Trading Weather-driven Grain Markets

September 30, 2017 01:22 PM
The plethora of derivative products in the grain complex provides opportunities for profitable trades in weather-driven markets.

From the middle of June through July this summer, the weather in the western United States has been too hot for corn, wheat and soybean crops. “Summer heat makes grains explode” (below) shows the effect of hot weather that followed a more moderate period from March through early June in which the three September futures contracts experienced declining prices.

Although wheat futures were in the middle of the price declines from March through early June, the hot weather in June and July had its greatest effect on wheat. September wheat futures escalated from a -2% cumulative price change to up 15% from June 23 to June 28. “Summer heat makes grains explode” also shows that September corn and soybean futures rose along with wheat, although the hot weather had a lower effect on corn and soybeans.

The difference in price changes for the three grains in early July 2017 suggests potential trades that depend on wheat futures falling back toward their usual relationship with corn and soybean futures, or perhaps lower in price. Because corn and beans rest at a zero cumulative price change on July 11, 2017 (while wheat is at +15%) it is easy to imagine the spreads between grain futures declining though their delivery date in September.

Grain ETFs
In addition to grain futures, there are several exchange-traded funds (ETFs) with price movements that closely reflect those of the underlying futures contracts. The Teucrium Corn Fund (CORN) mirrors corn futures, the Teucrium Wheat ETF (WEAT) follows wheat futures and the Teucrium Soybean ETF (SOYB) mirrors soybean futures. CORN and WEAT are shown over the April to July period in “ETFs CORN and WEAT” (below). Both of the ETFs have price increases in July, although WEAT started rising earlier and is more volatile than CORN.

The total variation in WEAT, a cumulative increase of 10% from March 1, is smaller than the variation in wheat futures, 15%, but it is still wide enough to suggest a spread trade among the grain ETFs might be profitable. A trader could sell WEAT and buy CORN in anticipation of a reversion to the mean on the basis of the two futures contracts.

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About the Author

Paul Cretien is an investment analyst and financial case writer. His e-mail is