Thread: Temporary structure of wood futures

Is there anyone interested in the timber market? I am not interested in the spot price, but the temporary structure of its futures. It is currently in contango, and it has also been in the last two years, even at high prices. However, 3 or 4 years ago it was in a marked backwardation. It is rare, because being a “normal” raw material, it should have a regular structure: either always in contango or always in backwardation. I am looking for a raw material with a stable structure in time, either contango or backwardation, but constant. Can anyone explain this? Did anything change in the commercial mechanism of physical wood (and therefore in the futures)

Gold and silver are almost always in contango. Why do you think that wood should always be kept in contango or backwardation and not change? It is a raw material like any other, with supply and demand fundamentals that vary. Forest fires can reduce supply temporarily, generating higher prices. If the real estate market falls, fewer houses and more wood are built, lower prices.

Thank you for suggesting gold and silver. Do you know any other? About wood (and other raw materials)

Sabbb, forget it. You will not find a raw material with a stable temporal structure, that is, always in contango or always in backwardation. That happens because the structure depends on many factors that change: expectations, climate, politics, future demand, etc. The stability you seek is more a theoretical ideal than something real. I think I understand what you want to do: you are probably looking for a constant structure to operate spreads of futures and capture the performance of the contango or backwardation. Good strategy, but the problem is that there is no guarantee that that that structure will stay stable in time. Crude, gold, silver... all have moments of change.

Thanks for your answer. Backwardation or contango have their raison d'être and depend on the physical product, their market and also on the supply and demand. I want to understand the instrument beyond whether it gives me profit or not. Generally the raw materials are in contango because the product already exists and the sellers demand more to deliver later, which is logical. No one in their right mind sells cheaper to the future. Backwardation should occur only in moments of immediate extreme demand, such as natural gas in cold winters, and for a short time. If that mechanism does not work, there is some specific feature in that market. But no one seems to be able to explain it.

And about that “probably you want to capture the yield of the contango by spreadings”, I don’t understand it at all. Even if I find a raw material in constant contango, I don’t see the gain in making a spread (buy the future further away and sell the nearby

Sabbb, if there is a potential gain in contango/backwardation spreads. For example, in a contango structure, the spread between F1 and F2 tends to expand, then you sell F1 and buy F2. If the contango is maintained or expanded, the spread gives you net gain, because you gain more in F1 than you lose in F2. You said you prefer to short directly, but that is a directional position. The spread is more neutral: you don’t care if the price goes up or lower, but how the curve evolves between maturities. Backwardation is the opposite: you buy the first month and sell the second. On the grid trading, I don’t know much. Can you explain?

Yes, sometimes it works, but sometimes it doesn't. And about the grid, it's not my idea, you can look for it. Basically, it consists of buying every X pips when the price goes down, and selling every position when you reach a certain profit. The good thing is that it doesn't need indicators or oscillators. But it has two big problems: you need a lot of capital to endure opposing tendencies, and to get out of all the winning positions is slow. It would be useful if you found an instrument that moves in a narrow range. That's why I thought of combining it with stops, but I still didn't find anything convincing.

Sabbb, and Narfa: I operate some VIX products (ETFs, options, futures

Rhoads proposes in his book a simple strategy with calendar spreads of the VIX. It consists of selling the nearest future with 3-4 months and buying the next one. It closes the position on the Friday before the expiration. It is like selling a volatility insurance. The second position acts as cover. It is profitable in the long term, but not spectacular. He proposes a filter: if the future premium is negative, it avoids entering. This improves the risk, although not necessarily the total return.