- HEADLINES: Extreme Chicago volatility as wheat starts to trade; Corn falls $0.60 from its high; Chicago May wheat still locked limit.
- Chicago values are sharply mixed at midday. Corn has traded $8.00 for the first time since 2012 while wheat futures scored new highs on a synthetic option basis. Rumours are widespread of firms struggling to meet margin calls as Chicago wheat futures have rallied an incredible $3.50/bu (to $12.09 May). Last Friday, wheat closed limit down at $8.59 as NATO members did not include SWIFT in their sanctions. That changed on Saturday and the grains have been on an incredible bull run since. The break appears to be on wheat trading again.
- The Chicago rally has caused short wheat holders to spread their losses by buying corn and even soybeans. Wheat shorts are trapped and are buying anything that can help them to reduce or manage risk. In 2008, wheat ran to record highs on the influx of money from the new index funds. That rally did not run limit up every day and allowed the bears to manage their position. This rally has not allowed the bears to step aside in an orderly manner. Concern is growing that brokerage firms will dramatically raise margin rates or put restrictions on position size to help them manage risk. The volatility of Chicago and other markets is going to stay extreme due to headline risk.
- Chicago brokers estimate that managed money has purchased 9,000 contracts of wheat, 20,600 contracts of corn, and 8,200 contracts of soybeans. In soy products, funds have bought 5,600 contracts of soymeal and sold 6,400 contracts of soyoil. The potential that the Biden Administration could change the RFS would have an important impact on soyoil demand and soybean crush margins. Our hope is that USDA/Biden hold to their prior RFS pledges.
- Chicago spread and options are trading widely as traders are loath to enter new positions amid the heightened risk ahead of the weekend. Option volatility is soaring with the corn vol rate rising to 56%, the third highest on record. Historically, option vol rates have correlated with intermediate tops in futures, so this week’s climb in volatility has been something to watch. The vol rate is like a momentum indicator in suggesting that emotions are high. Options are costly on any purchase of a put or a call.
- The USDA announced that 106,000 mt of soybeans was sold to China, 108,860 mt to Mexico, and 125,000 mt to an unknown destination. All the sales were for the 2021/22 crop year.
- Rarified Air – Chicago spot corn has only traded 8 weeks above $8.00 in history in the timeframe of July/August in 2012 when a dire drought struck N America. This drought produced the active planting of the winter corn crop in Brazil which brought this country to being the second or third largest corn exporter in the world. The market is trying to secure additional Brazilian and US corn seeding in 2022.
- The midday GFS weather forecast is slightly wetter across Central Argentina than what was indicated overnight. And the winter corn crop in Brazil will see enough rain for early vegetive growth, but better amounts will be needed in the last half of March and April as reproduction nears. Close attention must be paid to Central Brazilian weather in April.
- Corn futures fell 60 cents off their high as wheat values started to trade in KC and back month Chicago futures. All the short wheat holders that were long corn/soybeans sold out as they can get out of short wheat. The wheat relief value of the market opened which sent the summer row crops reeling.
- Going forward, the most pressure will be felt in soyoil futures if the Biden Administration decides whether to roll back RFS mandates to aid food inflation. Policy headlines for Chicago grain/soy are dangerous following the massive build up in net long speculative positions. Net long managed money in corn should be record large this afternoon. We are a longer-term bull, but caution is advised due to extreme market volatility, high option volatility and rising margin requirements. New crop futures offer the best risk on sharp setbacks. Remember that bull markets always let you in and May Minneapolis wheat is priced at a discount of $1.00 vs. Chicago in the options which is shows the speculative imbalances of large funds chasing the most liquid wheat futures.
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