USDA reports to watch in August

The last several years, August has been very volatile. A lot of information comes at you. What should you do with it all? 

In late June, I got a good question from a customer at one of my seminars in Iowa: “Should I buy some calls and puts every year during the last few days of July?” he asked. “The corn and soybean markets have been so volatile in August. It’s either straight up when the weather is bad, or straight down when the USDA comes out with its usual bearish reports.”  

I had an answer, but I knew it wasn’t what he wanted to hear. I told him I would address the question at the end of the seminar. Hopefully, the research I shared and the alternatives I reviewed would help him see what to do and when.

Here are four key factors I watch during August: 

#1. The trend in the USDA’s Monday Crop Progress reports

Which direction are the crop conditions going? I watch the corn conditions carefully from July through August, and soybeans from August into early September. If conditions are improving in the weekly reports during those time windows, then the odds are good the U.S. crop is getting larger. If conditions take a hit during those times, then yields will likely move lower in future reports. 

#2. The alignment of the corn and soybean futures

What’s the difference between the nearby contract and the next-dated contract? 

For example, if September corn futures are at a premium to the December contract, that’s an “inverse.” A big premium is a “steep inverse.” For soybeans, that would mean the August soybean contract is at a big premium to the November contract. If the markets have a steep inverse, then you can expect the cash market to move lower — possibly sharply lower — by the end of August. This usually takes the futures market lower as well. 

On the other hand, if the market shows a “carry,” it’s the other way around: December corn is above September, and November soybean futures are higher than August. This signals the cash market has adequate supplies, which means you do not have as much risk of a cash market collapse. 

#3. The relative price level in August

If prices are at historic highs in August, as they were in 2012 and 2022, then it’s dangerous to be bullish. This means early August may be a good time to buy puts. If prices have been trending lower and prices move down into the first delivery days against the September contract, then it can create a good time to buy some calls. 

#4. The average trading range (ATR) in August

When I look at the corn market over the last five years, the monthly trading range has been just over 70¢ per bushel. In 2022 it was a full $1 per bushel. Were there any signals in 2022? Yes. We saw a large daily trading range, with a lot of 20¢ daily trading ranges. When you have a very narrow trading range — just 3¢ to 5¢ per day, for example — that often signals you are probing for a low. 

For soybeans during the same five years, the monthly average trading range was just over $1.50 per bushel. In several years the range was $1.80 to $2 per bushel. Again, the very wide 30¢ to 40¢ daily trading ranges are typical when a market is putting in a high. This action signals the best time to buy puts. In years when the daily trading ranges pull in to just 10¢ to 12¢, that signals the market is approaching a low. 

Upcoming USDA reports

Let’s go back to the USDA reports. In addition to the Monday reports on crop conditions, I also watch the monthly World Agricultural Supply and Demand Estimates (WASDE). The next report is Aug. 12. WASDE shows us the ending stocks of corn and soybeans for the 2023 crop, and the projections for 2024. During the last several years, the August report has been bearish for grain prices; however, it could be different in 2024. 

Another big number reported in August is from the Farm Service Agency: the amount of prevent plant acres we have this year. The USDA reports this year suggest about 6 million prevent plant acres in 2024, but I think those could be much higher. 

Now, back to the question of whether you should just buy some calls and puts. My answer: No, and maybe. I rarely recommend both calls and puts because of the large volatility premium you pay at that time of year. I am more willing to fine-tune the strategy and either buy puts or calls, but not both. 

Talk about these guidelines with your marketing team, and evaluate if you have upside or downside risk to manage.