May 2019 Ags Update

Fundamental Recap

Livestock

The African swine fever (ASF) epidemic continues to impact the global marketplace. ASF is a highly contagious viral disease with a nearly 100% mortality rate in domesticated swine, according to the Organization of Animal Health (OIE). Since the first official case was reported in China in August 2019, it has spread to several other countries across Asia, and there is no known vaccine. According to the U.S. Meat Export Federation, the decrease in China’s pork production caused by ASF could exceed total U.S. production in 2020. China’s tightening supply is becoming more realized as China’s import demand has been increasing, including U.S pork exports to China, despite the 62% tariffs currently in effect. The pork shortage in Asia is expected to support prices for other meats, including beef. Lean Hogs futures have traded close to $100/cwt, up from the $70s in early March, with the 2020 contracts pricing high.

Grains

Wet and cool weather continues to plague the Midwest corn-belt, the Central Plains and the Southeast. The extended forecast calls for more of the same, potent rains and cool temperatures to prevail into mid-May. As of April 28, U.S. corn plantings were 15% complete versus the five-year average of 27%. U.S. producers are capable of extremely rapid planting progress, but they need dry enough fields and seeds need higher soil temperatures to germinate.  The weather forecast does not appear to be accommodating for any material catch-up in the next two weeks. Corn is the most immediate crop affected by delayed planting.  There is yield drag potential on corn planted after May 10.  There is clearly the potential for producers to consider the federal insurance “prevent plant option” to recover income losses or switch to planting soybeans.  With new crop soybean prices generally below the cost of production, a shift to soybeans seems less likely.  Analysts suggest a drop-in corn acreage of approximately 3 million acres is likely which represents a 3% drop from planting intentions.


Quikstrike

Use the Pace of Roll tool on Quikstrike to identify the percent of outstanding open interest from one contract month to the next during the roll period.


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April Highlights

  • Record Lean Hog option open interest on April 15th of 416,847
  • Record Non-U.S. Hours average daily volume in Chicago Wheat (3,983) and Corn (7,196) options in April, along with record extended trading hours (ETH) percentage of total volume in both (13% and 11% ETH respectively)
  • Record Corn Futures ADV out of EMEA in April (74,568 contracts)

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Options Update

  • Lean Hog options still sitting at all-time high open interest, calls more expensive than puts, term structure is pricing in sustained volatility going into 2020
  • Grain & Oilseed implied volatility continue to exhibit low volatility along with the call skew decreasing (calls becoming cheaper) in Soybean Options
  • A trend in Non-US volume growing in ADV and percentage terms

Callout Corner

Open Interest (Q1)

  • 37 record open interest days in Dairy options
  • Largest growth in open interest in nonfat dry milk options up 62% YoY
  • Class III Milk combined futures and options open interest record, 113K
  • Class IV Milk options open interest +178% YoY

Average Daily Volume (Q1)

  • Q1 Average Daily Volume record 5,890 up +38% YoY
  • Dry Whey Options +68% YoY
  • Nonfat Dry Milk +98% YoY
  • Class IV Milk options +394% YoY