Tag Archives: commodities

There was a modest drop in agricultural producer sentiment in December as farmers’ perception of both current and future economic conditions weakened, according to results from the Purdue University/CME Group Ag Economy Barometer. The December barometer reading of 127 was 7 points lower than November. The barometer is based on 400 survey responses from agricultural producers across the country.

Both of the barometer’s two sub-indices declined in December: the Index of Current Conditions fell 6 points to 109, and the Index of Future Expectations fell 8 points to 135. When comparing these readings to December 2017, the Index of Current Conditions is substantially lower, registering a decline of 30 points, while the Index of Future Expectations actually improved from year-to-year with an uptick of 15 points.

“Over the course of the last year, producers’ impression of current economic conditions on their farms has declined markedly” said James Mintert, the barometer’s principal investigator and director of Purdue University’s Center for Commercial Agriculture. “But at the same time their expectations for future economic conditions have held steady,” said Mintert. “As a result of this mixed view, farmers appear to be cautious about making large investments in their farming operations.”

For example, in December 2018 the Large Farm Investment Index, which measures whether producers feel this is a good time to make large farm investments, fell 5 points to a reading of 51. This marked a 29 point drop from one year ago when it reached a reading of 70. Those same concerns were also apparent when producers were asked whether now is a “good time” or “not a good time” to bring a new generation of family into the business. Just 42 percent said now was a “good time” compared to approximately half during the previous two years. However, when looking ahead 5 years, 65 percent of producers expect conditions to be more favorable to onboarding a new generation.

International agricultural trade issues continue to cause concern and could be causing producers’ reduced confidence in current economic conditions. When producers were asked whether they expect exports to increase or decrease in the next five years, 59 percent indicated that they expect ag exports to increase, down 7 points from November’s survey response, whereas 26 percent expect ag exports to decrease, up from 10 percent on the November survey.

Read the full December Ag Economy Barometer report at http://purdue.edu/agbarometer. This month’s report includes additional information about farmers usage of and perceived value of incorporating drone technology into their farm’s operation as well as their production expectations for the pork, beef, and dairy industries. Each month Dr. Mintert also provides an in-depth analysis of the barometer. That video is available at http://purdue.edu/agbarometer.

The Ag Economy Barometer, Index of Current Conditions and Index of Future Expectations are available on the Bloomberg Terminal under the following ticker symbols: AGECBARO, AGECCURC and AGECFTEX.

It was just a year ago when I wrote two articles about the merits of buying inexpensive put options as a way to minimize the price risk of owning and growing crops. Of all the various risk management strategies growers are presented with, buying an inexpensive put option has to be the one of the easiest, no-hassle ways of taking risk off the table that I know of, and yet, many still balk at doing it.

The example I offered a year ago talked about the benefits of buying a December 2018 corn $3.20 put for two cents a bushel. When the article was published on Dec. 19, December corn was trading at $3.81 and the DTN National Corn Index of cash prices was at $3.09.

Click this link to read the article:

https://www.dtnpf.com/…

Many at the time, were talking about selling the December 2018 corn futures contract as a hedge, because the new-crop price was so high above cash. I am generally not a fan of capping prices at this time of year, knowing that cash corn typically makes seasonal highs before early June.

Buying the put not only took 84% of the risk of owning corn off the table, it also allowed the holder time to benefit from a chance for higher corn prices, should corn’s seasonal tendency prove out as it often has in the past.

Going with the put in late December instead of committing to an early sale proved the better choice. When DTN Market Strategies recommended making forward cash sales on 50% of corn production on April 30, December 2018 corn futures had risen above $4.00 and the DTN National Corn Index was at $3.63 — higher prices than those offered in December.

Some have asked, why buy puts when we have crop insurance? That is a fair question.

Crop insurance is the better first choice because of its broader protections, but there are also reasons to check the prices of put options. The first is that, during the winter, price volatility is low and you can often find inexpensive puts that provide higher levels of price protection that do not interfere with crop insurance benefits.

The second reason is that owning put options gives you more flexibility than you get with crop insurance. For example, if corn prices fall to $2.80 in August, you can sell your put options for a profit in August. Your crop insurance provides protection, but only based on prices and yields in the fall.

It is also important to understand that crop insurance coverage is based on revenue, which means the price protection drops in years of higher yields. With put options, your chosen level of price protection does not change, allowing you to stay protected and benefit from higher yields.

As I have thought about why producers are reluctant to buy puts, I’ve noticed that framing makes a big difference. In other words, because we buy put options from a brokerage firm instead of an insurance agent, we tend to look at their purchase as a speculative investment and judge the outcome by whether the option itself made or lost money in a given year.

Most of us would be better off if we started looking at puts the same way we buy homeowners insurance.

No one bothers to check the weather forecast before they buy homeowners insurance. And I’ve never heard anyone get upset about losing the premium when their house didn’t get hit by a tornado. We tend to regard homeowners insurance as a 30-year or more commitment and we don’t expect to make money off of the premium payments.

We understand that over several decades, a major loss could happen, and so we are willing to pay a certain amount to prevent it. Nobody likes paying for insurance, and I don’t recommend loading up on insurance for your home or your grain. Just consider buying enough to obtain some cheap protection.

In the case of put options, we actually have some control over the prices we pay, and we help ourselves by shopping in winter when price volatility is low — or we can pass and wait for another day. But it only makes sense when we understand all the benefits and risks involved.

