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Full carry

The theoretical maximum contango: the deferred price at which financing plus storage plus insurance exactly equals the spread over the nearby.

Full carry is the ceiling on how wide a contango can get in a storable commodity, because at that point cash-and-carry-arbitrage becomes profitable and sellers of the deferred contract flood in. Market commentary often quotes spreads as a percentage of full carry.

A market trading at 90-100% of full carry is signalling abundant supply and plenty of empty storage; nobody wants the commodity now and holders are being paid to store it. A market at 20% of full carry, or in backwardation, is signalling scarcity and a positive convenience-yield.

Example: corn at $4.50, financing 5.5% and commercial storage 4 cents a bushel a month means carry of about 6 cents a month. If the three-month spread is 12 cents against a full carry of 18 cents, the market is at 67% of full carry.

Related: cost-of-carry, cash-and-carry-arbitrage, contango, storage-cost, convenience-yield

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Contango and backwardationTwo futures curves against contract expiry: one rising above spot, one falling below it.The same commodity, priced for delivery at different dates.78.0076.0074.0072.0070.00Futures pricespot+1m+2m+3m+4m+5m+6mMonths until the contract expiresspot price74.00CONTANGOlater contracts cost more than spotBACKWARDATIONlater contracts cost less than spot
Contango and backwardation. A futures curve shows what buyers will pay for delivery in one month, two months and so on. When later contracts cost more than the spot price the curve is in contango; when they cost less it is in backwardation.

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