Looking for Volatility? Try USDA Grain Reports

So you want to trade the grain markets, do you? Better be on the right side on grain report day… or you could end up like the Dukes from Trading Places.  It was just yesterday that the CME group magazine Open Markets was explaining how USDA reports influence ag markets, and boy did they have good timing – with today’s report bringing the most volatility we’ve seen in quite a while on a report day:

Charts courtesy Finviz.com. Disclaimer: past performance is not necessarily indicative of future results.

Corn went limit down, selling off the maximum allowed amount of -$0.40, and every other grain market – wheat, soybeans, even rice and oats – took a dive alongside it. We’re talking an increase in volatility of about 250% based on the 41 cent range 2.5 times higher than the 11.7 cent average range over the past 20 days. We’re talking a day’s move essentially taking out a month’s worth of gains. No, ladies and gentlemen, grains aren’t for the novice trader or investor.

Why the sharp moves lower? The report revealed that plenty of old crop corn is on the books: 5.4 billion bushels compared to the estimated 5 billion. Compounding the effect is the news that planting intentions for corn & beans remains near record highs:

Corn growers intend to plant 97.3 million acres of corn for all purposes in 2013, up slightly from last year and 6 percent higher than in 2011. If realized, this will represent the highest planted acreage in the United States since 1936 when an estimated 102 million acres were planted.

Soybean planted area for 2013 is estimated at 77.1 million acres, down slightly from last year but the fourth highest on record, if realized. Compared with 2012, planted area is down across the Great Plains with the exception of North Dakota. Nebraska and Minnesota are expecting the largest declines compared with last year, while Illinois and North Dakota are expecting the largest increases.

A few more things come to mind here:

  • What the heck were they doing with all that corn in 1936 when the record for planted acres was set? That was before ethanol, high fructose corn syrup, and 10 gallon tubs of popcorn at the movies – and when the world population was about 30% of what it is today.
  • What do long only commodity investors (CORN) think of this type of information? Do they just think, “it doesn’t matter, corn is still going up,” or is their logic more like “we know there will be ups and downs in the commodity markets, but timing them is hard, better to just stay long and ride out the down periods.” The first is just silly, though the second seems a little less so.
  • How is any normal human supposed to weed through all this acreage, old crop, new crop, frost, drought, Chinese demand, Russian supply, North Dakota, Nebraska nonsense?
  • Even worse, how is a computer algorithm supposed to interpret all of this and do something about it in the midst of prices falling 5% in minutes?

The last three items are no doubt why the Ag Trading strategy remains a part of the managed futures landscape, and why it remains mainly run by discretionary traders. There’s a high level of skill associated with being able to “read” the state of the industry ahead of such releases, perhaps the biggest of which might simply be getting out of the way, and there remains a part of this strategy which is more art than science.

We don’t yet know how today’s action treated most of the Ag specialists we work with (several trend followers were on the wrong side), but we’re pretty sure they have a healthy dose of respect for the risks and rewards present on the USDA report day.  For them, the fun part starts now – analyzing the report, checking their sources, putting their hands in the dirt to come up with their next trade in the grain sector.

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Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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