Weekly Corn Market Update 09/04/20
December 2020 (Dec20) corn futures (the benchmark for new-crop corn) finished the week lower by 1.25-cents (~0.35%), settling at $3.5800/bushel. This week's price action took place in a 13.25-cent (~3.69%) range. All of this week's trading was within the unremarkable bands we published last week.
The fundamental demand picture that we first visited on March 13th settled mixed for the second straight week. April 2021 futures for Crude Oil dove ~5.68%. While Live Cattle and Lean Hog futures for April 2021 rose ~0.90% and ~1.88%, respectively. The market took a pause this week from the powerful rally of the previous few weeks and ahead of the USDA's release of its monthly WASDE report next week. Given the high uncertainty level, we continue to recommend looking to the market for answers and staying market-neutral.
The technical picture is interesting again this week. The pause in the rally alleviated the overbought conditions in many momentum indicators on a daily chart. The overhead resistance in the low 360's we mentioned last week held, at least for now. Monday's trading briefly violated the July highs and the 200-day moving average, but there was no follow-through. We still believe it will require significant reductions in the market's production expectations to push prices meaningfully above the low 360's in Dec20 corn futures. The spread between Dec20 and Mar21 corn futures widened by a half-cent this week, settling at 10.50-cents, a slightly bearish signal.
Implied volatilities (the cost of options) finished mixed on the week with strength in near term expirations ahead of the WASDE next week. We continue to see options as an essential part of any hedging strategy, and given this week's action, we're leaning toward longer-dated expirations.
Looking ahead to next week's holiday-shortened trading, we see a ~51.4% chance that Dec20 corn futures will finish the week lower. We'd consider movement within the $3.4725-$3.7000 per bushel range to be unremarkable. Noteworthy moves would extend to the $3.3175-$3.8925 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. On Friday, the USDA will release its monthly WASDE report for September, which could significantly impact the market.
Looking further ahead to the Fall 2020 Crop Insurance Price (the average settlement of Dec20 corn futures in October), we believe there is a ~52.9% chance the average will be below this week's settlement price of $3.5800/bushel. This week, we see a notable shift; the distribution is slightly higher despite the mild selloff. Part of this shift results from a change in the relative implied volatility for upside and downside options in the options market. In general, implied volatility is an indicator of the demand for options. Perhaps counterintuitively, we saw the implied volatility for downside options increase relative to the implied volatility for upside options - suggesting that there was a relatively greater demand for downside options this week. At first glance, a change of this nature might indicate a shift lower in the distribution, but it has the opposite effect. In short, the reason for this counterintuitive phenomenon is that the owners of options who are well-hedged with an offsetting position in the underlying (i.e., market-neutral) are almost universally more profitable overall as prices move further from the strike price of the options they own. If you've ever purchased an out-of-the-money put option to protect your sale price, watched prices fall, and lost on both the price dropping and the put option expiring worthless, you've experienced this phenomenon firsthand. It'd be impossible to do this subject justice in the space available here, so look for an in-depth article in the future on what is often called "skew" in the jargon of options traders, or contact us with your questions. See the attached chart for a visual representation comparing our expectations for the Fall 2020 Crop Insurance Price for 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, email, or phone at (970)294-1379. Thanks again, and have a great week.
