April 25, 2020
On Monday April 20th, world traders watched in amazement as the NYMEX May Crude oil contract traded at a negative -$40.32 before bouncing back and expiring on the 22nd at $10.01.
The reason for the crash in prices is there is an oversupply of crude hitting the market. Energy demand is in free fall due to stay-at-home orders around the world, and protection cuts have not been enough to offset lost demand.
Traditionally excess supplies go into storage, but with storage filling up for a brief moment, the market was paying buyers to take it off of their hands as they had no place to store the crude if they took delivery of the product.
What about grain?
We will be entering the delivery period for CBOT grain contracts on April 30th, and some are wondering: can grains trade negatively. Technically they could, if the supply of a physically deliverable product would overwhelm the demand. At this time, the CME Group is only running option pricing and valuation for select energy markets to accompany negative prices, so they currently see no risk for the grain market trading negative, and neither do we.
We do, however, think there is downward price risk for the May corn contract as it moves toward its delivery period. My business partner addressed this phenomenon in this blog back in January as a warning heading into the delivery period for March futures.
Like crude, we have an oversupply of corn as the lack of demand for energy has spilled onto the corn market. The most recent ethanol production report shows that we used 55.6 Million bushels of corn to make 3.941 million barrels of ethanol last week. To put this in perspective, we were producing roughly 7.2 million barrels of ethanol and consuming approximately 105 million bushels a week before the lockdown began. We will need to use, on average, 93.30 million bushels of corn a week to hit the USDA’s latest ethanol production estimate of 5.05 billion bushels.
We at AgMarket.net expect to see further cuts of demand for ethanol production by at least 200 million bushels and possibly up to 400 Million bushels depending on how fast the U.S. economy re-opens. We anticipate feed demand will increase due to the lack of DDG’s but not nearly enough to offset the lack of ethanol demand.
Downward risk protection
The CME Groups September 2019, December 2019, and March 2020 corn contracts all sold off into and through a bulk of their delivery periods. The May 2020 corn contract delivery period begins on April 30th. We want to reiterate what was explained in detail at the end of March. Producers that have unpriced bushels should consider buying the June serial puts to control downward risk as we enter the delivery period for the May 20 contract. The option expires on May 22, 2020. The May contract goes off the board May 14.
This option will also give you downward risk protection for the May 12 WASDE report. Early thoughts are this report will look bearish. USDA is expected to cut ethanol demand and increase carryout for the old crop.
We will also be getting the USDA’s first look at new crop balance sheet. We expect it to show a total supply at a record 19 billion bushels and a carryout topping out over 3 billion bushels, which could put additional pressure on the market.
Contact McCormick directly at 815-665-0461 or anyone on the AgMarket.Net team at 844-4AGMRKT.
The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. AgMarket.Net is the Farm Division of John Stewart and Associates (JSA) based out of St Joe, MO and all futures and options trades are cleared through ADMIS in Chicago IL. This material has been prepared by an agent of JSA or a third party and is, or is in the nature of, a solicitation. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading infromation and advice is based on information taken from 3rd party sources that are believed to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. The services provided by JSA may not be available in all jurisdictions. It is possible that the country in which you are a resident prohibits us from opening and maintaining an account for you.
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