Term Structure as the Primary Driver of Long-Term Commodity Futures Returns

Abstract

Given the generally observed mean-reverting nature of spot commodity prices, it should naturally follow that across time, roll yields (and therefore, backwardation) have to be the dominant explanatory variable for individual futures contract returns over long enough time horizons. In this paper, we apply this natural conclusion to the agricultural futures markets since these markets have continuous data since the late 1940’s. We also examine how long the time horizon needs to be before roll yields (and backwardation) are the dominant explanatory variable for investment returns in soybean, corn, and wheat futures contracts.