HardAssetsInvestor

Written by S.M. Brorup  |

October 22, 2012

Contango Report: Cotton Drops Into Backwardation After Midweek Price Surge

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Investors should be wary of cotton prices fueled by harvest-quality fears.

Featured Commodity

CONTANGO WATCH: Cotton dropped into steep backwardation last week at the front end of the curve, while the longer end of the curve remains in contango. Speculation of a poor-quality harvest from the southeastern U.S. and a supply squeeze prompted a jump in prices midweek, before dropping back down on Friday. The potential for a December short squeeze has prompted investors to move into longer positions after the flurry of short-covering midweek. In short, we've got a classic disconnect between traditional agricultural harvest prediction trading in the out-months, with speculation on the near month.

Contango remains constant in the rest of the one-year curve, so speculator-driven swings in the front-month roll are not expected to last in either direction. More information will be forthcoming as the harvest continues; however, last week's rumor-driven price volatility should prompt investors to be cautious with near-months. It's worth noting that the market overall is still bearish, so take heed.

ROLL COSTS: Cotton's annualized front-month roll costs dropped from a contangoed 3.06 percent to a backwardated, investor-friendly 9.28 percent net.

BOTTOM LINE: Backwardation to Contango

Has oil moved into backwardation yet? What does corn's roll yield look like? How do you know when it's time to buy—or sell?

Each week, we investigate the futures curves of the most important commodities in the U.S., helping investors better understand the market and seize buy-and-sell opportunities as soon as they arise. For an easy-to-understand explanation of contango, backwardation and roll yields, please click here to go to our Hard Assets University.

To see current contango curve and front-month roll costs (Nov. 12 – Dec. 12) for each of our selected commodities, please select a sector or commodity below (or read the whole report): 

Data as of close on October 19, 2012
Data courtesy IndexUniverse.com