TFM Perspective 9-25-20


COVID Concerns Re-surfacing?

When COVID-19 became a major problem in March and April, there was much optimism that, once summer rolled around and temperatures warmed, positive cases would be on the decline and ultimately not a concern until perhaps fall, if at all. Well, fall is here, and cases are on the rise, mirroring spikes from late winter and early spring. College students went back to college, young kids went back to school, and more people willing to in eat in public restaurants may all be contributors to the spread of a very contagious disease. Many states have mandatory face masks requirements and perhaps this is providing a false sense of security. Whatever the reasons, recent numbers indicate positive cases are on the rise and, consequently, this could impact corn prices.

The energy market may have recently reflected COVID-19 resurgence concerns more than any other market. After moving into negative territory due to oversupply issues this past spring, energy prices rebounded for several months before leveling out. Crude oil futures recently peaked in the mid-$40s. Yet, despite lower production, prices stalled and just recently dropped near 20%. At the same time, COVID-19 cases have been on the rise. Demand concerns for gasoline are contributing to price uncertainty. Gasoline usage will not likely meet year-ago levels, with many people still working at their home or in isolation.  Energy use will not match 2019 levels for perhaps the next six months or even the next year. It is also looking more likely that, until a vaccine is widely distributed and proven beneficial, business travel, vacationing, and attendance at sporting events and other entertainment venues will be done so on a minimal basis.

This relates to a corn market which has recently rallied near 18% in value after finding a low on August 12. The near 60-cent rally has provided producers an opportunity to defend higher prices. On this month’s September 11 USDA report, a cut in corn used for ethanol by 100 million bushels is a telling sign of the USDA revising energy demand. Corn producers take notice, now is the time to defend this rally. It is likely that corn yield both in the United States and China will be lower than expected just 60 days ago. However, projected carryout will still likely be considered heavy moving into harvest.  A way to defend prices and leave the top side open in case prices rally is to purchase a put option. Consider doing this in the March, May, or July contracts, all of which also offer an attractive carrying charge to defend.  Purchasing a put is fixed risk, which is the premium paid plus commission and fees. When prices rally, it can be easy to become complacent making marketing decisions.  Yet, when they do drop, recent history suggests it is so fast, opportunity may be lost before you can make an informed decision.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.


Bryan Doherty

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