trades
FUTURES
A SAV V Y F U T U R ES T RA D ER’S TAK E O N T HE M AR K ETS
Grain: The Next GameStop? By Pete Mulmat
ven corn and soybeans are not immune to the perils of social media. According to online chatter, grain prices in 2022 will hit $18 to $19 per bushel of corn, $30 for soybeans and $42 to $45 for wheat. While those price forecasts may seem far-fetched, anything is possible and the 2020 price action on crude oil is proof of that. The odds of $18 corn are about the same as the odds that the world will ever see crude oil trade to -$40. Wait a minute. That did happen back in April. So, anything can happen in this environment. But is it likely? Probably not.
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Old crop—new crop Spread trading in the grains seems to be gaining popularity these days and for good reason. With high volatility in grain markets, spread trading may be one way to take on less risk and lower margin requirements. However, when spread trading grains it’s important to understand the difference between crop years and their relationships to each other. While new crop and old crop contracts certainly are related, they do have different factors influencing prices—and sometimes very different fundamentals. So, what does the relationship between the new crop and old crop mean?
Don’t spread too thin One way to trade the extremes in corn is to look at the old crop-new crop spread. Buying a December new crop (ZCZ21) and selling a July old crop (ZCN21) is a smaller-sized way to look for a bit of normalization to come back to the grain markets.
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In grains, traders refer to last year’s crop as old crop. This is the grain supply that farmers grew last year and the nation is currently using. New crop is the grain that will be harvested in the fall. The marketing season for corn and soybeans begins when crops are harvested, starting in September, and ends when the new crop harvest begins. There’s a lot of overlap in fundamentals between any grain’s old crop and new crop. The biggest unknown factor for the next year is supply. Grain production can vary—sometimes dramatically— from one year to the next depending on how many acres are planted and how good or bad the weather is during the growing season. Under normal market conditions, new crop contracts usually are at a premium because no one knows how the next growing season will go. This production uncertainty keeps new crop prices higher. That can be exaggerated in a bear market, as old crop prices can go lower to try to spur demand while at the same time keeping a premium in new crop because farmers still have to grow it. In a bull market, the relationship can flip. A bull market generally means that demand is strong relative to supply. In that scenario, many times old crop prices will be higher than new crop prices. The idea is that the balance sheet is tight now but could be better next year if production is good. When old crop prices are higher than new crop prices, this is generally a good indication of a bull market. Because of this relationship,
Luckbox | June/July 2021
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