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Dr. Ken Rietz |
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This is the monthly issue dealing with commodity spreads. This month, we are going over the factors that make for a good agricultural calendar spread, specifically corn. One typical use of agricultural calendar spreads is to buy/sell a leg of the spread expiring near the beginning of the crop season and sell/buy the other leg expiring near the end. Right now, the corn crop has been planted and is beginning to grow enough that a decent estimate can be made of how well it is going to do, so the near leg of the spread will be August futures. The end of corn harvest is around December, so the far leg will be the December futures. The spread is closed before the near leg expiry date when hedging or speculating. Before we get into the factors that make this year eligible for a spread, here is the chart of the July/December corn futures spreads for various years. |
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Figure 1: The July-December corn futures, in USD per bushel The graph above gives the July-December corn spreads for past and current years. The curves for past years run through July of those years, since we have that data. The data for the current year must end with the current date. Note that each of the past three years, the values of the spreads have skyrocketed during July. If we can show that conditions now are parallel to those years, then we should be able to benefit from a similar plunge in the prices of current-year spreads. Conversely, if the conditions are now the opposite of what happened in those years, perhaps the opposite will happen with the prices, and a contrary position might profit. Remember in either case, markets are notorious for doing whatever they want. There are several major factors that affect futures prices of corn (in common with many agricultural commodities): existing storage amounts, global harvests, and the most important, weather. (Certainly, other factors exist, but the combined effect, together with the major factors, are all reflected in the futures price of corn.) So, let’s consider each of the major factors, to see how they compare to current conditions. Farmers will often put into storage any corn that they have that they can’t sell for sufficient profit. The graph of the stored amounts of corn is shown below. |
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Figure 2: The amount of corn stored as of January 1 each year, in millions of bushels The amount in storage at the beginning of 2024 is very close to 4% more than at the beginning of 2023, not a significant difference. Global harvests are somewhat trickier, because China (a major importer of corn), for example, will play politics with where and when they buy corn. Another factor is that some countries (for example, Mexico) will not accept genetically modified corn, which describes 90% of US corn. But here is a chart of global corn harvested over the past several years. |
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Figure 3: The amount of corn harvested by year, millions of tons The graph also includes an estimated amount of corn harvested this year, the final bar. It is about 7% higher than last year, but less than 2% higher than the year before. That again doesn’t deviate much from the previous years. The weather is much more difficult to quantify, since it is a combination of both temperature and rainfall. There are various ideas that can be applied, such as long-term forecasts and ENSO (El Niño/La Niña). For the US, several different sites provide distinct, but not too different, forecasts for the Corn Belt for the rest of the year. The theme for all of them is hot weather is likely to stay around, and a series of showers is likely to form, but the pattern of rain is impossible to predict. But overall, the weather is neither very positive nor negative for corn. So, the past would nudge toward a downturn in the corn futures spread. The observant reader will realize that the July futures are no longer available, but just recently short-dated expirations are available monthly, January through October, so a spread using August to December corn futures could be put on. Those who subscribe to the Hightower Report in this week’s edition can find their analysis and a detailed vertical spread recommendation that can be taken. |