Is it Time to buy New Crop Calls in the Ags?

Last week an old friend called me with the idea of positioning long for the US growing season. Here are my thoughts. This is a pure risk/reward type of trade (i.e. with less than a 50% probability of success, but with a big payout if it works.).

Corn, wheat and the bean complex are all down a lot. This is fundamentally based; the world has had good to great crops for two years. Stocks levels are high. The speculative money has left commodities, and is actually somewhat short. It's hard to see US acreage down much, so we may get another bin buster this fall.

However....
We may not. We are currently in a extremely high ENSO period. The US NOAA is forecasting that these el Nino conditions will dissipate this summer and may well bring on a la Nina event in the fall. Here is a list of years since 1950 in which the ENSO has fallen by at least 1.0 from FEBMAR to AUGSEP, along with corn yields relative to trend:

	ENSO Change	Corn Yield
1954	-1.346	-10.6%
1958	-1.152	-0.9%
1964	-1.012	-10.8%
1970	-1.473	-12.3%
1973	-2.558	4.6%
1978	-1.35	7.2%
1983	-2.543	-22.9%
1988	-1.949	-24.7%
1995	-1.296	-9.3%
1998	-3.315	1.8%
2010	-3.339	-0.7%

So the average of the 11 years is  (7)%. The average for soybeans since 1960 is (4)%. Probably more important for this trade, the crop was bad over half the time.

So this smells like a pretty decent option position to me. Let's look at the specifics of the options market.

MORE TO COME