Sunspots as a Pure Sign for Buying and selling Wheat Futures? – QuantPedia

Sunspots are momentary phenomena on the Solar’s floor that seem as darkish spots because of decrease temperatures in comparison with surrounding areas. They’re related to photo voltaic magnetic exercise and comply with an roughly 11-year cycle. Whereas sunspots themselves could seem distant from on a regular basis issues, their affect on Earth’s local weather – notably by way of photo voltaic irradiance – has lengthy been studied.

This led us to discover whether or not photo voltaic exercise may function a predictive indicator for agricultural commodity costs, reminiscent of wheat or corn. Intervals of excessive sunspot exercise are sometimes related to hotter and extra variable climate patterns within the higher ambiance, with restricted however doubtlessly related results on Earth’s local weather. Slight will increase in air temperature might improve crop yields, which may, in flip, place downward strain on costs. Nonetheless, we assume that the impact of sunspot counts is extra prone to manifest over the approaching years fairly than within the brief time period.

We suggest to discover whether or not a structured funding technique, reminiscent of tranche-based entry timing, may reap the benefits of this relationship. By monitoring sunspot exercise and anticipating its potential affect on agricultural output, we intention to evaluate whether or not sunspot knowledge can enhance the timing and efficiency of commodity investments.

Introduction

Based on House Climate Prediction Middle, sunspots are momentary darkish areas on the Solar’s floor attributable to intense magnetic exercise. They usually seem in pairs or teams, range considerably in dimension and might persist for weeks. Sunspots comply with an roughly 11-year cycle, often called the photo voltaic cycle, alternating between intervals of excessive and low photo voltaic exercise, which influences the quantity of photo voltaic radiation reaching Earth. During times of heightened sunspot exercise, the Solar emits barely extra vitality. Traditionally, prolonged intervals of low sunspot exercise have coincided with colder climates, reminiscent of through the so-called “Little Ice Age.” 

This led us to contemplate whether or not sunspot counts may function a sensible indicator for agricultural commodity costs, notably for wheat or corn. Our speculation is that elevated sunspot exercise may sign extra favorable rising circumstances because of hotter climate, doubtlessly bountiful harvest and driving costs down. We suggest to analyze whether or not this relationship may be leveraged by way of a easy but efficient technique, reminiscent of tranche-based funding timing to raised navigate commodity markets utilizing publicly obtainable sunspot knowledge, both in futures and spot costs. 

Methodology

Since futures knowledge doesn’t prolong far sufficient into previous, we determined to additionally discover spot costs. Nonetheless, it’s obligatory to mix knowledge from a number of sources with the intention to get hold of a steady value collection for every commodity, as availability varies over time.

Concerning sunspot knowledge, this analysis makes use of the dataset of month-to-month imply complete sunspot numbers from 1749 to Could 2025, obtainable from the Photo voltaic Influences Knowledge Evaluation Middle. For consistency with our technique, we rework this knowledge into quarterly frequency, as we intention to rebalance on a quarterly foundation utilizing a tranching strategy. We apply three variants of this methodology:

4 tranches: 12-month holding interval with quarterly rebalancing,

8 tranches: 24-month holding interval with quarterly rebalancing,

12 tranches: 36-month holding interval with quarterly rebalancing.

In our earlier article Evaluation of Value-Based mostly Quantitative Methods for Nation Valuation, we described this tranching technique as follows: Think about common quarterly rebalancing, for instance on March 31, June 30, September 30 and December 31 of every yr. Solely a pre-selected a part of the portfolio is rebalanced at every date. This is named industry-standard tranching. Specializing in a 36-month holding interval (12 tranches), the portfolio is split into 12 sub-portfolios. Every tranche is rebalanced as soon as each 3 years (36 months) and contributes 1/12 of the full portfolio weight. As an instance this strategy, we current a modified instance tailored from the aforementioned article to raised replicate the present context:

On December 31, 1997, the primary tranche is invested; we go brief on underlying asset if the variety of sunspots of earlier month exceeds the desired threshold, in any other case, we don’t make investments. These positions are held till December 31, 2000. A second tranche is initiated on March 31, 1998, and held till March 31, 2001. This course of continues every quarter, leading to 12 staggered sub-strategies with overlapping three-year holding intervals. The ultimate portfolio is the equally weighted common of those 12 tranches.

The identical precept is utilized for the 12-month (4 tranches) and 24-month (8 tranches) holding intervals, with changes within the variety of tranches and corresponding holding durations.

