(05/20/09) Prospects Look Bullish for Corn

This time of year, I think the grain markets offer some great opportunities for traders as the growing season begins and everyone is watching the weather. Right now, I'm particularly bullish on the prospects for corn, which has seen planting delays, and recommend a call spread as a possible trading strategy.

If the weather is perfect early in the year, farmers would have no disruptions and get their product in the ground and harvest it. However, that's often not the case, and in the past couple years, we've seen longer cold weather patterns into spring combine with heavy rains to result in planting delays. Farmers have been scrambling to get their crops in the ground this year. There has been a lot of rain in the Midwest this spring, although not nearly as bad as last year when we saw the price of corn rally to $8 a bushel.

The USDA crop progress report for the week ending May 17 showed corn planting at 62%, compared with 70% last year. The ten-year average for crop in the ground by this time in the season is 82%. In Illinois, the crop is only 20% complete, well below the ten-year average of 86%. So we have some 9.76 million acres in Illinois that may be planted after the optimal yield date. To me, that lends support to bullish price action as the later the corn gets in the ground, the more vulnerable the immature crop is to summer heat, as well as the prospect of possible frost exposure heading into harvest.

The latest Commitments of Traders (COT) Report, released weekly by the Commodity Futures Trading Commission (CFTC), showed funds were net buyers of 55,794 contracts. These trend followers increased their net long exposure to more than 64,000 contracts, and that shows these market participants are also anticipating higher prices.

Any news of slow progress or bad weather as we continue into the growing season will lend support to buyers. In the past few years, we've seen back-to-back limit moves on consecutive days in the corn market at this time of year as the markets are highly sensitive to fundamentals. (The daily limit is 30 cents for corn futures.)

If you trade grains, it's important to not only watch the weather and crop progress reports, but also outside markets such as the US dollar, which also tends to drive commodity price action as most commodities are priced in dollars. Before the grain markets open, you can watch activity in the dollar as well as crude oil and the stock market to help gauge direction. As an energy source as well as a food source, corn often tracks the price of crude oil.

Of course, the US Midwest is not the only place that produces grains, and I don't think we will have the exact same market spikes as we saw last year in grains, which saw record highs amid widespread commodity inflation. So far, this market hasn't been trading in as big a range this year as we saw last year, but it does seem that given the planting delays we've had this year, conditions are bullish again for corn. We've had less-than-perfect weather, and some farmers who can't get their corn into the ground may shift to soybeans or other crops that can be planted later.

While I'm bullish, that's not to say the market will go straight up. There may be days that crude oil is down and the stock market pulls back, and that does impact the grain markets as well. Right now, I recommend bull call spreads, as well putting on strangles.

Right now, a good play would be to look at September calls in corn. With a call, your loss is defined as what you pay for that option, while your opportunity on the upside is virtually unlimited until expiration. You can also sell a call against it to make the trade even more affordable. Don't necessarily come in and buy at the highs, however. Instead, wait until the market pulls back a bit to give you an opportunity for a better price. Keep in mind that every penny in corn is worth $50.

As far as technicals go, I see support for July corn futures at $4.02 and $3.95, with resistance at $4.27 ?. Once we break that, I'd look for $4.50 as the next upside target, so a $4.50 call might be worth considering. After that, there is a big gap near $5 and I think there is a lot of opportunity for more upside. July corn settled at $4.21 ? on Monday, May 18, 2009.