Precious Metals, Corn, Coffee, and Sugar Sloping Up
These four commodities are in contango, meaning near-month futures are cheaper than those expiring further into the future.
Contango is the process by which near-month futures are cheaper than those expiring further into the future, creating an upward sloping curve for future prices over time. It usually stems from the cost of storing commodities prior to their sale, though a futures curve can also reflect market expectations of where a commodity is heading. Though contango often comes handcuffed to negative connotations, it typically is not a problem for traders and investors who are aware of it.
Below, we outline some of the biggest commodities currently sitting in contango:
- Precious Metals: As is par for the course, all four precious metals are currently sitting in contango. These commodities are typically expected to see price increases with inflation over the years as well as some steep storing costs, leading them to almost always sit in contango. Gold enters its contango pattern in its April 2014 contract and remains that way through the December 2019 offer. Silver, platinum, and palladium are all in contango from now until as far out as their respective contracts are offered.
- Corn: This agricultural favorite is among the most traded contracts in the US. Though only for a brief period, corn is sitting in contango from now until its July 2015 contract.
- Coffee: Coffee is a member of the "softs" community (along with cocoa, cotton, and sugar), which are known for their daily volatility. Though the coffee futures only extend until December of 2015 for now, coffee is sitting in contango for that entire period.
- Sugar: A fellow soft commodity, sugar is also contangoed as far out as its contracts are offered: March of 2016. Sugar made a high in October of 2013 but took a big hit until a few weeks ago. With prices depressed and finally seeing a bit of a recovery, it isn't surprising to see this commodity in contango.
Watch Your ETFs
The prevalence of futures-based ETFs has surged in recent years, as a number of investors have utilized these instruments to add commodity exposure. Contango can be devastating for futures ETFs in the long term, as a roll decay can hurt the price each month. The roll decay occurs when an ETF rolls out of an expiring position and into a new contract that is more expensive (caused by contango), causing the fund to instantly lose value.
A number of ETFs have employed unique strategies to circumvent this issue, but the majority of futures-based products will fall prey to contango. Be sure to take a look under the hood of your ETF to make sure you are on top of the pesky issues that contango can create.
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Editor's note: This article by Jared Cummans was originally published on Commodity HQ.
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