Excell with Ag Options: Trade frictions and market downturns ahead of Spring Planting Report

If nothing else, 2025 may well be remembered as the year of the tariff. Tariffs have been instituted, and then delayed, and then back again. There has been discussion of reciprocal tariffs. There have also been mentions and policies of countermeasures that countries will take against the U.S. if tariffs do come to pass. As the slip from the Reuters story suggests, China (and others) have U.S. agricultural products in its crosshairs as it considers how it will retaliate if tariffs are instituted by the U.S. The agricultural industry is familiar with this, having gone through the same back in 2018/2019. 

The chart above shows the amount of agricultural imports China brings in from its top two suppliers – Brazil and the U.S. There is a clear dip in 2018/2019 during the trade war of the last Trump administration. While there was a recovery post Covid and a new administration, the drop of imports from the U.S. while those from Brazil continue higher suggest, perhaps, a more permanent policy decision to shift away from U.S. imports. The current trade frictions may only exacerbate this trend.

It may not only be China that is considering retaliatory measures. The U.S. has also instituted, and then delayed as of this writing, tariffs on our neighbors Canada and Mexico. As one can see in the story from last Fall, 2024 was a record year of imports of U.S. corn into Mexico, shattering its own record and moving past the previous high set by China. Imports were up almost 50% year over year, an astounding amount. Mexico is now the largest end market for U.S. corn, suggesting that it is not just soybeans to China, but also corn to Mexico that could be caught in the crossfire of U.S. trade frictions.

Not only are imports and trade frictions an issue for U.S. agricultural markets, but competition is increasingly important. In the first chart, one can see how China is importing more from Brazil than the U.S. now. While Brazil has always been an important agricultural market, the scale it has developed moves the markets. The top chart above shows the rising trend of soybean production in Brazil, with only two down years in the last ten. This past winter (summer in Brazil) was a new record in soybean production. Records were set in areas planted and in production, with the yield being near a record for the last 10 years. In addition, the bottom chart shows that China is also growing more corn itself. The last two years of production have come in well above 5-year averages and this past year was up 8% over the last year. Competition from other countries going into China as well as competition from China itself create a demand picture that could be difficult for U.S. agricultural products. Knowing the supply of soybeans from Brazil is a record may give pause to farmers ahead of the spring planting season.

This backdrop sets the tone for the possibility of increased volatility in the coming year. In the chart above, the three lines are the 10-Year futures price (dashed), CVOL Index (blue) and skew ratio (red). A pattern developed over the course of the year: as futures prices fell, the CVOL Index rose and the skew ratio fell. This suggests not only a demand for options insurance as futures fell, but particularly a demand for downside options. While the CVOL Index has moved higher, it's still well below the highs seen before the election. The same is true for the skew ratio, which bottomed around the election and moved higher, suggesting hedges were unwound post the U.S. election.

Turning to technical analysis and charts, one can see that both Corn (top) and Soybeans (bottom) are at important potential inflection points. For Corn, there is reason to be hopeful if one is a trader. Yes, prices have broken below the Ichimoku cloud, suggesting a potential stalling or even changing of the trend. However, I also see the lagging span bounced off the Ichimoku cloud, an important sign of strength, while both the MACD and RSI are turning higher, suggesting Corn could be oversold in the near term. Soybeans are showing a somewhat similar pattern, though not quite as positive. Yes, the MACD has started to turn higher, indicating a possible change in trend. However, both the current price and the lagging span are breaching the cloud and indicating that the stalled trend may be set to move lower in the coming days and weeks.

Next, a trader needs to consider other traders’ positioning. For this, I turn to the Commitment of Traders report from CME Group, and particularly focus on Managed Money, which is more likely to change positioning in the near term in response to catalysts. The top chart shows the COT for Corn, which has recently been coming off the highs seen over the last 5 years but is still quite elevated and long relative to the last several years. This has the potential to disappoint traders who are long and looking for the current trend in Corn prices to continue higher. The positioning in Soybeans is only near the average of the last 5 years, though it is well off the record short levels shown for most of 2024. Again, given what traders witnessed last year, as Soybean prices struggled for most of the year until the very end, there is scope for the relatively flat Soybean positioning to move back to the record short levels traders saw in 2024. Both Corn and Soybeans have a potential negative catalyst from the change in trader positioning in response to catalysts – for instance, trade wars.

Turning to the volatility markets, I want to see how option traders respond to headlines, stories, positioning and trends. The top chart shows the CVOL Index for both Corn and Soybeans. Corn has seen a move higher in CVOL over the past couple of weeks, but even this elevated level is only average relative to the last year. Soybean CVOL is closer to the lowest levels of the last year, which is where it was until only the last week or so. 

The bottom chart shows Skew levels, indicating whether there is a trader preference for upside or downside options on a relative basis. There is nothing remarkable from the levels of Skew in either the Corn or Soybean options market, indicating no strong preference expected in the pricing of these options.

