In preparing for the WASDE report coming up in early November, I go back to the same process I have used the last several months. As you will read below, much to my surprise, I am coming to the same conclusion – it is still time to buy Corn and sell Soybeans. Like a character says in a well-known Christmas movie, “I double dog dare you!” ‌Before I get to the conclusion, let me walk you through how I am thinking. 

Let’s start with the daily Ichimoku cloud charts for generic front-month Corn (top) and Soybean (bottom) futures. In the top chart, you can see that not only has price broken above the cloud, re-tested and held, but now the lagging span has moved above the cloud. When the lagging span moves above the cloud, this is an indication that the trend is indeed shifting, and a trader might expect to see the cloud moving higher. This tells me the bulls are now in control of this tape as opposed to the bears. Now, turning attention to the bottom chart for Soybeans, the story is quite the opposite. Here, the move in September to early October was rejected by the Ichimoku cloud. The lagging span never even breached the lower end of the cloud. All signs here point to a market where the bears are fully in control.

Now let’s focus on what could be a catalyst in both of these markets. The U.S. right now is clearly in a drought. Using images from the University of Nebraska, one can see in both images on the left, the current drought monitor conditions for the U.S. The October drought is so bad, it has drawn some comparisons to the October 2011 conditions, which led to the drought of 2012. That summer, both corn and soybean prices moved higher because of these drought conditions. However, if a trader looks at the top right chart, this is what the drought monitor looked like in October 2011. There was an extremely severe drought in Texas and California, but the rest of the country was not experiencing this drought. However, by 2012 (not shown), the entire country was in drought and futures prices headed higher. If one looks at the lower right, though, this image looks much more similar to the current image. This is an image of the drought monitor in October 2022, where the drought was widespread across the country, even if more severe in some parts of the country. The drought conditions in October 2022 did not lead to extreme drought in 2023, and both Corn and Soybean futures headed lower throughout that year. While these conditions can change considerably in a short period of time, and there is rain forecast across the Plains and Midwest in the coming week, which of these scenarios ends up playing out could have a strong impact on prices. It is just too uncertain right now to be able to aggressively position for it.

Is the market pricing in a drought next year? In order to determine this, I look at the 1 – 6 month Corn futures spread as well as the 1 – 6 month Soybean futures spread. Is there a strong bias for summer 2025 futures in either product?  Actually, this is a very mixed picture. The futures spread in Corn shows that 6-month Corn is quite low relative to 1-month Corn. In fact, the spread is over 2 standard deviations off of the mean right now. This suggests in the corn market, one might expect to see continued upward pressure on futures prices as there is no drought being priced in. However, if I turn to the soybean market, it is quite the opposite. 6-month Soybean futures are more than 2 standard deviations above the mean relative to 1-month futures. That spread looks as wide as the Corn spread looks narrow. Could Soybean prices continue to see some pressure as 2025 approaches? It looks like that could be the case.

This is the same chart that I looked at last month – the relative price chart of the generic front-month Corn vs. Soybean futures. Recall from last month, that if a trader looks on a one-year basis, it may look like the relative move in Corn vis-a-vis Soybeans is stretched. Stepping back and looking on a five-year horizon, there appears to be more upside. In fact, markets have just moved above the mean on the five-year regression and are not even 1 standard deviation above it. This relative price of 0.42 shows it could have upside potential to 0.475 or even higher if history is a guide.

Turning to the Commitment of Traders Report to check on positioning, one can see that both Corn and Soybeans have seen short covering in the last couple of months, but that activity has been slowing down, if not stalling out. The positioning by managed money is not at any extreme level and is in fact quite close to flat. Perhaps managed money is simply waiting for the clear signal to press a bet in either direction. Overall, the positioning in the market appears pretty clean and is neither an inhibitor nor a catalyst to move in the futures.

