Before looking into seasonality cycles and their effects on commodities trading it is important to note that seasonality by itself does not make up a trading system (don't go and buy oil futures just because colder weather is round the corner - every trader and his dog knows that demand rises in winter!). However, seasonality cycles are helpful indicators that can be useful in your trading toolbox.
Most commodities are subject to the laws of demand and supply during the course of a year. For agricultural markets supply is dependent on the harvest, planting, weather conditions and transportation systems. Demand is influenced by cyclical consumption, export patterns and feed demand.
Livestock also tend to display seasonal cycles. For instance, hog and cattle cycles are usually caused by production, marketing and farrowing.
Grains on the other hand tend to display lower prices for nearby futures at harvest; more so than a number of other agricultural products.
Here is a summary of seasonals in some agricultural products -:
Corn: Seasonality here can be split into three recurring periods: the first one starting late spring to midsummer, second one covering mid-summer to harvest time and the third relating to the period after the crop has been harvested. The most striking characteristic here is a trend for corn to see a decline of prices from mid-summer going into the harvest period. Usually prices tend to be near their highest in July due to factors relating to the old crop and ambiguity over the new crop harvest. Even in some years when the price decline starts earlier, it tends to continue after the mid-July period if the crop harvest forecast is good. Harvest increases current supply which puts downward pressure on prices reaching their lowest levels of the crop year. Prices will then recover after the harvest although the 'February Break' may mean that corn prices display some weakness in February.
Soybeans: The July, June and August months are usually weak months for soybeans. Closing prices in the last week of July are typically lower than those of previous weeks. Likewise, closing prices near the end of August also tend to be lower than those at the end of July. On the other hand soybean prices in late January tend to be higher than those in late December. Soybeans are also subject to the February phenomenon where prices may display weakness during the month. Soybean meal and oil follow the same seasonal characteristics as soybeans.
Wheat: For a speculator who is on the long side, cycles here work best from the period of harvest lows to October/November. The winter into summer harvest period tend to display weakness in prices. There is a strong inclination for wheat prices to decline during the last weeks of winter and spring as harvest time comes close. The other tendency is for prices to rise from the harvest lows into the fall or early winter period. Wheat prices start a cyclical weak period by January or February, in most years.
Live Cattle and Feeder Cattle: Cycles in feeder cattle are dependent on seasonality factors relating to live cattle prices, as well as annual variations in feeder cattle supplies. Usually, feeder cattle prices display strength from late winter all through spring and drop during the summer to adjust to a lower level in the fall before moving up again in December. Live cattle prices tend to trend higher from January all through May, usually reaching a seasonal peak in May and then prices retrace back till the end of the year. The May seasonal peak corresponds to a peak for feeder cattle in May with prices falling into July.
Live Hogs: Cyclical marketing pressure tends to increase in March persisting with increased levels through April. This is because August and September farrowings tend to be larger compared to other farrowing months. Slaughter levels also decline seasonally from March-April into July or August. For this reason, prices can be expected to soar from March to May and drop from May into August.
Cocoa: The cyclical low tends to correspond with the Bahia (Brazil) main crop and happens in January, as opposed to May or June with the Temporao (Brazil) crop due to consumer demand. Demand usually rises into late fall and start of winter which puts an upward pressure on prices during the period. As demand starts to wane, cocoa prices fall into January. However, it is important to note that cyclical factors are not strong in Cucoa.
Coffee: Brazil experiences the frost season during the May to early-August period. Coffee prices generally rise from January into June in expectation of this. However, this seasonality is not really very strong as coffee is also produced in other countries like Mexico. Having said that, it is still a good idea to monitor the frost season in Brazil. Apart from that, the other cyclical influence happens during the winter when coffee consumption in the United States tends to increase.
Cotton: This is a heavily traded market with cyclicals depending on deliveries issued against the expiration of futures contracts in December, March, May, July and to a lesses extend October. November usually sees the cotton market recovering from harvest lows and in January the market retraces back to lower levels.
Orange Juice: The seasonal price fluctuations of Frozen Concentrated Orange Juice do not usually follow the December-February freeze period in the southern part of the United States. Cyclical factors are a function of harvest, production and demand with the most signification seasonal move in Orange Juice being that prices tend to fall from November to January. The freeze period shouldn't however be totally ignored.
Sugar: Sugar prices tend to reach a high in November due to supply and demand factors. Production at this time is still underway since the European crop has still not reached the market. However, demand in the Northern Hemisphere reaches its peak in the fall.
Here is a presentation that includes a list of 'Seasonality Picks' (pdf format) for USA shares/ETFs based on USA seasonality data. For example, buy Heating Oil futures at the start of Winter (not listed in the above PDF just an example I pulled out of my head) because more homes will be heated over the coming 3 months. As mentioned in the presentation, seasonality goes hand in hand with sector rotation. You need to incorporate both concepts to use either successfully, IMHO.
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