Historically tight stocks mean that corn prices should remain acutely sensitive to weather during the U.S. planting and growing seasons.
The lower stocks report paves the way for the USDA to adjust ending stocks (and thus stocks-to-usage) even lower in next month’s report. This is bullish for near-month corn contracts such as May and July.
However, as we recommend here, option sellers that want to sell deep, deep out-of-the-money strikes should look to go further out in time. This means looking at September–December contracts. This is referred to as new-crop corn, as these contracts will be satisfied with the 2011 corn harvest rather than the stocks already on hand.
Some in the trade have suggested that higher prices will result in more corn acres being planted in the United States this spring. This would in turn "alleviate" the bull market conditions that have persisted for the past nine months. These traders may want to consider the following.
Corn’s planted acreage was bumped slightly higher in the March 31 report to 92.178 million acres from the previous month’s 92.0 million. However, even if you assume an abundant yield of 162 bushels per acre (152.8 in 2010), it still leaves the United States with 2012 ending stocks/usage figure of 6.9%. Higher yes, but still the third lowest in history. This is with acreage intentions fulfilled and near-ideal growing conditions.
Tight ending stocks for 2010 puts the corn market in a situation where it needs nearly perfect weather in 2011 to avoid a continued surge in prices in 2012. Hence, prices should be extremely sensitive to any planting delays over the next 60 days and any less-than-perfect weather during this summer’s growing season.
While corrections will occur along the way, it is hard to envision corn prices trading substantially lower through this year’s planting and growing seasons unless the global recovery becomes suddenly and drastically derailed.
We suggest selling put premiums ahead of the U.S. planting season as a high probability strategy for profiting from steady-to-higher corn prices this spring.
We will be working closely with managed accounts in the coming weeks to determine appropriate strikes and premiums in the corn market.
More aggressive traders may consider adding some call premiums in the late May-June time period, turning the trade into a strangle. This approach would seek to take advantage of a potential period of profit taking once the crop is in the ground.
James Cordier is the founder of investment firm Liberty Trading Group/OptionSellers.com.
Michael Gross is an analyst with Liberty Trading Group. They are the authors of "The Complete Guide to Option Selling," 2nd Edition (McGraw-Hill 2009). For more information on selling options, visit their website at www.OptionSellers.com.