At the end of January we discussed in this blog how expiring corn contracts tend to make major lows while in delivery, and warned not to wait to price bushels that needed to be sold off the March contract.
Like clockwork, March futures made a low on Feb. 27 that amounted to a 21-cent meltdown in the matter of seven sessions.
A second warning was given that there was a likelihood of Dec ’20 futures testing the mid $3.60s and that a short-dated put priced off Dec ’20 would give you peace of mind while focusing on other things during spring.
But now things are different.
Eyes on USDA report
USDA’s report next Tuesday will be a Planting Intentions and Quarterly Stocks report. In our opinion, the implications of planting 94 mil acres of corn have been seen and digested by the trade. Since the Quarterly Stocks are as of March 1, there’s a good possibility the stocks number could be friendly. But the USDA has some changes that undoubtedly need to be made over the next several months regarding the Corn for Ethanol and Corn for Feed (Feed/Residual) line items on the balance sheet.
With the recent collapse of energy values and the difficult predicament the ethanol industry currently faces, USDA will have no choice but to reduce Corn for Ethanol demand while it is likely that they will partially offset that demand reduction with additional Corn for Feed.
Additional feed demand will be justified by changes in rations due to the fact there will be less DDGs available as ethanol grind reduces. However, additional feed demand is likely to only take a small bite out of lost demand from corn for ethanol.
Whether or not the USDA aggressively adjusts these numbers in April is obviously yet to be seen, but we must be aware that the May report has all the makings of a potential capitulation event. The May WASDE report will use the Planting Intentions number from the report next week and put a trend line yield on those acres. They can also further adjust the old crop balance sheet and make demand changes above and beyond the adjustments made in April; the first official carryout projection for new crop in May could be staggering.
The low made last week on the July contract was 338’2 while the May contract traded to 332’0. A look at the continuous chart for corn will show substantial support in the low to mid $3.30s which goes back to 2007. While there are only 10 months in the past 13 years where corn has dropped substantially below $3.30, it is worth noting that those drops led to a test or breach of $3 before swiftly recovering.
If the thought process laid out above comes to fruition, we could see a period ahead that breaks through last week’s lows and brings another leg lower.
If you’re concerned this could be the case, we have been using options in the June series which is priced off July ’20 futures to protect the downside. We have five reasons for using this series:
- They are priced off the July ’20 contract which offers 6 cents of carry from the May contract
- The options will be in place through all 3 reports discussed above
- The options will be in place during the delivery period for the expiring May futures
- The sold call, if you decided to sell one to help pay for the put, will expire before Memorial Day weekend which alleviates the cap to your bushels prior to the period when we are most likely to see corn make the move to the marketing year high
- Provides downside coverage but buys time to see if ethanol economics and corn basis improve
If you have questions, feel free to contact the AgMarket.Net team at 844-4AGMRKT