Weekly Corn Market Update 05/22/20
December 2020 (Dec20) corn futures (the benchmark for new-crop corn) finished the week up 0.75-cents (~0.23%), settling at $3.3275/bushel. Price action this week took place in a 6.00-cent (~1.81%) range - the narrowest weekly range of the year. All of this week's trading took place within the unremarkable price band we published last week.
The fundamental demand picture that we first visited on March 13th settled mixed on the week, but healthier overall. April 2021 futures for Crude Oil rose ~8.38.% this week. Relevant livestock markets were virtually unchanged on the week. Live Cattle futures for April 2021 dropped ~0.25%, and Lean Hog futures for April 2021 rose ~0.31%. While this improvement is encouraging, it's worth noting that these outside markets remain severely depressed since the arrival of COVID-19 and the corresponding economic impacts. The USDA's weekly Crop Progress Report, released on the 18th, continues to show planting progress ahead of average at 80%. We expect the upcoming Tuesday release of the USDA's Crop Progress report to show planting progress at 90%. We continue to believe that it is challenging to build a bullish fundamental case without a weather event that severely limits supply.
On the technical side, Dec20 corn futures remain in a downtrend and continue to consolidate in a pennant formation. We expect Dec20 futures to exit this pennant decisively in the next week or two as planting ends, and more weather data comes in. Assuming average weather, we expect this exit to be to the downside as the market reduces its risk premium on the back of a healthy planting season. The spread between Dec20 and Mar21 corn futures narrowed for the third week in a row, contracting by a quarter-cent this week to 12.50-cents/bushel - perhaps the only technical sign on which the bulls can hang their hat. We continue to see the technical picture as bearish overall.
In the corn options market this week, implied volatilities (the cost of options) for new crop expirations were generally lower on the week. Hardest-hit were near-term short-dated new crop options. Given the recent calm in the corn market, we do not find these declines surprising. We continue to believe that a further reduction in the cost of options represents a chance to increase their proportion in the hedging portfolio as opportunities naturally present themselves. However, we still would not actively increase that portion unless option prices decline further. To that end, we would look to actively add short-dated new crop July options with at-the-money implied volatility below 20% before an exit from the pennant formation mentioned above.
Looking ahead to next week's holiday-shortened trading, we see a ~52.0% chance that Dec20 corn futures will finish the week higher. We'd consider movement within the $3.2550-$3.3950 per bushel range to be unremarkable. Noteworthy moves would extend to the $3.1075-$3.5325 per bushel range. Price action beyond that would be considered extreme.
Looking further ahead to the Fall 2020 Crop Insurance Price (the average settlement of Dec20 corn futures in October), we believe there is a ~53.4% chance the average will come in below this week's settlement of $3.3275/bushel. We continue to see a higher chance (~25.4%) that the October average will come in below $3.00/bushel rather than above $4.00/bushel (~8.9%). See the attached chart for a visual representation of our expectations for the Fall 2020 Crop Insurance Price from this week and last.
Thanks for taking the time to read, and we look forward to your questions and feedback. Please feel free to contact us via our contact form, Facebook, Twitter, by phone at (970)294-1379, or by email.
