Seasonal switches in commodity markets

There is always talk concerning seasonality in commodity markets but there is little discussion on what is involved with changes in seasonality. One of the key issues not discussed is that the type of uncertainty changes with the seasons. The change in uncertainty is the main driver of seasonal price swings and should cause changes in the focus of research in commodity markets. A focus on the corn market can serve as a simple example of how the changes in seasonal uncertainty are represented in price and research activity. The supply of corn will be determined by acreage planted and the yield for each acreage. Supply will be q (the acreage) times yield.The sensitivity to price will be related to the amount of inventory that is held throughout the year.

We can identify four periods of uncertainty in the corn market:

1. Planting uncertainty during the spring which focuses on the amount of acreage that will be used by farmers. The acreage may be coming from other crops or from land that is fallow. It could be limited by flooding, but the spring uncertainty is size planted.

2. Yield uncertainty occurs in the summer as weather determines the yield for each acre. Of course the type of acres planted and the location will affect yield but the weather will be the main variable. There is switch in the uncertainty from acreage to yield.

3. The third uncertainty will be related to the harvest. This is when supply uncertainty is resolved from 1 and 2 and will also be affected by the cumulative effect of weather through growing degree days.

4. The final uncertainty will be when the total crop is in and there is an accounting of the inventory that will be available. It will be the period when inventory risk will determine what will be prepared for the next spring.

Using this switching of uncertainty may help determine the risks that are associated with any crop. Since there is a global market, the uncertainties will overlap across regions.