It is official. Inflation is back. But not everywhere. Food inflation is on the decline. All three major crops, Soybean, Wheat, and Corn have declined substantially. Bearish sentiments rings loud across agri with ample supplies combined with solid harvest expectations.
Among crops, corn has fared best. Its prices have not declined as much. Corn outlook is positive given South American supply uncertainty and gasoline linked demand spike.
Corn prices face downside risk from ample supply in the near term. Prices have the potential to spike during later part of the year due to supply uncertainty and higher consumption.
Traders can deploy a calendar spread in CME Corn futures comprising of a short September 2024 Corn Futures (ZSU2024) and a long March 2025 Corn Futures (ZSH2025) to gain from shifting dynamics.
RECORD US CROP WILL SUPPRESS NEAR TERM CORN PRICE
The US produced a record 389.69 million MT of corn last year as per latest USDA figures. Massive production is a result of record high yield of 177.3 bushels per acre.
Globally, corn production in the current marketing year is expected to reach a record 1,227 million MT, due to the US crop last year.
Higher supply is expected to lead to a buildup in ending stocks. Stocks are expected to increase from 302.19 million MT to 318.28 million MT. This represents a buildup of almost 16 million MT.
Ample supplies are a headwind to near term corn prices.
USDA ESTIMATES MAY BE TOO OPTIMISTIC
Global corn production forecasts by USDA may be too optimistic. Upcoming harvests from Brazil and Argentina may spring surprises to the downside.
USDA’s forecast for the Brazil corn crop is currently at 124 million MT. Brazil’s national agricultural agency - CONAB - puts the harvest at 110.9 million MT as per their latest crop survey. The difference stems from USDA’s assumption of higher planted area.
CONAB recently cut its estimate for planted area pointing to lower crop prices dissuading farmers from planting corn. Planting in Brazil is delayed from its usual schedule.
USDA is also optimistic about the Argentinian crop. It reduced its forecast for Argentinian corn by 1 million MT to 55 million MT in the latest WASDE report. However, that is still optimistic given the ongoing spread of spiroplasma disease. Last week, Argentina’s Rosario Exchange slashed corn estimates to just 50.5 million MT from a previous forecast of 57 million MT citing crop loss linked with diseases.
USDA estimates are 18 million MT higher than harvest forecasted by regional agencies across Brazil & Argentina. Corn supplies may end up being much tighter than the USDA is currently forecasting if harvests come softer than anticipated.
ETHANOL PRODUCTION IS LIKELY TO INCREASE CORN CONSUMPTION
USDA increased its forecast for corn consumption for ethanol production by twenty-five million bushels (635k MT) in the latest WASDE report. With gasoline and crude prices on a tear, ethanol blending into gasoline is likely to remain elevated during the coming months driving corn demand.
Sustainable Aviation Fuel (SAF) serves as another source of corn demand in 2024. The Biden Administration is set to release its primary climate model for SAF subsidies under the Inflation Reduction Act in the “very near future”.
While recent reports have stated that the model may be restrictive compared to corn-ethanol industry expectations, the subsidies will undoubtedly drive higher demand for corn-ethanol.
CORN FUTURES CONTANGO IS STEEPENING
Corn Futures term structure has become noticeably steeper over the past three months. Premium for dated contracts have increased. Specifically, corn delivery in later part of 2024 and early 2025 command higher premium.
MARKET METRICS ARE TURNING LESS BEARISH FOR CORN
CME Corn Options positions are currently skewed bullish with a put/call ratio of 0.84. Over the past week, bullish positioning has increased with large call option buildup on June (OZCN4) and December contracts (OZCZ4).
Asset managers have also started to reduce net short positioning on CME Corn Futures since positioning reached its all-time low mid-February.
HYPOTHETICAL TRADE SETUP
South America corn supply remains uncertain even as the US delivers a record harvest. Corn prices will remain bearish in the near term amid ample supplies. Longer term, supply shocks and rising demand has the potential to send corn prices higher. This is evident from steepening contango in CME Corn Futures.
To express the view on corn prices increasing towards the end of the year, traders can establish a calendar spread comprising of short position in September 2024 futures (ZCU2024) and a long position in March 2025 futures (ZCH2025). CME corn futures offer deep liquidity even for contracts in 2025 allowing such calendar spreads to be executed efficiently.
A hypothetical trade setup comprising of the calendar spread consisting of short ZCU2024 and long ZCH2025 also offers margin benefits. The calendar spread position is margin efficient with the entire position requiring margin of just USD 350 as of 15/April/2024.
This position not only benefits from the supply trend but also the seasonal trend in corn prices. Corn prices tend to rise from October through February due to seasonal factors. Between April to September, prices tend to decline. This hypothetical spread is supported by both trends.
• Entry: 1.06185 (ZCH2025/ZCU2024 = 485/456.75 as of 12/April)
• Target: 1.076
• Stop Loss: 1.052
• Profit at Target: USD 323 (Target price = 1.33% higher than Entry => Profit = 1.33% x notional = 1.33% x (485 x Contract Size) = 1.33% x (485 x 5000/100))
• Loss at Stop Loss: USD 225 (Stop level = 0.93% below entry => Loss = 0.93% x notional)
• Reward to Risk: 1.44x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Among crops, corn has fared best. Its prices have not declined as much. Corn outlook is positive given South American supply uncertainty and gasoline linked demand spike.
