New crop corn is slow to get in the ground this year. That could mean higher prices, in my eyes.
US corn planting is only at 4% according to this week’s crop progress report. This came in at the low end of expectations of 4-6%. It gets worse – the average planting progress from this time of year is 16%. Last year 26% had been planted by this time. Farmers are late to the game this year!
A weak 4% planting ties the record low which came in 1993, a flood year. Following that supply crunch corn futures appreciated 50% between April and December 1993. I’ll note this gain came off a lower starting price of about $2/bushel, so it cannot be directly compared to this year’s $5-something corn. It’s premature to make a bold call of another 50% move, but bullish trade at $5 is justified in my eyes.
Short-term forecasts for drier weather, conducive to planting, have corn futures off recently. Prices are lower by 9% in the past two months, including a 5% drop in just the last four days.
Longer-term, it doesn’t look like Mother Nature will cooperate. Wet weather and potential planting delays are predicted further out. Corn spreading was active with new crop getting hit more than old crop – something I like to see as I’m looking to establish bullish trade in new crop.
I favor selling put options under the market in this situation. Instead of popping immediately higher, prices could linger as we potentially carve out a bottom here. We want to be short volatility and time premium, in my opinion.
My pick is to sell $5 puts which are currently going 32’4 cents, or $1625 per contract. You collect this premium as you are opening the trade with a sale. Effectively, this is a long position with a “buy price” of $4.70/bushel ($5.00 strike minus 32.5 cents of premium). The lowest price December 13’ corn has traded in the last two years is $5.11/bushel (on 6/15/12). See the table below for more strike prices to consider.
The danger is corn prices completely fall apart from here. But after a 21% drop over the last seven months…I think most of the damage has been done.
To discuss in more detail this chart or any other you can reach me at: firstname.lastname@example.org or 954-929-9997
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