Report highlights

Access the latest Excell with Options where Rich Excell explores different tools and contracts that traders can use to hedge risk around the Acreage report.

Image 1: Temperature and precipitation outlook for the U.S.

As I sit down to write this week, I am happy to be indoors in the air conditioning as it is in the mid-90s outside right now. This hot weather is expected to continue throughout the week. It had me thinking about what impact this could have on corn and soybeans this summer. Depending on which region you read about, some areas already had some concerns for this year given the late planting in many parts of the Midwest. While it helped alleviate the drought conditions that persisted last year, steady rain in many areas, particularly in Illinois where I am from, meant that farmers were still planting late into May, bringing about some risk of lower yields. If these younger plants have not established deep roots yet, this heat wave we are going through could have negative effects on crop yields. I went to the National Weather Service for its outlook on the weather over the next couple of weeks:

Outlook: An early-season heat wave will grip much of the South, East and lower Midwest for the remainder of the week. With soil moisture adequate in many areas and with Midwestern summer crops having not yet reached the reproductive stage of development, Corn Belt impacts from the heat should be minimal. In parts of the South, however, high temperatures frequently approaching or reaching 100°F could adversely affect reproductive corn. In contrast, stormy weather will cover the northern and central Plains and upper Midwest, with five-day rainfall totals expected to reach 1 to 4 inches or more. The NWS 6- to 10-day outlook for June 22 – 26 calls for hotter-than-normal conditions nationwide, except for near- to below-normal temperatures in parts of southern Texas. Meanwhile, wetter-than-normal weather in western Washington and east of a line from south-central Arizona to the western Dakotas should contrast with near- or below-normal precipitation across the northern High Plains and much of the West.

This outlook sounded to me more upbeat than I would have expected. As hot temperatures can have a larger effect on corn than soybeans, and the warm evening temperatures do not increase the respiration in soybeans as much as corn, all eyes will be focused on the upcoming USDA release to see the relative proportions of corn and soybeans planted this year. 

Image 2: USDA weekly export sales as of June 6, 2024

Also important to monitor is the demand for crops. One source of this demand comes from the weekly export sales made by USDA. I have highlighted in particular the EU, Japan and China because these locations have had the largest demand for U.S. crops. Looking through, one can see that demand for soybeans does not look as robust as the demand for corn versus a year ago. The EU, Japan and Taiwan have strong demand for corn, but across the board one can see less demand for soybeans than one year ago. One major data point I am missing is the demand for new crop soybeans and corn. Japan has shown demand for these products, particularly corn, but no other areas have shown any demand yet. While it may be a bit too early still, this is a potentially big source of uncertainty going forward.

Image 3: Commitment of Traders report for corn and soybeans

Perhaps traders are more focused on the lack of demand than the potential for lower supply right now. The weather data struck me as possibly being bullish, though the price action does not corroborate that. Maybe that is because managed money is leaning heavily short both soybeans and corn. With the exception of a short-covering run in April, perhaps around the reports of late plantings, traders are heavily short the ags right now, with short levels seen at close to three-year high levels. In particular, the corn short was built back much more aggressively and stands at 200k contracts, not far from the 300k peak it hit. Soybeans are short but not near the peak hit back in March and early April, around 50k contracts vs. a peak that was triple that number. Managed money is leaning short both but appears to be pressing the bet on corn even more.

Image 4: Technical charts for the third futures contract in Corn and Soybeans

I am using some new charting functionality for the report this week. In CME Direct, traders can now access TrendSpider charting functionality. I have tried to show some different views that a trader can use in this view. On top is the chart of the third futures (as I want to look at New Crop Soybeans and Corn) which uses the automated analysis from TrendSpider. A trader only needs to go into the analysis and click on which technical patterns it would like the system to identify. The system will then go back over the time you have selected, here I have used the last year, to see if those patterns were identified. For Soybeans, while many of the patterns I have chosen were not detected, what is detected on the green lines to the right is that futures are breaking down below the channel they were in. One can also see that futures broke lower on heavier volume, seen because I use raindrops instead of candles. Raindrops are unique to TrendSpider and contain the period high/low/close many technical indicators do, but also contain volume. I can see heavier volume in this raindrop as it moves to the lows. On the flipside, in spite of the heavier short position from managed money, Corn appears to be forming a more bullish pattern. In this view, I have simply drawn the lines myself instead of using the automated analysis that traders can choose to identify and draw a myriad of patterns themselves. Here, I have chosen to draw both Fibonacci levels as well as a trendline. Both patterns show to me that there could be support here in Corn even with the heavier short position.

Image 5: CVOL analysis of Soybeans, Corn and the comparison of the two

The next stop for me is always CVOL. While I start to develop a potential directional view, I want to understand how much uncertainty is priced into the market, especially ahead of the annual acreage report from the USDA on June 28. There are three charts I have selected here. On top is the soybean CVOL chart where I show the level of CVOL, the level of skew and the underlying price. A few things stand out to me: 1. I can see the futures price breaking down to levels not seen in the past year 2. In the face of this move, CVOL levels are relatively benign, staying close to the average they have been over the past nine months 3. However, skew is moving higher up to levels not seen since last summer. Traders might be seen as showing a preference for upside options in Soybeans even if there is not a general buying of all options and counter to the direction move in the futures. In the middle chart, I look at the same things for Corn. I see the level of CVOL as well as the skew level are both very high. CVOL is at levels not seen this year, in fact not seen since last summer’s drought-like weather. The demand appears focused on call options as well with skew at the highs of the last year, while the futures prices are still in a range. The difference in CVOL levels between Soybeans and Corn are seen best in the third chart, which is the product comparison function available in the CVOL tool. I compare Soybean and Corn CVOL levels, and while there tends to be a premium for Corn CVOL, I can also see that premium has expanded to the widest levels in a year. There is more uncertainty in Corn markets than in Soybean markets, perhaps because of the greater risk to corn from the extreme heat we are seeing. Another reason may be the larger short position that traders are hedging ahead of the USDA Acreage report at the end of June. Either way, Corn CVOL looks pricey relative to Soybeans.

