Seasonal commodities Tendencies

How can we take advantage of seasonal tendencies?

It is no secret that true commodities such as the grains and energies have distinct seasonal patterns. These seasonal tendencies are often the result of annual harvest cycles or product demand cycles. Accordingly, you may have heard the term "harvest lows" used in reference to markets such as soybeans or corn. Likewise, the media refers to the summer driving season as a catalyst for energy prices.


Beginning traders often assume that making money is as easy as buying unleaded futures at the end of May. Yet it is important to realize that the markets (in the long run) are efficient.
For example, the seasonal price fluctuation relating to the increased traffic on the road during the summer months actually occurs in the spring, and timing the move isn't as obvious as we would think. Similarly, heating oil futures rally well before the winter weather ever becomes a reality. Hence, don't presume that buying a heating oil call in September is a sure thing. Too many beginning traders allow themselves to buy into media hype without fully understanding the big picture of seasonality, the markets and, most important, the challenges of profiting from them.


Similar to the way that fear and greed dictate futures market speculators, these emotions play a large part in the cash value of a commodity. The price of grown commodities undergoes cycles of peaks and valleys based on recurring events. This cycle is often referred to in terms of "risk premium." Simply, risk premium is the product of fear of shortage on the consumer end and monetary motivation for producers to withhold supply from the marketplace. Field crops, energies, and the softs often succumb to phases in which risk premium is built into market pricing, then subsequently removed.


For example, in the case of grown commodities, until the seeds are in the ground there is no telling how much of the available farmland will be dedicated to corn, soybeans, cotton, and so forth, leaving the next crop yield (supply) uncertain. Farmers will opt to grow crops that they consider to be more profitable. As a result, consumers begin to bid prices higher out of fear of a shortage. Consumers also know it isn't necessarily important what farmers claim that they will plant but rather what they actually put in the ground that counts, and the market knows that. Therefore, the risk premium typically remains until the seeds are actually in the ground. If you are interested in researching this topic, I recommend Commodity Trader's Almanac, written by Scott Barrie.


The market's tendency to build and remove risk premium is the basis of grain market seasonality. However, expecting seasonality to be your holy grail may result in financial peril. Using seasonal tendencies as a guide rather than a rule may be best.