Volume Volatility and Options

Published on: 20:46PM May 06, 2016


Market Watch with Alan Brugler

 May 6, 2016

Volume, Volatility and Options

  • Over 356,000 ag options traded daily (in April), 66% YoY and 44% MoM
  • A record 2.1 million option spreads traded on CME Globex, with 71% of all Grain & Oilseed options trading on screen
  • Soybean options surged 99% YoY to a record 134,327 contracts per day, including a single-day record of 252,094 on April 22nd                                         CME Group email, 5/5/16

It is no secret that market volatility increases in the spring and summer, particularly for the grains. This year is starting out that way, with the statistical volatility for soybeans as an example jumping from 13% in February to 25% this week. Options premiums have actually been a little bit on the cheap side, with implied vol about 2% less than that actually being observed in the futures.

When you have lots of volatility, you can have more margin calls as a futures using hedger (and a difficult time deciding when to jump as a cash seller). I have been of the opinion for some time that options are a better fit for most producer’s risk profile because they are one directional.  When you buy the inputs, your risk is only one direction, i.e. down. If prices for the prospective product rise, that is not a problem, but short futures make it one by generating a margin call. The numbers from the CME shown suggest that producers (and other traders) are getting over concerns about the complexities of options and increasing their use to control the directional exposure. Some speculators are also attracted to the huge leverageof buying a $500 call option to control an $18,000 corn contract. As always we remind you that there is a significant risk of loss in futures and options trading.

Corn futures retreated 3.8% this week after posting a 4.7% advance the previous week.  Planting progress continues to run ahead of the 5 year average pace, soil moisture is adequate to surplus, and weekly export sales and corn use for ethanol slowed down. That’s a pretty tough combination for the bulls to overcome.  Export commitments YTD are now 90% of the full year forecast from USDA, still lagging the 5 year average of 93% for this date but definitely closing the gap.  Unshipped sales on the books are 1% larger than last year at this time (13.276 MMT). The Commitment of Traders report confirmed that spec funds are still net long, but they did trim their recently required position by a net 8,749 contracts in the reporting week ending May 3.














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CBOT Wheat







KCBT Wheat







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Soy Meal







Soybean Oil







Live Cattle







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Lean Hogs





















Wheat futures were lower in all three markets, with HRW and SRW down 5.5% on the week.  The MPLS spring wheat was better supported due to nervousness about acreage and also potential losses in Canada. After posting the largest weekly total since July 2015 the previous week, US weekly export sales dropped off to only 318,860 MT during the week ending April 28. That said, USDA is likely to reduce their estimate of 2014/15 exports in the May WASDE report, as sales have not met the pace needed to hit their full year number.  They are at 96% of the full year forecast, but would typically be 103% by now. Unshipped sales on the books are 26% smaller than last year, limiting the ability to catch up. The Brugler500 crop condition rating for winter wheat rose 5 points to 364 and is implying a yield similar to 2012. The KS wheat tour projected a 382 million bushel crop for that state, on the highest expected state yield since 1998.

Soybeans were up 0.5% for the week, thanks to a valiant effort by the specs to dress up the close on Friday.  The gain for the week was 5 1/4 cents, and May was up 22 3/4 on Friday. USDA weekly Export Sales 1.245 MMT, with 815,820 MT of old crop bookings (the largest weekly total since the week ending January 14). Soybean commitments are now 99% of the full year forecast, matching the 99% average for this date. Unshipped sales are now 3% larger than year ago. Argentine soybean harvest has been picking up with drier weather, but is still only 41% completed. It was 62% done at this point in 2015. The Commitment of Traders report confirmed that the spec funds were still adding ( 7,429 contracts) to their net long position as of May 3, taking it to 167,554 contracts (837 million bushels).

May cotton futures were down 3.1% for the week, expiring at 61.63. Planting progress continues to lag in major producer Texas, due to wet conditions. We had a fairly weak export sales report for cotton with USDA showing 86,100 RB of combined old and new crop bookings for the week ending April 28. The old crop figure was about 71.2% of the total.  Net Pima sales were 11,400 RB. US Export commitments are still behind, with 88% of the full year total on the books, The average for this date is 101%, so we will need unusually large weekly export sales between now and July to catch up. The old crop marketing year ends July 31. The LDP/MLG for this week is 0.08 cents after being zero the week before.

Live cattle futures shot up 4.8% for the week.  Beef production this week was down 0.6% from the previous week but still up 4.7%  vs. the same week in 2015.  Slaughter was up 4.2% vs. year ago, with the rest made up by higher average carcass weights. Beef production YTD is up 3% from last year on 1.5% larger slaughter.  Wholesale prices were sharply lower again this week, with Choice down another 3.6% and Select boxes down 3.9% from the previous Friday. Cash cattle trade was firmer by about $2 from the previous week, with $126 trade reported in the south on Friday. June futures are still well below the current cash market, at $120.72 going home on Friday, but did a lot to narrow the basis premium. The Friday night Commitment of Traders report showed the large spec funds with a modest 19,086 contracts net long in live cattle.  They were net short in feeder cattle, and getting moreso in the reporting week just ended.

Lean hog futures were down 1/2 percent for the week, after gaining 3.5% the previous week. The CME Lean Hog Index was up $3.78 for the week to $73.59. That firmed the basis to -3.21K from -$8.09K the previous Friday. The average pork carcass cutout value was down a little over 1% for the week, at $81.65. Pork bellies hit the lowest prices since New Years this week. Weekly hog slaughter is estimated at 2.214 million head, up 3.5% from the previous week and 5.3% larger than a year ago. Pork production YTD is down 0.9%% from last year at this time due to a 0.3% drop in slaughter for the first four months of the year. US pork export shipments for the first three months of 2016 were up 5% from year ago.

Market Watch

Monday will also see the regular weekly USDA Export Inspections and Crop Progress reports.  EIA ethanol production is scheduled for Wednesday, with the weekly USDA Export Sales on Thursday. The main USDA reports for the week will be on Tuesday, however, with Crop Production and the WASDE supply/demand report. This will be the first WASDE report where the world outlook boards shows their expectations for 2016/17 US and world production and use. While the US production estimate won’t be based on actual surveys until August,  the WAOB folks are free to adjust armchair yield as they see fit. There will be a lot of interest in what they do with South American and Chinese numbers for next year, as well as revisions for 2015/16 for the former due to weather problems.  We will have a full webinar covering the grains and livestock markets and incorporating the new data, at 7:00 pm CDT on May 12. Registration is $40, here is the link:


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There is a risk of loss in futures and options trading. Past performance is not necessarily indicative of future results.  Copyright 2016 Brugler Marketing & Management, LLC