The conceits of IPO aficionados and bond traders aside, the original when-issued trade had nothing to do with financial assets. It was grain: Agricultural cycles dominated the origins of commerce, science and religion, and given the recent discovery of a Mesopotamian cuneiform tablet loosely translated as "Sell in May and go away," they dominated the origins of financial commentary as well. What treasures will future archaeologists find in the Hamptons? Agricultural crop cycles continue to affect financial markets. Their variability is such that food prices along with energy prices are commonly subtracted from reported price indices to yield a core rate, a subtraction I always have found disingenuous in the extreme, given the role both categories play in my household budget. Every dollar spent on either food or energy is a dollar unavailable elsewhere; whether you choose to recognize them or not, their macroeconomic impact on consumption patterns cannot be denied.
Old Crop, New Crop
While financial assets can be created quickly and, in the case of Treasury bonds, in vast quantities, crops require a growing season. They're produced in limited quantities and are subject to production uncertainties, both within a given growing zone and on a global crop basis. A production shortfall in the Southern Hemisphere affects global inventories and prices during the Northern Hemisphere's growing season, and vice versa. When this situation occurs, the price for existing inventories, or the old crop, rises relative to the price of the crop in the field or yet to be planted, called the new crop. Given the inability of suppliers to deliver new-crop grain into an old-crop month -- how could the corn crop for 2004, which has not been planted yet, be delivered to anyone yet? -- the spread between the old crop and the new crop can expand dramatically. In metals and energy, this spread is referred to as backwardation; in grains, livestock and other physical commodities, it is called an inverse.