Corn, soy and wheat futures have been trading in extremely narrow ranges the past year or so (Figures 1-3), with implied volatility on options for these products falling to extremely low levels (Figures 4-6). Such levels of realized and implied volatility are surprising given the strength of the recent El Niño and strong moves in the U.S. dollar (USD) – the global currency of trade in commodities. However, this placid trading period in agricultural goods might not last for a variety of reasons:In the face of these risks, implied volatility on corn, soy and wheat options might be pricing too placid a scenario and could be subject to an upward re-pricing.
In the face of these risks, implied volatility on corn, soy and wheat options might be pricing too placid a scenario and could be subject to an upward re-pricing. After having fallen below 20%, corn implied volatility has risen to around 23.5%. For much of 2011 and 2012, corn implied volatility averaged around 35% and ranged from 27%-47%. Likewise, implied volatility on wheat options recently traded at around 25%, whereas back in 2011 and 2012 they ranged from 30-45%. Finally, implied volatility on soybeans has recently been around 17%, whereas in 2011 and 2012 it was in the 20%-35% range.
Continued shifts in weather patterns related to the El Niño cycle as well as the economic factors mentioned above could create a scenario where implied (and realized) volatility rises sharply for all three markets, pushing the cost of option insurance sharply higher.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the authors and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
Erik Norland is Executive Director and Senior Economist of CME Group. He is responsible for generating economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact on CME Group and the company’s business strategy, and upon those who trade in its various markets. He is also one of CME Group’s spokespeople on global economic, financial and geopolitical conditions.
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