Seasonality effect
Also written Seasonal effect on commodity prices
The recurring swing in agricultural commodity prices between the sowing season, when spot supply is tight, and the harvest, when it becomes abundant — the main cause of backwardation in agri commodities.
In plain language
Farm output does not arrive evenly through the year. It comes in a burst, at harvest, after months of tighter supply while the crop is still growing. Prices follow the same rhythm.
At sowing time, whatever stock is left over from the last harvest is running low, so spot prices tend to be high. Everybody in the market also knows the new harvest is coming in three to four months, and that it will bring abundant supply. That expectation shows up in the futures price well before the harvest itself arrives.
How it works
Chapter 3 works this through directly. A three-month future settles against the market as it will look after the harvest, when supply is abundant, while spot today reflects a market that is still tight. So the three-month futures price ends up lower than today's spot price, even though three months of cost of carry sit in between pushing the other way.
This is the workbook's primary explanation for backwardation in agricultural commodities specifically — as against non-agricultural commodities, where backwardation is more often put down to a gloomy demand outlook or a supply glut that spot has not adjusted to. The same seasonal logic runs the other way at harvest itself: with supply now abundant and spot prices low, the next sowing-season future can trade at a premium to spot.
A worked example
In April, spot mustard seed trades at Rs 5,800 per quintal, with stocks from the last harvest running low ahead of the new crop expected in July-August.
The August futures contract, pricing in the expected harvest glut, trades at Rs 5,600 per quintal — Rs 200 below spot — even though three to four months of storage and financing cost would normally push a future above spot. A processor watching this does not read it as a bearish signal about mustard seed overall; he reads it as the market correctly pricing in more supply arriving by August than is available in April.
If the harvest is late or damaged by unseasonal rain, this seasonal discount can unwind sharply, and August futures can converge upward toward spot instead of spot falling to meet them.
Why NISM asks about it
Chapter 3 (Commodity Futures), section 3.4, on convergence and backwardation, immediately after the discussion of contango. Expect a reasoning question on why an agricultural futures contract trades below spot despite the cost of carry, with seasonality as the expected answer rather than "the market is bearish."
Common exam traps
- Seasonality is the agri-specific explanation for backwardation; it is not the explanation used for non-agricultural commodities, where demand and supply expectations dominate instead.
- A seasonally backwardated market is not a bearish market. Spot can be high at the same time the futures curve is backwardated.
- The three-to-four-month sowing-to-harvest gap is the workbook's own figure — do not generalise it to every crop without checking the specific commodity's cycle.
Where this is taught
Free preparation for NISM Series XVIRelated terms
- BasisThe difference between the spot price and the futures price of an asset — positive when spot exceeds futures, negative when futures exceeds spot, and zero at expiry.
- BackwardationA market in which the futures price sits below the spot price — the cost of carry says futures should be dearer, and something is overriding it.
- ContangoA market in which the futures price sits above the spot price, normally because the futures buyer is paying for the cost of carrying the commodity through to delivery.
- CommodityUnder Indian commodity derivatives law, any tangible good other than actionable claims, money and securities — sold in large, uniform quantities and approved by the government and SEBI for futures trading.
- Crush spreadAn inter-commodity spread specific to the soyabean complex — buying soyabean futures and selling soyabean meal and soyabean oil futures in a set proportion — used to lock in a processor's crushing margin.
- Soft and hard commoditiesThe basic split of the commodity universe: softs are perishable agricultural produce that is grown, hards are natural resources that are mined or processed.
- Lean period marginAn additional margin on agricultural commodity futures during the pre-harvest lean period, when uncertainty about crop size makes spot prices volatile; the periods and rates are set by exchange circular.
- Monsoon proxyUsing an agricultural commodity index future as a stand-in for a bet on the monsoon — buy it for a deficit monsoon, short it for a good one — which the workbook offers as an approximation only.