Managed Futures: Are They Right for You?

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A few months ago we discussed how a bottom in the corn market would be formed. History tells us that when you have a market with a perceived burdensome supply picture that the lows in the market will be formed over time, not overnight. That is exactly what has transpired over the past several months. Spot corn futures have spent much of this time in a relatively tight 40-cent range. The market has digested some very negative demand news over the past 6 months and now appears to be influenced mainly by the 2009 growing conditions. It is for this reason that I am declaring the bottom is in for the corn market...for now.

I am saying "for now" because I am making the above statement with my tongue squarely in my cheek. There are several reasons to believe that the corn market has scored some significant lows. The dramatic price ascension in which the corn market participated in 2008 had a tremendously negative impact on the demand base for corn. The export demand for corn dried up and the domestic use of corn fared no better. During this past 6 months of base building in the corn market the demand base for corn has shown signs of a solid recovery. Export sales for corn over the past 3 months have outpaced the previous 3 months by more than 2:1. In addition, livestock producers are enjoying their most favorable margins in some time.

The market is now prepared to look forward to the 2009 growing season, which is currently getting started at a snails pace. As of April 20th, only 5% of the nation's corn crop has been planted, which compares to a 5-year average of 14% completed. Farmers are dealing with soggy soils, cool soil temperatures, and inconsistent weather forecasts. Although there is a near-term window in which planting progress can advance, below normal temperatures and above normal precipitation appears to be on the horizon, based on the latest National Weather Service 6-10 day outlook. Current corn prices are certainly not void of weather premium at these price levels; yet as planting concerns grow, prices will advance higher.

On the price limiting side of the equation, there continues to be a lot of unsold inventory out in the country for both old and new crop. As of march 1st the USDA reported that nearly 60% of the current stocks of corn are stored on the farm. Until more of this inventory is out of the farmer's hands, corn rallies much above $4.00 for spot futures will be limited. Farmer sales will beat back rallies like a rolled up newspaper on the nose of a misbehaving dog. This sets up the most likely scenario for corn prices for the near term, range bound trade. Until the weather improves and production prospects increase, the market will be supported on dips. Meanwhile, until we chew through some of the unsold inventory in the country, the market rallies will also be limited.

Trade Ideas:

This corn market appears to be destined to work on a sideways fashion for the time being. An effective trading tool in this environment is to sell volatility, while waiting for a more defined pattern to develop.

Although I expect a sideways pattern for the near term, the chart below does create caution that the market can continue to fall if weather conditions improve. The chart below overlays the July '09 corn contract over top of the July '82 contract. Both crop years faced poor demand and large supplies. The key to avoiding a sustained down move is the continued improvement in this year's demand. Contact me if you would like to see the comparison to the end of the year. It's not pretty.

If you cannot view the Corn chart, go here.
This Chart is from Apex Trading System

For more information, please contact Scott at 1.800.933.3996 or email him at scott.harms@archerfinancials.com to discuss the specific details of his trade ideas above.

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. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, 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 ADMIS. Copyright © ADM Investor Services, Inc.

Sign Up For Complimentary Daily Market Research From Top Industry Analysts!

Futures Daily Market Research from ADM Investor Services is authored by some of the most well-known and respected analysts in the industry. ADM Investor Services has been a leader in the futures brokerage industry for more than 40 years. It's our commitment to quality through service, research, stability and technology that sets us apart. Sign up to receive our research, and we'll prove it.

Sign Up Now For Your Complimentary 30-Day Trial And See For Yourself!