I believe that it's extremely unlikely that old crop corn prices have
topped. Recently, the March corn contract surged 50 cents, moving from
$6.88 to $7.32 over a six day span. Suddenly, the market turned lower,
losing about half of the 50 cent gain. One reason for the setback in
corn prices can be attributed to evidence that prices trading in the
$7.20-$7.30 range seemed to choke off demand. With the strong basis,
cash corn prices have been near $7.50 in central Illinois. A negative
weekly corn export number (released Thursday March 7
th) tends
to confirm that corn priced in the $7.50 area is shutting off demand.
The ethanol crush continues to edge lower at these price levels, as
well.
With projected ending corn stocks at pipeline minimum
levels, the function of corn prices is to remain high enough for long
enough to assure the rationing of tight stocks until the next harvest.
Certainly the harvest and shipment of the South American crop will help
alleviate this rationing process. However, widespread relief from South
American corn may be 30 to 40 days away, possibly longer.
The old
crop futures market remains totally inverted, a sign of tight supplies
and an indication that prices could still move higher. The March/May
corn spread has moved out to record highs. The next spread to likely
move could be the May/July corn spread. Finding a way to participate in
this spread, or in the May contract, with limited risk, is the subject
of this article. March corn futures expire on Thursday, March 14
th.
Currently the March is trading 19 cents over the May. This spread
peaked recently at 24 cents over. Keep in mind these inversions are
extremely rare as normally the board has a carry built into the spreads,
which typically accounts for the cost of storage. Assuming that March
expires next week, say 20 cents over the May, I'm willing to speculate
that May futures will be well bid and possibly rally toward the
expiration price of the March. The trick is finding a way to participate
in this market without assuming a ton of risk.
I have two
suggestions to consider. First, consider purchasing the April corn $7.10
calls at 3 cents. For a premium outlay of $150 per option, before
commissions, one can own the right to be long May corn futures from
$7.10 until the expiration date, which is March 22
nd. Second,
consider establishing the May/July corn spread at 18 cents, risking a
close in the spread below 15 cents. The upside target on this spread
should be 28 to 32 cents over. The initial margin to hold this spread is
$675. While it appears the risk, as outlined here is only 3 cents, one
must be aware the spread could be well below 15 cents into the close,
making the risk potentially more than 3 cents. Having said that, the
spread will not expire as the April call option will, thus the risk of
losing, due to time decay is eliminated. In addition, you'll be able to
hold the spread through the March 28
th quarterly stocks and prospective plantings report.
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W.L. Laney
grew up in a migrant worker shack. By all rights, he should still be
living in that shack, but now he’s got several successful businesses
that keep him very busy. Now he helps other people realize and take
advantage of similar opportunities. It’s one thing to have an idea for a
new business, it’s quite another thing to actually go out and do it.
While WL is a religious person, he believes most strongly in the ability
of the individual to succeed, even in the face of the most challenging
circumstances.
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Today legendary trader Jim Sinclair predicted that the gold market
will shock market participants with $1,000 daily trading ranges as the
West battles the East in the gold war. Below is what Sinclair, who has
been actively trading the markets for over half a century and whose
father was business partners with legendary trader Jesse Livermore, had
to say about what is now taking place and what to expect as the gold war
continues to rage.
