With more than half of the largest U.S. crop in history still to be harvested, and cash prices in some key demand markets plumbing their lowest levels in five years, most corn market participants hold bearish to neutral views on price prospects for the near to medium term.
But a growing contingent is placing bets in the options arena that corn prices will start to recover early in the new year once the impending harvest pressure has alleviated.
Since front-month corn prices posted their 2014 low of around $3.20 a bushel on Sept. 30, open positions in bullish call options tied to March futures have increased by 20 percent at the $3.80 per bushel strike, and by nearly 100 percent at the $3.70 strike.
Along with additional call buying at other out-of-the-money strikes, this trend indicates that a number of traders anticipate prices to rebound within the coming months even if near-term price momentum remains to the downside.
Although the massive scale of the 2014 corn harvest looks set to outstrip immediate-term demand requirements, traders have reason to anticipate a pick-up in the overall consumption pace toward the end of the year.
Domestic ethanol production, which accounts for roughly 37 percent of annual corn use, has increased sharply over the final quarter in three of the past four years as abundant fresh corn supplies help propel ethanol production margins higher. The recent unprecedented weakness in global oil values is currently weighing heavily on the margins of all oil and energy product refiners, including ethanol makers.
But as more U.S. corn becomes available at harvest local ethanol producers are expected to dial up purchase orders and production in order to maintain market share, and so should offer a supportive prop to corn prices over the closing weeks of the year.
Robust demand from the cattle sector is also expected to underpin corn values late in 2014 and early next year. Feeder cattle prices scaled fresh all-time highs this week on the back of tight supplies, and ranchers are expected to pursue herd expansion plans in 2015 after profitable margins returned to the sector following years of losses.
Multiyear-low corn values have played a crucial role in restoring that profitability, and feedlot managers are expected to be quite aggressive in locking in future corn requirements going forward which should translate into large consumption contracts once this year’s harvest is wrapped up.
Corn's steep price discount to wheat is also expected to bode well for corn's export potential. At close to $70 per tonne, corn’s current discount to soft red wheat is the widest since March, and so should help corn win market share from wheat in overseas feed markets. And again, many of those agreements are likely to be forged shortly after this year’s corn harvest is complete when corn exporters have a better sense of the scale of supplies available for shipment.
Calling the bottom?
Given this confluence of supportive demand-side factors expected to emerge in corn over the coming weeks, some traders are increasing bullish exposure to the market for the opening months of 2015.
Out-of-the-money March call options have so far been one of the most popular mechanisms for that exposure, with more than 10,000 lots purchased since October 1 at the $3.60, $3.70 and $3.80 strike prices alone.
But an upswing in buy orders has also been evident in May contract calls, indicating that traders with a longer time horizon are also raising their price projections.
There is no question that further advances in corn harvest across the country will led to fresh pressure on the corn market over the near term and could well propel futures prices on another downward leg.
But with prices already at their lowest since 2009, consumer demand is starting to pick up, and should gather momentum once the 2014 harvest is passed the half way point.