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Around a year ago I wrote about the potential to achieve some alpha by trading the corn market. There is an ETF, CORN, which takes positions in the futures market. A few details about this ETF can be found here.

The drought, and now heat, in the Midwest has caused corn futures to jump higher over the last week.

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One can see the lack of rainfall in the following rainfall amount maps taken over the last couple of weeks.

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Source: http://www.intellicast.com/National/Precipitation/Weekly.aspx

On June 27th, a significant portion of the corn belt will have temperatures in the mid 90s to even over 100. Even before this week's heat the corn crop's condition rating was the lowest, for this time of the year, since recordings started in 1989.

I have previously written that I doubted the USDA's estimate of 166.0 bushels/acre of corn. I have done a rough estimate of the corn yield under the current crop conditions and have come up with a yield of around 150 bushels/acre, and this only reflects the data to June 24th. This is almost a 10% drop from the USDA's June estimate. I will provide updated articles of this forecast and the procedure I used to compile it in the future; just as I did in 2011.

Some important dates coming up:

June 29, 2012 is the quaterly grain stocks report . Estimates can be found in this article. I expect the heat and drought to continue to dominate the grain trading, but if this report is deemed bearish it could provide a better entry point for aggressive longs.

July 11, 2012 is the next World Agriculture Supply and Demand Estimate (WASDE) from the USDA. It provides a projected corn yield for the nation, however, for the last five years it was only a linear regression trendline adjusted for planting progress.

August 10, 2012 is the WASDE estimate that last year included the first corn yield estimate based on crop conditions.

In the coming weeks the corn market should continue to be dominated by the weather. The market will sell-off or rally violently depending on forecasts, let alone an actual weather event. Despite this, I believe that the bulls have the asymmetrical payoff edge when it comes to potential tail distributions of returns. A record planting and yield were already discounted by the market coming into June, what was not discounted was a poor crop year.

Only aggressive traders and speculators should be entering the grain markets at this time. If you trade options on futures think about using spread strategies because implied volatility is very high; also the CORN ETF has listed options on it which I have traded in the past and found them not to be very liquid, so use limit orders. If one wants to trade stocks in the agriculture sector, I have found this author interesting in his coverage of fertilizer stocks.

Source: Corn ETF Plays Part 2

Additional disclosure: I have positions in the corn futures options market