WASDE Overshadowed as War Pushes Fertilizer Prices Higher: Can Corn Rally?

• The March WASDE report was largely uneventful, with agricultural commodity markets remaining focused on war risks.
• Rising nitrogen fertilizer prices could impact planting decisions, as war in the Middle East complicates supply chains.
• Elevated volatility in the corn futures market and a possible change in planting decisions driven by nitrogen prices could create a trading opportunity.

Agricultural commodity futures market volatility increased over the past week as  geopolitical tensions flared in the Middle East. The WASDE report didn't give markets much to work with, but knock-on effects to fertilizer supply chains offer traders a potential way to trade corn futures. 

March WASDE: a largely uneventful report 

The March World Agricultural Supply and Demand Estimates (WASDE) report crossed the wires on Tuesday, March 10. 

It wasn’t an eventful report, much like February’s, with ending stocks for corn, soybeans and wheat remaining mostly unchanged. 

U.S. ending stocks for corn were held steady at 2,127 million bushels. That was just below the average trade estimates. 

Ending stocks for U.S. wheat crossed the wires at 931 million bushels, also unchanged from the prior month and just above the average trade estimates. 

Soybeans also held steady at 350 million bushels, which was slightly above the average trade estimates. The report sees higher crush but also increased imports, with the two 5-million-bushel changes offsetting one another. 

The most notable change was perhaps to world ending stocks for corn, which moved up to 292.75 million metric tons (MMTs) versus the prior figure of 288.98 MMT. That increase comes from higher production estimates in Ukraine and Brazil. 

War risk continues to drive price action as global trade is impacted

While the war in the Middle East leaves U.S. supply and demand largely untouched, it does complicate the picture because energy prices are seeing increased volatility and higher prices. 

One potential impact is from a jump in fertilizer prices. These products are not usually priced daily, but suppliers have already announced price increases for nitrogen-based fertilizers.

At a time when farmers are already facing burdensome market dynamics, the increased fertilizer inputs could impact planting decisions this year.

Primarily, we’d expect this to impact corn plantings versus soybeans and wheat, seeing as corn requires up to 200 lbs. of nitrogen per acre. This may mean that more farmers could opt to plant soybeans. 

While it’s still early to assess the impacts here, it does create a potential trading opportunity to get long corn or short soybeans if high fertilizer prices do persist, as less corn and more soybeans would likely be planted. 

There is little the U.S. government can do to offer support at this point since we are just weeks away from the planting season kicking off. Domestic production is also incapable of scaling up in this short amount of time. 

So, now we wait for the March 31 Prospective Plantings report that will shed light on farmers’ intentions. Until then, it’s worth monitoring war risks to fertilizer prices. If they stay elevated or continue to rise, then the trading thesis to get long corn or short soybeans from the knock-on effects may strengthen. 

Trading corn on higher fertilizer prices 

Corn futures are the most interesting trade of the three commodities currently, as elevated volatility is most evident in the /ZC contracts. The past four trading sessions have seen an expanded range of trading, with prices rising as high as 476 earlier this week. 

Tuesday’s price action saw intraday support come via the 21-day exponential moving average, and prices held above the 9-day EMA by the afternoon. The implied volatility rank was at 71.1 as of Tuesday afternoon, indicating the elevated volatility in the product. 

Selling a 10-dollar-wide put spread at 425/435 in the /ZCK6 contract gives a probability of profit (POP) of 68% with a max profit of $125 and a max loss of $375. This trade would allow prices to drop 18 points before the short strike goes in the money. 

However, if prices can hold the outlined EMAs, then the trade has the potential to generate faster returns should volatility drop from here. A price increase even with a modest elevation in volatility would also provide a viable outlook for the trade.