Weekly Corn Market Update 08/14/20
December 2020 (Dec20) corn futures (the benchmark for new-crop corn) finished the week higher by 17.25-cents (~5.38%), settling at $3.3800/bushel - well into the notable range we published last week. This week's price action took place in a 20.75-cent (~6.47%) range. The sharp move higher came after the derecho weather event in the corn belt on Monday and the USDA's release of its monthly WASDE report on Wednesday.
The fundamental demand picture that we first visited on March 13th settled higher again this week. April 2021 futures for Crude Oil rose ~1.85%. Live Cattle futures for April 2021 and Lean Hog futures for April 2021 climbed 1.27% and 1.02%, respectively. Notably, April 2021 Live Cattle futures posted their highest weekly settlement since February 21st - an encouraging sign on the demand side. On the supply side, the impact from Monday's derecho, especially in Iowa, is still being digested by the market. We've seen a wide range of estimates on the overall implications for corn supply, and the one thing we're confident of is that it will take a long time for estimates to converge on the truth. Until then, we recommend looking to the market for answers. The market is the best indicator of prices we have, and it's times like these that remind us of why market-neutrality is a core principle in our risk management strategy. Markets are incredibly challenging to predict, and so we find it more beneficial to measure and mitigate our clients' exposure than to guess where the markets are going.
The technical picture is as muddy as ever this week. While this week's rally alleviated oversold conditions in the market, it's hard to say if the overall downtrend in the market remains. This week, the spread between Dec20 and Mar21 corn futures narrowed by 0.75-cents, settling at 11.25-cents - tending to confirm this week's bullish action. Though the last time Dec20 corn futures were trading at these levels, the spread was closer to 10.00 cents, suggesting that the spread market is not as confident in this week's rally as it might seem.
In the corn options market this week, implied volatilities (the cost of options) for new crop corn settled mixed on the week. Implied volatility in short-dated new crop options for September was softer in front of their expiration next week. October, November, and December implied volatilities were higher this week, with the March, May, and July expirations little-changed. This week, we continue to note that we see short-term new crop volatility in the soybeans as significantly cheaper than similar durations in the corn market (from both an outright and relative perspective). As such, we continue to add volatility exposure to our hedge portfolios on the soybean side.
Looking ahead to next week, we see a ~52.1% chance that Dec20 corn futures will finish the week lower. We'd consider movement within the $3.2725-$3.5050 per bushel range to be unremarkable. Noteworthy moves would extend to the $3.0775-$3.7750 per bushel range. Price action beyond that would be considered extreme. Included below is a chart showing the history of these price levels. Before using these levels in any way, we strongly urge you to review our guide to Understanding Our Weekly Corn Market Update.
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 be below this week's settlement price of $3.3800/bushel. This week's rally shifted our distribution significantly, as a more than 5% move should. See the attached chart for a visual representation comparing our expectations for the Fall 2020 Crop Insurance Price for this week and last.
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