Hiraphor 

Have a look at ZM December 21 - Jan 22. Seems to be little downside risk on that one in my opinion.

I agree, downwards potential should be limited, and seasonal charts show a moderate upwards move after early October. But these upwards moves were limited in recent years.

Best regards, Myrrdin

The spread ON-CN (Oats - Corn, July contracts) has never been as high as currently at this time of the year since 1984. (I do not have older data.) July Oats is more expensive than July Corn.

The July contract is considered to be the first New Crop contract for Oats. This crop has not even been planted.

The seasonal chart shows that the spread should move downwards for the next couple of months.

A problem is the thin market for ON.

I began to scale in a position today.

Best regards, Myrrdin

I thought this was an interesting chart



Reminds me a bit of the old saying that the best fertilizer is high prices

Interesting. Would like to see that chart as a ratio so you can see the relationship better.

With regards to Ammonia...

it contributes significantly to the nutritional needs of terrestrial organisms by serving as a precursor to 45 percent of the world's food

Source: https://en.wikipedia.org/wiki/Ammonia

SMCJB 

Finally enabled CBOT data, a $120/month cost for me, and did my first ever Ags trade*. While I enjoy discussing trades and ideas I generally avoid discussing specific trades for several reasons** but for this I am going to make an exception as much to illustrate the types of things I do as anything else***. So today I bought the Soybean XFHK Double Fly (-35.25), sold the Soybean FHKN Double Fly (11.50) and sold the Soybean FHK Fly (15.75). I expect the margin requirements for these positions to be $935, $935 and $467.50 respectively. I'm going to be cautious as I get more comfortable but I think profit targets of 10c, 7.5 and 7.5c are conservative which equates to $500, $375 and $375 respectively. So total margin of around $2300 with a profit target of $1250 per unit. Each unit involves 16 futures so make your own commission assumptions. I looked at 3 different ways to enter the position and decided that trading the exchange listed butterflies XFH, FHK and HKN seemed to offer the best execution opportunities. While that might seem obvious it is definitely not always the case especially with double flys. * First ever discretionary SOYBEAN trade. Excludes CTAs and a signal system that I paid for (and traded) decades ago. ** On top of not wanting to be seen as endorsing any particular trade a major reason is I tend to manage trades on a portfolio basis so I might do things differently because of the effect on the portfolio rather than the individual trade. As such what is best for me and for somebody else may be different. *** While I do intend to update how this trade goes, I probably will not report other specific trades.

SMCJB 

Next day (4th) I added to the positions at better prices (-40.375, +13.67 & +18). This is very typical for me on a mean reversion trade, to layer into a position. As the position gets close to my desired size I also trade a around the position a little. Taking a little off as it moves into the money allows me to reestablish the position if it moves back out again. Looking at the price action though I became concerned that these butterflys seemed to move directionally with the market direction. This would mean that the butterfly trade is dependent upon the market, or spreads moving in the right direction, and not necessarily reversion to the mean. Due to my concerns, and as I did more analysis I tried to exit some of the position yesterday (5th). At one point prices were close to my original entry levels, so I had a small profit in the position but my execution wasn't quick/aggressive enough and the market moved back away. Last night I completed my additional analysis and confirmed my fears that this trade is more directional than I would like and not a great mean reversion candidate. (Analysis in a minute). This morning I exited the position. I am a strong believer that if your thesis for a trade is violated then you should immediately get out and reassess whatever the PnL. Staying in a trade you don't want to be in, purely to avoid taking a loss is a disaster waiting to happen. On the XFHK Double Fly I incurred a loss of just over 2c/unit. With the FHKN Double Fly I had a small profit of just over 0.5c, and finally the FHK fly had a small loss of just over 0.5c. All in all an average loss of almost exactly 1c per structure vs original average profit target of 8.5c each. Nobody likes losing money but this is pretty insignificant and I'll chalk it up to some cheap education! So let me explain further why I reversed course so abruptly. Below is a chart of the Crude Oil XFHK Double Butterfly (ie +1 X, -3 F, +3 H, -1 K) on the X-axis plotted versus the Crude Oil X-K spread on the Y-axis. As you can see this is a very noisy chart, with no obvious pattern. While different years have different price levels, there is little correlation between the price of the double fly and the spread. (For what its worth I do not trade this Crude Fly, I just used it as an example as it is the same structure as the Soybean trade.) The Black Dots are this years data. Now lets look at the exact same chart, but for Soybeans. There is now a clear relationship between the two. The higher the spread goes, the lower the Double Butterfly goes. The reason there are more 2021 data points for the crude chart vs the soybean chart is because crude expires 2.5 weeks earlier. CLX1 is currently about 120 trading days from expiry while ZSX1 is about 137 days away.

I've been meaning to revisit this trade for months but never seem to get around to it. Then yesterday I was doing some tax planning and my attention was drawn to the small sub account with the small loss from this trade in it, so I pulled up my excel and sharpened my mouse.

