The corn market has potential to see record high prices this summer. A number of contributing factors may allow the corn market to enter a true bull mode this summer. We will look at these factors and discuss how you can cash in on this corn market. First are the variables shaping up for the possibility of record highs. As planting progresses, we are expecting reduced corn acreage, dry long-term forecasts, and huge demand. All of these variables could lead to a decrease in ending stocks. Also, if we get a couple weeks without precipitation, we could see the corn market explode.
From the supply side, we already know we are looking at reduced acres. Even if it is not as extreme as the latest USDA report, we are still fairly confident there will be some reduction. With La Nina conditions, the more likely the possibility of some drought-like environments during the year. Combine this with low sub-soil moisture in many areas, and the market could react severely to any lack of precipitation. There are a couple of bullish factors already in the market, but we will need to see a weather market for a real price explosion. I cannot predict that, however, there appears to be a very good possibility for this occurrence.
The demand side will also be a huge help, internationally as well as within the United States. There are many expanding economies around the world (i.e., China) which will help increase the overall demand. Domestically, there appears to be a good increase in demand and more importantly, there is the development of inelastic demand. It is this inelastic demand that I believe gives corn the true potential to rally if we start to have a weather scare during the growing season. For instance, let’s look at ethanol. We have seen some reduction of ethanol production on recent reports, but you better believe that we are going to produce as much as possible, especially with oil over 70 dollars a barrel. This demand is inelastic, meaning the amount of corn used in ethanol production is affected very little by the price of corn. This is very promising in a bull market because it indicates there will still be buyers at any given price.
So how do we capitalize on this great potential? One way would simply be to buy calls or bull call spreads. If you just want to be long, want to know your total risk, and don’t want to have to make a lot of adjustments, a call strategy of some sort will suffice. Keep in mind that buying out-of-the-money calls may actually pay off like they did in the mid 90s. In a straight call strategy, I recommend you purchase September calls. This gives you the potential to capture the full weather market.
A strategy we recommend is purchasing July corn futures and selling 300 to 320 December calls. We recommend adding futures positions as the market breaks through resistance. To manage this position, adjust stops to secure profits. This is a great strategy, however, it takes much more monitoring and adjusting.
With a futures position, we recommend you stay in the front month. If we get into a true weather rally, it is my belief that the front month will greatly out-rally the deferred months. This has proven true in the past, as end users scramble to secure what is available.
For further details or help applying this strategy, feel free to call me at 1-800-334-9779.
Nicholas Mueller is a market advisor with Stewart-Peterson Group. Stewart-Peterson Group has been a leader in the in the ag marketing business for over 20 years, servicing the producers across the country with analysis, advice, and action. We provide outstanding customer service and provide marketing strategy and education meetings across the country every year. To receive a free trial to our Stewart-Peterson Advisory report and find out where our next meeting will be held, call Mike Rusch at 877-334-4407 or email: [email protected]
Our next marketing meetings will be held in Beatrice, NE on Thursday, June 8th and in Norfolk, NE on Saturday, June 20th .
