Weekly Corn Market Update 07/15/22
December 2022 (Dec22) corn futures (the benchmark for 2022 corn production) finished the week lower by 19.75-cents (~3.17%), settling at $6.0375/bushel. This week's price action took place in an 81.75-cent (~13.11%) range. The week's high was 14.75-cents below the upper notable band we published last week, and the low was 8.25-cents below the lower notable band.
Our corn demand index (CDI) outperformed Dec22 corn futures slightly this week, falling 2.84%. Dec22 corn futures are still trading at a discount to the CDI by roughly the same amount as last week. Based on this discount, we still believe the market is vulnerable to a sharp rally on production concerns. The war in Ukraine, executive branch policy, tensions with China, Federal Reserve interest rate policy, and strength in the Dollar remain concerns. The USDA released its monthly WASDE report for July on Tuesday.
Dec22 corn futures settled the week below the long-term trendline connecting the lows of 03/31/21 and 09/10/21. We see support below the market near $5.99, $5.80, and $5.65/bushel. Significant long-term support is between $5.26 and $5.35 per bushel and would require a substantial break in the longer-term trend to test. We see resistance above the market around $6.30, $6.47, $6.58, $6.88, $7.04, $7.14, $7.27, $7.37, $7.57, and $7.66/bushel. Daily momentum indicators remained in neutral territory this week, while weekly momentum indicators remained in neutral to oversold territory. Daily Bollinger Band Bandwidth was little-changed this week. Carry spreads from Dec22 to Mar23, May23, and Jul23 strengthened.
Our at-the-money model volatilities for the 2022 crop finished the week mixed, with the front of the curve lower and the back slightly higher. Given the movement in forward volatilities this week, we have begun shifting our preference from the October expiration to December. Though we still believe the high implied volatilities in the options market require opportunistic spreading and careful position management 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.
For next week's trading in Dec22 corn futures, we consider trade in the $5.6725-$6.4775 per bushel range unremarkable. Notable moves extend to the $5.2400-$7.0775 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 $5.7750 per bushel this week, with a mode between $5.50 and $5.55. Our Fall Price distribution shifted lower with the selloff and narrowed with decreased implied volatility.
We had another busy week in the new crop corn market for our Quartzite Precision Marketing customers. We made a nice scalp in some deep-out-of-the-money December puts in the overnight trade Sunday into Monday. Early on Tuesday morning, we purchased a deep-out-of-the-money call calendar spread from Short-dated September to October based on favorable implied volatility inputs. Later Tuesday morning, shortly before the USDA released its WASDE report, we sold a pair of vertical put spreads in Short-dated August and October to roll in-the-money puts down nearer-to-the-money. At about the same time, we bought a December future for one of the clients we made a sale for late in Friday's trade last week. After the USDA release, we made an outright purchase of a wide, vertical call spread in December while futures were trading near our lower notable level for the week. This call spread is not a typical trade for us. However, we saw some mispricing in the two calls' relative value, and, given the selloff, the spread's long deltas fit naturally into our clients' portfolios. On Thursday, we purchased another vertical call spread in December, but this was solely to roll down existing "risk" calls we have in the portfolio to protect against upside tail risk in the increasingly unlikely event that the Fall Crop Insurance Price exceeds twice the Spring Crop Insurance Price. In the overnight trade, early Friday morning, we rolled near-the-money October puts to the same strike in December when the calendar spread traded at a favorable price.
#AgTwitter & #oatt - cast your vote in this week's poll, then click over to read our Weekly #Corn #Market Update:https://t.co/lsRU60CEOH
— Quartzite Risk Management LLC (@QuartziteRMLLC) July 15, 2022
We think these scenarios are equally likely for next week. Where do you think Dec22 corn #futures will settle next week?
Overall, it was a good week, and we were happy with the changes we made in our clients' portfolios. While stringing all-nighters together takes a toll, we believe volatility creates opportunity. We want to be there for our clients when that volatility happens, day or night. We still think 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. It may still be the right time to consider your 2022 marketing plan or even begin considering your 2023 marketing plan. If you have any questions or want to learn more about what we do, 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.
