Weekly Corn Market Update 05/14/21
December 2021 (Dec21) corn futures (the benchmark for 2021 corn production) finished the week lower by 93.75-cents (~14.73%), settling at $5.4275/bushel - a record weekly decrease for the contract in both percentage and nominal terms. This week's price action took place in a 95.25-cent (~14.96%) range, also a new contract record. The week's low was a stunning 20.25-cents below the lower-extreme level we published last week. The week's settlement was 18.75-cents below the extreme level.
This week, our corn demand index (CDI) fell ~0.53%, outperforming Dec21 corn futures for the first time since March. See the chart below. Concerns over COVID-19 in the U.S. are mostly gone. Still, the potential for problems elsewhere in the world and from new strains remain. Uncertain executive branch policy, 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. The USDA released its monthly WASDE report on Wednesday, calling for a much larger than expected carryout for the 2021/22 marketing year.
The uptrend that started from the August 2020 lows remains intact this week. However, the week's price action showed how vulnerable and over-extended that uptrend may be. Most momentum indicators returned to neutral territory this week. Carry spreads from Dec21 to Mar22, May22, and Jul22 widened considerably this week.
Implied volatilities for the 2021 crop finished mixed on the week, with nearer-term expirations rising and longer-term expirations falling. Reasonable values for long-term hedgers are extremely challenging to find at these levels. Opportunistic spreading and careful position management are still virtual necessities to maintain the flexibility needed to manage 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 Dec21 corn futures, we would consider movement within the $5.0950-$5.7875 per bushel range to be unremarkable. Notable moves would extend to the $4.6500-$6.2850 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.
Our Crop Insurance Fall Price distribution shifted lowered this week due to the selloff. The distribution narrowed considerably due to decreases 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 were active in the corn complex for our Quartzite Precision Marketing customers this week. Despite going home a little long last week, our puts kicked in as expected. We were net buyers of futures late in the day Friday to cover the resulting short exposure and bring our clients' positions back into a relative balance. We also took advantage of some cheap short-dated June options for sale on Thursday morning. Purchasing them on a market-neutral basis afforded us some excellent gamma-scalping opportunities on Thursday's bounce from limit-down. At this point, we have a large percentage of insured production hard-sold (cash contracts, futures, expected feed usage) for most producers. Given that, we used the selloff as an opportunity to purchase some deep-out-of-the-money calls to effectively extend their insurance coverage. While we think it is unlikely that the market will reach twice the Spring Crop Insurance Price, we feel holding a few of these calls is prudent. We also used the expansion in carry spreads this week to extend the duration of our sales by selling longer-term futures contracts and buying nearer-term ones. In addition to all of that, we moved some May22 and short-dated August options into the Dec expiration. It was a busy week.
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.
#AgTwitter & #oatt It's been a crazy few weeks. Cast your vote in this week's poll, then click over to read our Weekly #Corn #Market Update:https://t.co/gFUFb827Ho
— Quartzite Risk Management LLC (@QuartziteRMLLC) May 14, 2021
We think these scenarios are equally likely for 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.
