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Dr. Ken Rietz May 2, 2024 |
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This is the monthly issue dealing with commodity spreads. This month, we return to the calendar spread. For those who want a refresher on them, you can look at an introduction to them. This month we take a deeper dive into calendar spreads and look at a specific example of how they are useful in dealing with variations in the price of corn along the corn commodity chain. First, we look at the CBOT price of corn December futures. |
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Figure 1: The CBOT Dec corn futures, in USD per bushel |
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The price of corn has stayed below US$5.00 since August of 2023. That makes life complicated, since many farmers have a breakeven price of close to $5.00, and they are reluctant to sell much corn at a loss, at least until they have planted next year’s crop. A look at the chart above can provide information necessary for the farmer. The best estimate for the price of corn in December (after the harvest is done) is UD$4.695 per bushel. That price is not at all guaranteed, but it is as accurate as can be given at the moment. And as such, provides a farmer with some valuable information. But that doesn’t use spreads. The corn futures spread is relevant more to those storing the corn than to the farmers. As noted back in the introduction to calendar spreads, the price of storing corn for an interval between settlement dates is approximated by the spread between those dates. A typical spread in this situation is the December-March spread, since by December, the corn harvest is finished, and plans for the next year’s crop are mostly in place by March (so the amount of grain needed would be ordered – genetically modified, or GM, corn comprises more than 90% of the crop, and this complicates the simplistic narrative given here. Perhaps in a later issue, I can go into that side of things.) |
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Figure 2: The CBOT Dec/May corn spread, in USD per bushel |
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The recent storage cost has stayed in the range of 18 cents to 23 cents per bushel and is currently at the upper end of that range. The person managing the warehouse storing the corn will be monitoring this number carefully and wants it to stay above the costs of running the warehouse (electricity, insurance, pest control, etc.). When the spread is large, the manager is likely to buy more corn from the farmers, since that will generate more profit. But when the spread drops (so the prices are narrowing), the manager will probably sell some of the corn to the processing plant. Corn is a commodity that is harvested once a year, but for which demand is constant throughout the year, so selling to the processing plant decreases the local supply for future sales, increasing the local price somewhat. Other wide-ranging factors affect the spread, such as the size of exports and the expectations of crop size from other countries, which have their own collection of variables. But what does the 2024 May/Dec corn spread indicate for us? It is well above the same spreads for 2022 and 2023, showing that the market is expecting a higher price for this component of our food supply. Again, this is merely the current thought, and there are many ways that this could change. |