Separating the Wheat from the Chaff: Backwardation as the Long-Term Driver of Commodity Futures Performance: Evidence from Soy, Corn and Wheat Futures from 1950 to 2004

Abstract

We examine the role of backwardation in the performance of passive long positions in soybeans, corn and wheat futures over the period, 1950 to 2004. We find that over this period, backwardation has been highly predictive of the return of a passive long futures position when measured over long investment horizons. The share of return variance explained by backwardation rises from 24% at a one-year horizon to 64% using five-year time periods. A historical examination of soybean production and trading suggests that the profitability of a passive long soybean position during the early part of our sample may have resulted from inadequate inventories and storage facilities at the time. These conditions created the conditions for demand-driven price spikes. Further, the thin margins of soybean processors likely increased hedging demand. The implications for commodity investing are considered.

Keywords: Backwardation, commodities, corn, futures, mean reversion, roll yield, rolll return, soybeans, wheat

JEL Classification: G13, Q19