Corn spreads trading way past full carry?

Discussion in 'Ag Futures' started by zfl, Jul 8, 2012.

  1. zfl


    I wanted to get some feedback on the cost of carry for corn spreads.

    Using the "standard" formula with 16.5c/bushel/day and 1 + 3.25% prime I am showing an 88.85c full carry cost for CZ12 to CZ13 (or 7.4c a month).

    That means the current premium of 93-2 for CZ12-CZ13 is almost 105% of full carry.

    I am relatively new to this whole Ag spread thing but as I understand it, 80%+ is considered "extreme".

    Am I calculating the carry cost wrong? What am I missing?
  2. TheBlackHand

    TheBlackHand Guest

    Your prime rate seems a bit high to me given how low rates are.

    One of the problems of CoC is that you never know how much say Bunge, Dreyfus etc are financing their inventory at. Given their size, they can probably negotiate rates better than the prime rate, maybe they get closer to LIBOR + 1 bp? Prime rate is for Joe farmer. Thats one of the issues - you'll be unlikely to find out the financing costs of those who control the market.

    I spent a few months fiddling round with CoC in corn, wheat and beans, but could never get anything meaningful. Maybe I never put enough time/thought in to it. Beans especially seemed to never reach anything close to CoC before reversing.

    I'm also kind of limited to the number of spread combinations. Front month - other months where there is liquidity, but the second and third months move more like Eurodollar spreads - not much bang for the buck. It pretty much leave me with old crop - new crop in each of the 3.
  3. zfl


    I've also heard the LIBOR+1 metric somewhere else too so I decided to plug that in instead. When I do so, it actually makes the full carry cost come down, making the current spreads (market carry) overshoot full carry even more.

    The reason I am trying to correctly calculate (estimate) full carry is to play those reversions you spoke of. I have heard that market carry almost never goes over 80% (I've read 90% quoted as well) so theoretically these situations can create major trading opportunities.

    However, again, my calculations appear to be wrong or my assumptions are off or something because market carry is extremely overshooting full carry costs at this time. If droughts are known to do this then we have an explanation but in some old data I've seen even 1988 didn't go over full carry and that drought was at least as bad or worse than the current one--at least so far.
  4. bone

    bone ET Sponsor

    The physical fungibility aspect of many futures contracts is usually overwhelmed these days by speculative flows.

    For example - you can calculate the basis for the Nymex CL contract easily enough, but the math ignores the fact that getting rack space in Cushing, OK is pretty much an impossibility to begin with these days.

    There is so much open interest in futures from large specs like HFs and CTAs ( and of course the retail spec accounts to a lesser degree ) that the physical fungibility gets completely overwhelmed by the pure financial speculative factor.

    Trading for mean reversion in commodities spreads the past several years has not been productive. And that is being very diplomatic about it. If you are fading one or two sigma moves you are asking for unsolicited prison sex.