Three Commodities Exhibiting Backwardation; How To Play The Trade (BAL, SOYB, CORN)

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April 26, 2012 10:27am NYSE:BAL NYSE:CORN

Jared Cummans: Trading commodities in today’s markets has been nothing short of difficult. While the first quarter was relatively stable, Q2 has been anything but, with volatility returning to markets and unpredictable behaviors becoming the norm. Commodity futures are already volatile on their own,

but throw in rocky markets and that effect is amplified. Rather than trying to make a speculative bet on day-to-day movements of commodities, investors can look to profit from backwardated futures curves. Backwardation is the process by which near month futures are more expensive than those expiring further into the future, creating a downward sloping curve for future prices over time [see also Invest Like Jim Rogers With These Three Agriculture Stocks].

Typically, investors spend their time trying to avoid contango, the opposite of backwardation which can quickly erase value in a portfolio, but not as many look for opportunities in backwardated futures. One of the best ways to profit from backwardation is to utilize a commodity-focused ETP, as a number of them feature a roll pattern that will profit from backwardation. In most commodity ETFs, futures exposure is automatically rolled into the next contract at some point during each month. When futures are backwardated this allows the fund so sell at one price, and buy into the same exposure for a lower price, creating value for the investors. Those who a re bit more seasoned can also trades futures on their own to lock in profits, but this method is not for everyone, as it can lead to big losses [see also What Is Contango?].

Below, we outline three commodities currently sitting in backwardation and how you can make a play.

  • CottonThis soft commodity has become a popular trading tool among investors as it is well-known for its big daily movements. Cotton futures on the NYMEX are currently in backwardation until October of next year, giving investors plenty of time to make a play. Aside from the futures themselves, the Dow Jones-UBS Cotton Total Return Sub-Index ETN (NYSEARCA:BAL) can offer a compelling way to play the fluffy commodity. BAL trades around 48,000 shares each day and is flat on the year.
  • Soybeans / Soybean MealThese two have been among the best performing commodities on the year, as soybean meal has jumped 32% while soybeans have gained 21% respectively. For the time being, soybean meal is backwardated through January 2014 and soybean meal through may of that same year. One ETF option for this commodity comes from the Soybean Fund (NYSEARCA:SOYB) from Teucrium though it does charge a hefty fee of 100 basis points.
  • Corn: Corn’s appeal as an investment has become increasingly popular in recent years as many have realized that it is used in thousands of every-day products. In fact, it would be difficult to live a day (at least here in the U.S.) without running into something that utilized corn. That being said, corn futures are exhibiting backwardation through the end of the year. Teucrium also offers a Corn Fund (NYSEARCA:CORN) which trades around 47,000 shares each day, though the fund has lost just over 9% during 2012.

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.

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