Kub's Den

Take yourself back to the summer of 1997 when The Notorious B.I.G. posthumously released a hip-hop single called "Mo Money Mo Problems," which quickly hit No. 1 on the charts with its bouncing chorus:

"I don't know what they want from me

It's like the more money we come across

The more problems we see."

Now, with that soundtrack stuck in your head, take a look at the soybean futures chart: up 21 cents one day, down 45 cents the next. In quieter times, like March of 2019 when soybean prices were under $9 per bushel, daily movements of only 5 cents might be the norm. But now on a different scale, that same half-a-percentage-point move in today's $16-plus soybeans means a double-digit gain or loss. Instead of 5,000 bushels changing value by $250 per day, today's wild swings might change the value by $1,000 per day, or $2,500 per day, either up or down. More money does cause more volatility.

And volatility can be a problem.

The traditional way to measure volatility in a financial market is by calculating the standard deviation of its past 21 days of returns or by calculating the volatility implied from options pricing models, but there are more direct, intuitive ways to communicate the same idea.

For instance, we can say how wide the trading range has been: $1.32 between the March high ($17.45 1/4) and the March low ($16.13 1/4) on the continuous soybean chart. Compare that to the 33-cent trading range during March 2019, between $9.12 1/4 and $8.78 1/2. Or we can say that the average daily price movement in soybean futures has been 19 cents per bushel per day, either up or down, during the month of March 2022, and compare that to the average price movement up or down during the March 2019 trading sessions, which were only 5 cents per bushel per day. (I'm using March 2019 as a "control" comparison, or a fair example of "normal" market conditions when the domestic and global supplies of grains and oilseeds were comfortably abundant.)

Things are more exciting now, for sure, and we might think it's more enjoyable to wake up in the morning when soybeans are worth a lot of money and might easily be worth 30, 40 or even 50 cents more per bushel by the end of the day. But for most producers and end users, this kind of volatility isn't enjoyable. The uncertainty just makes everyone's decisions more difficult.

Specifically, it makes locking in a price for future sales or purchases -- known as hedging -- harder and more expensive. Maintenance margin is the good-faith money that a futures exchange holds in escrow from futures traders to make sure they can cover potential losses when the market moves against them.

At the Chicago-based CME Group, the maintenance margin for nearby soybean futures positions is currently $4,600 for a single futures contract, which represents 5,000 bushels of soybeans.

Therefore, every time the soybean market moves up $0.92, someone holding a short futures hedge will need to pay more cash into their margin account to cover market losses. This might be approximately every couple of days, the way things have been going lately. Grain producers trading through independent brokerage accounts need to have bankers who understand where all that cash is going and are supportive of disciplined hedging programs.

At the same time, this is why elevators and other grain traders may go "no bid" during volatile market conditions -- they don't want to get stuck in a cash market position they can't turn around and hedge at a predictable price, because the prices are changing too fast, or if the market is locked limit up or limit down, the real price is unknown and untradeable. Even when they may be able to hedge with futures, they could still be sensitive to the cash flow requirements of paying margin calls over a period of months, just to lock in a price for a customer who might (in a worst-case scenario) renege on their contracted obligation altogether and take a higher price elsewhere.

There are so many more dangers and counterparty risks when futures prices are swinging wildly from day to day and month to month.

Even if a grain marketer isn't trading futures and options or paying into a margin account, the volatility in the cash market alone is nevertheless a source of added stress. Deciding to accept a price for new-crop soybeans at $14.50 only feels good today when there isn't a looming fear that it might feel terrible tomorrow, when the price could be $15. This leads to "decision paralysis" and often, inaction, which marketers might regret later. The emotional component of trading in volatile markets can definitely feel more like fear than excitement, especially for people who may be risk averse to begin with.

Maybe grain producers shouldn't complain when the markets are offering them profitable prices, but in these days of greater volatility and heightened emotion, it may be time for singing: "The more money we come across, the more problems we see."

Elaine Kub, CFA, is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at masteringthegrainmarkets@gmail.com or on Twitter @elainekub.ekub.

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