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You normally hear contango and backwardation in relation to New York
contracts. In Chicago the terms I hear used are a "Normal" market (one with
carrying charges ), and an "Inverted" market (one with nearby prices higher
than deferred prices). Just different terms to describe the same thing.
An example of a normal market to an extreme is the Lean Hog market. There is
a glut of available nearby supply, not much capability to store product, and
weaker demand than anticipated when the farrowings were planned.
Given our glut of supply in most all commodities, and weak worldwide demand,
there are not any significant inverted markets I can see right now. However,
the corn market of 1996 would be a good example. Nearby prices gained
dramatically on deferred prices.
Sometimes markets will go inverted when there is a shortage of the commodity,
like the 1996 corn market. Other times you will see an inverted market in the
first couple of months, despite a glut of supply. This will occur because the
owners of the commodity, like farmers holding and storing soybeans, are
waiting for higher prices in the future to sell their crop. In the meantime,
processors of soybeans need to buy them to fulfill their nearby meal and oil
contracts. This creates a strong basis, which supports the nearby price due
to the relationship of the cash prices in the country to delivery values of
the futures contracts.
Regards,
John J. Lothian
Disclosure: Futures trading involves financial risk, lots of it!
In a message dated 12/3/98 7:53:09 AM Central Standard Time, stansan@xxxxxxx
writes:
<< Ketayun:
This is my understanding of these terms.
In commodities, e.g. oil, cocoa, etc., the contracts for
future delivery carry a higher price than contracts for
near term delivery.other factors being equal.
So a contract for oil expiring in 6 months would usually
cost more than the same contract expiring in 30 days.
This is due to several factors one of which is the carrying
cost. This normal situation is called "Contango" but I'm
not sure the origin of the term.
However, a year ago long-delivery oil was priced below the
short-delivery oil and this unusual situation was referred
to as backwardation. I believe this term is appropriate
because the relationship of long term to short term is
backwards.
I hope the RT'ers who deal in commodities can give
a better explanation.
BTW at the time of the backwardation in oil occurred
it was explained partly as due to temporary loss of
refinery capacity and was a near term factor only.
Regards,
Stan R. >>
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