Coming into the planting season, the U.S. was facing a drought in many areas of the Midwest, which was particularly impacting the potential U.S. crop output. However, over the course of the last couple of weeks, there has been a considerable amount of rain and more forecast in the coming days. As a result, the current U.S. Drought Monitor suggests that while many parts of the West and Southwest are still in a drought, the Corn Belt in the U.S. is now out of the drought condition. This rain may be welcome to farmers who were looking to alleviate the drought conditions, however, this rain has not been friendly to corn prices, as traders quickly began to focus on a better-than-expected crop which could lead to lower prices.

With the market perhaps already vulnerable because of rainy and hot weather adding to the outlook for growing conditions, the market was hit with more news that analysts are expecting a potential record corn crop out of Brazil. The report also points out the uncertain demand as key markets such as China, Iran and Egypt have either been out of the market or are facing regional conflict, which makes their demand much less certain. The combination of news was a delight to bearish traders but not the welcome news farmers were looking for when it comes to prices.

The technical picture for Corn is therefore expectedly bearish. One can see a series of lower highs and lower lows. One can see that price has broken below the Ichimoku cloud accumulation zone and the cloud is beginning to point lower, indicating a change in trend. One can see the lagging span has also moved lower adding force to the bearish trend. The MACD has crossed over and is pointing lower. About the only potential positive is that markets are moving into the oversold RSI area. The bears are clearly in control of the tape.

It should not be surprising, therefore, to see that managed money is short corn. The size of the short futures position is large but is not quite yet to the size it got to early last year. However, the short futures position from managed money is striking given that these managed funds started the year at their longest positioning of the last 3 years. This shift from very bullish to very bearish in a 6-month time frame is striking in the change of tone from these funds, showing the magnitude of the bearish news the market has faced.

Turning to the volatility markets, it is important to see how option traders are set up and pricing the current environment. In the top chart, you can see the CVOL for Corn compared to the underlying price. The level of CVOL has risen in the past month, though it still sits near the lows of the last 3 years. The cost of options is not overly burdensome, possibly suggesting options traders have plenty of supply of options even though prices are breaking down. The bottom chart then looks at the relative price for upside vs. downside options and it shows there has been more demand relative to supply in upside vs. downside strikes. This could be because traders who are short futures are looking for protection. It could also be that those who want to take a directional shot on the long side prefer the options market to the futures market because of the defined-risk nature. Either way, while the overall level of volatility is not burdensome, on a relative basis, upside options look expensive versus downside options at one of the highest levels in the last 3 years.

One of the major catalysts coming up for the corn market is the WASDE report that comes out on July 11. Using the Event Volatility Calculator, I can determine how much incremental risk the market is pricing in for this report. The Event Volatility Calculator identifies that the market is not pricing in any additional volatility for the WASDE report, suggesting traders do not think it is a particular catalyst. Perhaps this is because the supply/demand picture is quite clear and there is little new information expected in the report. More likely it is because the USDA Acreage report comes out on June 30 and any movement is expected to come from that event, with little new information beyond that on July 11. In fact, I can see that if I look at the Vol Tools feature in QuikStrike. I have chosen all of the New Crop Weekly contracts, and I see that implied volatility across the board is higher in the CN1N5 contract vs. the CN2N5 contract, as traders see ‌higher odds of potential movement from the June 30 Acreage report. However, by looking at the CN2N5 contract, I can capture both of these catalysts, as well as any trade news that would potentially come out on the July 9 tariff deadline. This CN2N5 contract has more catalysts embedded within it yet is trading at a discount to the CN1N5 contract.

Christmas in July! No, I am not talking about the weather, clearly. I am talking about the fact a Christmas Tree call option spread lines up nicely given the set-up here. First of all, what is a Christmas Tree? It is similar to a call butterfly but the amounts are skewed, where instead of doing the spread 1 by 2 by 1 to have symmetry, the trader buys 1 call, sells 3 of the middle strike and buys two of the high strike. The benefit is that the Christmas Tree will be much closer to premium neutral than the butterfly. It will do better should futures prices end up near the middle strike of the spread. However, the risk is that from the middle strike to the upper strike, the trader loses money more quickly, though losses are ultimately capped at the upper strike and the spread still has a defined risk. The idea here is that the spread is bullish but only mildly so. Volatility is low overall, but that is more a function that downside volatility is low, and the underlying has moved lower. The implied volatility for the 450 strike is actually over 2 vols higher than the 430 strike, so an elevation of volatility is built in. Given how bearish the market is right now, given weather news and Brazil news‌ and the price action of futures, one might expect a surprise is possible but likely only on the upside. Managed money is currently short, but as traders saw last year, they were very short in the first part of the year and turned very long by the end of the year. However, the technical picture looks lower, and the bears are in control, so if there is any bullish news, one expects the 450-460 level would contain the rally. Finally, I use the New Crop Weekly contract CN2N5 because no incremental volatility is priced into this contract, even though I am capturing not only the WASDE catalyst, but also the USDA Acreage report and the July 9 tariff deadline. I feel like this contract is very good value for all of the news I am getting. The Christmas Tree will do well if futures prices move higher but stall at 450. Because I have almost no premium at risk, if the bears maintain control of the tape and futures settle lower, I have not risked much premium at all. Thus, at the 450 level, I could potentially make 20 ticks (18.7 net) for risking 1.3 ticks. This is a very attractive reward to risk with a very asymmetric payout, which I would expect since I am making a contrarian call on direction.

The tools to analyze what the market is pricing in and the contracts that allow a trader to optimally express views is the key to what CME Group brings to the table for traders in the Ag markets.

Merry Christmas (tree) in July!

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