As the USDA monthly supply-demand and crop production reports are released this Friday, some are expecting the data to reflect robust demand potential while others point to poor exports to date. Timothy Evans of Long Leaf Trading Group shares his trade idea based on the former.
Often times it is easy to get carried away with looking at what is front of us to forget what is around us. Let's begin this today acknowledging the price action of late in the corn market has been lackluster at best. After such a robust market move this summer, where we saw record corn prices at $8.41/bushel the market has been consolidating that move since. The threat of the extreme dryness ended as we moved into harvest in the late fall and that sent a huge percentage of long specs to the sidelines.
We now sit at $6.85/bushel and most of the news flow remains negative. Commercials are not anxious buyers of corn and the demand numbers of late have been week. Calendar spreads (March/May) do not provide elevators an incentive to sit on their stocks looking for a time to sell in the future. This has pushed a lot of grain forward to the cash market, suppressing the price.
Weekly export sales have also been very slow. Last week came in at 49,100. Because the market needs to see sales at 464,000 tonnes to reach the USDA forecast, this leaves the market in need of a lot of foreign buying to get back on track to meet that forecast.
Ethanol demand numbers have also been poor. The week ending December 28 showed 807,000/barrels a day reported on sale. That is down 16.3% relative to last year. Ending stocks on ethanol were up 12.6% over last year, as well.
In summary most of the near-term data is bearish and the price action supports those fundamentals. But, where do we go from here? Ending stocks in corn are still extremely light. The incentive to plant corn this spring falls with every move lower in the market to fill the tightness we will inevitably feel all through 2013.
The technicals of the market are still very favorable on a longer-term chart. We are still holding the 200-day moving average and we are now sitting on the 61.8% retracement of this summer's historic move. The potential for a favorable number this week leaves the market vulnerable to a nice short covering rally if the market is caught leaning the wrong way.
The market is at a level that presents a good long side opportunity from a risk/reward perspective. I am buying ratio spreads in March Corn (long one 7.00 call vs. short two 7.50 calls). The premium outlay on the position is right at 5 cents at the time of this article. This is a way to position for a rebound in the market before the USDA planting numbers begin to take center stage.
By Timothy Evans, Founder & Chief Market Strategist, Long Leaf Trading Group