Back in July, I discussed the reasons why lower corn prices could be on the way. Even though the crops in the Midwest were undergoing one of the worst droughts in decades – with predictions for it to only get worse.
Well, my analysis wasn’t exactly spot on… Yet!
You’ve undoubtedly heard about the extreme dryness in both corn and soybean fields in states like Illinois, Iowa, Ohio and Indiana. As a result, these commodities are skyrocketing, and investors on the right side of the trend have been making a fortune.
According to data from the U.S. Commodity Futures Trading Commission (CFTC), hedge funds and large traders have taken on one of the most bullish net positions in the commodities market since 2009. It’s been paying off, as well. Since the middle of June, corn prices have risen a healthy 54%, while soybean prices are up a solid 31%.
But the tide might be about to turn – especially for corn.
You see, the USDA released its monthly crop report yesterday. And the results weren’t as bullish for corn prices as many analysts predicted.
In last month’s report, the USDA estimated corn supplies will come in at 10.779 billion bushels.
For this month, analysts were predicting a large drop to 10.42 billion bushels – a prediction that helped send corn prices through the roof.
But yesterday’s report came in at 10.727 billion bushels – less than 1% lower than last month.
Granted, the crop might be the smallest since 2006, which is about 13% lower than last year’s yield. But the larger-than-expected result yesterday drove the price of corn lower.
Where Does it Go From Here?
I mentioned before that $8.00 per bushel for the December 2012 Corn Futures contract was the make-or-break area for the market. And if it didn’t break higher through that level, then corn prices could experience a huge tumble.
Well, corn did end up blasting through $8.00, and hit an all-time high of $8.49 per bushel on August 10. But that advance was short-lived. The December futures contract is now trading back down at $7.68 per bushel, right where it was back in July.
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Now, technical analysis won’t wipe away the fact that we’ll have lower corn supplies. But the traders who follow these indicators should continue to push corn prices lower. And once the ball gets rolling, all those large traders and hedge funds will look for the exits, as well, potentially creating a snowball effect to the downside.
There are two other things you need to consider when it comes to corn’s movement in the near term: seasonality and acres planted.
The later in the year we go, the more precise the estimates get for the ending supplies.
If traders are content with today’s USDA’s estimates, which shouldn’t sway too much for the next few months, then we can see corn prices continue to fall. And with the recent rain in the Midwest, next month’s estimate could actually show an increase in supplies.
Typically, we see prices go down once supplies start to hit the market. According to the USDA, as of September 10, 15% of the corn has already been harvested, compared to 5% at the same time last year.
Lastly, farmers tend to flock toward crops that are paying the best. With corn prices hitting record levels, you can bet that more acres will be used next year to plant corn. That should keep a lid on prices for the foreseeable future.
Like I mentioned before, if you’re in the bearish camp, but still want some upside protection, it makes sense to continue to sell out-of-the-money bear call option spreads in corn. The time value will continue to erode those prices, increasing the potential for profits. Take a look at the December 2012 or the March 2013 option contracts if you’re interested.
Ahead of the tape,