Weekly Corn Market Update 02/25/22
December 2022 (Dec22) corn futures (the benchmark for 2022 corn production) finished the week lower by 18.00-cents (~3.01%), settling at $5.7975/bushel. Dec22 corn futures established another new contract high of $6.4625/bushel during the overnight session early Thursday morning. The week's high and low were both outside the extreme band we published last week (an exceptionally rare event). The weekly settlement was 2.00-cents below our lower extreme band. This exceptional volatility came mainly on the heels of the Russian invasion of Ukraine.
This week, our corn demand index (CDI) fell 0.75%, outperforming Dec22 corn futures. Russia's invasion of Ukraine dominated headlines this week, yielding a hectic few days of trading late in the week. Additionally, COVID-19, executive branch policy, tensions with China, Federal Reserve interest rate policy, and the Dollar remain significant concerns. We believe these factors will continue to provide potential sources of volatility for the foreseeable future. Increased input costs for corn production continue to impact acreage decisions this year.
Dec22 corn futures remain in a long-term uptrend supported by a trendline connecting the lows of 03/31/21 and 09/10/21. Near-term support sits below the market at $5.65/bushel. Additionally, significant support rests below the market between $5.26 and $5.35 per bushel. Most daily momentum indicators returned to neutral territory following the selloff late in the week. On the other hand, weekly momentum indicators show a mix of overbought and neutral readings. Some weekly momentum indicators still show divergences with price action since the former contract high from 11/24/21. Bollinger Bands expanded again this week. Carry spreads from Dec22 to Mar23, May23, and Jul23 finished little-changed to slightly narrower for the week.
Implied volatilities for the 2022 crop rose this week, with near-term expirations leading the charge. Implied volatilities for the 2022 crop remain high relative to recent years before the 2021 crop year. We believe the Mar22 and later expirations offer the best value for long-term hedgers. Still, careful execution remains essential as those markets are illiquid. For nearer-term hedges, the short-dated June series looks attractive. Given the high implied volatilities in the options market, we believe opportunistic spreading and careful position management are crucial to managing production uncertainty and volatility risk. See the charts below for more details. One compares our closing at-the-money model volatilities for this week and last. The other compares our current model volatilities with the forward volatilities they imply between consecutive expirations.
Looking ahead to next week's trading in Dec22 corn futures, we would consider movement within the $5.6000-$6.0250 per bushel range to be unremarkable. Notable moves would extend to the $5.3750-$6.3150 per bushel range. Price action beyond that would be extreme. Be sure to visit our Twitter page to vote in the poll we hold there each week. While you are there, please give us a follow.
Our median Fall Price estimate is $5.4450 per bushel this week, with a mode between $5.10 and $5.15 per bushel. The Spring Price continued its discovery period, and with 94.74% of the observations in, the average so far is $5.8896/bushel. The Fall Price distribution shifted lower with the selloff this week and widened with increases in implied volatility.
We were very active for our Quartzite Precision Marketing customers during this exceptionally volatile week. On Tuesday, we added to a position in short-dated April puts and bought some short-dated June calls. We used the rally Wednesday night to liquidate a quarter of the short-dated April calls we purchased last week. This sale more than covered the cost of the initial premium outlay for the entire purchase of those calls. We used the proceeds from that sale to help fund the purchase of some short-dated May puts. Later in the overnight, early Thursday morning, we sold another quarter of our initial position in the short-dated April calls for a significant profit. As the market reversed during the day session on Thursday morning, near-term implied volatility and upside skew rose. We took advantage by collecting a small premium to roll the balance of our short-dated April calls down on a ratio. As Thursday's selloff continued, we rolled our newly-purchased short-dated May puts down, collecting a little less than half of their original cost. The market took another leg lower in the overnight session early Friday morning. We used this opportunity to liquidate a portion of the short-dated April puts we accumulated Tuesday and last Friday. Though, we left a few on to cover the out-of-the-money puts we initially sold against them. On the open of Friday's day session, we made a quick scalp on some out-of-the-money short-dated April puts that we thought were mispriced given the opening print. Then, later in the day on Friday, we again rolled our short-dated May puts from Thursday. This time we went down and out to the short-dated June expiration, again collecting a little less than half of the initial premium outlay from Wednesday night. In addition to these general trades, we made a few small trades throughout the week to adjust individual positions.
We want to add that none of this week's trades resulted from a keen foresight about market direction. Instead, they came from the disciplined application of a Dynamic Hedging/Option Replication strategy designed to capture volatility in the marketplace. This strategy lies at the heart of our Quartzite Precision Marketing program. We believe that volatility, especially extreme volatility like that in the last half of this week, creates opportunity. The trick is being well-positioned ahead of time and staying disciplined, especially when the markets go crazy. While we were incredibly pleased with this week's trading, we should add that this week was exceptional and that trading futures and options always involves the risk of loss. We continue to believe that producers should protect their investment in expensive inputs with a disciplined and flexible risk management strategy like the one at the heart of Quartzite Precision Marketing. There is still time to consider your 2022 marketing plan. If you have any questions or want to learn more about what we do, please reach out. We are always happy to chat about the markets, and there is no obligation.
#AgTwitter & #oatt - cast your vote in this week's poll, then click over to read our Weekly #Corn #Market Update:https://t.co/SMm6JgaDDw…
— Quartzite Risk Management LLC (@QuartziteRMLLC) February 26, 2022
We think these scenarios are equally likely for next week. Where will Dec22 corn #futures settle?
Thanks for taking the time to read. We look forward to your questions and feedback. Thanks again. Have a great week.
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Weekly Price Levels and Corn Demand Index
As a reminder, the Quartzite Risk Management Corn Demand Index references the weekly change in April 2023 futures for Crude Oil, Live Cattle and Lean Hogs. We weigh the percentage change in those contracts and compute the index's percentage change. Crude Oil accounts for 50% of the index, and Live Cattle and Lean Hogs each make up 25%. To create the chart, we started the index at the Dec22 corn futures settlement on 11/12/21; then added or subtracted the index's weekly percentage change. We want to add a few warnings. First, there are only a handful of data points - not much to go on. Second, the index references relatively illiquid markets - making any strategy based on it challenging to execute. Third, we expect divergences to increase as we get into the growing season when the corn market will likely look more toward supply for its direction. In short, we would not attempt to trade on this information without much more data, nor would we recommend anyone else does.
