Weekly Corn Market Update 06/26/20
December 2020 (Dec20) corn futures (the benchmark for new-crop corn) finished the week lower by 20.00-cents (~5.79%), settling at $3.2525/bushel - their worst week and lowest close of the year. This week's price action took place in a 23.25-cent (~6.73%) range - the broadest weekly range for Dec20 corn futures in 2020. This week's trading extended well into the noteworthy range we published last week, and the week's low of $3.2200/bushel was a mere penny away from tagging the lower extreme band we published last week.
The fundamental demand picture that we first visited on March 13th traded lower this week. April 2021 futures for Crude Oil fell ~2.30% this week. Relevant livestock markets also traded lower with Live Cattle futures for April 2021 down by ~0.93%, and Lean Hog futures for April 2021 down ~0.73%. White House trade adviser Peter Navarro shook global markets on Monday night during a Fox News interview where he made negative comments about the U.S. trade deal with China. Most markets quickly recovered from the weakness, when Navarro walked those comments back, and President Trump tweeted that the "China Trade Deal is fully intact." Notably, Dec20 corn futures did not recover fully, giving the impression they were looking for an excuse to sell-off. Price action throughout the rest of the week confirmed that notion. We expect further volatility over the next few weeks as the market prices in the USDA's Tuesday release of its Quarterly Grain Stocks and Acreage reports as well as critical growing season weather. We continue to see an unforeseen supply shock as the only fundamental basis for a rally.
On the technical side, the downtrend in Dec20 corn futures resumed this week. Dec20 corn futures notched back-to-back contract lows on Thursday and Friday and did significant damage to any bullish technical case. The failure of the breakout we mentioned last week is, in itself, a very bearish indicator. The spread between Dec20 and Mar21 corn futures settled at 11.50-cents, unchanged on the week. Overall, we see the technical picture as bearish, but given the extremity of this week's move, we would not be surprised by a short term bounce next week.
In the corn options market this week, implied volatilities (the cost of options) for new crop expirations were softer across the board. December options showed the most weakness. With December at-the-money volatility coming in at the lowest we've seen since March, we will be looking to add December options to the hedging portfolio opportunistically.
Looking ahead to next week, we see a ~52.0% chance that Dec20 corn futures will finish the holiday-shortened week lower. We'd consider movement within the $3.1425-$3.3775 per bushel range to be unremarkable. Noteworthy moves would extend to the $2.9925-$3.5750 per bushel range. Price action beyond that would be considered extreme. This week, we've added a chart (found below) showing the history of these price levels. We strongly urge you to review our guide to Understanding Our Weekly Corn Market Update before using these levels in any way. Market participants should note Tuesday's USDA release mentioned above, and that markets will be closed on Friday in observance of Independence Day.
Looking further ahead to the Fall 2020 Crop Insurance Price (the average settlement of Dec20 corn futures in October), we believe there is a ~54.7% chance the average will come in below this week's settlement of $3.2525/bushel. We now see a considerably higher chance (~26.9%) that the October average will come in below $3.00/bushel rather than above $4.00/bushel (~4.8%). See the attached chart for a visual representation comparing our expectations for the Fall 2020 Crop Insurance Price for this week and last.
This week, we decided to add to our 2021 hedges, taking us to 10%-20% hedged on expected 2021 production. We believe that March 2021 short-dated new crop options expiring into Dec21 corn futures in February of 2021 are an excellent tool to protect producers between now and the setting of next year's spring price for crop insurance.
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