Mecardo Analysis - The certain period of the year

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By Andrew Whitelaw | Source: CME, Mecardo

Key points

· The northern hemisphere is the biggest driver of prices due to its importance for global supply.

· The volatility ramps up throughout the year and tends to be highest in June/July.

· After the northern hemisphere is accounted for the market tends to get quiet until the end of the year.

As a regular reader, you will be aware that the middle of the year brings volatility and opportunities. The market then quiets down. In this analysis, we look at what the ‘quiet' season brings to the overseas market.

Most of the worlds grain production originates from the northern hemisphere, which for the most part is harvested by September. The volatility in the market tends to ramp up throughout the first half of the year, before declining (Figure 1). This volatility occurs as uncertainty on the outcome of the crop rises.

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As a real-life example, a large snow event during May in Kansas a few years ago caused a great deal of consternation which pushed the market up. However, the reality was that the world was awash with wheat and the snow had little impact on the overall US balance sheet, causing the market to fall.

So, when we get into September, the world is largely finished with its harvest of wheat and there are little in the way of uncertainties. The exception being the southern hemisphere nations.

In order to display the historical market, we have produced figure 2. This chart represents the average change in price (since 2010) if we were to take a contract in each of the months August through November and hold until December.

As we can see the change in pricing is negligible. Over the past decade, only November has shown more than a 1% rise. This highlights that there is little action in CBOT futures for these five months of the year.

What does this mean?

The certainty of the market reduced the volatility and unless something major has occurred in the early part of the year the market will stay relatively stable. During this decade only 2010 and 2014 have seen major rises in pricing during the last quarter.

This year may buck the trend as the concerns related to the US corn crop may provide some fire. However, with large global stocks, we may continue to require local issues to push our pricing level higher.

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