Two distinct crops

New crop and old crop instruments reflect different physical supplies and behave accordingly. For example, in June, the front-month Corn futures instrument expires in July, reflecting stores of corn harvested the prior autumn. On the other hand, the new crop Corn futures instrument at that time expires in December and reflects the anticipated supply resulting from the corn crop that is currently being grown. Extreme weather in June might affect new crop futures more than old crop futures because the new crop is more vulnerable to disruptions in its growing phase, whereas old crop supplies are then already known at that time. Conversely, transitory supply chain issues, for example, may more distinctly affect old crop futures because logistic hurdles could hamper transport of the preexisting supply and would be expected to be resolved by the time the new crop is harvested.

New crop vs. old crop corn in 2023

The Corn futures forward curve demonstrated an inverted spread or backwardation in 2023, a condition whereby longer-dated instruments are priced lower than nearer-expiring instruments. The slope of the forward curve only steepened as May 2023 Corn futures reached expiration and the relative price of December 2023 corn futures, representing the new crop year, declined, augmenting the May-December Corn futures spread.

Figure 1: May vs. December Corn futures 2023

The dynamic between the July and December 2023 instruments told a different story. Although the July-December Corn futures spread was also inverted, the difference between the two futures instruments demonstrated more volatility following the March 2023 commencement of the planting season, compared to the March-December 2023 Corn futures spread.

Figure 2: July vs. December Corn futures 2023

Market information released throughout the 2023 planting and growing season, including USDA releases Prospective Plantings, Acreage and WASDE reports indicated strong planted acreage for the nation’s Corn 2023/24 corn crop, while a summer drought elevated new crop volatility last year.

How the crop year prices options

Fundamental differences between crops lead to very different volatility surfaces for Corn and Soybeans throughout the year. The figures below show Corn and Soybean one-week constant maturity volatility old crop and new crop contracts. Seasonal risks come into play during June, July and August when new crops in North America are most vulnerable to weather. One week new crop volatility for Corn in February averaged 15% and is double (~30%) in June and July during the summer “weather markets.  

Figure 3: Corn and Soybeans one-week volatility, seven year average

Early in the calendar year, new crop Corn futures averaged lower volatility (3.7% on average for Q1) compared to the old crop. New crop Soybeans historically trade at 2.5% lower volatility level in Q1 compared to old crop. As the year progresses, the average spread narrows as both contracts accumulate volatility going into the summer. Specific events, however, may disrupt this trend: South American weather issues, for example, may lead to a stronger reaction in the old crop. On average, the July “weather market” sees an inverted volatility spread, with the implied volatility of new crop Corn and Soybeans exceeding the implied volatility of old crop Corn and Soybeans, respectively.

Converting the average historical implied volatility levels into premium terms: A one week, at the money call in new crop corn will trade at a ~18% lower premium to the old crop contract based on $5.00 corn at the beginning of the year. New crop Soybean premium will trade ~12% lower based on $12.00 Soybeans at the beginning of the year.

2024

Figure 4: Corn CVL (old crop) - new crop (Dec) volatility spread

Looking at 2024 the difference between old and new crop volatillity is on the lower end (3.5%) vs. the last four years. Outright volatillity levels of old crop volatillity are lower than past years with new crop volatility staying at elevated levels causing the spread to decrease.

Figure 5: Corn vs. Soybeans 1-week ATM calls, seven-year average

Skew

Skew is the price relationship between an equal distance call and put: The figures below show the difference between a 25-delta call minus a 25-delta put using a 30-day constant maturity. We again see a seasonal relationship between old and new crop, with skews for both crops increasing from early through mid-summer given the weather risk to North American crops. Corn exhibits larger skew, peaking at 5% vs. 3% for Soybeans.

The old crop/new crop relationship is different for Corn when looking at skew vs. volatility levels. New crop exhibits higher call skew early in the season compared to the old crop. The overall volatility level is higher for old crop early in the calendar year, but calls are less expensive compared to puts when compared to the new crop contract.

Figure 6: Corn vs. Soybeans skew, seven-year average

Risk management

Given the different fundamental drivers and unique volatility surfaces between old and new crop, CME Group has specific options that are tied to each crop year. Using corn as an example, a trader can gain exposure to the new crop (December contract) with the standard December option, a Short-Dated New Crop option or a New Crop Weekly option.

Listing Cycle Example

 

 

JUN

JUL

AUG

SEP

OCT

NOV

DEC

July Future

Week 1 Weekly                          
Week 2 Weekly                          
Standard July                        
Week 4 Weekly                          

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December Future

New Crop Week 1                        
New Crop Week 2                        
SDNC - JUL                        
New Crop Week 4                        
SDNC - AUG                        
Standard Dec                        

Short-term options on both crop years

Short-term options give traders greater flexibility to manage near-term volatility with lower premia than long-dated options early in the calendar year. Short-term options are priced lower than longer-dated options due to what is referred to as the theta decay (or time decay) of the options. Options lose value as expiration nears because as days to expiration dwindle, there is less time for the option to become in-the-money. A short-term option, which exists for a shorter period of time than a long-dated option, exhibits an aggressive decay in premium, advantaging the long holder looking for short-term coverage at a low price.

Standard weekly options are based on the front month contract, listed year round and available for Corn, Soybeans, Wheat, Soybean Meal and Soybean Oil.

New Crop Weekly options are exclusively based on the underlying of new crop futures (December for Corn and November for Soybeans), expire each Friday and are listed four weeks out from February through August to reflect the crop year preceding the next new crop.

Short-Dated New Crop options are exclusively based on the underlying of new crop futures (December for Corn November for Soybeans, July for Wheat), expire monthly and are listed year round.    

Historically, atmospheric and geopolitical events affect old and new crop futures in distinct ways. Volatility may be the new normal, and the action of the past year shows no sign of slowing into 2024. News moves fast, and the suite of old and new crop options allow market participants to express a precise and nuanced view on immediate issues affecting a specific crop year. Short-term options have lower cost than conventional long-dated options, helping increase leverage and risk reward profiles. Learn more about Agricultural short-term options. 


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 author 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.

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