Volatility can be predicted by seeing how the options markets are trading. Early in the week, indications were for corn to trade in a 15-20 cent range, says Thomas Grisafi, of the Indiana Grain Co. The only question was whether that volatility would go to the upside or down.
With unrest in the Middle East and concerns about the dock worker strike in Argentine, the answer didn’t come quickly, and the concerns actually created less volatility. The last hour of trading on Friday, however, provided a resounding answer as the March corn futures contract closed 16-cents higher.
And this isn’t the end, Grisafi says "By the way corn acted Friday, we saw what it is and corn has more upside. So do beans and wheat. We saw more spreading between corn and wheat and beans and wheat. (Click here for the Mar '11 Corn Chart.)
"The way options trade, compare it to betting on sports. It’s like in Las Vegas how they come up with the lines for who wins or loses the Super Bowl. At the Chicago Board of Trade, they come up with a line on how much corn is going to move. They don’t know always which way it’s going to move, but they say at this level we’re either priced for a 15 cent move up or a 15 cent move down."
Through much of the week, trading ranges were in the 10-cent range. "By the end of the day, we figured out it was to the upside. There’s going to be a lot of people over the weekend saying, ‘Wow, did you see what corn did in the last hour.’"
Impacts on the Economy. Remarks by Federal Reserve Chairman Ben Bernanke on Thursday are a somewhat concerning to Grisafi. Food inflation is becoming a popular topic of discussion among the general media and the business media. Granted, this isn’t still a big concern in the United States, but Grisafi does point out that it is a major concern in other parts of the world. These are the growing markets for U.S. agriculture products.
"Someone specifically asked Bernanke about the food prices in Egypt. He said you’d have to convert their currency against our and compare it against food. Very arrogantly and it was almost like he was saying, ‘well, that’s their problem.’"
Some of the temperance on the market this week could have been sparked by traders lightening up on their positions over the dock worker strikes in Argentina and the unrest in the Middle East. However, logic eventually took over and people realized that little has changed when it comes to fact that people still need to eat.
"Eventually the grain grown in Brazil and Argentina will get shipped out. It’s just sitting there delayed. So if these parts of the world want our grain, they’re going to get it. Or they’re going to starve and then that leads to more riots and fighting."