There is a lot of information in these next few charts, all of which come from CME Group Volatility Indexes (CVOL). The top chart shows the CVOL levels for all Ag products. A trader can see that on a one-year horizon, Corn CVOL is near the lowest levels markets have seen while Soybean CVOL is still near the highest of the last year. Neither stands out as extremely high or low relative to many of the other Ag products. I am intrigued by the relative levels of Corn and Soybeans, though. So, I turn to the middle chart, which shows the time series of CVOL for both Corn and Soybeans. Here, Corn historically has always traded either flat or at a premium to Soybeans. In fact, it was typically a premium. However, right now, Corn is trading at a discount to Soybeans on a CVOL basis, the first time in three years that markets have seen this. The market is daring us to be long Corn options relative to Soybeans. 

What about the Skew in each market? Are end-users and traders favoring either upside or downside options in either market? Is there something about the flows and positioning that may suggest a preference for a move in either direction? Actually, not at all. One can see that the skew in each market is almost perfectly zero, suggesting both upside and downside options are trading flat relative to the at-the-money options. There is no preference for either side. Perhaps there is confusion about what the next direction will be. Perhaps there is indifference as traders wait to see the move play out.

All of this information leads me to a very similar conclusion that I came to last month, namely that traders should buy Corn calls and sell Soybean calls. From a technical perspective, Corn is breaking out and beginning to trend higher, while the move higher in Soybeans was rejected and it has traded back lower. On a relative basis, Soybeans vs. Corn has been moving lower and has up to 13% to move lower (2.37 current vs 2.1 target) on a relative basis. Looking at futures spreads, it appears to me there could still be upside in Corn futures looking further, particularly Soybean futures which are priced at a much higher premium relative to the front month. Perhaps Soybeans are pricing in the drought of 2012, while corn traders see this more of a 2023-type environment. 

The positioning in each market is pretty clean, as traders can see in both the Commitment of Traders report as well as the Skew from each product. I get the sense that traders are waiting for a catalyst (perhaps WASDE) to give them a sign of the trade to put on. 

Corn CVOL is below Soybean CVOL for the first time in three years, thus buying Corn options looks appealing relative to Soybean options, which are not only expensive relative to Corn but also high on a one-year horizon vs. its own history. 

So, if I want to be long Corn directionally and via volatility, and I want to be short Soybeans both directionally and via volatility, I am led back to the same trade that I did last month – buying Corn calls and selling Soybean calls. Last month, I did the trade on a 3-to-1 basis. This month, I do it on a 2-to-1 basis, buying 2 of the March Corn 460 calls and selling 1 of the March Soybeans 1100 calls. This ratio of strikes is about 0.42 where the relative price is right now. I do the entire trade at zero cost, and you can see that the volatility for each option is approximately 22. 

What are the possible outcomes? Traders may get news via WASDE that is bearish for futures in each market, and both trade down not only in the near term but through expiration. If things end up below strike for each, since I did these at zero cost, there is no money made or lost. Another possibility is that futures trade higher on this catalyst, but that Soybeans outperform on the upside. In this case, the price ratio falls, and the trade is at risk of ending up in the money on the short Soybean calls and out of the money on the long Corn calls. This is the worst-case scenario. Since the individual futures are giving me a different technical signal, I don’t think this is a large probability, but it is one I need to consider, and one that if it occurred, I would need to look to cut my losses and close the position. A third option is that futures move higher, and the price ratio expands to 0.475. In this case, if Soybeans hypothetically move right to strike, but not through, at 1100, the calls will expire worthless. If that happened Corn futures would be 522.50, meaning the 460 calls I am long are deep in the money, the best-case scenario for this trade. 

There are clearly risks on a relative value trade, and many things need to go right for it to hit perfectly. However, the set-up for this trade looks as good this month as it did last month. It is as if the market is shouting at me, “I double dog dare you.” Well, I am inclined to take that dare. 

Good luck trading. 

The opinions and statements contained in the commentary on this page do not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by [Data Resource Technology]. CME Group has not had any input into the content and neither CME Group nor its affiliates shall be responsible or liable for the same.

CME GROUP DOES NOT REPRESENT THAT ANY MATERIAL OR INFORMATION CONTAINED HEREIN IS APPROPRIATE FOR USE OR PERMITTED IN ANY JURISDICTION OR COUNTRY WHERE SUCH USE OR DISTRIBUTION WOULD BE CONTRARY TO ANY APPLICABLE LAW OR REGULATION.