Markets unPACKed: A Crack in the Armor?

A Crack in the Armor?

 

Last week’s price action was not the week for the bulls as we watched the corn trade limit down on Thursday and the July contract (as of this writing on Friday, May 14) currently down another 20 cents after trying to claw back some gains in the overnight session.

As one of our traders said, “Were the two days of weakness we’ve just witnessed the cleansing the market needed in order to trade higher OR the crack in the armor telling us this could be the top?”

So how do we determine whether the corn market is being cleansed or if we are at the top? Let’s review what we knew at the end of the day on Friday:

Planting Progress and Acreage: Let’s just say I spoke to more people on tractors last week than I have on desks. Corn planting was estimated to be 67% completed, at record speed. But the interesting discussion was the projected U.S. corn acreage. IHS Markit is projecting corn plantings at 96.85 million acres, up from its March 22 forecast of 94.29M and above intentions at 91.1M. This is probably the highest projection I have come across and begs to ask whether acres are being taken from soybeans? —Bearish.

China Exports: This is by far the most interesting fundamental news right now. It seems as though China has a tactic to exports. They seem to show 20/21 corn cancels in the Weekly Export Sales Reports but show the purchases in the Flash Export Notices. So, China weakens the market a bit with its disappointing sales and then the USDA later confirms sales. The USDA confirmed the sale of 1.36 million tonnes of U.S. corn for delivery to China in 2021/22. A recap of the prior China flash sales this week are:

  • May 10: 1.02 mmt for 21/22 corn
  • May 10: a cancellation of 280kt
  • May 11: 680kt for 21/22
  • May 13: 680kt for 21/22 corn

China is on a buying spree as new crop corn commitments top five million metric tonnes. But it is important to point out that they are not buying nearby corn. After all, why pay $7.50 when they can go to the new marketing year (21/22) and get $6 corn? But China reaching that far out to the 2022 crop is bullish because the demand is reaching to 2022, and the U.S. does not have a lot of crop available to be buying right now anyway. —Bullish.

Weather in Brazil and the U.S: Hot and dry conditions in Brazil continue to reduce the potential size of the safrinha corn crop. Brazilian officials did lower their production estimate for the safrinha crop to 79.8 million tonnes versus 82.6 million tonnes last month.–Bullish.

North Dakota finally saw rain early last week and dry conditions in the rest of the corn belt have allowed planting to speed up. Now forecasts show hotter temperatures for the rest of May, which is good news for emergence. The U.S. weather play is still a factor to be determined. —Indeterminable.

Option Activity: As of Friday, May 14, there was notable volume in the CZ1 580/600 call spread and CZ1 600/640 call spread. CZ1 closed down 15’4 cents at 542’6. Interesting to see some take advantage of cheaper calls. —Bullish.

With conflicting fundamental data, the beauty of options is the ability to position yourself on either side of the market with attention to premium spent. That is what we have done after last week. We then like to watch the Sunday evening overnight market activity to take advantage of trading opportunities ahead of Monday.

 

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