Posted by: usset001 | July 24, 2014

The bear spread in corn

Dec July corn 2014The bear spread takes its name from the tendency for spreads in grain futures markets to widen (positive carrying charges to increase, or inverses to decline) when prices are trending lower. Put another way, as grain prices fall, it is typical for the nearby contracts to fall faster than deferred contracts. For speculators, this tendency gives you two ways to play a bear market. One way is to simply “short” the market, i.e. sell futures contracts. The other way is with an inter-delivery spread, selling the nearby futures contract and buying a deferred futures contract.

A recent example of a bear spread can be seen in the corn market (see charts). Over the past 10 weeks, as Dec’14 corn futures prices declined by nearly $1.40/bu., the Dec’14/Jul’15 spread has widened from 13 cents to over 27 cents/bu. While the tone of the market remains bearish, I don’t expect this spread to widen much more in the weeks ahead – at 27.5 cents it is just about as wide as it can get. I see an outside shot at 28.5-29 cents per bushel but, at this point, I can’t imagine it getting any wider. If you sold December futures to hedge the price of your new crop corn AND you intend to store corn at harvest, you might consider rolling your hedge forward from the Dec’14 contract to the Jul’15 contract, By next spring, you will put that 27.5 cents in your pocket, along with a stronger basis next year.

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