Prior and at the time of writing, wheat prices were hovering at a decade-low.
The Chicago SRW1 historical volatility has rebounded from 16% annualized, a period of relatively low volatility to a rate of 37% annualized, a regime of extreme volatility.
Let’s turn to the implied volatility derived from options written on commodity futures, its volatility surface is shown below.
When UBS, a major investment bank and market maker quotes soft-red wheat, they convert everything into fixed delta volatilities.
Figure 1 show wheat quote in delta space.2
25-delta Put is at 46.5%
ATM forward is at 50%
10-delta Call is at 64%
Shock, shortage or scarcity ?
On figure 1, with an asymmetry of the implied volatility curve, the “positive skewness” translates the cost of buying calls to protect short positions and has reflected the gigantic numbers of investors, small and large, who were short SRW Wheat in mid April.
The wheat markets have collapsed to reasonable prices.
The skew to the right doesn’t indicate a physical shock, shortage but rather expresses a greater market aversion to the prices going up.
Should global inventories, inversely related to prices and volatility, are the Great Equalizer of the wheat market, we can also discard scarcity.