Weekly Corn Market Update 03/04/22
December 2022 (Dec22) corn futures (the benchmark for 2022 corn production) finished the week higher by 49.75-cents (~8.58%), settling at $6.2950/bushel. Dec22 corn futures established another new contract high of $6.4700/bushel near the open of Friday's day session. This week's price action took place in a 67.25-cent (~11.60%) true range. The week's high was 15.50-cents above the extreme upper band we published last week. The weekly settlement was 2.50-cents below that band. The Russian invasion of Ukraine continued to fuel extreme volatility.
This week, our corn demand index (CDI) rose 8.50% - almost in lockstep with Dec22 corn futures. Russia's invasion of Ukraine continued dominating headlines this week. We expect these headlines to continue driving volatility as the market attempts to price the unpriceable. 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. Chatter about a nuclear deal with Iran resurfaced again this week. As we mentioned two weeks ago, an agreement with Iran would likely mean a significant increase in the global supply of oil. The resulting price pressure could flow into the corn market. Increased input costs for corn production continue to impact acreage decisions this year. The USDA will release its monthly World Agricultural Supply and Demand Estimates for March next Wednesday.
Dec22 corn futures remain in a long-term uptrend supported by a trendline connecting the lows of 03/31/21 and 09/10/21. Additional support sits below the market near $5.98, $5.80, and $5.65/bushel, with significant long-term support between $5.26 and $5.35 per bushel. Most daily momentum indicators remained in neutral territory despite the week's rally - representing significant divergences with price action over the past few weeks. Weekly momentum indicators show a mix of overbought and neutral readings, and some divergences remain there as well. Bollinger Bands expanded again this week. Carry spreads from Dec22 to Mar23, May23, and Jul23 collapsed this week, settling for the week at deeply-inverted levels.
Implied volatilities for the 2022 crop exploded this week and are incredibly high relative to recent years before the 2021 crop year. Careful observers of our forward volatility chart will notice that the Mar23, May23, and Jul23 expirations show no forward volatility reading on the chart this week. The chart assumes a perfect correlation between futures contracts to calculate the forward volatilities. However, the implied-volatility discounts in the deferred expirations are so significant that they rule out perfect correlation among those futures contracts. Given the extraordinarily high implied volatilities in the options market, we believe opportunistic spreading and careful position management are crucial to managing production uncertainty and volatility risk. Cautious execution is essential in every expiration because of an incredible lack of liquidity. 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 $5.9250-$6.8625 per bushel range to be unremarkable. Notable moves would extend to the $5.5500-$7.6850 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 $5.7350 per bushel this week, with a mode between $5.35 and $5.40 per bushel. On Monday, the Spring Price completed its discovery period, fixing at $5.90/bushel. The Fall Price distribution shifted higher with the rally this week and widened considerably with increases in implied volatility.
We were very active for our Quartzite Precision Marketing customers again this week. Rather than a lengthy, blow-by-blow list of trades, we will share our general thoughts for the week. Given the extraordinary increases in implied volatility throughout the week, we were eager to reduce our overall option count in any way possible. In general, this meant rolling up previously purchased puts on a ratio. These trades allowed us to collect some premium without significantly impacting our overall delta exposure. We also sold a few calls against existing call positions. Friday, the movement in futures spreads allowed us to sell existing put positions in deferred months and replace them with higher-strike puts in Dec22 for a small credit. Overall, we were pleased with the opportunities to improve our client positions in the market this week.
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, creates opportunity. The trick is being well-positioned ahead of time and staying disciplined. While we were again 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/6uk86kLJ4b…
— Quartzite Risk Management LLC (@QuartziteRMLLC) March 5, 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.
Model Volatilities
Please see the commentary above regarding why the Mar23, May23, and Jul23 forward volatilities are not included this week.
