Capturing Volatility from the USDA Acreage Report with New Crop Weekly Options
The annual USDA Acreage report
Acreage, which is released annually on the last business day of June, is one of the most impactful reports released by the USDA. While Prospective Plantings contains intended acreage for principal crops for the upcoming crop year, Acreage reports completed planting, serving as an indicator of how well the reality of the crop year meets expectations at its outset. The report is a particularly notable mover of Corn futures (Globex code: ZC) and Soybean futures (Globex code: ZS) prices.
Demonstrative of the report’s potential, the June 30, 2023, Acreage report rocked markets when the USDA reported national soybeans acreage of 83.5 million acres, a number significantly below expectation. November 2023 Soybean futures jumped 77^4 cents that day, 6.12% from the day’s open to the daily settlement price. June 30, 2023 was also the most traded day in terms of total volume for the instrument.
Figure 1: November 2023 Soybean futures
Although Acreage has the potential to move both old and new crop instruments, the fundamental nature of the report differently impacts instruments of different crop years. Because Acreage reports the planted acreage for the new crop year, it carries a potential primary impact on new crop instruments. While old crop instruments including July, August and September Soybean futures moved very significantly on the report, November Soybean futures had the largest one-day move.
Upside vs. downside risk
Options skew – the difference in implied volatility between upside calls and downside puts – can suggest a window into sentiment of directional risk. Skew suggests demand for calls or puts, possibly indicating either bullishness or bearishness.
Currently, December Corn options exhibit higher 25-delta risk reversal than at the same days to expiration in 2023, though the risk reversal at 184 DTE in Corn futures is below the 10-year average (below, in Table 1). Risk reversal is one command measure of skew, which is the difference in implied volatility between calls and puts with the same absolute value of delta or same moneyness. A risk reversal demonstrates the cost of downside versus upside protection. The 25-delta risk reversal is calculated by finding both the 25-delta call and put and then taking the difference between the implied volatilities of the two.
Figure 2: Corn options 25 delta risk reversal skew (C - P)
A positive risk reversal skew means that the implied volatility of calls is greater relative to that of puts. When a call marks significantly higher implied volatility than an analogous put, that could mean that there is greater upside expectation over downside. A higher risk reversal skew in 2024 relative to 2023 suggests more demand for upside protection or exposure although this year’s risk reversal skew for 25 delta December contracts is still less than at the same points in 2022 and 2021. Market participants should keep in mind that in 2023 December Corn futures were trading at higher levels heading into the 2023 Acreage report compared to 2024.
Table 1 shows the December Corn futures pricing, at -the-money (ATM) options volatility and straddle pricing at 185 days to expiration (May 21, 2024, for December 2024 Corn) for each year, 2007-present. ATM volatility in 2024 (25.65) is lower than the historical average (29.42) at 185 days to expiration, while the futures price this year is remarkably close to the historic average in current terms, but the lowest since 2020.
Table 1: December Corn futures price, options volatility and straddle price
Pricing in the near term, expressed via the term structure of Short-Dated new crop Corn options and New Crop Weekly Corn options, suggests greater near-term volatility, which could be hedged or captured with short-dated or weekly options. Week 4 options expire June 28, 2024, the same day as this year’s Acreage report. September 2024 Corn futures underlie Week 4 Corn options, while December 2024 Corn futures underlie New Crop Week 4 Corn options.
June 2024 Corn options calendar
Strategy spotlight: horizontal call spread
As an example, selling one ATM 490 New Crop (CN4M4) call for 9 cents, while buying a December (OZCZ4) 520 call for 22 cents would offset premium costs but give short-term upside exposure. The 490 New Crop call expires on the day of the report, while the December 520 call can be active for an additional 147 days.
Hypothetical horizontal long call spread pricing
Possible outcomes on June 28, 2024:
- If the report is flat or bearish, the cost of buying the 520 call would effectively be cut from 22 cents to 13 cents. The long-dated call would remain an open position with potential to expire in the money over the next ~145 days following Acreage.
- If the report is bullish, loss on the 490 New Crop Weekly call would be partially offset by the Dec 520 call. The larger the move on report day, the larger the loss; though if the report sets a long-term bullish trend for the summer, the 520 calls have 145 days to recover.
Conclusion
The USDA Acreage report has the potential to move markets. Because the report provides a survey of new planted acreage, its release is particularly impactful on new crop instruments. The CME Group suite of new crop options allows market participants to express a nuanced view, whether they want exposure only up until the number, or hope to participate in later movements as well. To learn more, visit 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.
