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Corn closely tied to crude oil

Crude Oil and Corn: It has been a few months since we talked about the crude oil-to-corn connection but it is time to roll it out again.

You may remember a good chunk of the 2008 price rally in corn and soybean oil (and therefore soybeans) was due directly to higher energy prices. Crude oil started at $96 in January 2008, rallied to $147 in July, and fell to $32 in December. If you look at a continuous crude chart, not just a June contract, you will see we are in a slow uptrend. The portion of corn that goes into ethanol returns a higher "value" back into the corn price than that which goes into livestock feeding. That "value" is directly tied to ethanol prices. The relationship is unleaded gas (RBOB) -> ethanol -> corn. We will reserve the specifics of this discussion for a future commentary.

US Dollar and Commodities: The US dollar can have a clear relationship with a highly imported/exported commodity like crude oil and a general relationship with others. Friday's sharp decline in the US dollar now, on a very good job loss number, puts it at the lowest level since January 8. A lower US dollar makes our exports cheaper for foreign countries to buy.

Corn: A sharply lower US dollar and the highest weekly close in crude oil in months were the prime movers in corn last week. If ethanol is right at the exact same price that it peaked at in January, there is a chance nearby corn futures (July) should be at that same price the nearby corn contract peaked at ($4.29). The other issue supporting prices is the planting pace.

Corn Planting: A week ago yesterday, corn was 33% planted. From Monday the 4th - Sunday 10th we normally add 23%. A week ago last Friday, our informal poll of brokers in the office was about dead on with what USDA found. This past Friday, out of the 23% we normally plant we would estimate 12%-14% was planted. That would bring us up to between 45% and 47% complete on Monday's report. The five-year average on Monday will be 72%. So far, we have not heard of eastern Corn Belt farmers making dramatic corn to soybean acreage changes yet. They are still waiting impatiently to plant corn at this point.

Direction: Based on corn-only fundamentals we had pointed out corn had likely topped in early April. Those highs were taken out, though barely, this week. We will have to go back to watching crude apparently for direction here. Overall for trading we will still follow this trend. For hedging we have no problem holding our hedge position (using options). This position allows us to benefit from higher prices…Rich Nelson

Trade Idea(s):
(04/30) Bought Dec 418, objective 435 1/2 filled 05/08 for +$875.
(05/08) Buy Jul 406, risk 392, objective 434.
Option Strategy(s):
(01/23) Bought 1 Dec09 410 put @ 51. This as a starting point for a position to be built as the market moves. Closed 37 5/8.
(04/21) Sold Jul 350 put/sold Jul 430 call for 27 1/2, move risk to 36, objective 0. Closed 26 1/8.

Corn Technical Commentary:
Corn was finally able to post a close above resistance at 417 1/2 Friday. Further levels of resistance are just ahead at 423 1/2 and 428. We will stand aside for Monday. The next major hurdle is the Dec highs near 450.

Vital Technical Indicator: the next projected major turn day is May 15.

Friday's Closing Cattle Commentary

Cattle: As you would have expected, live cattle reacted positively to Friday's job report. It would appear we are past the worst of the recession and would have further job losses slowing down. It is nice to hear but we still are noting the economy to live cattle connection is waning. During the Easter week beef production was down to 465 million lbs. Last week's kill will bring in 502 million lbs. In three weeks that total will come to around 520 or so. We will remain at the 500 – 520 million lb range from now through July or so. Cash cattle peaked at $88 around Easter and are now $84. We see no reason why cash will not hit $78 to $80 and for June futures to reach $80. Keep in mind demand is strong right now as buyers pick up grilling needs. That is helping to offset some of the dramatic supply increase. Once that buying drops off sharply in June we will deal with the full weight of supply. We have to make one thing clear here…we are running a lower slaughter pace than last year. That will continue through summer. However, the normal seasonal rise in slaughter into summer is something you just cannot stop. If we were running slaughter equal to last year that summer downside price would be lower.

Trade Idea(s):
(05/08) Sold Jun on 82.75 open (order was 82.70), risk 83.90, objective 81.00. Closed 82.97.

Option Strategy(s):
(04/28) Sold Aug 85.00 call at 1.90, risk to 2.55, objective 0. Closed 2.17.

Cattle Technical Commentary:
Cattle gapped higher today and closed above the 40 & 50 day moving averages. We won't confirm a bottom unless we see some follow-through on Monday, but this is a step in the right direction for the bulls.

Vital Technical Indicator: Next projected major turn day for live cattle is May 14 and for feeders is May 13.

Crude Oil and Corn: It has been a few months since we talked about the crude oil-to-corn connection but it is time to roll it out again.

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