Excell with Ag Options: Examining a Relative Value Trade Strategy with Soybean and Corn Options Ahead of the September WASDE Report

^{Source: USDA}

The charts above recap what the August WASDE report told traders about crop condition, yield and production. You can see in the top chart that the crop condition continues to track along the best of the past five years as it has all year long, as good as the crop in 2020. For those who recall 2020, corn prices stayed subdued through August, but rallied sharply from September and through the end of the year as the conditions still stayed strong but moved more in line with previous years. 

One can see in the other charts that corn yield expectations moved up by 3.3% in the last report, such that the total crop production estimates for this year came in at 15.1 billion bushels, down about 1% from where they were last year. These were roughly in line with the estimates of the market ahead of the report, possibly explaining the more muted, but still negative, reaction to the price of corn to the report.

^{Source: USDA}

The charts above show the results of the August WASDE report for soybeans. You can see the condition also continues to track near the best of the past five years. Yield was up over 5.3% in the last report and the production; at 4.59 billion bushels, it is the highest the markets have seen in the past 10 years. Clearly an excellent report by all measures, which was not bullish for the price of beans, as they have sold off sharply over the rest of August. Combining this with worse-than-expected export sales, the supply/demand conditions are such that beans are struggling to get out of their own way.

Turning to the technical charts for the generic front-month futures of both Corn and Soybeans, I have drawn an arrow at the last WASDE report. Both futures have continued the bearish trend that has persisted for the entire year, taking a brief respite in the May – June time frame. Since the June report, followed by the subsequent next two reports, the expectation for supply in each product has led to this rapidly declining trend. 

When is the move overdone, though? As I look at Corn in the top chart, the recent, more muted move in futures shows that there is no sense of the trend changing. The Ichimoku cloud continues to point lower and the MACD is in a sideways, directionless channel. The RSI is not oversold, nor did it get oversold at any point in August. The decline has been relentless the past few months, but while it looks set to continue, there are no signs of exhaustion. 

Soybeans may be showing more signs of exhaustion, which is consistent with the more pronounced drop in price since the August report. Yes, the Ichimoku cloud is still pointing lower, suggesting this is the direction of the trend. However, notice the two areas I have circled in the middle and bottom panels of this chart. The middle panel shows the MACD which is pointing to an upward crossover, indicating a possible trend reversal. The bottom panel shows the RSI did reach oversold periods this month and is starting to improve. Both of these suggest to me that while the trend may point lower, there is more scope for a countertrend rally in Soybeans than in Corn.

^{Source: CME Group, COT report}

Now I want to turn to the Commitment of Traders report to see how managed money is positioned in each product. In the top chart you can see that managed money did cover some of their short ahead of the August WASDE report, as the net position moved off the most short it had been in a year back into the bottom half of positions. These shorts have not been added back, and while the position is still short, it is not extreme. The story may be different in Soybeans. Traders saw very little short covering before the August report and the net positioning at this time is still at the shortest it has been in the past year. Traders are clearly more bearishly positioned in Soybeans than in Corn.

What is getting priced into the options? The CVOL has been falling all year long, so when I look at any product on a one-year view, it looks to be near the very low end. Thus, I want to zero in to see how implied volatility looks relative to levels that have persisted over the summer. For this, I look at the three-month range of CVOL for all of the products. In doing this, I can see that Cattle volatility resembles the future price near the highs of the summer, in spite of the fact that the input cost for Cattle – Corn – is near the lows of the summer. Interesting, but I am more focused on Corn and Soybeans. Each of these products show that the CVOL level of implied volatility is at the lows of the summer. While the spread between these two has narrowed from 3 points last month to 2 points this month, there is still a volatility premium to Corn over Soybeans. Surprising given the price action in each of these? I think so.