Separating the Wheat from the Chaff

In this paper, the authors examine the role of backwardation in the performance of passive long positions in soybeans, corn and wheat futures over the period of 1950 to 2004.


Barry Feldman

Founder of Prism AnalyticsSenior Research Analyst at the Russell Investment Group

Hilary Till

Research Associate, EDHEC Risk and Asset Management Research Centre

They 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. The share of return variance explained by backwardation rises from 24% at a one-year horizon to 64% using five-year time periods. A historical examination of soybean production and trading suggests that the profitability of a passive long soybean position during the early part of their sample may have resulted from inadequate inventories and storage facilities at the time. These conditions created the conditions for demanddriven price spikes. Further, the thin margins of soybean processors likely increased hedging demand. The implications for commodity investing are considered.
Separating the Wheat from the Chaff...
(-1.00 B)
Type: Working paper
Date: le 06/03/2006
Extra information : For more information, please contact Séverine Anjubault, EDHEC Research and Development Department [ [email protected] ] The contents of this paper do not necessarily reflect the opinions of EDHEC Business School.
Research Cluster : Finance

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