While the levels of Corn and Soybean volatility (per CVOL) and Skew are relatively unremarkable versus the past year, this may be masking the potential event uncertainty that is priced into the market. The best way to ascertain that is to look at the CME Group Event Volatility Calculator. One can choose the product and the date of the Prospective Plantings report to determine the implied volatility priced in for the particular event, and determine if it is different than the surrounding volatility. 

The top chart shows the Event Volatility Indicator for Corn. The move higher in the CVOL in the past two weeks perhaps may show an increased demand for options expiring just after the March 31 Prospective Plantings report. For this calculation, the tool uses the Friday options after the Monday report. There are daily options listed in Corn, but those were used in the tool at the time of this writing. However, I can see based on the options expiring just before and just after the report, the expected volatility for the event itself registers over 55% vs. the typical 23% – 24% range. This is a considerably heightened amount of implied volatility priced into the event. Traders may be lured into buying options if only looking at absolute levels of volatility per CVOL but the combination of the Event Volatility Calculator show that being long options for the event has a very high bar for success. 

The same is true but not quite the magnitude in the Soybeans market. Event volatility registers almost 28% vs. the average of 15% – 16% for the product. Thus, traders also see a higher bar for success in owning options for the Prospective Plantings report.

My first inclination was that the Prospective Plantings report catalyst is incredibly important for the market, not only because of the news contained, but also because it comes at a time of high uncertainty. The market is positioned at critical technical levels. Positioning could be unwound after the catalyst, U.S. tariffs and retaliation could be announced‌ and there is considerable supply and demand uncertainty. This report could really go in many different directions. 

However, while the CVOL Index suggests that volatility levels are not demanding, and buying options for the event could make sense, the Event Volatility Calculator, which dials in the particular catalysts, gives a very different picture. A trader has a decision to make – do they feel comfortable buying options with a very high bar for success, even if the catalyst is potentially quite market-moving, or does the trader find a defined-risk way to sell this higher risk premium that chooses a direction but defines the maximum risk? Having a defined maximum risk makes the strategy more appealing than a strategy with unlimited risk of loss (short straddles or strangles), or even a long or short futures position as the amount of slippage on a stop loss is unclear. 

For both products, I have chosen a bearish idea as I feel the reward to risk is more favorable for a move lower. The technical pattern in Soybeans is quite weak. While it is stronger in Corn, the positioning is a lot longer and more at risk of a reduction if news is poor. Supply from Brazil and China, coupled with weaker demand from China and Mexico due to trade frictions, already sets up a potential reason to be short. Will farmers give market participants the particular reason by deciding to plant more corn, in spite of record yields, because of the record Brazilian soybean crop? Will farmers not choose a product and plant as they did last year, which was still enough to lead to weaker prices for most of the year?

In each product, I put on split-strike put butterflies, which see maximum P&L on a small move lower, but which still lock in some gains should futures continue lower even below the lowest strike of the butterfly, as opposed to a symmetric butterfly. The cost of this comes from the higher premium since the strikes are not symmetric, which brings in the risk of a move higher in either product, that hits my maximum loss. 

My Corn butterfly costs about 4 ticks with a maximum payoff of 15 ticks (profit of 11) and a payoff of 5 ticks (1 tick profit) if futures move below the lowest level. The maximum reward to risk is 11 to 4 or about 3 to 1.  My Soybeans butterfly costs 8 ticks, with the maximum payoff of 30 ticks (net 22 ticks) and a gain of 10 ticks (net 2 ticks) if futures move below 980. The maximum reward to risk is 22 to 8 or a little more than 2.5 to 1.  Both strategies have an asymmetric reward to risk payoff which allows a trader to capitalize on a definable catalyst in a market with potentially long positioning, weaker technicals and uncertain headlines. 

Both strategies are short vega which benefits the trader if there is a vol crush post the catalyst. The small drift lower is the best case outcome, but a big move lower also profits. The risk is a move higher as the trader would lose the premium paid. Buying options outright has the risk of a volatility crush while having more potential to gain on a big move lower. Given the high volatility priced in for the event, long options did not appear favorable to me.

The trade ideas presented today are for Friday options. That is simply because the tools that I am using only had the data for these options. However, CME Group now lists daily Ag options. Since the launch, total volume has surpassed 49,000 lots.  One can see from the charts above the trends and patterns in the daily option contracts. The most popular contract has been the Wednesday contract, which could well be used in the case of the Prospective Plantings report as the catalyst is on a Monday. Corn and Soybean contracts constitute 91% of the daily contract volume thus far, so the volume numbers in the charts above would certainly apply to those options. 

The flexibility of daily options and the tools needed to analyze them give traders great flexibility in finding the optimal expression of an idea for well-defined market catalysts. This is particularly the case when trying to isolate the event volatility, as traders can choose the contracts that expire as closely to the event as possible.‌ This may be a great time to give the new daily options contracts a try. 

Good luck trading!

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