^{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.

^{Source: CME Group Event Volatility Calculator}

While CVOL is low for both Corn and Soybeans, and the spread between them has come in, I am more focused on how the market is pricing in the potential for movement on the September 12 WASDE report data. Is the market expecting a bigger reaction in Soybeans? Or is the market expecting the reaction to be in Corn? In order to determine this, I go to the Event Volatility Calculator. Simply by choosing the product, and loading the date of the event, a trader can see what the market is pricing in for the particular event day, by looking at options pricing before and after the event. In doing so, I see that the event volatility priced into Corn options is over 35%, almost double the 20 implied volatility that Corn typically sees. In Soybeans, the story is different. Yes, there is a premium for the September WASDE event, but at 20% this premium (relative to the 18% implied volatility that is typical) is relatively subdued. Thus, while the CVOL spread looks like it has come in, the actual expected event volatility in Corn is much higher than the event volatility in Soybeans at 35% vs. 20%. This tells me that it may be a good idea to use Corn options to fund a position in Soybean options.

Referring back to the relative performance of the generic front-month Soybean vs. generic front-month Corn futures, I see numbers well below the level that existed last month at this time (note that I am using a ratio of 1 Bean for 3 Corn futures). I have drawn an arrow at that level, which was low, and falling but off the lowest levels of the past year. Now, however, the level is at the lowest level of the year but has started to perk up a bit in the last few days. I have drawn horizontal lines at the highest point, the previous lowest point, and the average of the past year. I can see from this that the relative pricing is very much at an extreme on this basis. Bear in mind, I am only looking at the past year. If I looked over the past five years, this might give a different picture. I am not trying to suggest that this relative ratio could not go lower. I am only suggesting that considering a shorter-term relationship, there may be scope for a relative move higher once again.

^{Source: QuikStrike}

Time to look at a relative value trade? If this trade were being made a month ago, it would have made a little money and done better than futures would have done, but it would have fallen short of maximizing profits. That’s fine. In options trading, one does not expect to make money on every trade, a trader just wants to make more money when they are right than they would lose when they are wrong, and in this case, a trader would’ve actually made money even when they were wrong given the opportunity the market was giving them. I think that opportunity still exists. Why do I say that?

Consider: 1. Soybean charts are oversold on the RSI with the MACD turning higher which is not the case for Corn 2. Soybean positioning is at the shortest it has been over the last year, which is not the case for Corn 3. Soybean relative price to Corn is at the lows it has been for the past year 4. The volatility priced into the September WASDE event is 35% for Corn while it is only 20% for Soybeans, a marked premium 5. Both products are in a downward trend, with conditions at the best of the past five years and expected production some of the best markets have seen, so there is scope for a downward production surprise in either. 

This all tells me that I should consider buying 1 Soybean call and selling a ratioed amount of Corn calls. At present, I am only going to sell 2 calls, even though the event volatility is high, because the CVOL for each product for the last three months is at the lows traders have seen. I still want to take advantage of relatively higher volatility, but I am less keen to get too short of any volatility here. I have looked at the ZS2U4 and ZC2U4 expirations, which are September 20, so right after the report. I have used 20 delta call options for both. I am net long premium because I am spending 6.59 ticks in beans while taking in 4.45 ticks in Corn, so I am net spending $107 for every time I do this trade. I am net long premium but happy to do so with such a low CVOL. 

What can happen? Once again, the report can come out strong and both futures head lower, meaning a trader would lose the premium they are spending. As I mentioned, I am content with this risk because CVOL is so low, but if you prefer, you can do it on a 3-by-1 basis, and it would be premium neutral. Another scenario is that the condition starts to fall more rapidly than expected and futures rally, similar to what happened in 2020. If corn condition/yield/production falls more than soybeans, one would expect Corn options to rally more, and a trader would lose money on this spread. If soybean condition (and yield/production) falls more rapidly, a trader would make money. If condition/yield/production falls equally, a trader might expect both futures to rally and in this scenario, given futures are more oversold in Soybeans and positioning is at a more negative extreme, they might expect Soybeans to rally further, potentially moving the relative price back toward the middle of the range at 0.91 (on a ratio basis). If this happened, and Corn futures moved to our call strike at 410, this would imply Soybean futures at 1119, for a potentially considerable profit. This may be too much to ask on such a short-term trade, but even moving back to where the ratio was in August at 0.89, a 410 Corn would imply 1094 in Soybeans, again a good profit. 

The conditions seem ripe for a relative value trade, in other words. Of course, that doesn’t mean it will work out favorably. However, if a trader looks at the opportunity the market is providing, using the CME Group tools, they can potentially create a reward to risk trade that has favorable characteristics. 

Good luck trading!

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