Futures Measures

Learn How To Trade A Grain Ratio Spread

Futures Measures

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If you recall, we discussed the basics of grain futures in this episode of Futures Measures.

Part of that previous discussion featured looking at the specs of each of the main grains products. You can see them below:

Corn (/ZC) Specs:
Index Multiplier (leverage) - 5,000 Bushels
Current Price - $440.98
Notional Value - $22,049* = ($4.4098 x 5,000)
Tick Size - .0025 ($12.50/tick)

Wheat (/ZW) Specs:
Index Multiplier (leverage) - 5,000 Bushels
Current Price - $565.11
Notional Value - $28,255* = ($5.6511 x 5,000)
Tick Size - .0025 ($12.50/tick)

Soybeans (/ZS) Specs:
Index Multiplier (leverage) - 5,000 Bushels
Current Price - $1112.15
Notional Value - $55,608* = ($11.1215 x 5,000)
Tick Size - .0025 ($12.50/tick)

Old Crop v. New Crop

If you aren’t familiar with the phrase ‘old crop versus new crop’, you should get familiar with it if you plan to trade grain products.

If you look at grain futures, you may notice that the farther out contracts are trading for less than current contracts - this is called backwardation. This occurrence may seem abnormal when you consider the farther out contracts have carrying costs that associated with them.

The reason that this happens is because throughout the year, different grains are being harvested/stored (old crop) and replanted (new crop), meaning that the pricing structure of the futures contracts changes depending on whether harvesting/replanting is occurring within a futures contract’s expiration cycle.

New Crop Timeframes
  • Corn (/ZC) - the standard first new crop contract for corn is December.
  • Winter Wheat (/ZW) - the standard new crop contract for winter wheat is July (although some wheat harvest can start as early as April)
  • Soybeans (/ZS) - the standard first crop contract for soybeans is November (although the crop year for soybeans begins in September)
Trading A New Crop (Ratio) Spread

When considering a trade with grain futures, there are a few things we are considering at this point in time. The two agricultural products we are looking at for this trade (corn and soybeans) are in key planting and development stages so we expect there to be volatility.

The market has already priced in planting delays, but the fact that soybeans can go in the ground later than corn (for ideal yields) means that corn has given up acreage to soybeans...it is too early to tell how significant this will be though.

Another consideration that you always need to be cognisant of is the weather.

The strategy we are going to look at is a ratio spread. Now remember that ratio spreads work when:

  • one commodity moves a lot in the proper direction and the other does not move
  • both commodities move in the correct direction a little (but consider this two separate trades)

For this specific trade, we won’t do a 1:1 trade. we are going to do it 1:2 (for every 5,000 bushels of soybeans we sell, we will purchase 10,000 bushels of corn). We do this because the notional value of the soybeans contract is almost twice that of the corn futures.

Strategies: Futures Ratio Spread
Products Discussed In This Episode: /ZC, /ZS

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