Afternoon Corn: CME raising corn margins again

Afternoon Corn:  CME raising corn margins again

Yesterday's bullish USDA reports were still the talk of the trade today, but intraday price action proved a little more mixed. Corn looked set to take advantage of the expanded 40 cent limit at one point, trading as much as 24 cents higher overnight. The day session saw some apparent profit-taking and hedging after the recent run; corn would finish-out 7-8 cents higher in old crop positions, which was roughly where the markets traded synthetically Tuesday. New crop futures actually finished a little lower. Managed Money traders are likely still long at least 420,000 combined futures and options. Today may have been the final day of index fund rebalancing (selling)? Cash trade was a little easier, particularly in areas that witnessed more farm selling.

One can almost hear the gears turning on LaSalle Street, as traders adjust to the apparent new supply and demand realities of the market. In brief, the USDA erased more than 600 million bushels of expected corn supplies at the stroke of a pen yesterday. While soy fundamentals are obviously tighter, no longer can corn users lean on a comfy ~2 billion bushel USDA carryout forecast. Just how much of this new reality has been baked-in with a five month, $2 market rally is certainly up for debate! That will be the job of markets to determine over the next several weeks.

The ethanol data within the weekly EIA report was almost exactly in-line with our forecast, showing a small uptick in production and a modest inventory build. Ethanol production increased +0.6% wk/wk to a 941,000 bbl/day rate; such a rate would consume 5.0 billion bushels of corn over the course of a marketing year. Blender demand found the expected post-Jan 1 bounce, increasing 4% wk/wk. Ethanol stocks increased by +1.8% on the week to 995 million gallons. Ethanol futures sure appeared keen to try and keep pace with corn, but the report helped take the wind out of the sails of the bulls. Over the past two days, March Corn has gained 32 cents and Feb CU 8 cents. With this in mind, we still think most producers are losing about ~10-15 c/gal in the spot today, or 30-40 cents/bu processed, including all costs.

The weekly export sales report is due out in the morning. We are looking for another rather pedestrian week of corn sales; call it just under 1 million metric tons. The export rolls have been quiet of late, but we have plenty of outstanding sales on the books at this point. South Korea picked up a cargo of Brazil corn overnight for Feb ship at $295.50/mt C&F. A little surprising, as U.S. origin is generally more competitive? Argentina is said to be backing down farther on export limitations due to farmer pressures. Russia is moving in the opposite direction, considering an export tax on both corn and barley? They are a middling player in corn at best, but do account for a significant quantity of world barley exports.

Elsewhere, end-user markets were mixed today; dairy bounced back a little, while spot hogs and cattle were under mild pressure. Summer Hog and Cattle positions inched to a new high today? South American weather remains in a relative holding pattern; Argentina enjoyed good rains this week, but conditions turn hot/dry again into the end of January. Brazil is mostly in good shape. There is a pocket of dryness in Sao Paulo, southern Goias and extreme eastern Mato Grosso do Sul? Northern Mato Grosso could also use a little more rain? Brazil's CONAB overnight pegged their total corn crop at 102.3 mmt vs. 102.6 mmt prior (and 102.5 last year); this is below the USDA's 109 mmt forecast from yesterday. CME raised corn margins again overnight; initial margin goes to $1,300.

In options action, volatility set back considerably, particularly up-front; March fell more than 7%. Feb options expire next Friday. Players sold 1,000 Feb $5.30 Calls at 11 ½ cents. CSO trade was active. Calendar spreads were a little softer within the marketing year, but were much firmer between marketing years. Corn gained on the beans and the wheat today. Technically, the intraday spike high of $5.40 will now function as initial resistance. The $5 level is now immediate support, below which stronger support at $4.50-$4.60 should be found. Corn is still overbought, but momentum indicators are solidly positive.

KJ