Does anyone understand why agricultural commodities fall for long periods in backwardation? Sugar in 2011, corn in 2012 ....
The explanation often is: it is expected a price decreasing in future months or there is a low supply. But both these expalnations don't make sense.
Assume that you are a seller (of material product) and you have the product in the storage. It doesn’t care how much is supply: if the seller can sell a future, product is present.
If he sees a future chain in contango he can prefer to sell at a longer expiry to gain more. And so contango is created and maintained.
But if the future chain is in backwardation obviously seller will sell at immediate expiry to have 2 adavantages: to gain more and sooner. And so contango is re-established.
But it would be absurd that seller, who can sell immediatly at a higher price, sells later at lower price (that is backwardation).
Backwardation can happen in 1 only case: when the product cannot be delivered. Then the seller would want sell soon but he can’t beause he hasn’t the procuct. But it is impossible that for many months the product is present but undeliverable.
Then, why does backwardation exist?
The explanation often is: it is expected a price decreasing in future months or there is a low supply. But both these expalnations don't make sense.
Assume that you are a seller (of material product) and you have the product in the storage. It doesn’t care how much is supply: if the seller can sell a future, product is present.
If he sees a future chain in contango he can prefer to sell at a longer expiry to gain more. And so contango is created and maintained.
But if the future chain is in backwardation obviously seller will sell at immediate expiry to have 2 adavantages: to gain more and sooner. And so contango is re-established.
But it would be absurd that seller, who can sell immediatly at a higher price, sells later at lower price (that is backwardation).
Backwardation can happen in 1 only case: when the product cannot be delivered. Then the seller would want sell soon but he can’t beause he hasn’t the procuct. But it is impossible that for many months the product is present but undeliverable.
Then, why does backwardation exist?
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