Q3 2019 Ag Update

QuikStrike

This free tool illustrates the volatility term structure for CME Group options products. Users can view the current implied volatilities across expirations and compare to one week prior.

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What is R-Cross?

Suppose you have a large order to execute, but it does not appear to be supported by floor liquidity or bid-ask spread in the central limit order book (CLOB) There is another way you can get the order competitively executed in the CLOB – an R-cross order.

Crosses are a form of relationship-based trading (RBT) available to all Agricultural market participants. Crosses are similar to blocks, but instead of being executed off-exchange and submitted for clearing, crosses are executed in the CLOB.

With a cross, two parties can engage in allowable pre-execution discussions (either directly or through a broker) to agree on order size, price and direction. Once the terms are finalized, the cross order is submitted to CME Globex. The order first executes a pre-cross RFQ to ensure the best market is represented in the order book, then the cross trade is submitted. The order is filled at the agreed-to price, unless the price is bettered by another market participant.

Benefits

  • Order quantity is executed in the CLOB and improves the market
  • Ensures order execution at the cross price or better
  • Executes specific, less liquid instrument types (e.g., a deferred contract month or less liquid strike)

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Fertilizer

CME first listed cleared fertilizer swaps in 2011 for Urea, UAN, and DAP, however, not all customers could access the cleared swaps. In June 2019, Fertilizer futures were listed side-by-side with swaps to improve market access.

Key Features

  • Financially settled against leading fertilizer price reporting agencies Profercy and ICIS
  • Low minimum block threshold of 2 contracts (fertilizer broker directory)
  • 100-ton contracts
  • Include: Urea US Gulf, Urea Egypt, UAN NOLA, DAP NOLA, Urea Brazil, and MAP Brazil

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Whitepaper: Fluid Milk: A Better Hedge

The Agriculture Improvement Act was enacted last year, which dramatically changed the pricing formula for the skim milk portion of milk costs regulated by Federal Milk Marketing Orders. Previously, the “higher of the two” between Class III and Class IV milk prices were used to price skim milk, and that unknown led to basis risk. Now, the formula for skim milk is the simple average of the two contracts plus 74 cents. Hedgers now have a far more effective hedging tool to manage fluid milk price risk. Read on to find out how.

Find it here: Fluid Milk: A Better Hedge

Analysis of USDA data February 2000 through April 2019.

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Options Update

  • Dec Corn 25 delta risk reversal decreasing from 12% to 2% in Q3 as the at-the-money volatility reached a high on July 12 of 30% to a low of 17% at the end of September
  • Oct Lean Hog 15 delta risk reversal reached a high of 11% (calls over) to -4% (puts trading higher implied vol than calls) at the end of September
  • Dec Lean Hog implied volatility trading in the mid 40s in Q3, sitting at historically high levels
  • SRW Wheat constant maturity implied volatility trending lower in Q3 from a high of 30% in late July to mid-teens at the end of September

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Black Sea futures and options

  • Total Black Sea Wheat and Corn futures and options volumes to end September 2019 of 171,142 contracts
  • Total volumes YTD up 40 % from 2018
  • 15 calendar months available to trade with open interest out to February 2020
  • Black Sea Sunflower Oil futures now available, adding to the robust suite of Black Sea risk management tools

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Monthly Market Movers

Industry experts Dave Hightower, President of The Hightower Report, and Dan Basse, President of AgResource Company, discuss grain markets ahead of every WASDE Report.