Corn futures, Stock up on your Arepas

Living in Miami it’s sometimes hard to avoid the sweet smell of roasted corn. We have the Latin American community to thank for Arepas – a delicious snack made of melted cheese sandwiched between two corn patties, all sizzled to perfection on a street-side griddle.

Of course, Miami’s Arepa purveyors don’t worry much about corn prices. But as traders, we do. I see bullish trade on the horizon, let’s take a look…

It seems the USDA miraculously found 400 million additional bushels of corn in storage, according to its last Quarterly grain stocks report. To me, this looks like a magician pulling a rabbit out of a hat – I just don’t see it.

Will the US have a monster corn crop this year? Yes, likely. In fact we may see the largest crop in several decades as we continue to increase yields. But guess what – supply is just one side of the equation. What if demand increases at a faster pace than supply? We should see higher corn prices, of course.

What if we get planting days… or what if we get weather issues once the crop is in the ground? There are enough “what ifs” in the oversupply thesis for me to buy into it. I see corn as oversold and expect strong demand – I think we can justify wading into bullish trade.

Now for the technicals.

Corn Futures

Corn Futures chart, April 10, 2013

Looking at the big picture, December futures are 30 cents above their lows and $1.20 below their highs. That’s a ratio of 4:1, showing more room to the upside if you agree that the corn selloff is overdone.

I have three trade ideas to recommend:

1.) Buy December futures and sell out-of-the-money calls 1:1.

2.) Sell December puts under the market (out-of-the-money). You’ll collect the premium if corn trades higher, but you must be willing to buy corn futures at the strike price of your options if corn trades under the strike. (You could have the option “put” to you)

3.) Buy December call options.

I do not think corn will appreciate in a straight line, so at times I may take counter trend trades (shorting corn) in July or September contracts to manage the position.

As always, I’m here to discuss specifics and give guidance. Give me a call…

To discuss in more detail this chart or any other you can reach me at: mbradbard@rcmam.com or 954-929-9997

Risk Disclaimer: The opinions contained herein are for general information only and are not intended to provide specific investment advice or recommendations and are not tailored to any specific’s investor’s needs or investment goals. You should fully understand the risks associated with trading futures, options and retail off-exchange foreign currency transactions (“Forex”) before making any trades. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results.
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