Speculating On Final Yields May Be Costly
Debates over the yields are raging right now, but does it really matter?
Of course it will matter when it all gets sorted out, but it may not help as much as you’d expect in the short term. The markets always revert back to their fundamental value, but we all know that in the short term, other market forces are at play. So ignore all the yield debate for the time being and let’s take a look at the corn market in light of the clues that are coming straight from the markets.
Funds entered the stocks report short about 170k. The report was surprisingly bullish, which caused a big fund liquidation that sent the market up 20¢ over 2 days. (It also tightened the final yield range necessary for sub $4 prices to continue).
Post report call skew
After corn hit 390, something interesting happened. Funds stopped liquidating and instead started buying up cheap calls in November and December. Open interest has jumped tremendously in the 390-420 range especially. The skew jumped from .5 between dime strikes all the way up to 1.3! This play allows funds to hold on to their short position, as it is protected with the calls, and also easily reenter the shorts they panicked out of.
We know the funds are capable (and desire) a much shorter position going into the winter, especially at these levels. They were over 40k contracts shorter just 2 weeks ago, and last winter they held a short position of over 300k.
We won’t know final yield numbers for quite a while yet, and funds have been known to trade and respond only to hard numbers. So that points us to the USDA report this Thursday. Average estimates are at 167.5. If we were really trading those estimates corn would be 15¢ lower. If the USDA comes out with a number in this area or higher, we think the market breaks back and sits till the next number.
We think it would be unusual for the USDA to cut the yield more drastically than the average estimate. We have seen a relatively warm September, and they are in the business of reporting what is out there now, not forecasting what may come.
Throughout this year, we have seen funds add calls so that they can hold a short futures position, or add to a short futures position. The fact that they are loading up on calls leading up to this number, with the Corn market at the relatively attractive sale price of 390 makes us think they are running the same play.
Of course, all that gets thrown out the window if the USDA posts a yield of 165 or less. Odds are they won’t, and the funds will add to their shorts, selling the fact.