Ukrainian Impasse Propels Bullish Corn Trades to Record: Options

Russia’s incursion into Ukraine has led to record options trading in a security that tracks corn, reflecting concern that supplies from the third-largest exporter will be disrupted if tensions escalate.

Investors are piling into contracts on the Teucrium Corn Fund, which tracks U.S. prices for the grain used in everything from motor fuel to soft-drink sweetener. A record of more than 16,000 call options giving the right to buy the exchange-traded fund changed hands last week as prices for bullish contracts rose to a three-year high compared with puts, according to data compiled by Bloomberg.

U.S. corn futures traded in Chicago are approaching a bull market and reached a six-month high last week as pro-Russian forces seized control of the Crimean peninsula, triggering speculation that demand for American exports will increase if Ukraine’s supplies become threatened. The $128 million Teucrium exchange-traded fund has rebounded from a three-year low reached in January.

“Export demand has been very good,” Joe Vaclavik, president of Standard Grain Inc., said last week in a phone interview. The Chicago-based brokerage and consulting firm focuses on grain and livestock markets. “The Ukraine story has fueled the fire.”

Ukraine Exports

Ukraine’s escalating crisis may boost demand for U.S. supplies, according to the U.S. Grains Council. While ports are open and vessels are loading, farmers may hold on to commodity supplies as a hedge against a declining currency, it said. Ukraine’s hryvnia has weakened 11 percent this year and slid beyond 10 per U.S. dollar in February for the first time.

Ukraine may export 18.5 million metric tons of corn in 2013-2014, making it the top shipper behind Brazil and the U.S., according to the U.S. Department of Agriculture on Feb. 10. The USDA is scheduled to issue an update today.

Corn futures gained 16 percent from the start of the year through last week, touching a six-month high of $5.025 a bushel on March 7 and ending the week at $4.89. A settlement at $4.944 or higher will be a 20 percent gain from $4.12 on Jan. 9, meeting the common definition of a bull market.

Exports from the U.S. surged 81 percent in the week ended Feb. 27 and sales have increased fivefold in the past four weeks compared with a year earlier.

Stockpile Estimates

The USDA chopped its estimate in February for U.S. stockpiles at the end of the crop year to 1.48 billion bushels, down 9.2 percent from its January number. Inventories for the year ended Aug. 31 were pegged at nearly 2 billion in July.

Rain through early next week in central Brazil, the largest shipper, could delay plantings for the country’s second crop in a quarter of the Corn Belt, according to a report from Commodity Weather Group LLC. Informa Economics Inc. cut its production forecast for the country on March 4.

Options traders started buying calls on the Teucrium Corn Fund as it rebounded from last year’s decline of 31 percent, according to Fred Ruffy of New York-based Trade Alert LLC. The ETF rose 3.2 percent to $33.51 last week for the biggest gain since June 2013.

“Investors are taking positions to get upside exposure,” Ruffy, a Chicago-based senior options strategist at Trade Alert, said in a phone interview. “The options are mirroring the action in the shares themselves, which are grinding higher and investors seem to be looking for more.”

Call Volume

Trading in bullish options on the corn ETF reached a single-day high of 5,460 on March 3, according to data compiled by Bloomberg. About 2,900 bearish contracts changed hands during the last five trading days, or 18 percent of the volume in calls, data show.

The buying has pushed implied volatility, used to gauge the cost of options, up 42 percent on the ETF since Jan. 29 to 25.318 at the end of last week, according to data compiled by Bloomberg on three-month contracts with an exercise price closest to the stock.

Calls with an exercise price 10 percent above the shares cost 2.42 points more than puts 10 percent below on March 7, data compiled by Bloomberg on three-month options show. The price relationship known as skew reached a three-year high of 2.61 points on March 3, the highest since January 2011.

That’s a reversal from the beginning of January when puts traded at a 1.84-point premium to the bullish contracts, the most expensive in more than a year.

Slow Time

A quick resolution to the Ukrainian crisis could ease sharp gains in corn prices, according to Don Roose of U.S. Commodities Inc. Prices jumped 5.5 percent last week, the largest increase since May.

“Most of their export pace is really in August and September and it really tapers off” this time of year, Roose, president of U.S. Commodities in West Des Moines, Iowa, said in a phone interview. The conflict occurring at this time of year means it has the least impact on the country’s grain shipments, he said.

The Chicago Board Options Exchange Volatility Index, which tracks the cost of S&P 500 options, rose 0.6 percent to 14.20 today after climbing 0.8 percent last week. Europe’s VStoxx Index fell 1.7 percent to 20.12 after jumping 22 percent last week. The Teucrium Corn Fund decreased 1.7 percent to 32.95.

Ownership of calls on the corn ETF rose 333 percent percent since Jan. 21 to a record 23,360 on March 6, while open interest for puts increased 81 percent to 6,677. Among the 10 most-owned contracts on the corn fund, nine were calls, according to the data.

The ratio of calls to buy the ETF versus puts to sell has climbed 173 percent this year with bullish contracts outnumbering bearish ones by 3.5-to-1, data compiled by Bloomberg show. The measure rose to more than 4-to-1 on Feb. 28, the highest level since 2010.

“People are buying upside calls in the ETF and the positioning is bullish,” Terry Wilson, an equity derivatives strategist at Credit Suisse Group AG, said in an interview. “Demand for upside calls is being driven by a combination of factors, including the situation in Ukraine”