While soybean meal has been dominating the grain trade the past month or two, corn also has been rallying. Many had been discounting the rise in corn prices as a byproduct of a rising crude oil market and a very strong soybean meal rally. However, take a look at Sept/Dec corn now trading at an inverse. Old crop carryout is projected at 1.8 billion and new crop 2.15 billion bushels. That is a lot of corn.
So why is sept now trading over dec? The rise in meal is a part of it. Meal and corn both compete as feed and if meal is going higher as a protein source that could add to value in corn for old crop too. Another reason is the production losses in South America are leading to more export demand for the US. Brazil oversold their first crop corn and now their second crop (safrina) has been hurt by hot and dry weather. Brazil has been forced to import corn from their neighbors to meet prior commitments.
Argentina’s delays in soybean harvest has in turn delayed corn harvest. So the Arg corn the market was counting on to be available now has been delayed. Corn harvest will most likely get under way in a couple of week but it will not be until July when Argentina gets caught up on export shipments. Add on that US corn is competitive in the world market the US becomes a source of additional export demand.
I like bear spreading Sept/Dec corn at an inverse. By the end of August we should have adequate old and new crop stocks and the spread comes back to -10 or lower. In the mean time we could still see higher prices in Sept/Dec corn. Seasonal traders may already be in this spread. Other may have been waiting for a summer rally.
I think from a fundamental perspective the risk/reward now favors the bear spread in Sept/Dec corn. Seasonally sep/dec has favored bear spreading for a month now. But with the spread trading at an inverse and the fact we still have adequate old crop and new crop stock carryout, I like bear spreading sept/dec.
Conservative traders can wait and see how summer weather starts off. June weather is very important for the corn crop. Weather scares could send the sept/dec corn spread higher depending on the severity of the weather issues. I would look to put in a small position now if you don’t already have one and see what happens in the next couple of weeks.
Margin for Sept/Dec corn is currently $385 and subject to change anytime per the CBOT/CME Group.
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