Commodities Roundup: USDA Report a Game Changer for Corn

James Cordier & Michael Gross, Optionsellers.com
October 11, 2010

There had been whispers all summer about dry weather across the US Midwest hampering corn yields this fall. But few expected the sharp reduction in yields and ending stocks reported by the USDA in Friday’s monthly supply/demand report.

The USDA reports the average yield per acre for this year’s US corn crop will drop to 155.8 bushels of corn as compared to last month’s estimate of 162.5 bushels per acre. For those not familiar with corn futures, that’s a big, big number. It will result in US corn production dropping to 12.664 billion bushels down from 13.16 bushels last month – close to a 4% reduction.

What's most important is that this takes projected 2011 ending stocks (the amount of corn left over at the end of the crop year on Sept 1. 2011), down to 902 million bushels of corn. The key figure of corn price discovery however is stocks to usage ratio. This is the amount of corn on hand at the end of the crop year vs. the expected demand for the upcoming year. A stocks to usage ratio of 10% would mean that if no corn were harvested in 2012, we would have enough left over from 2011 to meet 10% of the demand.

2011 stocks to usage ratio is now expected to drop to 6.7% - the 2nd lowest ever on record. This is the real figure that is driving corn bulls, especially given that last month’s estimate for 2011 stocks to usage was a more moderate 8.3%.

Chart 1

Given the steadily rising global demand for corn, wheat and soybeans, continued dry weather concerns in global corn heavyweight Argentina, and they steadily eroding US dollar, today’s USDA report could lock corn into a bullish mode for months to come. The market’s job now will be to take corn to a price level that discourages demand, and preserves supply.

At the very least, the chances of a sharp downtrend in corn prices seems remote at this point, which should create a ripe environment for put sellers. Prices could be a little volatile next week as the market fully digests Friday’s USDA report. However, lower yields should secure somewhat of a floor beneath the market.

Put sales appear to be a high percentage play for late 2010 in the corn market. We at Liberty Trading like March and May puts beneath the 4.50 level – however, we would wait for a corrective break before seeking premium. As harvest progresses in the US this month, producer selling could create those kind of breaks. Get ready.

Chart 2: March Corn, 10-8-10 1

Note: The opinions presented here are that of Liberty Trading and not necessarily shared by Optionetics and/or its instructors.

James Cordier & Michael Gross
Contributing Writers, Liberty Trading Group/Optionsellers.com
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