Tariffs and trade continue to be top of mind in the agriculture markets, and it is not difficult to see why. For one, agriculture enjoys positive terms of trade and is one of the largest export products from the U.S. For another, farmers (or the states from which farmers come) leaned favorably toward the current administration in the last election. Thus, policies that tend to hurt your voters are usually not seen favorably. However, there may be bigger fish to fry, which is why the Trump administration is both continuing with tariffs (though they have backed off some) but also considering ways in which farmers can be compensated for any losses due to trade turmoil. While these payments might help in the near term, the risk, of course, is that as a global commodity, ceding market share to any other country (looking at you, South America) can point to long-run negative trends. In many ways, traders have already seen this play out in the soybean market as exports to China have struggled in the years since the 2018 – 2019 trade wars. Luckily, domestic production of biofuels has stepped in to fill the void. Can that continue to happen? What about the products that are exported to countries like Mexico (e.g., corn and wheat)? Is there another buyer looking to step in?

If I look at the last report on April 10, products responded favorably. In corn, the reduction in ending stocks coupled with increased expected exports led to a bullish move in futures. In soybeans, ending stocks also decreased vs. an expected increase. While exports were not changed, there was an increase in crush estimates, which helped give a more bullish tone. This was not the same message in wheat markets as ending stocks were increased and exports decreased, leading to an overall bearish sentiment in futures post the report.

While the WASDE report last month was bullish for corn, and futures did move higher over the month, the momentum appears to be stalling at this point. One can see in the top chart that the highs seen in the last month are lower than those reached in February. In addition, in the middle panel, one can see the MACD rolling over. The Ichimoku cloud is only flat here, suggesting that while there was a bullish move last month, it was not strong enough to assert a trend higher. Finally, the lagging span (red line) has dipped back into the cloud, signaling near-term trouble for corn.

In the middle panel, Soybean futures broke out above the cloud and the lagging span followed suit. The cloud itself has not turned higher, but there is evidence of a bottoming process taking place. The lows in soybeans continue to come in at higher levels looking back to last August and last December. While not a strong uptrend yet, there is reason for optimism in the soybean futures market.

That brings me to Wheat futures. This is another sideways, trendless market, but one that appears to be much closer to resolving lower. The price action since ‌last April’s WASDE was poor, and while futures attempted to rally, the rally was met with resistance at the cloud and turned back lower. This is a market that looks vulnerable to a move lower.

The next stop is ‌ volatility markets. For this, I use CVOL from CME Group, looking at both the index and the Skew Ratio, trying to get a gauge on the overall level of volatility but also the preference for upside vs. downside options. The top chart has CVOL and Skew Ratio for Corn over the last year. The overall level of volatility is near the lows of the last two years, suggesting no particular nervousness in the corn options market. Maybe more importantly, the Skew Ratio is pretty flat near 1, telling me there that the demand for upside and downside in corn is pretty similar.

Soybean volatility is also near the low of last year. However, where there is demand appears to be in the upside, as the Skew Ratio has ticked higher to 1.1. While this is below the highs of the last two years, it does indicate that where there is demand for options, it tends to be higher in the upside strikes than the downside strikes.

Finally, turning to Wheat, volatility is also at or near two-year lows. Skew Ratio is also at two-year lows, but the level itself of 1.2 still suggests more upside than downside demand, even though this ratio is considerably lower than levels seen previously. This could be because of overall low volatility levels, but it could also indicate a falling demand for upside strikes.

Positioning stayed pretty consistent compared to last month. Using the Commitment of Traders report from CME Group, one can see that managed money is still long Corn (top panel) and near the high levels traders have seen over the last two years. Does this suggest the market could be vulnerable to a negative catalyst? The same might be true in the soybean market, with length also near two-year highs. Much like the price action in the futures overall, wheat shows a different picture, as traders are as short as they have been over the last several months. While there were shorter positions back in 2023, positioning is still shorter than normal at this point.

Looking at all of the information above, I came up with what I think are the most compelling options trades in each of the products. For all of them, I sought out the flexibility of the daily options expiration and have chosen the options that expire on the Friday after the WASDE report. With daily option expirations, a trader can even wait until the day before the report to put on hedges for the next day if that fits their views more closely. For me, I wanted to have some trades in advance. Let’s take a look at each. For Corn, I chose a ratio put spread where I sold one of the slightly in-the-money 455 puts and used the premium to buy two of the 440 puts, taking in some premium as well. My concern in Corn is that futures are rolling over and look poised for a downside move. Positioning is long as well so any negative news from WASDE could be a catalyst for a move lower. If the news is positive, Corn futures could move back higher, but given the length, the move is probably not sharp. Volatility is near the lows of the last couple of years, so I wanted to net buy options. My thought is that there is either a drift higher or a sharp move lower in Corn; thus, the ratio put spread makes the most sense. If futures move above the 455 strike, I take in the net premium. If futures move below 440, I make money in a ratioed fashion. My risk in this trade is a drift down to 440 and stopping. Given the weakening technical picture and the length, I felt this was a risk I could take thinking a move lower would gain momentum.

In Soybeans, futures are just starting to break out. Positioning is long but could get longer. However, the possibility of negative news is also arguably higher given the headlines on trade with China. Thus, some protection for long positions may be needed. With CVOL near two-year lows and the demand for options favoring the upside as evidenced by the Skew Ratio moving higher, I have opted instead to show a long futures position hedged with the SN3K5 1000 puts. The implied volatility of these options is low versus its own history. For those with increasing length given the breakout since the last WASDE, it makes some sense to add a hedge. One can see the resulting position is a synthetic call. The risk is that futures simply keep moving higher and you do not need to buy a hedge. However, by adding a hedge, you can comfortably stay in the position ahead of the WASDE report. In addition, you may even feel comfortable to add to your length if you are hedged as well.

The final trade is in Wheat. Price action here is already poor. Positioning is short but could get shorter. My sense is any move higher, back toward the resistance at the Ichimoku cloud, will be sold into. CVOL is near the lows as is Skew Ratio. I wanted to be net long options for an acceleration of the move lower and I can feel comfortable selling upside options to fund the position. Therefore, I have chosen a ratio risk reversal where I sell one 535 call for the ZW3K5 expiration and use the proceeds to buy two of the 515 puts. The risk in this trade is a move above 535. With the technical resistance and poor price action, this is a risk I am willing to take. The benefit is if the futures accelerate on a move below 515 because I will be long two fully funded puts at that strike. This would be a big benefit.

With the uncertainty in the markets these days, it is difficult to know what to do. Fortunately, traders have countless tools available to them at CME Group that help to analyze the data. In addition, the flexibility of daily options expiration gives a trader the ability to customize their trade to the precise views they have. This combines to give traders a leg up in an uncertain world. Stay vigilant and good luck trading!

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