Image 6: Event Volatility Calculator for USDA Acreage report on June 28

Another step in the process, especially when there is a major and well-defined catalyst, is to go to the Event Volatility Calculator on the CME Group website. According to the description by CME Group: “See how markets price upcoming economic and geopolitical events through the lens of options on futures forward volatility. The term structure of volatility for a specific product is the market consensus estimate of future realized volatility for each given option expiration period. Variations in this term structure can imply moves in the underlying futures contract being priced in due to an upcoming event.” Essentially, the calculator looks at all of the options surrounding the event. A trader can observe the implied volatility for each. The difference between expirations is what is called forward volatility, and it is the implied volatility between one date and another. When there is a major catalyst, it can get quite high. In the charts above, you can see that the event volatility for the USDA event is much higher for both soybeans and corn. At 47% and 99% respectively, it is 2-3x the implied volatility of all of the dates surrounding it. From this, I can see that the market is expecting large moves on that day. I can see once again that the expectation for volatility is much higher in corn than in soybeans, though in fairness it is pretty high in each. This is a great tool to help the trader assess “what’s priced in?”

Image 7: Implied volatility surface for New Crop Weekly options in Soybeans and Corn

I want to focus particularly on New Crop Weekly options for both Soybeans and Corn. As I mentioned earlier, we still haven’t seen any export sales for the new crops, which creates some uncertainty. Of course, with the upcoming Acreage report, the new crops are going to be most affected. CME Group provides options on new crop futures, which give traders and end-users an excellent opportunity to hedge either side of the trade around major market-moving events. I am most focused on the SN1N4 and CN1N4 options that expire in early July, after the Acreage report comes out. My sense is that when the report comes out on June 28, traders will want to trade into or out of positions before going into the long Fourth of July weekend the next week. These options capture that time period perfectly. Using the implied volatility surface view, a trader can see that for both Soybeans and Corn, puts trade below both calls and at the money. I’m not surprised about trading below calls because I saw the skew from the CVOL chart. However, it is interesting to see these out-of-the-money puts trade at a discount to at the moneys. I can also see the premium in Corn vs. Soybeans, as Corn implied volatility is about 32 while Soybean implied volatility is about 18.60. Traders are paying a pretty good premium for Corn options at the moment.

Image 8: 1 by 2 call spread in CN1N4 New Crop Weekly Corn options vs. a long Corn futures contract

My directional bias is to lean into the breakdown of Soybeans while taking a contrarian view on Corn. Relative to Corn, Soybeans both tolerate late planting better as well as tolerate heat better. These are the two big potential concerns for traders right now. In addition, there is a large premium in implied volatility for Corn versus Soybeans. Thus, I want to find a way to be net short Corn implied volatility and long Soybean volatility. I feel if I have on a relative value trade of long Corn vs. short Soybeans, I have less exposure to sharp moves in either direction if I simply have on one side of the trade. Ahead of the USDA Acreage report on June 28, where I do not feel I have any particular edge, I want to be neutral to this catalyst while taking what the market gives me in the options market. 

The first trade I want to view a ratio 1 by 2 call spread on CN1N4 New Crop Weekly Corn options. I have also bought a Corn futures contract. I like to use ratio call spreads as way to lever up my long futures position. The ratio call spread enables me to add to my gains between the strikes – 475 & 490 – while taking me out of my long futures position if we should trade above 490. Given the short base in Corn is quite large, I feel there is the possibility that even if the news is not that bearish for Corn on June 28, there is scope for a move higher. The technical patterns look healthy, and the short position is large. In addition, the ratio call spread allows me to be net short vega so if nothing happens, I will earn some premium from this trade which will help lower my basis in the futures. Buying the at-the-money and selling the out-of-the-money call also takes advantage of very steep skew that we see in the CVOL report. 

Image 9: Short an 1150-1180 call spread vs. long the 1100 puts in SN1N4 New Crop Weekly Soybean options

For the Soybean options, I have taken a different approach. I want to have a bearish directional view for three reasons: 1. The short position has not been rebuilt in Soybeans like in Corn 2. Soybeans do better with late planting and heat, so the weather conditions from this Spring should not hurt soybeans as much 3. Technically, futures are breaking down, so I want open-ended exposure to the downside. Skew is also high, so I want to be careful not to buy any upside options. I do not mind being a little long vega in Soybeans because I am short in Corn and the spread between the two products is wide. Selling the call spread to fund buying puts gives me exposure to a continued move lower in futures should the Acreage report prove to be a bearish catalyst. I have defined risk in this position as the most I can lose is the difference between the call strikes. If the overall USDA report is bearish for both corn and soybeans, I have some protection for my long Corn futures with Soybean puts. It isn’t perfect, but it does offer some protection against a broadly bearish report. With the relative short bases in Corn and Soybeans suggesting there could be more pressing of shorts in Soybeans vs. the possibility of more short covering in Corn, I like the relative risk exposure. 

I have given you two different ways you can look at trading the USDA Acreage report at the end of June. With the flexibility of New Crop Weekly options, CME Group has given traders a lot of flexibility for how they can hedge their positions or express their directional views around a catalyst. Finally, with a variety of new tools, from CVOL at CME Group, to TrendSpider and QuikStrike in CME Direct, traders have a lot of ability to analyze the markets and find the optimal trade to use. 

I have some relative value risk into this major catalyst; however, I believe I have found the optimal way to express my view using options spreads. I hope you can too.  Good luck trading.

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