Posted by: usset001 | May 7, 2014

Dec’14/Jul’15 Corn Futures Spread

Note the strong tendency for the December/July corn futures spread to widen from spring to harvest.

Note the strong tendency for the December/July corn futures spread to widen from spring to harvest.

I have a book titled “The Encyclopedia of Commodity and Financial Spreads.” The book examines the history of a large number of seasonal futures spreads. A number of these agricultural seasonal spreads rely heavily on just one seasonal price move – the powerful tendency for December corn to trade lower from spring to harvest. The December/July corn futures spread is driven by the same powerful tendency.

(Let’s be clear about the December/July corn spread I am referring to. Today, I am talking about the new crop December contract, i.e. the Dec’14 contract, and the “red” July contract, or the July contract trading more than one year out, i.e. the Jul’15 contract. The nearby July contract, i.e. the Jul’14, is not a part of this discussion – the Jul’14/Dec’14 spread is an old crop/new crop spread, and a completely different animal).

The Dec’14/Jul’15 corn spread is currently trading in the neighborhood of 19 cents/bu., i.e. there is an 19 cent “carry” from the Dec’14 contract (currently about $5.05/bu.) to the Jul’15 contract (currently about $5.24/bu.). This spread is referred to as either an intracommodity (within the same commodity) spread or as an interdelivery (between delivery months) spread. This spread has a very strong tendency to widen from spring to harvest, i.e. the carry from December to July gets larger. If the corn crop develops normally, I expect a today’s Dec’14/Jul’15 spread of 19 cents to widen out to 25-30 cents by harvest.

The table below shows a 24-year history of the spread. Since 1990, the December/July spread has widened in 20 of 24 years (83% of the years) from May 1 to October 1. That looks like great odds, but I can make it even better. There were five years – 2001, 2002, 2009, 2010, and 2012 – when the spread was already very wide on May 1 (I defined very wide as more than 200% of interest costs). Eliminate these five years and you find that the December/July spread widened in 18 of 19 years (95% of the years) from May 1 to October 1.

Dec-Jul Carry Dec-Jul Carry
Year 1-May 1-Oct change
1990 9.75 13.25 3.50
1991 14.75 16.25 1.50
1992 17.00 21.25 4.25
1993 13.25 15.25 2.00
1994 9.50 23.75 14.25
1995 15.50 11.25 (4.25)
1996 9.25 22.50 13.25
1997 14.00 18.50 4.50
1998 17.50 26.25 8.75
1999 17.50 23.00 5.50
2000 16.25 26.75 10.50
2001 24.25 24.50 0.25
2002 19.00 11.25 (7.75)
2003 13.75 16.75 3.00
2004 2.75 24.25 21.50
2005 17.00 27.25 10.25
2006 18.75 28.50 9.75
2007 21.00 35.25 14.25
2008 21.50 41.75 20.25
2009 28.50 29.75 1.25
2010 28.00 21.75 (6.25)
2011 26.25 26.75 0.50
2012 27.00 (8.25) (35.25)
2013 25.50 27.50 2.00
2014 19.50
1990-2013 average 17.81 21.88 4.06
1990-2013 average* 15.83 23.47 7.64

 *calculated without 2001,02,09,10, & 2012

How can a producer and seller of corn use this information? It looks tempting, but I am not recommending a speculative spread position in the futures market. However, if you are interested in making pre-harvest hedge sale of corn with futures contracts or with an HTA contract, stick to the Dec’14 contract. Producers with storage capacity on the farm might be tempted to assume storage of their corn at harvest and sell the Jul’15 contract. However, by selling the December and rolling the hedge or HTA contract forward next fall, you open the possibility of a wider carry and an extra 5-10/bu.


Responses

  1. The HTA+on farm storage seems to be the proper way to play the Dec’14/Jul’15 corn spread. The way I see it: You pay a fee to the grain elevator, he manages the margins calls, not you. On June 1st, the posted cash bid for October delivery corn is $4.60 and the Dec 14′ futures is at $5,00. Farmer likes the futures level, but thinks the basis is wide and will narrow before he delivers. He enters a HTA contract with Ed’s world LLC and lock in the $5,00 corn futures.
    On October 1th Ed’s world LLC basis is at -45 Dec. Farmer decides to
    roll the HTA to July 15′, the elevator charges a fee of 1.5 cent/mo. There is a 15 cent carry from the December 14′ to the July 15′, say covering 130% of the carry costs. The futures price becomes $5.00 + 15 cents carry for a total of $5.15. On July 1st, Ed’s world LLC’s basis is -20 Jul. Farmer pays 9 months fees 13.5 cents, and price corn at Ed’s world LLC at $4.815.

    The farmer has pocketed an extra 21c in its pockets, without facing marging calls risks. The risk is still there if cash prices doesn’t turn out in your favor, cash price may stay flat during some marketing years and with the on-farm storage, and many farmers doing the same thing, local sell patterns might be altered.
    Simon Jacques

  2. The line between speculation and marketing is thin because Farmers are overexposed with aggressive marketing, news, social medias. They should concentrate on farming at a Profit, Keeping it simple, avoid distractions or actions that could Hinder their farm. The grain elevator helps you to manage your profitability goals and buys a lot of your risks; If it was easy to manage alone 11 corn contracts and daily margin calls everyone would do it.

    SEASONALS
    People write books to promote these seasonals, They are futures brokers, books writers, trading educators, data re-sellers. I assume that they don’t fully understand the risks of seasonals.

    NAKED FUTURES SPREADS

    Never trade a speculative naked spread in the futures market. Reason is that although they look pretty, these seasonals carry significant CURVE RISK i.e there’s nothing preventing a spread to trade like 2/10 worst year.

    -Grain elevators who want to stay in business, would never trade naked Spreads, it’s too risky.
    -FUNDs, HEDGE FUNDS do trade spreads BUT only with dynamics hedging (hedging with the exposure with options or swaps).

    Simon Jacques


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