When the USDA released its quarterly grain stocks numbers on June 30, corn and soybean markets took a nasty tumble that lasted several days and sent prices to their lowest levels since 2010. When the USDA released its world supply and demand report two weeks later, grain markets eroded further as acreage and yield predictions, combined with current carryover stocks, are pointing to a possible storage glut next year – a phenomenon not seen in the U.S. for a number of years.
As corn and soybean prices retreat from the lofty levels of the past few years – corn down over 50 percent from the 2012 drought and soybeans about 45 percent off the highs, one metric has ticked up considerably – options trading. Volume and open interest on CME Group’s flagship agricultural contracts – corn, wheat and the soy complex (soybeans, meal and oil), are up double digits versus last year. Average daily volume in options on soy products are up over 70 percent year-on-year.
Many of the highest volume days, not surprisingly, coincide with big releases such as planting, acreage and supply and demand reports.
“We’re going from what has been, over the last couple years, very high prices to more historical levels as we built ending stocks,” says Tim Andriesen, managing director of agriculture and alternative investment products at CME Group. As to why this is driving options business, Andriesen says it is a function of the previously lofty levels of grain prices and perhaps a bit of optimism on the part of producers that such prices may be revisited.
“At the same time,” he says, “they also have a sense of realism that they need some sort of protection. When one has that view, options tend to be the best tool.”
He adds that agricultural producers are somewhat unique in that, while users of some asset classes tend to be either futures traders or options traders, users of agricultural derivatives will switch from futures to options given the right opportunities. “A lot of users are seeing options as the right tool for this environment,” says Andriesen.
Since the last period these levels were tested, options volumes have also been driven higher by the addition of several new CME products such as: options on futures spreads, weekly options and, most recently, short-dated new crop options (SDNCOs). These options, March, May, July and September expiries on new crop futures – November soybeans and December corn – have traded over 2 million contracts since the initial listing in 2012. During this crop year, SDNCOs have been averaging 10,000 a day on CME.
Corn and beans appear to have found a bottom – for now – and have inched upward after this past month’s freefall. Is the move over, or will there be another leg down? We may need to watch and wait for this fall’s harvest. But all signs point to a continued rebuilding of carryover stocks. Whatever your view, there are plenty of options available.