Commodity Markets In Contango

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Includes: BCM, CMD, CMDT, COMT, CSCB, CSCR, DBC, DDP, DEE, DJCI, DJP, DPU, DYY, FTGC, GCC, GSC, GSG, GSP, LSC, PDBC, RJI, SBV, UCD, UCI, USCI
by: Jeff Malec

If you've read an article lately about a commodity market being in contango and thought it related to Latin dancing, you wouldn't be the first, and you certainly won't be the last. While the term contango doesn't have anything to do with doing the tango, it does have something to do with one of the more unique aspects of all futures markets, called a "price curve."

Unlike other investment markets, futures markets have fixed-term contracts which expire at specific dates, and many different "contract months" for each commodity futures market. For example, Managed Futures systems don't just trade the crude oil market, they trade the May 2016 crude oil contract or the December 2016 crude oil contract. A contract like December 2016 is described as a further out contract, and can have a price that is either higher or lower than the contract that's closer to expiration. As we talked about in detail a while back, when the further out contracts "curve" downward, it's referred to in the business as backwardation, and when the further out contracts "curve upward", it's referred to as contango.

If the market is in contango, the investors in ETFs following that market typically see underperformance from that market structure itself. This is because the ETF has to pay the roll yield, which means they have to sell the contract before it expires at the lower price and buy the further out contract at a higher price.

Here are the contango/backwardation curves of 9 commodity markets, extending into 2017.

Markets in Contango

Crude Oil Contango

Gold Contango

Coffee Contango

Corn Contango

Wheat Contango

(Disclaimer: Past performance is not necessarily indicative of future results.)

Markets in Backwardation

Emini Backwardation

10 Year Note Backwardation

(Disclaimer: Past performance is not necessarily indicative of future results.)

Mixed

Lean Hogs Mixed

(Disclaimer: Past performance is not necessarily indicative of future results.)