Travail en cours, je m’excuse pour le désagrément
21 janvier 2023
Spread trading : la construction d’un spread
30 janvier 2023
(Traduction française à venir).
I take my cue from several e-mails I have received concerning some corn calendar spreads, especially ZCK23-ZCN23 and ZCN23-ZCZ23, to make an analysis.
The calendar spreads on corn are going up, some are about to start (or have recently started) a bearish season but do not seem to have any intention of dropping. For the time being, I will not consider the fundamental analysis which I will do last.
Below, you can see the two spreads mentioned above with the 5- and 15-year seasonal patterns.
ZCK23-ZCN23 still has a bullish seasonality for a while, from March a bearish one begins. Would you buy the spread at this price? Most of you would not (I did). ZCN23-ZCZ23 between mid-January and mid-February usually starts a bearish seasonality, would you sell the spread at this price? The price is tempting, but what if the spread continues to rise?
I show you two more charts to better understand the price level. Below, again for both spreads, is the Seasonality stacked chart.
Indeed, the two spreads have high prices, I was a fool to buy ZCK23-ZCZ23. Take a look at the next two charts.
The price of the two spreads does not seem that high. The two charts are the same two Stacked charts seen above but with only the current spread and that of 2021 and 2022 (the two previous years). The movement of the calendar spreads on corn and their high prices do not seem to be an anomaly for a couple of years now and this must give one pause for thought. Has anything changed?
Two more charts, the Continuous histogram.
The price of both spreads is yes out of the 5th-95th percentile range but not that extreme and, if you look to the right of the chart, over the last 63 years the price has risen much higher. This does not mean that it will do so now but that it would not be so surprising.
The next two charts, this is the Seasonality by month.
From the two charts above you can see how different the start of the bearish seasonality is. For the ZCK23-ZCN23 spread, both January and February (even though not as much as the previous one) are bullish months, whereas March is the month in which a bearish phase usually begins. For the ZCK23-ZCZ23 spread, January is a decidedly bullish month while February has about a 50% bullishness showing that the bearish seasonality starts between mid-January and mid-February.
I will postpone the C.O.T. later in the fundamental analysis while it is unnecessary to add the chart of the term structure, it is already obvious from the two charts above with the prices in the positive, that the corn term structure is in backwardation for 2023 delivery.
In conclusion of the chart analysis, the rising calendar spreads of corn in this first month of 2023 are in the normal range and prices are high (in backwardation) but not so exaggerated.
I now turn to the fundamental analysis of corn. I start by showing you the chart of the latest WASDE.
The data show a 200 million bushels decline in production as the increase in yield was more than offset by a 1.6 million acre reduction in harvested area. Total corn use declined by 185 million bushels to 13.915 billion mainly due to exports falling by 150 million bushels to 1.925 billion (already down 75 million bushels in December), reflecting the slow pace of shipments through December and the lowest level of pending sales in early January since the 2019/20 marketing year. Food, Seed & Industrial use (down 10 million bushels), and Feed and Residual use (down 25 million bushels) were also down, as shown in the Grain Stocks report.
As the supply (-200 million bushels) decreased more than the utilisation (-185 million bushels), 2022/23 corn ending stocks dropped by 15 million bushels. The average corn price received by producers for the season remains unchanged at $6.70 per bushel.
So, will the rise in corn prices continue in February?
Seasonal post-harvest rallies tend to be significant because in the US corn is not produced during the winter months but only consumed. Commercials know this fact and have to cover their consumption needs by buying futures contracts.
I will now show you the C.O.T. chart with only the Hedgers.
The chart shows how Commercial's bullish sentiment began in late July (blue arrow), with a higher rally than at any other time in the past 12 months, creating the post-harvest lows of the season. When the market corrected the initial rally from this low, the December lows were reached, when the Commercials started buying again at even higher prices (green arrow), very bullish behaviour.
Before the conclusions, the last chart. Below you can see the chart of the 5-, 15- and 30-year seasonal patterns of the corn futures contract with delivery in May 2023 (ZCK23).
The chart confirms the consistency of this post-harvest rally. Looking at the seasonal patterns the price, from the September/October lows (in 2022 brought forward to the end of July) you can clearly see the bullish trend of the futures until the beginning of March.
In conclusion, even though the prices of the two calendar spreads taken as examples are a bit high, everything points to a continuation of the corn's bullish trend, at least until 8 February when the next WASDE report comes out. Therefore, I preach caution for those willing to open short positions on a calendar spread on corn. Unless events occur or particularly negative data for corn come out we are unlikely to see a reversal before March.
