Weekly Corn Market Update 02/26/21
December 2021 (Dec21) corn futures (the benchmark for 2021 corn production) finished the week higher by 10.75-cents (~2.34%), settling at $4.7075/bushel. This week's price action took place in a 19.00-cent (~4.13%) true range. It is worth noting the week's low of $4.6225/bushel was 2.25-cents above last week's settlement, creating a gap on the weekly chart. The week's high of $4.7900/bushel was 9.25-cents above the notable band we published last week, and the week's settlement was 1.00-cent above that level.
Our corn demand index was up ~1.43% this week, underperforming Dec21 corn futures. Though, corn's outperformance the last two weeks has still not been enough to offset the prior two weeks, which still leaves room for corn to catch up. See the chart below. Our concerns over COVID-19 and executive branch policy remain, though COVID-19 worries are fading. This week we add rising long-term interest rates to our fundamental concern list. We believe these factors will continue to provide potential sources of volatility for the foreseeable future. They are of particular concern where they might impact U.S. and Chinese trade relations or exchange rates.
The uptrend that started from the August 2020 lows reasserted itself with a new contract high this week and a strong weekly close. This week's action notwithstanding, the market could still be in the process of forming a top, or it could be taking its next leg higher - time will tell. A variety of daily and weekly momentum indicators now show overbought conditions and several display bearish divergences from price action. Carry spreads to May and July of 2022 futures widened this week, while the spread from December to March was unchanged. We still would not be surprised by a pullback to the $4.10-$4.12/bushel range. However, as the market presses higher, the likelihood of seeing those levels in the near term is diminishing.
Implied volatility was higher across most of the curve this week, with July 2022 being the lone decliner. Reasonable values for long-term hedgers remain challenging to find. Opportunistic spreading and careful position management are still virtual necessities to maintain the flexibility needed to manage production uncertainty and volatility risk. See the chart below for a comparison of our closing at-the-money model volatilities for this week and last. We are including another chart this week that displays the implied forward volatilities between consecutive expirations. Forward volatility is essentially the volatility required between two expirations to justify the difference in their full-term implied volatilities. The forward volatility chart should show why we think March 2022 options are currently a better value for long-term hedgers than December 2021 options. However, readers should note that proper execution is critical in less-liquid expirations.
Looking ahead to next week's trading in Dec21 corn futures, we would consider movement within the $4.5750-$4.8325 per bushel range to be unremarkable. Notable moves would extend to the $4.2875-$5.0375 per bushel range. Price action beyond that would be extreme. You will find a chart comparing these levels to the corresponding weekly price action below. 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.
The Spring Price for crop insurance finished its discovery period this week. Most producers in the corn belt should have a Spring Price of $4.58/bushel - the highest since 2014. Due to the rally, the distribution for the Fall Price shifted higher this week. It also broadened slightly from increases in implied volatility. See below for distribution and cumulative probability charts for Fall crop insurance prices and a chart highlighting the distribution's changes.
We continued tiptoeing into hedges for our Quartzite Precision Marketing customers this week, and they are now mostly-hedged. We will be looking to make opportunistic adjustments as changing market, and crop conditions warrant as the season progresses.
Thanks for taking the time to read. 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. Have a great week.
Another week, another #corn #market poll. Cast your vote, then head click-through to read our Weekly Corn Market Update:https://t.co/6avfDAAXmm
— Quartzite Risk Management LLC (@QuartziteRMLLC) February 27, 2021
We think the following scenarios are equally likely next week, what do you think?
Will Dec21 corn #futures settle:
Weekly Price Levels and Corn Demand Index
As a reminder, the Quartzite Risk Management Corn Demand Index references the weekly change in April 2022 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 Dec21 corn futures settlement on 11/20/20; 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.
Model Volatilities
Readers should note that there could be slippage between months with different underlying futures contracts.
