Backwardation and Commodity Futures Performance

Abstract

The recent performance of commodities has spurred interest in the various sources of returns to commodity investment. The underlying sources of return include the potential return due to backwardation. The extent of backwardation existing in various commodities depends both on the actual commodity examined and the changing characteristics of that particular commodity market. This article examines the role of backwardation in the performance of passive long positions in soybeans, corn, and wheat futures over the period, 1950 to 2004. The results show 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 article also focuses on the backwardation for a particular commodity, soybeans. A historical examination of soybean production and trading suggests that the profitability of a passive long soybean position during the early part of the sample may have been a result of inadequate inventories and storage facilities at the time. The implications of changing demand and supply characteristics on future commodity backwardation and on commodity investing are considered.