Corn prices face downside risk from ample supply in the near term. Prices have the potential to spike during later part of the year due to supply uncertainty and higher consumption.
Traders can deploy a calendar spread in CME Corn futures comprising of a short September 2024 Corn Futures (ZSU2024) and a long March 2025 Corn Futures (ZSH2025) to gain from shifting dynamics.
RECORD US CROP WILL SUPPRESS NEAR TERM CORN PRICE
The US produced a record 389.69 million MT of corn last year as per latest USDA figures. Massive production is a result of record high yield of 177.3 bushels per acre.
Globally, corn production in the current marketing year is expected to reach a record 1,227 million MT, due to the US crop last year.
Higher supply is expected to lead to a buildup in ending stocks. Stocks are expected to increase from 302.19 million MT to 318.28 million MT. This represents a buildup of almost 16 million MT.
Ample supplies are a headwind to near term corn prices.
USDA ESTIMATES MAY BE TOO OPTIMISTIC
Global corn production forecasts by USDA may be too optimistic. Upcoming harvests from Brazil and Argentina may spring surprises to the downside.
USDA’s forecast for the Brazil corn crop is currently at 124 million MT. Brazil’s national agricultural agency - CONAB - puts the harvest at 110.9 million MT as per their latest crop survey. The difference stems from USDA’s assumption of higher planted area.
CONAB recently cut its estimate for planted area pointing to lower crop prices dissuading farmers from planting corn. Planting in Brazil is delayed from its usual schedule.
USDA is also optimistic about the Argentinian crop. It reduced its forecast for Argentinian corn by 1 million MT to 55 million MT in the latest WASDE report. However, that is still optimistic given the ongoing spread of spiroplasma disease. Last week, Argentina’s Rosario Exchange slashed corn estimates to just 50.5 million MT from a previous forecast of 57 million MT citing crop loss linked with diseases.
USDA estimates are 18 million MT higher than harvest forecasted by regional agencies across Brazil & Argentina. Corn supplies may end up being much tighter than the USDA is currently forecasting if harvests come softer than anticipated.
ETHANOL PRODUCTION IS LIKELY TO INCREASE CORN CONSUMPTION
USDA increased its forecast for corn consumption for ethanol production by twenty-five million bushels (635k MT) in the latest WASDE report. With gasoline and crude prices on a tear, ethanol blending into gasoline is likely to remain elevated during the coming months driving corn demand.
Sustainable Aviation Fuel (SAF) serves as another source of corn demand in 2024. The Biden Administration is set to release its primary climate model for SAF subsidies under the Inflation Reduction Act in the “very near future”.
While recent reports have stated that the model may be restrictive compared to corn-ethanol industry expectations, the subsidies will undoubtedly drive higher demand for corn-ethanol.
CORN FUTURES CONTANGO IS STEEPENING
Corn Futures term structure has become noticeably steeper over the past three months. Premium for dated contracts have increased. Specifically, corn delivery in later part of 2024 and early 2025 command higher premium.
MARKET METRICS ARE TURNING LESS BEARISH FOR CORN
CME Corn Options positions are currently skewed bullish with a put/call ratio of 0.84. Over the past week, bullish positioning has increased with large call option buildup on June (OZCN4) and December contracts (OZCZ4).
Asset managers have also started to reduce net short positioning on CME Corn Futures since positioning reached its all-time low mid-February.
HYPOTHETICAL TRADE SETUP
South America corn supply remains uncertain even as the US delivers a record harvest. Corn prices will remain bearish in the near term amid ample supplies. Longer term, supply shocks and rising demand has the potential to send corn prices higher. This is evident from steepening contango in CME Corn Futures.
To express the view on corn prices increasing towards the end of the year, traders can establish a calendar spread comprising of short position in September 2024 futures (ZCU2024) and a long position in March 2025 futures (ZCH2025). CME corn futures offer deep liquidity even for contracts in 2025 allowing such calendar spreads to be executed efficiently.
A hypothetical trade setup comprising of the calendar spread consisting of short ZCU2024 and long ZCH2025 also offers margin benefits. The calendar spread position is margin efficient with the entire position requiring margin of just USD 350 as of 15/April/2024.
This position not only benefits from the supply trend but also the seasonal trend in corn prices. Corn prices tend to rise from October through February due to seasonal factors. Between April to September, prices tend to decline. This hypothetical spread is supported by both trends.
• Entry: 1.06185 (ZCH2025/ZCU2024 = 485/456.75 as of 12/April)
• Target: 1.076
• Stop Loss: 1.052
• Profit at Target: USD 323 (Target price = 1.33% higher than Entry => Profit = 1.33% x notional = 1.33% x (485 x Contract Size) = 1.33% x (485 x 5000/100))
• Loss at Stop Loss: USD 225 (Stop level = 0.93% below entry => Loss = 0.93% x notional)
• Reward to Risk: 1.44x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
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