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Profiting from seasonality in the commodity markets

Agricultural market seasonality

Agricultural market seasonality is as old as civilisation itself, and is one of the most predictable of financial cycles. At the heart of this seasonality is an unchanging fact: Crops have a growing season which begins with planting and ends with a harvest. And except for minor variations, crops are planted around the same time every year, and harvested at about the same time months later.

Because the growing season happens every year over the same time period, it makes sense that market prices show recurring patterns based on the recurring plant/harvest cycle. For instance, a study of historical corn prices shows that corn tends to see it’s highest prices during mid-summer, then typically has price declines into the fall.

This seasonal price trend generally coincides with the supply/demand of the cash crop -- less supply in the spring, more supply in the fall after harvest. Knowing this seasonal trend, you could devise an investment strategy to profit from it. 

While the plant/harvest cycle is predictable, seasonal price patterns can change over time. A seasonal trend evident over the last 20 years may not have been as prevalent over the last 5 years. As you build a strategy based on seasonality, you will want to study historical seasonal patterns over various time frames. For instance, it could be that extended drought conditions over recent years have altered a seasonal pattern seen for decades, but now with the drought over, the seasonality exhibited over the long-term is set to return. 

For example you can see the recent 5 years for corn:

The reason is quite simple: Not every year is a simple copy of all other years as you can see here the range of all years:

Considering this it would be the best if all years are in very tight range. Or in other words, the bold black line represents the average of all single thin grey lines. The tighter the range of thin lines is the better the validity is.

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