Early January, the market will get the first WASDE report of the year. The January report is particularly significant as it includes final production estimates for the previous year’s crops, updates on domestic and international demand and projections for ending stocks. Analysts and traders will closely monitor the report for insights into crop yields, harvested acreage and potential adjustments to export and consumption forecasts. These are all critical updates that could influence agriculture prices and inform planting decisions for the upcoming season. Two critical drivers could be an early forecast for international demand that is potentially impacted by threatened tariffs, as well as Brazilian supply that's in the middle of the growing season. The table above shows the prior WASDE report’s data, which serves as a useful guide to the expectations for this month’s report.

Brazil is the world’s largest soybean exporter and a major producer of corn. Agroconsult had projected a 10.74% rise in Brazil’s soybean production for the 2024/25 season. The planted area actually expanded 1.5% year-over-year. However, those estimates could be at risk.

As one can see in the chart above, drought conditions persist in Brazil, particularly in key producing regions like Mato Grasso, Parana and Rio Grande so Sul. The 2024 drought, exacerbated by El Nino, has led to delayed planting and lower yield expectations for soybeans and second crop corn.

Reduced yields have decreased Brazil’s export volumes of soybeans, corn and other products, leading to potential supply shortages and higher prices. This has led to domestic inflation, which the Brazilian government will likely be keen to keep in check.

In the Excell with Ag Options October and November report, I had recommended relative value trades favoring buying corn calls and financing this trade by selling soybean calls. The argument was that while corn had already outperformed soybeans on a near-term basis, there was more potential upside on a longer-term basis. Given the technical set up in corn, the reduction in shorts by corn traders and not to mention the more favorable fundamentals, the call was for continued and expanded outperformance of corn over soybeans. Looking at this performance on a daily chart over the last two years, one can now see that the performance is more than two standard deviations above the mean over the period suggesting there is little room for continued outperformance of corn. In addition, the bottom chart shows the weekly relative performance over the last five years. Corn’s performance is almost two standard deviations stretched on a longer-term basis as well. No matter how you cut it, the days for corn’s continued outperformance may be numbered.

Now turn to the individual charts for each product. In the top chart you can see that daily candlestick chart of generic front-month corn. It is clear that prices have moved above short, medium and long-term moving averages. In addition, the shorter-term moving averages are above the one-year moving average. This is a positive technical set up for corn. The bottom chart also suggests that it may be time for soybeans to catch up. For one, the trendline that held for all of 2024 has given way with prices recently moving above. In addition, the recent low in December 2024 was higher than the low in August 2024. The Fibonacci retracements would suggest a move to the 38.2% retracement level of the entire 2024 move from 1324 down to 926. This could mean scope for a move to 1084. Importantly, while corn looks stretched relative to soybeans, both corn and soybeans have a positive technical set-up. This tells me that this is not the time for a relative value trade because selling corn, either by selling calls or buying puts, does not have scope for positive returns even if the relative price action works.

Trader positioning corroborates the idea that it may not be prudent to look at relative value ideas. The top chart shows that traders have begun to take a liking to corn. A short that was once close to 400,000 contracts in the summer of 2024 has not only been reduced but is now in positive territory close to 200,000 contracts. While this is large, it has been larger in the past, so is not necessarily a catalyst to fade the move.  Conversely, traders, perhaps looking to stay flat Ags overall, are still short soybeans. With a potentially positive technical set-up, this provides the kindling for a move higher if there is an event catalyst that leads to short covering. Could WASDE be that catalyst?

Volatility markets are somewhat subdued for corn and soybeans relative to other agriculture markets, such as wheat, or relative to their own time series. The top chart shows the CVOL Index and in it you can see that while corn and soybeans CVOL has moved higher the last several weeks, it's still near the lows of the year and well below products such as wheat.  The bottom chart is the skew ratio for each. Recall the skew ratio calculates the demand for upside vs. downside options by the market, with a ratio above one indicating demand for upside and a ratio below one indicating demand for the downside. Skew ratios for both corn and soybeans are near the lows of the year. In particular, the skew ratio for soybeans is near one, this suggests that there is no particular relative demand for upside or downside options by traders, indicating a relatively clean positioning in the options markets. In summary, implied volatility is near the lows of the last year and there is no particular directional demand for options right now.

While the view from CVOL suggests no particular demand for options, if I hone in on the WASDE report, it may be a different story. The Event Volatility Calculator from CME Group lets a trader view how much movement the market is pricing in for a particular event by comparing the pricing of the options before and after the event. While the broader volatility markets may still be subdued because of the end of the year and the holidays, using the daily and weekly options around WASDE, the Event Volatility Calculator backs out the volatility just for January 10. In doing this, I can see the corn market is pricing in a 53% volatility and soybeans a 47% volatility, which compares to implied volatilities that are normally in the 17-20% range. Thus, there are expectations that WASDE could be a major catalyst and source for movement.

Putting these thoughts together, I came up with the trade above: SN3F5 1010-1030-1040 call butterfly. This trade is long soybean deltas and benefits from an upward move in prices. While the trade is long option premium, because of the premium priced in for the WASDE event, I wanted to make sure to do an options spread. If the event does not prove to be a catalyst, I don’t want to see implied volatility deflate. Because I have chosen asymmetric strikes and not symmetric strikes, if the move is much larger than I anticipate, I would still make money unlike a typical butterfly where one only makes if futures prices hit the middle of the butterfly. I have spent a bit more option premium for this but since I am comfortable being long some option premium with both the CVOL and skew ratio near the lows of the year.

The hope here is that the drought conditions in Brazil potentially combined with better-than-expected international demand for U.S. soybeans could lead to a short covering in Soybean futures, extending the technical breakout in futures prices perhaps as high as the 38.2% Fibonacci retracement. The risk is a non-event or a move lower that would cost the options premium. This is a defined risk way to express a catch-up trade of soybeans to corn, which has outperformed by more than two standard deviations on a two-year and five-year basis. Options markets allow me to have a high reward-to-risk method for implementing my bullish bet into WASDE.

Good luck trading!

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