Markets unPACKed: What is a Seasonal Average in Grains?
What is a Seasonal Average in Grains?
This week my colleague and I have been in North Dakota presenting grain marketing programs to farmers who mainly grow hard spring wheat, some corn, an increased amount of beans, and several specialty crops (sunflowers, canola, chickpeas even). Now, I love hosting these lectures because it reminds me of concepts I often take for granted that are worth discussing to any investor in commodities.
For those who are not familiar with the term ‘marketing programs’ in this context, it is essentially a devised plan for farmers to hopefully get sell futures at higher prices ahead of the delivery of their grain. A topic of discussion in marketing programs with farmers is often the ‘seasonal high’ and the ‘seasonal average.’
In these markets, the ‘seasonal high’ is the time of the year that futures prices in grains and oilseeds are typically the highest: May-August. The reasons for this historical price pattern are that the seeds are planted in the spring and the transition from spring to summer is usually the time frame when crop stress has reduced the yield potential and just prior to pollination. Then we watch the crop progress through the summer ahead of harvest in the fall. Farmers then usually want to run a ‘seasonal average’ program, where they sell futures periodically to capture the average of these rising futures prices.
The following images are a sample of the last 10 years, with December contract in corn for 2011, 2013, 2019, and 2020.
Figure 1: December 2011 contract in corn.
Figure 2: Dec. 2013 contract in corn.
Figure 3: Dec. 2019 contract in corn.
Figure 4: Dec. 2020 contract in corn.
The first three charts follow this seasonality, and 2020 does not. Another year that this trend deviates is 2009:
Figure 5: Dec. 2009 contract in corn.
Why does 2009 deviate? Well, large global financial shifts like recessions and pandemics change our supply and demand of commodities in addition to weather crises, stocks-to-use ratios, foreign production, and inflation. In 2020 it was ethanol demand plummeting followed by huge export demand as China stockpiled corn (in summary).
My point is this: Regardless of which market participant you are, you need to be aware of the seasonal highs. As a farmer, you are inclined to average this time for a decent futures price. As an institutional trader, you recognize upside opportunities. What I really want to drive home is that such colloquial terms like ‘the season’ carry a lot of weight. If a farmer tells me that he is waiting to just average the seasonal highs, I immediately know he is expecting the best prices of the year to be in the summer; he may have weather or planting concerns, and he may be interested in other strategies to the upside. We look to bring that same outlook to our institutional clients, and I advise those speculating in grains and oilseeds to hear what farmers are casually saying.
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