So to recap

• Trade idea was that the Soybean FHK fly was over valued. Hence I bought the XFHK double fly, sold the FHKN fly and sold the FHK fly outright. (ie bought XFH, sold 3 FHK and bought HKN).
• I entered this trade on 5/3. added to it slightly on 5/4
• Upon further analysis I noticed that this trade was highly correlated to the spreads (illustrated with my analysis of XFHK double fly vs the XK spread) which wasn't the trade I wanted.
• Exited trade on 5/6 at small loss.

So actually what happened... (focusing just on XFHK).

Right after I exited this trade, it plummeted. so my exit timing was fortunate. A week later the trade would have been showing a 20c loss (recall I had a 10c profit target), but over the next few months it actually performed very well.



Now lets look at how the XFHK Double Fly performed versus the XK spread. Here we can see that the two were highly correlated. Hence the XFHK Double Fly WASN'T a good trade to speculate that the FHK fly was over valued (which was my hypothesis), it was just another way to speculate on the XK spread, which I wasn't intending to.



All in all I'm glad I got out of this at a small loss, as I'm sure I would have been exiting on the lows a week later wondering what was going on. Also think it highlights very nicely one of my trading rules which I mentioned on 5/6.

SMCJB 

I am a strong believer that if your thesis for a trade is violated then you should immediately get out and reassess whatever the PnL. Staying in a trade you don't want to be in, purely to avoid taking a loss is a disaster waiting to happen.

SMCJB 

I've been meaning to revisit this trade for months but never seem to get around to it. Then yesterday I was doing some tax planning and my attention was drawn to the small sub account with the small loss from this trade in it, so I pulled up my excel and sharpened my mouse. So to recap Trade idea was that the Soybean FHK fly was over valued. Hence I bought the XFHK double fly, sold the FHKN fly and sold the FHK fly outright. (ie bought XFH, sold 3 FHK and bought HKN). I entered this trade on 5/3. added to it slightly on 5/4 Upon further analysis I noticed that this trade was highly correlated to the spreads (illustrated with my analysis of XFHK double fly vs the XK spread) which wasn't the trade I wanted. Exited trade on 5/6 at small loss. So actually what happened... (focusing just on XFHK). Right after I exited this trade, it plummeted. so my exit timing was fortunate. A week later the trade would have been showing a 20c loss (recall I had a 10c profit target), but over the next few months it actually performed very well. Now lets look at how the XFHK Double Fly performed versus the XK spread. Here we can see that the two were highly correlated. Hence the XFHK Double Fly WASN'T a good trade to speculate that the FHK fly was over valued (which was my hypothesis), it was just another way to speculate on the XK spread, which I wasn't intending to. All in all I'm glad I got out of this at a small loss, as I'm sure I would have been exiting on the lows a week later wondering what was going on. Also think it highlights very nicely one of my trading rules which I mentioned on 5/6.

Absolutely, trading the grain harvest through a fly is materially the same as trading it through a spread. People must realise that there is often a reason for the wild price swings in calendar months. It can be very dangerous to go short on the prompt and long further down the curve (much less dangerous to do the opposite) for the simple reason that historically things are usually higher. Yes, it is usually the case that you will make money (much like selling an OTM option), but ags traders price in the risk of tail events (ie big supply mishaps, and acknowledgement of current stocks). I would just say make sure to know your crop calendars as a minimum if you want to trade ags non-systematically :P

Schnook 

I thought this was an interesting chart Reminds me a bit of the old saying that the best fertilizer is high prices

Any update on this?


South American Soybean Futures

For the Soybean traders out there. Not sure if the new South American contract will trade but the following video could be interesting/educational.

https://www.cmegroup.com/trading/agricultural/south-american-soybeans.html#the-basics

I stole this from Fertilizer Week on twitter:



It's not just ammonia. Potash, Urea, Sulfer etc. all at multi-year or all-time highs

The rise in ammonia prices is largely due to the spike in natural gas, as this is a primary input for the production process (and ammonia, in turn, is the primary input for synthesized urea). Since gas prices have fallen substantially from their recent highs we will probably see some relief there. But with lingering supply chain issues, and China and Russia now also restricting exports, it's a little worrisome.

Here's an article from the NY Times earlier this week - https://www.nytimes.com/2021/12/06/business/urea-fertilizer-food-prices.html

None of this seems to have impacted the grains markets too much, perhaps because specs remain quite long and probably don't want to add in front of year-end. But at the margin, I think this would at least keep a floor under prices for a while.

Thanks @Schnook very interesting. You don't realize how connected everything is. (Little like AWS's outage yesterday taking down so many businesses!).

I wonder how much producers hedge some of this exposure, its surprisingly simple to do. In a previous life I was involved in structuring a deal where we sold NG to a Gulf Coast refinery with the price of the gas indexed to crack spreads (the spread between gasoline and/or heating oil and crude oil which reflects the refining margin). Hence as their margins increased, they paid more for NG, and vice versa.

Cocoa March-May '22 spread looking wild. Does anyone have any idea why March is trading at a ~50 discount to May?