TRADING FUTURES
It’s Corn Versus Wheat!
Is there a way to exploit the seasonal tendencies of these two markets?
No, this contest is not going to involve any kind of a taste test. Nor will this competition offer the wit and humor of Mad magazine’s “Spy vs. Spy” serial cartoon. Still, to traders looking for a tempting trading idea to snack on, the interplay between corn and wheat can be, well, quite tasty. As everyone knows, corn and wheat are both essential grains that are planted, grown, and harvested and then used to create myriad food products. While corn can be eaten whole or milled, wheat typically is milled in order to make it useful for creating other food products.
But there is another key difference between these two grains, and that is the time frame in which they are primarily grown. While both grains are grown in various locations around the globe, in the United States the bulk of the corn and wheat is grown in the Midwest. Given the vagaries of weather in that region, there is the potential for great uncertainty from year to year regarding the size of a given year’s crop for either or both of these grains.
But the real key to playing the game of corn versus wheat is in understanding the difference between the planting cycles of these two grains and the psychology of supply concerns.
A time to reap, a time to sow
The greatest period of doubt for a given grain is during that time when no seeds are in the ground. At that point, no conclusions can be drawn about the size of the next impending crop. As a result, that is when a given grain is most likely — although by no means certain — to rise in price. Likewise, once the growing season is reaching its end, the outcome of the impending harvest is pretty well known, for better or for worse, and prices will tend to lose any “fear” premium that might have been built in earlier in the growing cycle.
Year |
$ +(-) |
1992 |
33,013 |
1993 |
45,175 |
1994 |
6,825 |
1995 |
30,975 |
1996 |
48,750 |
1997 |
3,525 |
1998 |
3,550 |
1999 |
1,425 |
2000 |
6,300 |
2001 |
2,800 |
2002 |
(50) |
2003 |
23,675 |
2004 |
18,200 |
2005 |
(4,875) |
2006 |
11,325 |
2007 |
(17,425) |
2008 |
155,825 |
2009 |
26,125 |
2010 |
(-88) |
Figure 1: annual results of february–april long may corn/short may wheat spread. These trades took place at a time period during which you can expect corn to outperform wheat. Assume that 10 May wheat contracts are sold short and a roughly equal dollar amount of May corn contracts are purchased long