An interesting calendar spread on corn
5 February 2021
Analysis of a calendar spread on cocoa
12 April 2021
In spread trading, the least risky and volatile spreads are the Intramarket, that is when you are long and short on futures of the same commodity but with different deliveries (aka calendar spread or intra-delivery). Most brokers recognise the low risk of this type of spread and apply a discount on the margin. But this is not always the case, especially for the agricultural markets.
An aspect that not all spread traders consider is the Crop Year. But what is the Crop Year?
A Crop Year is a period from one year's harvest to the next for an agricultural commodity. The Crop Year varies for each product, and it influences the price of a commodity, especially of a spread. If I buy, for example, the spreads ZCN21-ZCU21 and ZCN21-ZCH22, my broker will require two very different margins: $ 370 for the first, $ 600 for the second.
This is because with ZCN21-ZCU21 I buy and sell two deliveries on the same crop, whereas with ZCN21-ZCH22 I buy the futures on the old crop and sell the futures on the new crop. This means that with the first spread, news, data, reports, etc. will have the same impact on both futures concerning the same crop. With the second spread, instead, the impact will be much stronger on the first futures (the one on the crop involved) and less on the second (whose reference crop will be sown the following year). This is why ZCN21-ZCH22 is considered a riskier spread than ZCN21-ZCU21, therefore the broker requires a higher margin.
Below, you can see the table with the Crop Year for all the major commodities.
CBOT: Chicago Board of Trade; KCBT: Kansas City Board of Trade; MGE: Minneapolis Grain Exchange; NYBT: New York Board of Trade.
The table shows the data for the crops listed on the US exchanges above. The Crop Year, of course, varies by country and type of crop. An example of this is coffee. The two main qualities are Arabica and Robusta. The first is mainly grown in Brazil with a Crop Year (calendar months) of 1 April-31 March, the second quality is mainly grown in Vietnam with a Crop Year of 1 October-30 September.
In conclusion, when you build a spread, always check the deliveries of the two futures to avoid any possible unpleasant surprises.
In spread trading, the least risky and volatile spreads are the Intramarket, that is when you are long and short on futures of the same commodity but with different deliveries (aka calendar spread or
I am a macroeconomic and financial analyst with over 30 years’ experience, including two years as a fund manager. I specialise in currencies and commodities, and I am the author of several successful books on trading, macroeconomics, and financial markets.
3 Comments
Hello David,
thanks for a very interesting article. I, personally, am aware of an impact of creating a calendar spread with futures from two different crop years. However, I´ve been struggeling a bit with an influence of a crop season to a particular spread around the transitional month. Exempli gratia: Corn shows September as a transitional month (I generally consider the last months in the table as containing a new and still an old crops). So, I am always curious about what an influence of a new crop is to calendar spreads around that transitional months. Would you be able to elaborate more on that influence based on your observations/experience? And share your recommendations?
Again, thanks for a very interesting info and wish you all the best,
Adam
Thank you very much Adam for your comment. In my experience, the two key months for corn are December because it gathers all the crops, part of September (the old crop) and the new crop, and June because it is the first delivery after planting. The months change slightly for soybeans (November and June) while for wheat it depends on the type. For Chicago SRW (ZC) the first delivery after planting is December, while the key month that gathers the old and new crop is September.
Have a great day!
David
Thanks a lot for your remarks, David. Really appreciated!
All the best to you, Adam