Fundamentally Speaking

Grain, Oilseed Futures Volatility Trending Lower

Joel Karlin
By  Joel Karlin , DTN Contributing Analyst

Not to get too technical here but the definition of a standard deviation is a measure of the dispersion of a set of data from its mean.

The more spread apart the data, the higher the deviation.

Standard deviation is calculated as the square root of variance.

In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility.

Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility.

Standard deviation is a statistical measurement that sheds light on historical volatility.

For example, a volatile commodity will have a high standard deviation while the deviation of a more stable commodity will be lower.

The reason we bring this up is that it has become apparent that with increased domestic and global grain and oilseed stocks, futures price volatility has dropped quite significantly over the past number of years.

That and rather benign growing weather over the past two years has resulted in few if any limit up or limit down days that were so commonplace a few years ago.

This graphic shows the 50 day rolling standard deviation of spot corn, soybean and wheat futures from March 2008 to the present.

A few things stand out including the trend toward lower standard deviations or lower volatility over the past seven years.

There also appears to be a pattern of seasonality with standard deviations tending to peak in the late spring-early summer, the most volatile time period for grain and oilseeds most likely due to the importance of weather this time of year.

Within the graph is a box showing the average standard deviation over the Mar 2008-Sep 2015 study period and the range in the standard deviations for each market that tend to prevail two-thirds of the time.

One trading guide is that volatility is imbedded within an option's value so when volatility of standard deviations are higher this inflates premium values while conversely periods of low standard deviation tend to depress premium values all else being equal.

For traders buying options when the standard deviation of corn is 10.3 or lower, soybeans at 24.6 or lower and wheat at 13.9 or lower makes sense, while option sellers should look to target sales when the standard deviation for corn is 46.3 or higher, 86.4 or higher for soybeans and 60.7 or higher for wheat.



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Freeport IL
11/4/2015 | 8:15 AM CST
That is right, you can only insure one primary crop. You can also insure a secondary crop. FAC (Following Another Crop) Soybeans have crop insurance rates in many counties - mainly Southern States. Although we can buy it in Southern Illinois. In Northern Illinois, double crop soybeans have generally not been grown since the early pea crop has moved out of the area. If one partakes in what Risk Management Agency (RMA) calls "Generally Accepted Practice" and has an Actual Production History (APH) for that practice, one can request insurance in the form of a written agreement. So if soybeans are generally double cropped in ones area or one harvests a cover crop and plants a second crop on that field, crop insurance is potentially still available. One will want to check with a "good" crop insurance agent. But this is way off the point we were trying to make. Best of Luck to You. Freeport, IL
Raymond Simpkins
11/3/2015 | 8:03 PM CST
You can only insure one primary crop per year. Even a cover crop is harvested that is considered the primary crop. What I've been told.
Freeport IL
11/3/2015 | 6:41 PM CST
Why is it not legal to insure double cropped beans? Freeport, IL
Raymond Simpkins
10/30/2015 | 11:39 AM CDT
Freeport ,you can't insure double cropped beans. Legally anyway!
Raymond Simpkins
10/30/2015 | 6:37 AM CDT
There has not been anything in the news about corn piles. Is there any in Indiana and Ohio or even Illinois? That fact would be a huge market maker. I don't see the interest rates going up much,they have said that for years now. I wish they would though.
Freeport IL
10/29/2015 | 2:23 PM CDT
In volatile time we are either saying;; "Prices are surely going higher. I will price later" or "I wished I had sold when prices were higher but they will surely turn around." In times when the market seems to be quite, we seem to be looking for ways to squeeze profit from under every stone. We tend to prefer the volatile times. At least then we have the hope of profits with a lot less effort. But the quite time do force our operations to become much "cleaner". A big dose of volatility could be coming this spring. It could be more than the "normal" seasonal occurrence noted by Mr. Karlin. The financial markets are projecting further tightening of credit in developing countries as the US interest rates start to move higher. The developing countries will see further declines to their currencies helping their local price and export chance. But the cost of imported inputs will climb. The increase in input cost and tight credit may limit the amount of inputs used. This would seemingly increase the risk of lower production levels which might limit exports helping US producers. Brazil is expected to have 70% of their corn acres following soybeans. One can only imagine how the market would follow weather changes if 70% of our soybeans were double cropped after wheat. (Double cropped beans can be either a winning Lottery ticket or a blessing for having a crop insurance premium that is due.) This trend of tight credit and a strong dollar seems to be setting up for the next year or two and maybe beyond. This spring might give an indication of how things could be in the years to come. But look out when this trend changes. The US producer could get clobbered. Freeport, IL