Kub's Den

At least the corn market in spring and summer 2019 isn't boring. From the May contract's all-time low of $3.35 1/2 on May 13, to the July contract's May high of $4.38, the continuous corn chart's trading range during the month of May stretched across more than a dollar of chart space. Not since Sept. 2012 has the monthly trading range been so broad. Through the month of June and now into July, corn prices demonstrated their ability to make big moves not only upward, but downward as well. The market is putting on a fireworks show, just in time for the Fourth of July.

Whenever we want to consider a market's volatility, the usual measurement of historical volatility comes from the standard deviation of returns, typically looking back over the past 21 trading sessions (i.e. the past month of time). By that measure, it's clear that during the past seven weeks' rally, corn prices have become suddenly more volatile than they have been during the past two years of generally flat trade. Not since August 2017 has the standard deviation of trailing 21-day logarithmic returns in the corn market been above 0.02, as it is now.

But what is a standard deviation, anyway? It's a little hard to conceptualize. Mathematically speaking, all you have to do is find an average value for the past month, figure out how far each daily return is from that average, square those results, average all those squared deviations together, then take the square root of that to put it back into useable units. Easy, right? But the resulting number still makes volatility difficult to understand in terms we're used to.

So in order to pin down the corn market's volatility in easy-to-visualize terms, I did the calculations in dollars and cents per bushel. We shouldn't use these units to compare across long, unrelated time series, nor could we use them to compare the corn market's present volatility against the stock market's present volatility, for instance. But when I say that the daily volatility in the corn market during the month of May 2019 was 28 cents per bushel, that's now easier to understand. The daily market close during the month of May tended to be 28 cents away from the month's central value. Conceptually, it's easy to compare that scale of wild daily movements against what's been more typical recently: volatility of 3 cents to 5 cents during any given month. In October 2017, the daily volatility of the corn chart was only 2 cents per bushel; which is to say, the market's close on any given day that month tended to be within 2 cents, up or down, from the month's average. We are in a much more volatile timeframe now. During the month of June 2019, the daily volatility was 14 cents per bushel.

Another way to look at the volatility of a market is to consider its trading range during a given timeframe. A trading session like last Friday (June 28), when the session high was $4.55 and the session low was $4.11 (a trading range of 44 cents) is obviously wilder and more volatile than a trading session like Feb. 16, 2018, back when things were boring and the daily high ($3.68 1/2) was exactly two cents above the daily low ($3.66 1/2).

Entire months can be compared in this way, showing how far the maximum daily close ranged above the minimum daily close. In the corn market, we've experienced a long series of months where the monthly trading ranges have been notably quiet: November 2018 stretched across 18 cents, December 2018 stretched across 14 1/4 cents, then in January 2019, the daily closes never ranged more than 12 cents apart from each other. Now we've seen a sudden burst of wider monthly trading ranges as the corn market day by day tries to digest a fresh supply of information and incorporate that information into the prices that will best match buyers' and sellers' willingness. These trading ranges are perhaps the clearest visualization of this new era of corn market volatility.

Think of the past eras in the corn market: let's say everything from 1997 through 2006 was pretty calm. Then came the ethanol push of 2006 and 2007, adding some much-appreciated upward volatility to corn prices. Then there was the "commodities supercycle" of 2008 followed by the global financial crash of 2009. Technically, this was the era with the highest volatility in corn prices by any measure -- either standard deviation or monthly trading ranges ($1.55 from high to low in June 2008 and $1.77 trading range in July 2008). Then there was another calm bit. Then there were the high prices during the supply crunch of 2011 through 2013, notably juiced up by a widespread drought in 2012. Then this latest era of relative calm, which stretched from late 2014 through the first half of May 2019. The question now becomes: what shall we call the era of volatility that is likely just getting started?

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.comor on Twitter @elainekub.

(BE/BAS)

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