Wheat- calc the cost of carry...

J

J-Law

Trying to calc the cost of carry for the current CBOT wheat market.

In looking to figure the cost of carry between WH7 and WK7 the exchange gives the following formula,

# days x { (Interest rate/365 x Futures Price) + .0015}

LIBOR = 5.38%
CBOT Carrying Charges for Corn, Wheat and Soybeans = $.0015

My values I am assuming are as follows (Chime in here if anyone knows them to be differently)

# of days = 60 days
LIBOR = 5.38% (Bloomberg)
Futures price = I believe we would use March 07, $494.00/bushel
Cost of Carry per CBOT = $.0015

This gives me 9.8cents for carrying charge for WH7/WK7.

The spread is currently @ 0.5 cents, having narrowed from the 15c area.

Anyone see any errors in my figuring ???
 
(1) Mathematically, your calculation appears correct. (2) Strategically, what you aren't taking into consideration is the fact that CBOT-May-Wheat is a "swing month" between the old crop and new crop wheat while March is an old crop month. March-07 Wheat reflects the "carryout" or whatever supply is on hand BEFORE harvest. May-07 will reflect the remaining carryout AND whatever supply is harvested early. July reflects carryout AND much larger harvested supply. (3) From a trading perpective, May seems expensive compared to March. Consider doing a bull spread with March versus May. (4) In a raging bull market, the March should be at a larger premium.
 
Quote from nazzdack:

(1) Mathematically, your calculation appears correct. (2) Strategically, what you aren't taking into consideration is the fact that CBOT-May-Wheat is a "swing month" between the old crop and new crop wheat while March is an old crop month. March-07 Wheat reflects the "carryout" or whatever supply is on hand BEFORE harvest. May-07 will reflect the remaining carryout AND whatever supply is harvested early. July reflects carryout AND much larger harvested supply. (3) From a trading perpective, May seems expensive compared to March. Consider doing a bull spread with March versus May. (4) In a raging bull market, the March should be at a larger premium.
More...

Kick ass post!
 
Thanks for your insight. Def is a closer look at the structure of the market.
One that we all benefit from.

J-Law
 
Nazz,

Just revisiting

# days x { (Interest rate/365 x Futures Price) + .0015}

LIBOR = 5.38%
CBOT Carrying Charges for Corn, Wheat and Soybeans = $.0015

# of days = 60 days
LIBOR = 5.38% (Bloomberg)
Futures price = I believe we would use March 07, $494.00/bushel
Cost of Carry per CBOT = $.0015

This gives me 9.8cents for carrying charge for WH7/WK7.


So, Naz, 9.8c would mean that if wheat was in a normal contango, carrying charge market, the spread between WH7 and WK7 should be 9.8c.

So, if WH7 was trading @ 450.00/bushel, WK7 @ full carry would be 459.8/bushel ???


J-Law
 
The "Cost of Carry per CBOT" is too arbitrary. Allendale computes this by looking at front month futures versus cash prices. They publish an updated commentary at MGEX.com pretty regularly.

From the last USDA report:

Corn - 4.1 cts/bu/mo
Soy - 6.2 cts/bu/mo
Wheat - 5 cts/bu/mo

.0015 actually works out pretty close to 5cts/bu/mo though, so your math may still be pretty close.
 
Revisiting?.........It took you long enough! According to your calculation, the full carrying charge of 9.8 cents per bushel seems correct. Remember also that markets will seldom trade at full carry. If they did, hedgers would be able to hedge for free. If a spread widens out beyond full carry, it means one of your assumptions is incorrect and/or somebody has delivered lower-quality grain that nobody wants to take delivery of that keeps pressuring the front month.
 
storage for wheat is 7.50 per day per contract

that is 7.50/5000 = .0015 per contract * 60 day day is .09 cents


.09 is storage for 60 days

secondly u should be using a 360 day calender not 365

the correct equation is

(price * cost of money * 60 days/ 360) + .09


today the spread closed at .135 cents (4.81-4.675)

so full carry is



(march settl) 4.675 * (2 mo libor) 5.345 *60/360 = .1316 cents



so no current opportunity for cash and carry trade
 
This is why I love ET/ I am new to futures and wanted to know this very thing, and here it is in explicit detail.

Corn and Soy are my faves, with a little rice thrown in :)
 
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