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Crop problems lead to options bets on $7-$8 corn

For the past month, investors who foresee a potential shortfall in U.S. corn production at a time of brisk demand have placed low-risk bets that new-crop prices will surge 25 to 45 per cent by the end of this year.

They’re banking on corn to surge back to the $7- or even $8-per-bushel mark after it stumbled 25 per cent in late 2011 from a record of nearly $8 per bushel set last summer.

The price of Chicago Board of Trade new-crop December corn futures is currently just over $5.50 per bushel, while open interest in the CBOT December out-of-the-money $7 corn calls has tripled since mid-December to over 20,000 contracts. The $8 calls have seen similar buying.

“Funds are buying the $7 and $8 calls, which is an inexpensive and low-risk way for them to bet on some kind of weather disaster or economic problem that would rally the corn market,” said Matt Pierce of GrainAnalyst.com.

“The premium in $7 calls as of (last Tuesday) is 19 cents and only nine cents in the $8 calls, so they are a good buy.”

Some veteran traders said the cheap premium for the calls was probably a “no-brainer” for a hedge fund manager with lots of money. Traders expect 2012 promises to be another spirited battle between corn bulls and corn bears.

There are forecasts for the U.S. corn supply to fall to its lowest in 16 years, which bulls find appealing. Harsh weather in Argentina, the world’s second-largest corn exporter after the U.S., has lent further support to the bullish case.

Corn bears cite the potential for a big U.S. corn crop this year if farmers plant corn fencerow to fencerow, as expected.

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