As the weather in Chicago continues to toy with the good folks at Attain (90 degrees and 40 degrees should not fall within the same 7 day span), we thought it might be a good idea to look at how the seasons impact something other than our wardrobes. Turns out, certain periods of the year cause pseudo- predictable shifts in the price of various commodities [past performance is not necessarily indicative of future results].
It is important to note that these seasonal tendencies are not a sure thing. It is impossible to accurately predict the numeric shifts. Historically, you’ll see that certain times of the year will see price movements in one direction or another, but we will not claim to have a crystal ball that tells us the exact amount of seasonal shift you can anticipate. It’s important to note that simply getting into the market is not a guarantee that you’ll benefit from seasonality. Anyone who tells you otherwise isn’t being honest.
That being said, some of the seasonal price changes are fairly regular, and the regular changes are often gradually reflected into futures prices. For example, during the spring and right after harvest time, the price of corn can start to spike up, largely based on projected plantings and yields. For cattle, when calves are born in the spring, and retailers and wholesalers purchase their stocks for the coming summer barbeque season, the price of cattle can jump. The same may happen in April and October, when hogs are birthing. Leading into the summer driving season, crude and gasoline may go up in price (as we saw last week). Some of the seasonal swings are holiday based. For example, leading into Christmastime, you may see cattle and hogs spike in anticipation of holiday hams and roasts. Again, there are no guarantees when it comes to seasonality, but these are some of the shifts that are typically expected.
There are a few less predictable elements that will influence the magnitude of these seasonal swings. The obvious factor is demand. If the price of gas has gotten so high that people are choosing public transportation or backyard holidays over summertime road trips, the increase in crude or gasoline could be marginal, if not absent altogether. If weather interferes with the planting of corn or wheat, you could see those prices go even higher for fear of a poor crop. If the price of corn gets so high that feeding livestock becomes cost-prohibitive, leading to lower stocks of cattle, you could see the price of cattle go up to account for lower supplies butting heads with the same level of demand.
These are some fairly basic ideas, but ones that are not always taken into consideration when people consider the futures markets. People pay far more attention to the major events influencing price swings (Japan quake, Middle East protests, etc.) than seasonal ones. Some managed futures strategies factor seasonality into their trades, like specialty or spread traders, while other programs, such as trend followers, may not be able to truly benefit from the predictable changes, unless they are in line with the current trend.
Why talk about seasonality now? Any ag trader worth their salt will tell you that now is the time of year, in particular, where seasonality comes into play. It’s planting season, and this year, circumstances could end up boosting prices across the board. Unseasonably cold weather, heavy rains, and flooding along the Mississippi has wreaked havoc on planting schedules- either wiping away planted seed or delaying the process altogether. Every day planting is delayed, you risk seeing a lower yield. With more rain projected in the coming weeks, our already low stocks of corn could be further beleaguered by lower than anticipated yields.
Speaking with several of the agricultural programs we follow, we heard a lot of surprise expressed regarding the lack of market reaction to these seasonal conditions, along with predictions for an upswing in grain prices in the near future as investors wake up to the seasonal reality we’re facing. Maybe it’s coming to fruition- with corn up 2.84% and wheat up 3.6% today. While there’s no way to measure the true impact of these seasonal conditions right now, when the numbers do come out… hang on to your hats.