Commodities Roundup: Corn - Quarterly Stocks Review Paves Road for Put Sellers
James Cordier, Michael Gross, OptionSellers.com
April 1, 2011
The news media has been offering up a number of reports, facts and figures regarding increasing food costs. "Food inflation" has become an in vogue topic amongst the pundits.
This week, we'd like to present you some of the real numbers behind the story. For when you peel back the glossy media cover, there actually is some substance to this theme - enough so that Option Sellers can probably use it to bank some solid premiums in the coming months.
Corn prices have benefited from what is expected to be the tightest stocks to usage ratio in history this year (5.0%). As we explained in previous reports, stocks to usage measures the amount of corn supply on hand at the end of the crop year (Sept. 10) vs. the expected demand for the coming year.
2010 US Ending Stocks to Usage ratio is expected to be the lowest in history. The March 31 Grain Stocks report suggests this number could drop even further.
On March 31, the USDA released it's quarterly grain stocks report which shocked corn traders. The report pegged US stocks on hand at 6.523 billion bushels, about 165 billion bushels short of trade expectations. What it means, in short, is that despite higher prices, we are using more corn than most anyone had expected. When one considers that nearly 35% of last year's US corn crop went into ethanol production, there is that much less corn on the market to meet the world's growing demand for feedgrains. Feedgrain demand has become especially acute in developing economies such as China, Brazil and India where newly affluent middle classes are developing appetites for meat.
Historically tight stocks mean that corn prices should remain acutely sensitive to weather during the US planting and growing seasons.
The lower stocks report paves the way for the USDA to adjust ending stocks (and thus stocks to usage) even lower in next month's report. This is bullish for near month corn contracts such as May and July contracts.
However, as we recommend in The Complete Guide to Option Selling, option sellers that want to sell deep, deep out of the money strikes should look to go further out in time. This means looking at September - December contracts. This is referred to as new crop corn, as these contracts will be satisfied with the 2011 corn harvest (not the stocks already on hand).
Some in the trade have suggested that higher prices will result in more corn acres being planted in the US this Spring. This would in turn "alleviate" the bull market conditions that have persisted for the past 9 months. These traders may want to reconsider.
Corn's planted acreage was bumped slightly higher in yesterday's report - to 92.178 million acres from last month's 92.0 million. However, even if one assumes and abundant yield of 162 bushels per acre (152.8 in 2010), it still leaves the US with 2012 ending stocks/usage figure of 6.9 %. Higher yes, but still the 3rd lowest in history. This is with acreage intentions fulfilled and near ideal growing conditions.
Tight ending stocks for 2010 puts the corn market in a situation where it needs nearly perfect weather in 2011 to avoid a continued surge in prices in 2012. Hence, prices should be extremely sensitive to any planting delays over the next 60 days and any less than perfect weather during this summers growing season.
While corrections will occur along the way, it is hard to envision corn prices trading substantially lower through this year's planting and growing seasons unless the global recovery becomes suddenly and drastically derailed.
We suggest selling put premium ahead of the US planting season as a high probability strategy for profiting from steady to higher corn prices this spring.
We will be working closely with managed accounts in the coming weeks to determine appropriate strikes and premiums in the corn market.
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
Optionetics.com ~ Your Options Education Site