Just as it seemed that Corn futures prices were headed for fresh lows, along came the announcement that China had purchased 115,000 tons of U.S. Corn, causing a mad scramble by Corn bears to cover their short positions and sending old-crop futures prices soaring. The purchase was significant, as China had been a net-exporter of Corn, with its last U.S. purchase occurring nearly 4 years ago. However, Corn prices in China have soared, causing the government to use domestic reserves to help curtail the rapid price rise. Poor growing conditions in Southwestern China have some analysts looking for additional Chinese purchases later this season. Here in the U.S., Corn producers have taken advantage of ideal weather conditions to get this year's crop into the ground. The USDA announced that 50% of the U.S. Corn crop has been planted to date, which is well above the 20% planted at this time last year. The quick start to the planting and adequate moisture levels throughout the Corn Belt have analysts looking for a near-record Corn crop this season. It was the prospects for another large U.S. Corn harvest that had sent Corn prices to lows not seen since last October. However, if this is just a start of Corn purchases out of China this year, even a record Corn harvest may not be enough to keep U.S. Corn carryout from becoming tight -- especially as an economic recovery increases the demand for Corn for both livestock feed and for ethanol production.
Trading Ideas
The news of China buying U.S. Corn may have changed the momentum in the Corn market from bearish to bullish -- at least for the near term. Technical traders will note the rapid rise in July Corn futures after a test of 350.00 on the downside was thwarted. Some traders who believe that the Corn market will not fall below the recent lows at 351.50 may wish to investigate selling near-term puts in Corn futures with a strike price below this support level. An example of this trade would be selling the June Corn 350 puts. With July Corn trading at 369.50 as of this writing, the June 350 puts could be sold for 3 ½ cents, or $175 per contract, not including commissions. The premium received would be the maximum potential gain on this trade and would be realized if July Corn is trading above 350.00 at option expiration in late May. Given the potential risk in selling naked options, traders should have an exit plan in place should the trade move against them -- such as closing out the trade before expiration should July Corn trade below support at 351.50.
Looking at the daily chart for July Corn, we notice that during the last 6 months, Corn prices traded in a pattern of several weeks of a consolidation phase before moving to lower prices. The recent surge due to the China news threatens to break this pattern and send prices higher. However, chart technicians would want to see July Corn close above the 100-day moving average, currently near the 389.00 area, to put Corn bulls back in charge. The 14-day RSI has moved into neutral territory with a current reading of 51.39. This past Tuesday's lows of 351.50 should act as significant support for July Corn, with the March 18th highs of 387.50 looking to be the next resistance level.
Mike Zarembski, Senior Commodity Analyst