Overview of Grain Intercommodity Spreads

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Learn about Grain and Oilseed Spreads

Spreading, a trade in which you simultaneously buy one futures contract and sell another, is a popular strategy among those trading Grains and Oilseeds products. One reason is that spread strategies typically involve less risk than outright futures positions, and as a result, also tend to have lower margin requirements.

Learn about the various types of agricultural spreads typically traded today, including the features that make them valuable strategies for both hedgers and speculators alike.

Categorization

Grain and Oilseed spreads can be categorized in three ways: intra-market spreads, inter-market spreads and commodity product spreads. Participants who use these strategies are more concerned with the relationship between the legs of the spread than the actual prices or direction of the market. 

Intra-Market Spreads

Intra-Market spreads, also referred to as calendar spreads, involve buying a futures contract in one month while simultaneously selling one in a different month, for the same grain or oilseed commodity.

One example would be the July-December Corn spread.

Calendar spread traders are primarily focused on changes in the relationship between the two contract months; the goal of this strategy is to take advantage of those changes.  In most cases there will be a loss in one leg of the spread, but a profit in the other leg.

If the Calendar spread is successful, the gain in the profitable leg will outweigh the loss in the losing leg.

Calendar spreads are also used by grain and oilseed hedgers to roll a futures position from one delivery month to the next.

Inter-Market Spreads

Inter-market spreads involve simultaneously buying and selling two different, but related, grain or oilseed futures with the same contract month in order to trade on the relationship between the two commodities.

For example, the Soybean-Corn spread is a tool for trading on the relationship between Corn and Soybean futures prices. This price ratio is one of the factors that grain producers take into account when making planting decisions, to decide whether to plant more of one commodity versus the other.

Commodity Product Spreads

Commodity product spreads involve buying and selling futures contracts based on raw commodity versus futures based on the derived or processed commodities; such as the Soybean Crush, which involves buying Soybean futures and selling Soybean Meal and Soybean Oil futures.

The participants in this spread are able to simulate the financial aspects of soybean processing, buying soybeans, crushing them, and selling the resulting soymeal and soybean oil. The Soybean Crush spread allows processors to hedge their price risks, while traders will look at the spread to capitalize on potential profit opportunities.

As previously mentioned, one of the attractions of spread trading is the relatively lower risk versus outright futures positions, and the subsequent lower margins.

Example

In October 2016 the outright margin for Soybean futures was $3,000 and the outright margin for Corn futures was $1,500.

Rather than posting $4,500 to trade both futures contracts, the Soybean-Corn spread traders receive a 75% margin credit to reflect the lower risk of spreading the two contracts as opposed to trading each of them outright, reducing initial margin to $1,125.

Note: These margins were current as of October 2016 and are used for illustration only, keep in mind that futures margins are always subject to change.

Summary

There are many Grain and Oilseed spread strategies that allow hedgers to manage risk and traders to capitalize on potential opportunities. You can learn more about Grain and Oilseed spreads in other modules in this chapter that feature European Wheat spreads and the Soybean Crush.