Eur-Usd fundamental analysis
1 February 2021
Crop Year, an aspect to consider in spread trading
11 February 2021
An interesting spread is certainly ZCN21-ZCZ21, that is, the spread built by buying the corn futures with delivery in July 2021 and selling the corn futures with delivery in December 2021. A calendar spread that not only appears on my list, so with a very reliable (bearish) seasonality but also sees December delivery in strong backwardation.
But let's proceed in order. Below you can see the chart of the spread with the two seasonal patterns, at 5- and 15-year.
Seasonality, if there are no events or contingencies to the contrary, usually starts between mid-January and mid-February and continues until at least April. I have mentioned backwardation above, so let us now look at the term structure of the corn.
We can see that especially the December delivery is in strong backwardation, in particular, if we compare the curve (coloured blue) with its 5-year average (coloured red). This appears even more clearly if we take the Continuous histogram chart, which you can see below.
The chart tells us that over the last 5 years the spread has only spent 11.60% of the time above zero. In fact, the entire 25th-75th percentile range is in contango (below zero). Finally, as we could have expected, the current value is very extreme, well above the 5th-95th percentile range. To complete this aspect, we also see the Continuous price chart.
I think there is no need to say more. Let's continue with the next graph and let us return for a moment to seasonality. Below, in more detail, is the seasonality of the spread by month.
As I said, the graph tells us in more detail how the spread has moved over the various months. We can see that in February the red band for the last 5 years is at 40%. This means that in 3 out of 5 years the spread in February has fallen. In March the percentage drops to 20%, so in 4 out of the last 5 years the spread in March has fallen. In April still at 40%. This graph confirms a predominantly bearish seasonality, especially in March.
If we focus on the 15-year green band, we see that in February it is at 60%, i.e. only in 6 out of 15 years the spread has fallen. In March the percentage is 33.33% (in 10 years out of 15 the spread has decreased) and in April the percentage is 46.67 (in 8 years out of 15 the spread has dropped).
The graph, therefore, tells us something very important: in recent years seasonality in February-April has become increasingly bearish. Now, let's take a look at the COT.
The net position is well over 300K (364K to be exact), however, in the past, it has also exceeded 400K so in theory, it could still increase. There are no signs yet of large traders taking profit. Furthermore, I would add that the US dollar could at least retrace after the gains of the last few days and this would give the corn a new impetus.
It is still too early to sell the spread at the moment. Not because it will rise again in the coming days (I do not know this, it may well happen), but because there are no signs of a weakening of the uptrend yet. Also, some important reports are released on Tuesday, including the WASDE. Therefore, it is better to wait to have also a complete and updated fundamental analysis of the corn.
I conclude with the most significant levels for the spread: $95, $86, $73, $53, $24.
An interesting spread is certainly ZCN21-ZCZ21, that is, the spread built by buying the corn futures with delivery in July 2021 and selling the corn futures with delivery in December 2021. A calendar spread
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
Great job David. Thank you.
Good Article
Can we do this for Sep21-Dec 21 ?
Selling Sep 21 and Buying Dec 21 is that a good trading strategy
Do you think its a good ? Any levels to watch in this space ?
Yes, in my book on the best seasonal spreads for 2001, I give the ZCU21-ZCZ21 spread as an alternative to the ZCN21-ZCZ21 spread. The seasonal windows are the same, and in March it was possible to enter or re-enter short on the spread. $17 is a very important level, below that there is a lot of room to go down to at least the $4 area.