U.S. farmers are facing their second harvest season during the COVID-19 pandemic and this year brings additional uncertainty.
In 2020, the U.S. Department of Agriculture reported widespread impacts from the pandemic, and this year offers new challenges as variants and their impact on the economy remains unclear. To help farmers and food workers, USDA plans to invest $700 million in grants to provide relief to those affected.
On top of COVID concerns, inflation remains high, the U.S. dollar remains strong and adverse growing conditions in the top two global grain and oilseed producers, the U.S. and Brazil, have already affected harvest in the U.S. and will likely impact the South American planting season.
Further, China, the world’s largest soybean importer, is behind on its average purchasing pace, as COVID, shipping backups, and high energy prices have contributed to a slowdown in the soybean crush, says David Hightower, president of The Hightower Report.
Options Use Surges Amid Volatility
Corn options volatility rose to historically high levels this year as corn futures prices nearly doubled between November 2020 and May 2021, rising from $3.83 per bushel to $6.38. Market participants who followed the Corn CVOL Index (CVL), which measures 30-day implied volatility across all strike prices, saw how call implied volatility peaked on the index at 56 the day before the June 30 USDA Acreage Report.
Tim Andriesen, managing director of agriculture products at CME Group, notes the index offers market participants a chance more fully understand options pricing and what options are saying about the marketplace. That information can help participants in their hedging and risk management.
The use of short-term options also increased significantly amid a volatile crop season, particularly the weekly and short-dated new-crop options. Market participants have long used options to hedge, but these shorter-length options give users flexibility at a lower cost.
Andriesen says the weekly options are being used by traders to hedge event risk, such as ahead of a crop report, and he notes weekly options volume averaged over 8,000 contracts daily, with average open interest of 25,000 contracts.
Producers are using the short-dated new-crop options, such as options against December Corn or November Soybean futures. These expire sooner and cost less than traditional options. Andriesen says year to date, 20% of all corn options volume has been from short-term options.
“That's really showing how the market is embracing these tools, particularly in a time when there is high volatility and standard option premiums are pretty substantial,” he says.
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