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Carrying Charges

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Where can I refresh my understanding of carrrying charges and grain spreads?

We do not know of any link that follows and publishes carrying charges any more.  However, you can always calculate them yourself --- at least for corn, wheat, and soybeans.  For any other markets, you are on your own.


Carrying charges are,  of course, the cost to carry (store) a physical commodity over time.  These include storage rates, insurance, and finance costs.  Maximum storage rates are set by the exchange(s), usually include insurance, and are reviewed once a year.  Finance costs are traditionally calculated using the prime rate plus 1%.
You can find maximum storage rates by going to the CME/CBOT web site and looking under Rules & Regulations.  For corn, for example, go to:

http://www.cmegroup.com/

On the right-hand side of the page, look under "Featured Links" for "Rulebooks."  Click on the latter.  Once that page comes up, look for the link to "CBOT Rulebook" and click.  Then, under "Browse CBOT Rulebook," open "Agriculture."  There you will find "Chapter 10:  Corn Futures."  Click to open and therein you will find "10108:  Premium Charges."  Open that and find that "premium charges on corn shall not exceed 16.5/100 of one cent per bushel per day."  Use the same process to find premium charges for oats, wheat, and soybeans.  ******Be aware that those for wheat change dramatically twice throughout the year.  You will find the dates in the Rulebook.********
For finance costs, you can always find the current prime rate by going to FRED at the following location:

http://research.stlouisfed.org/fred2/

In the box for "Categories," find "Interest Rates" and click.  On that page you will find "Bank Prime Loan Rate."  Click, and then find the link to "DPRIME" and you will find the daily prime rate --- currently at 3.25%.

Always using the price of the nearby futures contract --- currently December 2010 at $5.,65/bushel, we have all the information we need to calculate full carrying charges.
(1)  Storage and insurance cost is 16.5/100 cent/bushel/day, or 4.95 cents/bushel/month for a 30-day month;
(2)  Finance cost (at a prime of 3.25% and price at $5.65) is $5.65/bushel x 0.0425/12, or 2.00 cents/bushel/month.

Thus, full carrying charges for corn under the above conditions is equal to 6.95 cents/bu/mo.
Of course, markets rarely if ever reach full carry, and normally do not go beyond 80% of full carry because professional speculators will step in front on the assumption that risk is minimal while potential is unlimited.  If a market exceeded full carry, a trader or an entity could buy the nearby and simultaneously sell a (overpriced) deferred, take delivery, store, and then redeliver against the deferred contract ---- all for a risk-free profit, as abhorrent to markets as is a vacuum to nature!  Further, most commercial firms consider their finance costs instead to be an opportunity cost; thus, rather than the prime rate, they calculate their finance cost using the 90-day Bankers' Acceptance Rate --- found in the Business section of most newspapers and considerably less than the prime rate.

 

 


Sometimes in the chart spread like wheat with different expiration I dont understand the charts because I see that MRCI doesnt consider the full carry. So I see the far month with a big different of nearby that its impossible to do because there is a full carry.
i.e. see March 11 vs September 11: its impossible a possibile difference of 300 points for September
May 11 vs December 11 too?


You are correct.  When we select our strategies --- at least two months in advance of the entry date and often more, we do not (and cannot) consider carrying charges.  When a strategy has an excellent historical track record, we feel it our responsibility to present the information no matter what the fundamentals at the time.  We do not presume to know any more than anyone else about what the market will do tomorrow --- let alone two or three or four months hence.  We leave it to the individual trader to take advantage of the information however he/she sees fit to do so.  You have recognized a strategy whose potential reward this year appears to be minimal based on full carry limitations and the weekly/monthly charts.


The seasonal pattern does appear to suggest a price objective of nearly 300.  However, the operative word in "seasonal pattern" is pattern.  A pattern can suggest only TIMING and DIRECTION --- not price.  The daily/weekly/monthly charts of price can be used for perspective and for projecting price objectives; the pattern cannot.  If you continue to follow this chart, you will likely find that the amplitude of the swings in the seasonal pattern will contract over time.  The highs and lows and trends will remain registered to the calendar --- but not to price.


Last Updated on Thursday, 25 August 2011 06:26  
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