Weekly Corn Market Update 02/12/21
December 2021 (Dec21) corn futures (the benchmark for 2021 corn production) finished the week lower by 3.00-cents (~0.66%), settling at $4.4875/bushel and posting their smallest absolute change since the week ending 12/11/20. This week's price action took place in a 21.00-cent (~4.65%) range. All of this week's trading took place within the unremarkable bands we published last week.
Our corn demand index was up ~2.08% this week, outperforming Dec21 corn futures for the second straight week, indicating that new crop corn could have some catching up to do. See the chart below. Our concerns over COVID-19 and executive branch policy remain. We believe these factors will continue to provide potential sources of volatility for the foreseeable future. They are of particular concern where they might impact U.S. and Chinese trade relations. The USDA released its monthly WASDE report on Tuesday. Some short-term convulsions notwithstanding, there was little impact on the market. Next week Thursday and Friday, the USDA hosts its annual Agricultural Outlook Forum - which will give us a peek at their expectations for 2021 production.
Technically speaking, while we are not ready to call the uptrend dead, the chart took some severe damage this week. On Monday and Tuesday, Dec21 saw a failed breakout from the rising wedge we mentioned last week. After forming a double-top, they reversed course and broke down from the rising wedge pattern. Time will tell if the uptrend remains intact. Though, this week's action makes us more concerned about sideways or down-trending markets. Most daily and weekly momentum indicators are in neutral territory, though some weekly indicators remain near overbought levels. We still would not be surprised by a pullback to the $4.10-$4.12/bushel range.
Implied volatility was lower in almost all new crop expirations for the second straight week. Again, the front months took the worst damage, with short-dated March collapsing 5.32%. Despite there only being four days until expiration, we consider short-dated March options cheap at these levels, especially given the USDA's forum next Thursday and Friday. Unfortunately, these inexpensive options do not provide hedgers with much time to work. Options trades of this duration are likely to have highly variable returns, a factor that requires small bets. Reasonable values for long term hedgers are still challenging to find. Opportunistic spreading and careful position management remain virtual necessities to maintain the flexibility needed to manage production uncertainty and volatility risk. The volatility spread from Dec21 to Mar22 options narrowed this week but remains somewhat attractive at these levels. It still may be tricky to execute this spread favorably, given the liquidity in the Mar22 expiration. Over the past two-to-three weeks, a consistent bid for the Jul22 $4.00/bushel puts has kept long-term implied volatility firm. Open interest in these puts has grown to nearly 4,000 contracts since 1/28. See the chart below for a comparison of our closing at-the-money model volatilities for this week and last.
Looking ahead to next week's holiday-shortened trading in Dec21 corn futures, we would consider movement within the $4.3900-$4.5850 per bushel range to be unremarkable. Notable moves would extend to the $4.2200-$4.7550 per bushel range. Price action beyond that would be extreme. You will find a chart comparing these levels to the corresponding weekly price action below. Be sure to visit our Twitter page to vote in the poll we hold there each week. While you are there, please give us a follow.
The Spring Price for crop insurance continued accumulating this week. With just over half of the observations collected, the average is currently $4.5125. The distribution for the Fall Price shifted slightly lower due to the selloff. It also narrowed due to decreases in implied volatility. See below for distribution and cumulative probability charts for Fall crop insurance prices and a chart highlighting the distribution's changes.
We continued tiptoeing into hedges for our Quartzite Precision Marketing customers this week. They continued making regular forward sales with their local elevators. We have continued looking for favorable option spreads to create a flexible portfolio without too much exposure to the still high implied volatility levels. We generally favor the simple over the complex but elevated implied volatilities this season make simplicity a challenge. If you are interested in learning more about how we plan to navigate this season's challenges, please give us a call.
Thanks for taking the time to read. We look forward to your questions and feedback. Please feel free to contact us via our contact form, Facebook, Twitter, email, or phone at (970)294-1379. Thanks again. Have a great week.
It's time again for our weekly #corn #market poll. Cast your vote, then head over to read our Weekly Corn Market Update:https://t.co/LvLe2xv9ql
— Quartzite Risk Management LLC (@QuartziteRMLLC) February 13, 2021
We think the following scenarios are equally likely next week, what do you think?
Will Dec21 corn #futures settle:
Weekly Price Levels and Corn Demand Index
As a reminder, the Quartzite Risk Management Corn Demand Index references the weekly change in April 2022 futures for Crude Oil, Live Cattle and Lean Hogs. We weigh the percentage change in those contracts and compute the index's percentage change. Crude Oil accounts for 50% of the index, and Live Cattle and Lean Hogs each make up 25%. To create the chart, we started the index at the Dec21 corn futures settlement on 11/20/20; then added or subtracted the index's weekly percentage change. We want to add a few warnings. First, there are only a handful of data points - not much to go on. Second, the index references relatively illiquid markets - making any strategy based on it challenging to execute. Third, we expect divergences to increase as we get into the growing season when the corn market will likely look more toward supply for its direction. In short, we would not attempt to trade on this information without much more data, nor would we recommend anyone else does.
