New crop corn futures are off 15% YTD and prices are 23% below their September 7th highs. I do not like picking bottoms, but I think we are close enough to wade into a bullish trade. December 13' futures traded within 3 cents of contract lows overnight.
The latest decline comes from the planting progress farmers made in recent weeks. US farmers sowed corn at a feverish pace for the last two weeks as warm, dry weather in the Midwest allowed producers to get in the fields. A cold, wet spring had previously caused a very slow start to plantings, raising concerns of lower crop yields and prompting some farmers to plant soybeans instead of corn.
A break in the clouds made it possible for 71% of the US corn crop to be planted thus far, up from 28% just one week ago. This one week gain in seedlings matches the record of 43% set in 1992. The planting delay premium previously built into market prices has now come to pass. From here, the focus will shift to summer weather and any changes in demand.
Now for the trade…
Futures traders could buy new crop corn using the Fibonacci levels as upside objectives. As for risk, I see two ways to manage your exposure:
1) Place a stop loss order just under contract lows. If this is hit, we'd regroup again after the next interim low.
2) Sell out-of-the-money calls 1:1 against your futures positions.
Options traders can buy $1 bull call spreads in December. I have recently started accumulating $5/6 spreads for some of my clients. Those looking to make this trade with less of an outlay (and a little more risk) could partially finance the position by selling out-of-the-money puts.
For example, let's assume you bought (25) $5/6 CZ13 spreads for $40,000, you could simultaneously sell (10) $5 puts for $15,000. This would result in a net debit of $25,000 (plus all fees and transaction costs). Understand this trade, as it's laid out, carries fees on 60 contracts, so be sure to factor this in when computing your potential profit/loss.
As always, I'm here to discuss specifics and give guidance. Give me a call…
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.