WHAT IS A FORWARD CURVE IN THE COMMODITY MARKET?
It represents the prices at which the market is willing to transact business at present for settlement over a series of future dates.
IS IT A PREDICTOR OF FUTURE SPOT PRICES?
No. But the shape of a forward curve is more important than the spot price, as it indicates market expectations of supply and demand for a range of periods.
SO HOW CAN TODAY’S FORWARD CURVE FOR MAIZE BE INTERPRETED?
It shows that the market expects rainfall to normalise for 2017 and that there will be a larger harvest than in the drought-troubled 2016 season. It expects the 2017 price of maize to be 20% lower.
WHAT IS CONTANGO?
This is when longer-dated commodity futures are priced higher than near-dated ones. The market expects that current supply is greater than demand, and perhaps that supply is so great that producers are running out of storage space, forcing them to sell at lower and lower prices.
AND WHAT IS BACKWARDATION?
When demand rises, and overwhelms supply, near-dated futures will trade higher than longer ones. The market expects that, even though there is a current shortfall, prices will rise enough to convince producers to increase supply in the future.