Here are the basics of trading a soybean commodity spread using a seasonal strategy."The price relationship between two or more given commodity contracts is known as a spread. Spread trading is the purchase of one commodity contract and the simultaneous sale of another, related, futures contract. The price difference can change, and if it trends in the correct direction, the change in the relationship of the prices will be profitable. There are two basic types of spreads: intercommodity and intracommodity spreads."
"An intracommodity spread involves the purchase of one delivery month and the simultaneous sale of a different delivery month of the same commodity on the same exchange. A common example of an intracommodity or interdelivery spread is the July--November soybean spread."
THE PROS AND CONS
Since spread trading involves the simultaneous purchase and sale of two (or more) commodity contracts, the trading of spreads involves a higher initial overhead cost in the form of commissions.
THE OLD CROP -- NEW CROP SOYBEAN SPREAD
The most commonly followed soybean interdelivery spread is the July­p;November spread (Figure 1). This spread is a classic example of an old crop (July) to new crop (November) spread.
Figure 1: Spread Markets. The top chart is the July 1996 soybean contract and the middle chart is the November 1996 soybean contract. The bottom chart is the spread chart, which is the difference between the closing prices of the two contracts. Notice that the spread chart has an uptrend, a downtrend and sideways trading patterns.
When the immediate demand for soybeans is high, the July contract will increase in value relative to the November contract. Thus, if prices rise, then July soybeans will increase in value by a greater amount than November soybeans; if prices decline, then July soybeans will decrease in value less than November soybeans.Soybeans are typically planted in March and harvested in November; as such, soybeans for July delivery are old crop, as they have been sitting in storage since last year's crop, while the November contract is this year's crop.
When the immediate demand for soybeans is low, the July contract will decrease in value relative to the November contract. This means that if prices rise, then July soybeans will increase by a lesser amount than November soybeans; if prices decline, then July soybeans will decrease in value more than November soybeans.
