Confused about the price spread for crops between delivery months?
Sometimes the spread between future month prices for crops with a futures market is particularly noticeable. The amount of carrying charge is a measure of what the market is paying to store the crop from one period to the next, said provincial crop market analyst Neil Blue.
“A carrying charge market — or higher price going forward — should not be interpreted to mean that prices are expected to move higher in the future,” said Blue.
A strong carrying charge market is one where a buyer is saying it doesn’t want the grain or oilseed right away and is willing to pay the farmer to store it.
“When the spread, or carrying charge, is low or maybe even the nearby crop price is higher than the deferred price, the market is saying, ‘We want that product right now,’” said Blue. “So the spread between months of futures or cash prices within a crop year is part of market analysis.”
The spread is often measured against what the commercial costs of storage and interest are for the actual crop in a facility.
“That varies somewhat for each crop,” said Blue. “For canola, the commercial carrying charge is about $5.50 per tonne per month. The market seldom pays that much of a carrying charge, but some market analysts follow the ratio or percentage that the market is paying of that full carrying charge.
“For example, on Jan. 17, the futures spread between March and May canola was $8.50 per tonne. Compared to full commercial carrying charges of $5.50 per tonne per month — or $11 per tonne for that two-month period — it calculates to a price spread of just less than 80 per cent of full carry. Analysts watch for a change in that carrying charge percentage as a signal of change in market demand.”
To take advantage of the spread on price — that is, to capture a carrying charge in the futures or cash market — producers have to lock it in.
“That can be done with a deferred delivery contract, a futures sell position, or by using an option strategy,” said Blue. “Carrying charges can provide an opportunity to have the market pay a producer to store crop while waiting for the delivery period. That payment advantage can be greater than interest saved or earned by having the sale proceeds on hand earlier.”
A complementary strategy can be to take advantage of the cash advance program. The first $100,000 of a cash advance is interest free.