Information-rich wheat markets in the early days of COVID-19

This paper uses the information implicit in commodity futures and options prices to infer market beliefs about the impact of early-stages COVID-19 on commodity market fundamentals. The particular commodity examined is soft red winter (SRW) wheat, and the timeframe is early February to late March 2020. The analysis highlights various adjustments in the cash and futures price of SRW wheat in light of surging short-run demand from consumer hoarding of staple food products, and a weakening long-run market from growing wheat stocks and an emerging global recession. This split is causing the forward curve to flatten and basis levels to invert. The change over time in the price of options on wheat futures reveals increased price volatility in response to growing uncertainty about the COVID-19 impacts. Similarly, changes in the skewness of the option's volatility smile illustrate a shift in traders’ perception about risk in the right versus left tail of the price distribution.