Suppose the cotton (a storable commodity) futures prices are currently:

Expiry month	Price c/lb
December 2021	83
December 2022	96

(a) Is the cotton market in contango or in backwardation?
(b) What is the slope of the futures curve for cotton? Draw a future curve graph to support your answer.
(c) Are there positive returns to storage between Dec 21 and Dec 22? Draw a graph of supply and demand for storage to support your answer (where t=Dec 21 and t+1=Dec22).
(d) Suppose an unexpected typhoon destroys cotton crops in India. This causes a downward revision in the expected global cotton production in 2022. Assuming all else equal, will demand storage of cotton in 2021 (St) increase, decrease or stay the same? Draw a graph of the demand for storage to support your answer.

Answer rating: 100% (QA)

Part a Firstly you need to remember that both the terms contango as well as backwardation are used to determine and easily understand the forward curv... View the full answer