In a former post, here, we showed the influence of contango conditions on the profit from investment in four commodities: Oil, natural gas, gold and silver. In this article we will show the influence of contango on the profit from long time investment in other four commodities: Copper, corn, platinum and wheat.
In order to calculate the influence of rolling over future contracts on profit from investing in copper, corn, platinum and wheat from 1991 until May 2012, we used the nominal prices of the commodities as well the adjusted prices for rolling over contracts. Both types of prices were taken from the database of TradeStation Group, Inc.
In the table below, the total change in the nominal and adjusted prices was calculated from 29 December 1990 to 15 May 2012, along with the calculation of the Compound Annual Growth Rate (CAGR). The differences between the total, annual, nominal and the adjusted prices were calculates as well.
The above calculation shows that between the years 1991 to 2012 there was a significant negative effect on profit when investing in corn and wheat, almost no effect in platinum, and a small positive effect in copper due to contango conditions. The total change in the price of corn was 151.6% during this period, and the annual compound change was 4.40%, but investors who rolled over contracts during this whole period suffered an annual loss of 0.91%, not considering commission cost. The situation was even worse for wheat, where the nominal annual price change was 3.96%, but in fact investors suffered an annual loss of 2.83%. In the case of platinum, the annual price change was 6.00%, but the real annual profit was 5.48% - a nice gain nevertheless. In the case of copper, due to backwardation conditions that prevailed during some parts of this period, the real annual profit was 6.20%, better than the nominal annual change of price.
A calculation of the profits from the same kind of investment during the period from 29 December 2000 to 15 May 2012 obtained the results described in the table below.
During that period, the real annual profit from investing in corn was only 0.57%, although the annual price change of corn was 8.41%. The price of wheat rose 6.89% a year, but because of rolling over contracts, investors suffered annual loss of 4.57%. The platinum gave annual profit of 7.06% after its nominal price rose 7.86% annually. People who invested in copper during this period enjoyed an annual profit of 12.68%, when the nominal price of copper rose 13.61% annually. The profit from investing in platinum and copper was very impressive; especially considering that the stock index S&P 500 rose only 0.07% annually during that time.
Since corn is in clear backwardation condition now, as shown in the table below, investors might profit from price appreciation, which usually goes up for all contracts at the same time, and also from rolling over the contracts, which is closing off a near term expiring futures position and simultaneously opening the less expensive same number of contracts in a further expiration month.
Corn traders expect corn price to rise because of increasing demand from China and bad weather conditions in Iowa, Illinois and Indiana, which produce 40% of the U.S. crop, and are poised for a seventh consecutive month of above-normal temperatures, the most since 1895, according to T-Storm Weather LLC. The U.S. is the biggest corn producer, consumer and exporter.
An easy way to invest in corn is by using the ETF Teucrium Corn (NYSEARCA:CORN), which was launched in June 2010, and seeks to replicate, net of expenses, the daily changes in percentage terms of a weighted average of the closing settlement prices for three futures contracts for corn that are traded on the CBOT.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.