Backwardation and Commodity Futures Performance: Evidence from Evolving Agricultural Markets

The underlying sources of return include the potential return due to backwardation. The extent of backwardation existing in various commodities depends both on the actual commodity examined and the changing characteristics of that particular commodity market. In this paper, we examine the role of backwardation in the performance of passive long positions in soybeans, corn, and wheat futures over the period, 1950 to 2004. We find that over this period, backwardation has been highly predictive of the return of a passive long futures position when measured over long investment horizons. We focus on the backwardation for a particular commodity; that is, soybeans. A historical examination of soybean production and trading suggests that the profitability of a passive long soybean position during the early part of our sample may have resulted from inadequate inventories and storage facilities at the time. The implications of changing demand-and-supply characteristics on future commodity backwardation and on commodity investing are considered.