Afternoon Corn: Post-report liquidation continues to drive trade

Afternoon Corn:  Post-report liquidation continues to drive trade

The "Margin Man" came calling today, and apparently many market bulls did not want to answer. Liquidation was apparent from the get-go; popular "2 corn to 1 soy" spec trade has moved over $1 in two sessions! Against that back drop, Sept and Dec corn futures finished 19 and 16 cents lower, respectively, with gains tapering off the farther back one looked. Managed Money traders were viewed net sellers of another 40,000 corn today, which would likely put them "net short" the market for the first time since early spring. In the cash, interior markets were steady (shock 'n awe?) while CIF bids were slightly lower in spot slots.

"Report redux" was the order of the day. Given corn's synthetically sub-limit finish Monday, it was not a surprise that the markets opened weaker overnight. It probably also wasn't a huge surprise the market kept extending, as margin calls no doubt nipped at the heels of many market bulls. The corn market has now moved 48 cents off last Friday's high, and nearly one full dollar off the summer (June) highs. We are pricing in an awful lot of demons (ranging from poor demand to bearish USDA statistics), so exercise careful pressing? Do not mistake that warning for calling a bottom, however? Note, the CME is raising corn margins 15%, which will also not help traders in the short-run that are struggling with said margin calls.

We will get some hard data tomorrow in the form of the weekly EIA report, though we assume the market will have bigger fish to fry, position-wise (see above). We think ethanol production will likely continue to retreat, given poor industry profitability, likely falling to the tune of 1-2% wk/wk. Blender demand should be firm, though we think residual disappearance will fall back to more "normal" levels. With that in mind, we would look for ethanol stocks to draw down again, likely to the tune of about -1.5%. As noted above, industry margins are poor; believe it or not, they have actually gotten worse this week despite the big corn break?! We estimate an average Midwest ethanol plant is losing 30-40 cents/bu including all costs, or close to 15 c/gal.

Adding to pressure this week has been some welcome rains in some portions of dry Iowa and Illinois. Some areas went without, however, so coverage was certainly not universal! Some of the Eastern Belt also received a nice drink. 6-10 & 8-14 day maps lean warm with mixed precip odds. World weather influences remain mostly benign; Brazil getting ready to ship out a monster crop, though Argentina likely close to sold out, particularly given recent economic issues?

Elsewhere, the cattle shell-out continued, trading "limit down" at expanded limits today! Hogs joined the parade, despite some positive China chatter around. Dairy has held up surprisingly well throughout? Financial markets were bid; big volumes said to have traded across all exchanges today. Crop Tours of various stripes are set to kick off in a week or so. It may be hard to find ears to count, given the late maturity of the crop?!?

In the options pit, volatility continues to collapse; Dec was down nearly 3% today, and is now back below 20% for the first time since early May. Players paid 3 3/4 for 1000 red dec 340 puts, covered delta neutral versus $4.08 futures. Another house sold Sept straddles and bought downside puts to hedge. Spreads were under extreme pressure today; old/new crop fell almost 20 cents, while the U/Z roll fell 3 cents. Goldman Roll "caught up" today in that U/Z, with total volume done there exceeding 170k contracts. Corn lost a lot of turf to both beans and wheat today in apparent spread liquidation. Technically, the charts obviously look a lot different now, with the breach of key $4 Dec Corn support. This will become very difficult resistance looking forward. The bear filled the old May chart gap today. Next downside target is likely the May lows -- $3.64 CZ, $3.53 CU? CU may be easier to get than CZ, given spreading?

KJ