Weekly Corn Market Update 06/30/23
December 2023 (Dec23) corn futures (the benchmark for 2023 corn production) finished the week lower by 93.25 cents (~15.86%), settling at $4.9475/bushel - below the extreme down level we published last week and their lowest settlement since the fall of 2021.
Our corn demand index (CDI) outperformed Dec23 corn futures this week - rising 1.19%. The ratio of Nov23 soybean futures divided by Dec23 corn futures skyrocketed from 2.23 to 2.72. Potential instability in the US financial system, the war in Ukraine, executive branch policy, tensions with China, Federal Reserve interest rate policy, and the Dollar remain concerns. The USDA released its Quarterly Grain Stocks and Annual Acreage reports on Friday.
Dec23 corn futures are now well below the long-term downtrend trendline extending from the highs of 04/27/22 and 10/14/22. We see technical levels below the market at around $4.83, $4.63, and $4.20/bushel. We see technical levels above the market at around $4.98, $5.14, $5.25, $5.48, $5.63, $5.71, $5.84, $6.03, $6.14, $6.31, $6.55, and $6.78/bushel. Most daily and weekly momentum indicators finished the week in neutral territory. However, some daily indicators entered oversold territory on Friday's price action. Carry spreads from Dec23 to Mar24, May24, and Jul24 widened considerably this week.
Our at-the-money model volatilities for the 2023 crop finished the week lower. 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 trading in Dec23 corn futures, we consider trade in the $4.6950-$5.2300 per bushel range unremarkable. Notable moves extend to the $4.3500-$5.6625 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 amount of weekly movement we believe is necessary to justify their implied volatility in our model. 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 $4.8675/bushel with a mode between $4.70 and $4.75/bushel. The fall crop insurance price distribution shifted significantly lower with the selloff and narrowed considerably on decreased implied volatility. Similar to our weekly price levels, we derive this distribution from listed options prices. See the crop insurance charts below.
This week, we were quite active for our Quartzite Precision Marketing customers in the 2023 corn crop:
On Wednesday, as the market approached our notable down level for the week, we sold in-the-money short-dated Aug23 puts and purchased near-the-money short-dated Sep23 puts, collecting a nice premium. This trade converted our short-dated Aug23 position to a "true" put fly while moving the bulk of our directional option hedge to short-dated Sep23. At about the same level, we made a few small futures purchases for several clients whose overall risk profile had drifted to a net short delta due to previous cash sales and ample crop insurance policies.
On Thursday, we closed last week's ratio futures spread between Apr24 heating oil and Dec24 corn for a nice winner. Though hindsight being what it is, we would have been better off waiting until Friday after the USDA release.
On Friday, before the USDA release, we purchased a downside put calendar from short-dated Sep23 to Dec23 - based on what we saw as a favorable implied volatility spread between the two months in the downside part of the curve. After the USDA release, as the market approached our extreme down level for the week, we rolled the now in-the-money short-dated Sep23 puts from Wednesday down and out to near-the-money Oct23 puts - collecting a hefty premium in the process. Then, for an individual client with enough on-farm storage capacity to justify the trade, we reopened a sale in the Dec23/May24 carry spread that we closed two weeks ago on a slightly larger quantity than the first sale seven weeks ago. Lastly, we purchased some upside calls in short-dated Aug23 late in the day to help manage the deltas resulting from our clients' gamma.
#AgTwitter & #oatt - cast your vote in this week's poll, then click over to read our Weekly #Corn #Market Update: https://t.co/R2S2DxSUzc
— Quartzite Risk Management LLC (@QuartziteRMLLC) July 1, 2023
We think these scenarios have roughly equal probability next week. Where do you think #cbot Dec23 corn #futures will settle next 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 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.
