Watch For a Corn Market 'Bear Trap'
New crop December corn futures dropped from $4.17-1/2 on March 11 to a low of $3.92-1/2 on March 18. Heavy liquidation with traditional funds going from net long to short weighed on futures as did a higher U.S. dollar and weakness in other commodities.
Yet, on Wednesday afternoon, March 18, the Federal Open Market Committee met and, in their wording, indicated that a rise in interest rates may be some time off. The market quickly responded, posting upward reversals in grain prices after reaching their lowest levels since late October.
December corn futures need to digest six months of usage (since harvest) and six months of uncertainty for the growing season ahead. In other words, with December corn futures trading at a level where most producers can't make money, it is an industry that may have room to rebound. The technical side to the story looks weak, but as the ever critical Prospective Planting and Grain Stocks reports loom closer (due for release on March 31), it wouldn't be a surprise to see traders who recently went short futures move to the sidelines, or even reverse their position.
A bear trap is, in essence, when a market usually breaks chart support, weakens and gives every appearance that prices are poised to continue to move lower. Traders jump on the short side selling into weakness. The fundamental bearish argument grows. For the year ahead, after two record crops, the market once again seems to be of the belief that record crops are easy to accomplish, and 2015 will again produce a big numbers.
Yet, it is early in the season, and end users and bullish speculators may think otherwise. Corn currently is a value. We determine value occurs when buyers can own corn for less than it costs to produce. There is no guarantee what the corn crop in the year ahead will look like.
Therefore, while it is simple to argue lower prices, the recent drop in value may be nothing more than a chance for buyers to jump in. If prices begin to rebound, those who recently went short will likely begin to exit by buying their contracts back. This could lead to a short cover rally. If prices rally and focus on favorable price factors, the recent sell-off will be viewed as a trap that caught bearish traders. One has to wonder if this might not be the case this year with corn priced as cheaply as it currently is.
If you are a corn buyer, pay close attention to current price levels which offer excellent value for this time of year. Yes, corn may get cheaper. Yet, at the same time, there is probably a finite move downward for corn prices while the topside could become explosive, should weather disrupt production. The key is preparation for all scenarios and to avoid getting caught in a trap.
If you have questions or comments, or would like help implementing strategy for the year ahead or desire materials that you can read to learn more about marketing, please contact Bryan Doherty at 1-800-TOP-FARM ext. 129.
These strategies may not be for everyone. In any strategy, consider commission costs on transactions, and make sure you understand the ramifications whenever you are in any market position.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Hypothetical performance results have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Reproduction of this information without prior written permission is prohibited. This material has been prepared by a sales or trading employee or agent of Stewart-Peterson and is, or is in the nature of, a solicitation. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Stewart-Peterson. Stewart-Peterson refers to Stewart-Peterson Group Inc. and Stewart-Peterson Inc. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with both companies. Accordingly this email is sent on behalf of the company or companies providing the services discussed in the email.
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