Weekly Corn Market Update 03/11/22

Written By James Schroeder

December 2022 (Dec22) corn futures (the benchmark for 2022 corn production) finished the week higher by 25.75-cents (~4.09%), settling at $6.5525/bushel. Dec22 corn futures established another new contract high of $6.5625/bushel on Friday. This week's price action took place in a 28.75-cent (~4.57%) range. All of this week's trading took place within the unremarkable band we published last week. 

Our corn demand index (CDI) fell 1.74% this week - significantly underperforming Dec22 corn futures. Pay close attention to the CDI chart this week. The last time the CDI crossed Dec22 corn futures was just before the new year. Then it was from under to over at the beginning of the recent rally. This week, the CDI crossed from over to under - potentially signaling weakening demand and a possible change in the trend. Russia's war with Ukraine continued dominating headlines this week. We expect these headlines to continue driving volatility. COVID-19, executive branch policy, tensions with China, Federal Reserve interest rate policy, and the Dollar remain significant concerns as well. Increased input costs for corn production continue to impact acreage decisions this year. On Wednesday, the USDA released its World Agricultural Supply and Demand Estimates for March. 

Dec22 corn futures remain in a long-term uptrend supported by a trendline connecting the lows of 03/31/21 and 09/10/21. However, they are near the upper end of a channel formed using the 05/07/21 high as an upper boundary parallel to that trendline. We would not be surprised by a pullback testing support below the market near $5.98, $5.80, or even $5.65/bushel. Significant long-term support is between $5.26 and $5.35 per bushel and would require a substantial break in trend to test. Most daily and weekly momentum indicators are now near or in overbought territory - some divergences remain. Bollinger Bands expanded again this week. Carry spreads from Dec22 to Mar23, May23, and Jul23 remained inverted this week, but less so than last week.

Our at-the-money model volatilities for the 2022 crop mostly fell this week but remain high relative to recent years before the 2021 crop year. 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. Cautious execution remains essential in deferred expirations because of a 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 $6.2850-$6.8925 per bushel range to be unremarkable. Notable moves would extend to the $6.000-$7.3125 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 $6.0075 per bushel this week, with a mode between $5.65 and $5.70 per bushel. The Fall Price distribution shifted higher with the rally this week.

We were somewhat active for our Quartzite Precision Marketing customers this week. As implied volatility softened early in the week, we increased our option count with purchases of calls in short-dated July and puts in short-dated April. Before Wednesday's WASDE release, we effectively rolled our short-dated April puts into short-dated July with put calendars. We purchased a small vertical put spread in short-dated May after the WASDE release on Wednesday. As implied volatility firmed into Friday's close, we traded a ratio put-spread in short-dated July. This ratio decreased our overall option count and collected a small premium, with little impact on our net directional exposure. We also made a few other small trades to manage individual positions throughout the week. Looking back, we were early buying back the volatility we sold last week, and a little more patience would have been beneficial. Still, we were happy with the changes we made to the portfolio this week and glad we liquidated as many options as we did last week. 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.

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

Crop Insurance Price Charts

James Schroeder
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