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Weekly Corn Market Update and a *BONUS*
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qrmllc
Posted 6/13/2020 16:47 (#8313191 - in reply to #8312350)
Subject: RE: Weekly Corn Market Update and a *BONUS*


Fort Collins, CO
Deere6,

You've asked some great questions, thank you for them. To the first about backtesting, I would guess that if someone were to backtest this (though I won't because I'm not a fan of backtesting in most cases), it would look more like a real-time indicator. What we're publishing is based on a snapshot of the options market. That market is continually moving, adapting to supply and demand, and digesting and displaying new information. As I mentioned in my prior response to Cole, whether or not they're predictive (a leading indicator) is almost irrelevant to how we do things at Quartzite - the prices simply are (very zen, I know). Because we're not trying to predict the market's direction (generally) - this information tells us how our hedges should respond to a given move in the market. By looking at how the options market is currently pricing the distribution, we can infer how various options will react to a change in the price of futures, which therefore lets us know if we've adequately hedged for that move. Since we're looking at the markets best guess at the likelihood of all changes, we can generally balance things well. Additionally, because we're working form the market's distribution, this tends to work pretty well. Even when it doesn't, it's not devastating (if we're doing our job) in the way a wrong (or overly-confident) price prediction might be. It's not perfect, but I believe it's wildly better than a system that tries to guess where the market is going (and it's how many professional option dealers/market-makers manage their risk).

As far as the likelihood of an October average below $3.00, we see a roughly 17.4% chance as of yesterday's settlement (we left the price buckets below $2.00 off the chart, which is why you might see a lower total). That's a pretty big chance (roughly one year out of every 5.75 years). There's a lot of growing season left, ethanol and feed demand could improve, etc. And while I'd agree that in a typical year a 50-cent drop from the summer highs (I'm admittedly not a big fan of seasonals) wouldn't be surprising, this isn't a typical year. In how many years is the summer high 39.5-cents below the spring price? To be clear, I'm not saying Monday's $3.4850 print was/is the summer high (I won't venture in that water), but *if* it was, that would be a pretty abnormal year - so one might expect some unusual movements.

To be honest, at this point, I'm not too concerned about where 2020 goes or ends up. My clients have already been and continue to be well-protected. I'd love to see some more volatility, but if it doesn't come, my customers will still be happy. Basic blocking and tackling will get us to harvest from here. I'm much more concerned about getting a start on 2021 at this point.

I hope that helps. Don't sweat being a novice; that's where everyone starts. Keep asking smart questions, and you'll make good progress.

Thanks,
James
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