Grain Spreads And Storage Flashcards
Why do you use a calender spread?
So market participants can in the grains futures market can discover prices and manage their risk with growing and storing grains
What do claneder spreads do?
Encourage storage when supplies are plentiful and encourage the movement of supplies to the commercial users that value them most when supplies are tight
When do corn futures expire?
September, décember, March may and July
The price given for a december futures contract represents….
The expected price in December
What is a calender spread?
Buying a futures contract that expires in a month while simultaneously selling a futures contract for the same commodity that expires in a different contract month
The price of a calender spread is…
The price difference at a given point in time between the two futures contract expiration months
The December - March calender spread would be the difference in price…
Between the December futures contract and March futures contract
What costs are involved in managing a grain warehouse?
It costs you money to store grain in your warehouse, electricity to elevate the grain, insect people to us pesticide
What’s the decision of a grain warehouse manager?
Do I sell that ton of grain today on the cash market Or continue to store until tomorrow
You would only make the decision to store grain longer…
If you think you will get a higher price in the future to compensate for storage costs
What do futures spreads represent?
The December futures price represents prices expected in December. The March futures prices represent prices expected in March. Thus, the spread between December futures and march futures represents what the market is offering as compensation to store it from déc to March
Spreads become wider….
Around harvest, when supplies are plentiful. It encourages storage.
The spreads are too narrow…
The market is not paying enough to store the grain. Warehouse managers start selling grain which depresses the nearby futures price
Deferred prices rise if….
There will be less inventory available in the future
Deferred prices will continue to rise until….
The buyers in the market get exactly the amount of grain today and can store some for the future
Late in the crop year, when supplies of grain become short…..
The spreads narrow to discourage storage
When would users of grain bid up the nearby price and narrow the spread?
If the spreads are too wide and supplies are short to encourage the selling of grain out of storage
What happens if the supplies of grain are WAY TOO SHORT
Futures prices invert meaning that the nearby price is greater than the deferred price
When would miller’s or exporters be storing at a loss?
If the market charges the exporters to store rather than paying them too - when nearby price is greater than deffered price
A calender spread…
Is simultaneously purchasing and selling the same product contract with different expiration dates
The spread between December futures and march futures…
Represents what the market is offering to store grain from december to March
Who would use a calender spread?
To see if it is worth hanging on to grain for a couple of extra months. The difference between the two contracts you buy and sell in the same commodity tell you storage is even worth it.
