Weekly Corn Market Update 03/05/21
December 2021 (Dec21) corn futures (the benchmark for 2021 corn production) finished the week higher by 10.75-cents (~2.28%), settling at $4.8150/bushel. This week's price action took place in an 18.50-cent (~3.93%) range and did not close the gap from last week at $4.60/bushel on the weekly chart. All of this week's trading took place within the unremarkable band we published last week, though the week's high was just a penny below the notable band.
Our corn demand index soared ~4.06% this week, outperforming Dec21 corn futures, continuing to leave room for corn to catch up. See the chart below. Concerns over COVID-19 continue to fade. However, uncertain executive branch policy and rising long-term interest rates (and their impact on the Dollar) remain significant concerns. 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. On Tuesday, the USDA will release its monthly WASDE report for February.
The uptrend that started from the August 2020 lows continued with another new contract high this week. Various daily and weekly momentum indicators continue to show overbought conditions, and several display bearish divergences from price action. Carry spreads for the 2021 crop year narrowed this week. We would not be surprised to see the market use Tuesday's USDA report as an excuse to close the gap at $4.60/bushel and relieve some of the overbought conditions in the market.
Implied volatility was higher across the curve this week. 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 comparing our closing at-the-money model volatilities for this week and last and a chart comparing current our current model volatilities with the forward volatilities they imply between consecutive expirations. The forward volatility chart shows why we continue to think Mar22 options are currently a better value for long-term hedgers than Dec21 options. However, readers should note that proper execution and management are essential for these strategies to be effective.
Looking ahead to next week's trading in Dec21 corn futures, we would consider movement within the $4.6675-$4.9800 per bushel range to be unremarkable. Notable moves would extend to the $4.4875-$5.2150 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.
Due to the rally, the distribution for the Fall Price shifted higher this week. It also broadened 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 moved some options to Mar22 for our Quartzite Precision Marketing customers this week. We also flattened some exposure to futures spreads. Since the market did not reach any of our rebalancing levels, we did not make any significant adjustments to their portfolios' overall directional exposure.
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.
Here's this week's #corn #market poll. Cast your vote, then take a look at our Weekly Corn Market Update:https://t.co/45U4VUrmnW
— Quartzite Risk Management LLC (@QuartziteRMLLC) March 6, 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.
