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Profit From Backwardation In Corn, Crude Oil, and Soybeans (CORN, USO, BNO, SOYB)

September 15th, 2012

Jared Cummans: Backwardation and contango are as inevitable as death and taxes when it comes to commodity investing. No matter what is going on the world, there will almost always be an asset in contango and the same can be said for backwardation. As a quick reminder, backwardation is the phenomenon in which near month futures are more expensive than those expiring further into the future, creating a downward sloping curve for future prices over time [for commodity news and analysis subscribe to our free newsletter].

The process is a bit confusing for some, as storage costs for commodities typically mean that a contract will get more expensive as time goes on, but backwardation can often be a reflection of where the market thinks a commodity is headed. If one particular asset has shot up over a short period of time, it will typically enter backwardation as traders and speculators wait for its price to fall back to sustainable levels. Either way, traders that are aware of futures curve trends can turn a nice profit. Below, we outline three commodities currently in backwardation to help keep you up to date on the futures market.

Corn


Believe it or not, corn is one of the most popularly traded assets in the U.S., as it is one of our biggest outputs on the agricultural side of things. Starting with the March 2013 contract, corn futures fall into backwardation through December of 2015, as markets are pricing in a dip in prices for this buttery commodity. For those who a wary of futures markets, the Teucrium Corn Fund (NYSEARCA:CORN) invests in multiple corn futures at once and can help you add exposure to thisagricultural juggernaut.

Crude Oil

Both WTI and Brent crude are currently exhibiting backwardation, as the recent gains for crude oil prices seem to have a falling out priced in. WTI slips into this pattern starting with the June 2013 through December of 2020, while Brent is backwardated right now for as far out as contracts are offered (December 2019). Investors can take a closer look at both the United States Oil Fund (NYSEARCA:USO) for WTI and the United States Brent Oil Fund (NYSEARCA:BNO) for Brent. Both funds invest in front-month futures meaning that their automated roll process will actually benefit from a backwardated environment [see also Crude Oil Guide: Brent Vs. WTI, What’s The Difference?].

Soybeans

Another one of the most heavily traded commodities in the states, Soybeans enjoyed a massive jump after this year’s disastrous drought.  It should come as no surprise, then, to see a backwardation pattern start at the January 2013 contract and extend through November of 2015. Teucrium also offers the only soybean ETF on the market with (NYSEARCA:SOYB), and the fund provides exposure to multiple contracts on the agricultural asset.

Written By Jared Cummans From CommodityHQ  Disclosure: No Positions.

CommodityHQ offers educational content, analysis, and commentary on global commodity markets. Whether you’re looking to speculate on a short-term jump in crude or establish a long-term allocation to natural resources, CommodityHQ has the information you need.


NYSE:BNO, NYSE:CORN, NYSE:SOYB, NYSE:USO


 

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