Long-range corn bulls eye July 2015 call options

July 24th, 2014

By:

Category: Grains

(Reuters) – At roughly 10 cents a pop, $4.80 per bushel July 2015 corn calls look to be the latest hot ticket among long-term corn bulls, even as nearby corn futures prices descend to their lowest level in four years under the weight of a likely record-setting U.S. crop.

And with the U.S. corn crop rated in its best condition in years at this point in the growing season – and projected to complete its all-important pollination phase amid generally non-threatening weather conditions – corn futures tied to this year’s harvest looked set to continue struggling to post any meaningful rallies over the near to medium term.

But now that cash corn values have sunk to multiyear lows, grain buyers across the world have seen profit margins improve and are expected to ratchet up corn purchases accordingly. This promise of improving end-user demand is encouraging many traders to brace for a more supportive price landscape over the early months of 2015, even if price action for the remainder of 2014 remains skewed to the downside.

LOOKING BEYOND THE PILE

The current focus of a majority of corn market traders is on trying to assess the likely overall scale of the 2014 U.S. crop, which has so far enjoyed one of the most crop-friendly growing seasons on record and was widely projected to post record yields across a majority of planted area.

Some disgruntled corn bulls have lately tried to stir up buying interest by highlighting pockets of dryness in certain key growing areas such as central Illinois, in the hopes market forecasters will start to dial down the size of their overall crop projections.

But on the whole, the mood of the majority of the market remains devoutly bearish, with few players interested in engaging in any corn buying of any note.

That said, a minority of corn traders appeared to be prepared to look beyond the immediate-term prospect of record-large corn supplies toward a more robust demand landscape in the medium term that should start to eat through corn inventories at a faster pace than many are currently forecasting.

The true scale of global corn demand throughout the latter months of 2014 and opening half of 2015 is difficult to accurately assess now, and is unlikely to be fully appreciated until the last of the 2014 crop has been cut out of the field and brought to market or locked away in storage silos.

However, with cash prices now at their lowest level since 2010 in most major export markets, it can be assumed most large-scale grain end-users will be preparing to dial up purchase orders to cover crop needs while the supply side of the equation continues to dictate price direction and set market mood.

And once this flow of buy orders starts to filter through trade desks to originators, they should start to have a supportive influence on the price that could set the stage for an eventual rally once the rest of the market moves on from obsessing about the potential size of this year’s crop.

PRE-STRENGTH POSITIONING

Forward-looking traders anticipating an upturn in corn values once the 2014 harvest is out of the way have already started to buy bullish call options tied to July 2015 corn futures. Indeed, more than 2,100 contracts (or around 10.8 million bushels) of call buying has occurred since July 1 at just the $4.40, $4.60, $4.80 and $5.00 strikes. An additional 3,600 contracts of open positions are located between the $5.00 and $6.00 strikes, indicating a growing number of traders are preparing for corn futures to eventually turn higher once the 2014 crop harvest is over.

The July 2015 call options provide their owners with exposure to any upturn in general corn market sentiment all the way through the first half of 2015.

More importantly, they offer exposure to any acreage tussle between corn and other crops in the run-up to the 2015 U.S. planting season, which will set supply expectations for the subsequent crop year.

In any event, July calls looked set to appreciate in value once corn prices start to recover, and have the real potential to outperform the underlying futures prices in the event of any surprisingly strong bursts of demand or concerns about any potential reduction in 2015 planted area.

Lately, the $4.80 July calls have been the flavor of choice among buyers, with open interest at that strike doubling since July 1 to 2,071 contracts, making it the highest cluster of ownership in July calls.

But other adjacent strikes have also seen swells in buy-side interest lately to reveal a general rise in upside buying interest among those focused on the long term.

Certainly the broadly friendly growing weather across the U.S. Midwest will remain the primary price-setter for the corn market over the near to medium term.

But once that crop is “in the bin,” it is likely that the market focus will shift more fully to the demand side of the equation, which has upside potential, given the strong profitability margins of end users at current corn values.

For owners of upside corn calls tied to corn futures that expire well into 2015, such an environment should be beneficial and worth waiting for through the enduring bearish mood of the present.

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