion is the same as for the group of hedgers.

From the perspective of COT analysis, the situation is the same – the market is still overbought. The following COT report will be more interesting as it will already take into account the new estimate of planted areas.

Market Structure

It is important to monitor the spreads, respectively the development of the market structure. If the contango decrease would be too heavy, it would be very negative, and it would indicate tensions in the physical market. This is something I would be very sensitive to. It would be a signal for me to close early my losing position. If I will not see anything like this, I will remain calm and will not change the point of view from day to day.

My position

The rise in corn prices has caused the fall of the ZCN19-ZCZ18 bear spread, which I have been holding for some time. As part of this decline, I extended my position at 14.25 cents. But I admit that I did not even look much at the markets before Easter. My pending order that I had set up on the platform long time ago has been opened. Of course, it could have been opened at a better price. Looking at the daily chart, my entry does not look so bad (the green line on the chart below). Besides, you cannot guess the price bottom precisely on a cent. So, I’m happy.

Summary

Despite the estimate of planted areas was negative, I do not consider it a disaster. COT analysis, technical analysis and market structure are so far ok. In addition, this event gave us the opportunity to buy bear spread at even better prices.

The last chart is the analysis of storage costs. In short, I’ll just explain that we see the partial share of the spread compare to full carry. It is beautiful visible how the spread with the last drop in the price gets into a really underestimated area.

It is also not excluded that the corn will continue in further growth. So please take this analysis as my subjective point of view. It can not be taken as an investment recommendation.

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