Here are two candidates to consider for new-crop protection in 2019:

A December 2019 $3.40 corn put, preferably below 3 cents.

A November 2019 $7.80 soybean put, preferably below 4 cents.

Comments above are for educational purposes only and are not intended as specific trade recommendations. The buying and selling of grain futures and options involve risk and are not suitable for everyone.

CME Group, the world’s leading and most diverse derivatives marketplace, reached average daily volume (ADV) of 21.7 million contracts per day in November 2018, up 21 percent from November 2017. Open interest at the end of November was 128 million contracts, up 4 percent from November 2017 and up 19 percent from year-end 2017.

Equity Index volume averaged 3.7 million contracts per day in November 2018, up 35 percent from November 2017. Highlights include:

  • E-mini S&P 500 futures and options ADV increased 26 percent to 2.5 million contracts, including E-mini S&P 500 futures ADV, up 34 percent to 1.8 million contracts
  • E-mini Nasdaq-100 futures and options ADV, up 95 percent to 635,000 contracts
  • E-mini S&P 500 Weekly options ADV rose 5 percent to 317,000 contracts
  • E-mini Dow futures and options ADV rose 80 percent to 233,000 contracts
  • E-mini Russell 2000 futures and options ADV grew 38 percent to 151,000 contracts
  • E-mini S&P Select Sector Index futures and options ADV rose 258 percent to 13,000 contracts

Interest Rate volume averaged 12 million contracts per day in November 2018, up 27 percent from November 2017. Highlights include:

  • Record U.S. Treasury options daily open interest of 10.6 million contracts on November 21
  • Record Weekly Treasury options ADV, up 153 percent to 293,000 contracts
  • U.S. Treasury futures and options ADV increased 36 percent to 7.5 million contracts, including U.S. Treasury futures ADV, up 27 percent to 6.1 million contracts, and U.S. Treasury options ADV, up 104 percent to 1.4 million contracts
  • Eurodollar futures and options ADV grew 10 percent to 4.1 million contracts, including Eurodollar futures electronic ADV, up 20 percent to 2.7 million contracts
  • Ultra U.S. Treasury Bond futures and options ADV increased 28 percent to 305,000 contracts
  • Fed Fund futures ADV rose 102 percent to 268,000 contracts
  • Ultra 10-year U.S. Treasury Note futures and options ADV grew 31 percent to 256,000 contracts

Options volume averaged 4.3 million contracts per day in November 2018, up 23 percent from November 2017. Highlights include:

  • Record Energy options ADV, up 31 percent to 492,000 contracts
  • Electronic options ADV grew 36 percent to 3 million contracts
  • Interest Rate options ADV increased 32 percent to 2.7 million contracts
  • Equity Index options ADV rose 6 percent to 801,000 contracts
  • Agricultural options ADV grew 3 percent to 207,000 contracts
  • Metals options ADV increased 30 percent to 55,000 contracts

Energy volume averaged a record 3.1 million contracts per day in November 2018, up 16 percent from November 2017. Highlights include:

  • Record Energy futures and options daily volume of 5.1 million contracts, including record 1.6 million Henry Hub Natural Gas futures and a record 1 million energy options on November 14
  • Record Henry Hub Natural Gas futures and options ADV, up 36 percent to 902,000 contracts
  • Record WTI Crude Oil options (LO) ADV, up 58 percent to 279,000 contracts
  • Record Heating Oil futures ADV, up 27 percent to 215,000 contracts
  • WTI Crude Oil futures and options ADV increased 6 percent to 1.7 million contracts
  • Gasoline futures and options ADV grew 6 percent to 192,000 contracts
  • Brent Crude Oil futures and options ADV, up 47 percent to 125,000 contracts

Foreign Exchange volume averaged 904,000 contracts per day in November 2018, down 1 percent from November 2017. Highlights include:

  • Australian dollar futures and options ADV rose 14 percent to 113,000 contracts
  • Canadian dollar futures and options ADV grew 7 percent to 79,000 contracts
  • Mexican peso futures and options ADV increased 27 percent to 62,000 contracts

Agricultural volume averaged 1.5 million contracts per day in November 2018, down 6 percent from November 2017. Highlights include:

  • Livestock futures ADV grew 4 percent to 141,000 contracts
  • Lean Hog futures and options ADV rose 14 percent to 71,000 contracts
  • Soybean options ADV grew 15 percent to 63,000 contracts
  • Wheat options ADV rose 12 percent to 26,000 contracts

Metals volume averaged 624,000 contracts per day in November 2018, down 17 percent from November 2017. Highlights include:

  • Precious Metals options ADV increased 27 percent to 53,000 contracts
  • Gold options ADV grew 23 percent to 45,000 contracts
  • Silver options ADV rose 65 percent to 8,000 contracts

BrokerTec fixed income and EBS foreign exchange trading activity highlights, in terms of average daily notional value, include:

  • U.S. Treasury average daily notional value increased 11 percent to $174.2 billion
  • European Repo average daily notional value increased 5 percent to €252.7 billion

Footnote: To see CME Group daily over-the-counter (OTC) notional cleared volumes and open interest, monthly OTC notional cleared volumes and monthly total trade count, go to http://www.cmegroup.com/education/cme-volume-oi-records.html