Weekly Corn Market Update 06/16/23
December 2023 (Dec23) corn futures (the benchmark for 2023 corn production) finished the week higher by 67.00 cents (~12.63%), settling at $5.9750/bushel - by far their largest weekly change of the year. The week's high was 1.50 cents below the extreme upper level we published last week.
Our corn demand index (CDI) underperformed Dec23 corn futures this week - rising a comparatively small 2.12%. Notably, Dec23 corn futures are nearly back to parity with the CDI - see the chart below. The ratio of Nov23 soybean futures divided by Dec23 corn futures decreased from 2.27 to 2.25. Potential instability in the US financial system, the war in Ukraine, executive branch policy, increasing tensions with China, Federal Reserve interest rate policy, and the Dollar remain concerns.
Dec23 corn futures are now trading above the long-term downtrend trendline extending from the highs of 04/27/22 and 10/14/22 - currently in the neighborhood of $5.77/bushel. We see technical levels below the market at around $5.84, $5.71, $5.63, $5.48, $5.25, $5.14, $4.98, $4.83, $4.63, and $4.20/bushel. We see technical levels above the market at around $6.03, $6.14, $6.31, $6.55, and $6.78/bushel. Daily momentum indicators finished the week in overbought territory, while weekly momentum indicators show mostly neutral readings. Carry spreads from Dec23 to Mar24, May24, and Jul24 narrowed this week.
Our at-the-money model volatilities for the 2023 crop finished the week higher. Excepting short-dated Jul23 and short-dated Aug23, our new crop model volatilities are lower than comparable volatilities a year ago. Our primary focus remains trading around our clients' established positions to capture market volatility to help offset time decay. See the model volatility 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.
For next week's holiday-shortened trading in Dec23 corn futures, we consider trade in the $5.5200-$6.5425 per bushel range unremarkable. Notable moves extend to the $4.9275-$7.4775 per bushel range. Price action beyond that would be extreme. Here is a short note on these levels for those that have not read the Guide to Understanding our Weekly Corn Market Update: We derive these levels from listed option prices and the volatilities we use in our model to approximate them. If they seem incredibly wide for next week, they are. The demand for options this week was extreme, reflected in the short-dated Jul23 $6.00 straddle that expires next Friday settling at 40.5 cents - an incredibly high price reflecting extreme uncertainty in the options market. Be sure to visit our Twitter page to vote in our weekly poll. While you are there, please give us a follow.
For the fall crop insurance price, we see a median of $5.7775/bushel with a mode between $5.45 and $5.50/bushel. The fall crop insurance price distribution shifted much higher with the rally while widening considerably on increased implied volatility. Similar to our weekly price levels, we derive this distribution from listed options prices. When the demand for options is high, you can expect a correspondingly wide distribution. See the crop insurance charts below.
This week, we made many trades for our Quartzite Precision Marketing customers in the 2023 corn crop. Here they are, day by day:
On Tuesday, as the market neared our notable up level for the week, we rolled out-of-the-money short-dated Aug23 puts to a near-the-money strike. Additionally, we sold futures against the now-in-the-money short-dated Jul23 calls we purchased several weeks ago. At about the same time, we also purchased some out-of-the-money short-dated Jul23 calls to replace some of the potential upside we had just sold. Lastly, we bought a Dec23/May24 futures spread we sold for a customer in the week linked above - booking a small profit.
On Wednesday, we collected a small premium to roll down the short-dated Aug23 puts we rolled up on Tuesday. Because of a drop in implied volatility, we used the opportunity to add a unit by trading this on a small ratio - hence the small premium.
On Thursday, we sold the short-dated Jul23 calls we purchased on Tuesday for a nice scalp. We also sold some of the short-dated Aug23 calls we purchased over a month ago for a nice winner. We used some of the premium from those sales to roll our short-dated Aug23 puts back up nearer to the money, again on a slight ratio, but this time decreasing a unit to take advantage of an increase in implied volatility. We also sold a short-dated Jul23 put to close the synthetic put position we created on Tuesday by selling futures against our in-the-money short-dated Jul23 calls.
On Friday, with implied volatility hitting extreme levels, we did everything we considered prudent to capitalize on the increase and reduce our client's exposure (vega) to potential future decreases in implied volatility. First, we purchased a put fly in short-dated Aug23 to make a small reduction in our clients' overall vega exposure and reduce the strike concentration of the short-dated Aug23 puts that make up the bulk of their listed directional hedges. Near the close, we liquidated the remaining short-dated Aug23 calls we purchased over a month ago for a considerable winner.
Overall, we were delighted with the opportunities this week’s price action presented.
#AgTwitter & #oatt - cast your vote in this week's poll, then click over to read our Weekly #Corn #Market Update: https://t.co/1S4DWdoodD
— Quartzite Risk Management LLC (@QuartziteRMLLC) June 17, 2023
We think these scenarios have roughly equal probability next week. Where do you think #cbot Dec23 corn #futures will settle next week?
If you think Quartzite Precision Marketing might be a good fit for your operation, reach out to learn more and discuss your options.
Thanks for taking the time to read. We look forward to your questions and feedback. Thanks again.
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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 2024 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 Dec23 corn futures settlement on 11/04/22; 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.