Now, figuring out the precept of tranching, we will incorporate it into our technique. Suppose each the quarterly commodity costs and sunspot numbers are ready. The one remaining step is to outline a threshold. If the variety of sunspots in a given quarter is increased (or alternatively decrease) than the chosen threshold, it generates a sign to speculate, both by getting into a protracted or brief place utilizing a tranche-based strategy. That is primarily based on the idea that the results of photo voltaic exercise might solely manifest over the approaching years, fairly than instantly. Furthermore, it’s essential to account for the truth that sunspot knowledge is offered with a one-month lag.

In our analysis, we look at how the funding performs below two eventualities: brief positions are initiated when the variety of sunspots exceeds a predefined threshold (primarily based on the idea that increased photo voltaic exercise indicators extra favorable rising circumstances and thus decrease commodity costs). Conversely, lengthy positions are taken when sunspot counts fall under the brink. Think about that the beginning portfolio worth is ready to 1.

Primary efficiency traits in tables are offered as follows: the notation perf represents the annual return of the technique, st dev stands for the annual normal deviation, max dd is the utmost drawdown, adjusted Sharpe r is calculated because the ratio of perf to st dev and adjusted Calmar r because the ratio of perf to max dd.

Firstly, let’s discover whether or not the variety of sunspots doubtlessly influences the value of wheat futures, adopted by an evaluation of the spot value.

Futures 

For the backtest, we make the most of a dataset of constantly rolled wheat futures consisting of back-adjusted day by day knowledge from November 23, 1979, to April 30, 2025 sourced from Premium Knowledge. Earlier than the primary evaluation, let’s check out the futures costs themselves.

As we will see within the graph, the value has a long-term declining tendency (primarily because of unfavourable roll yield over time attributable to storage and carry prices). Subsequently, we are going to use a quarterly rolling brief place as a benchmark.

Regardless that the benchmark exhibits an upward development, its efficiency shouldn’t be notably sturdy, with a yearly return barely reaching 2% and markable variablity, displaying not solely graphically, but additionally on the results of normal deviation. Can our market timing technique outperform this indicator and ship extra environment friendly outcomes?

Quick positions

We first centered on brief tranching technique, getting into a brief place when the variety of sunspots exceeds a given threshold, anticipating a value decline, with 4 tranches and a number of other threshold values: 30, 50, 80, 100, and 150.

It’s evident that methods utilizing the variety of sunspots exceeding the brink as a sign for brief positioning with 4 tranches are extra worthwhile than the benchmark, which depends solely on a rolling brief place, particularly when the brink is ready to 50. With a return of 5.27%, a regular deviation of 14.83%, and a most drawdown of -45.46%, this technique clearly outperforms the benchmark, attaining a Sharpe ratio greater than 4 occasions increased, in addition to a considerably superior Calmar ratio.

Subsequent, let’s look at the technique with the brink nonetheless set at 50, this time not solely utilizing 4 tranches, but additionally increasing to eight and 12 tranches.

At first look, rising the variety of tranches doesn’t seem like useful for the technique. Each the graph and desk point out decrease effectivity, nonetheless, the technique nonetheless outperforms the benchmark when an appropriate threshold is utilized.

This implies that the affect of a rising sunspot quantity is lagged, however as time progresses, its impact step by step weakens. Whereas the shorting technique seems relevant when a value decline is anticipated, it stays unclear whether or not it may be tailored successfully for rising markets (variety of sunspots falling under the brink) and lengthy positions. 

Lengthy positions

Now, let’s apply the identical process specializing in the variety of sunspots falling under the brink set to twenty, 30, 40, 50 and 60, however as a sign for lengthy positioning .

Regardless that there have been intervals when methods primarily based on taking lengthy positions after the brink fell under a sure degree outperformed the benchmark, their long-term efficiency remained unfavourable and constantly much less efficient than the benchmark. Subsequently, it nonetheless holds that the one relevant technique utilizing sunspots as an funding sign is the brief tranching technique that make investments when the brink is exceeded, notably when it’s set to 50. 

Nonetheless, backtest interval of 40 years shouldn’t be so long as we want, however the wheat futures knowledge we’ve doesn’t have longer historical past. Because of this we determined to utilise the spot costs of wheat.

Spot costs

We desire utilizing futures contracts in our evaluation as a result of they inherently replicate storage prices, that are already priced into the market. This makes them a extra reasonable instrument for learning commodity value habits from a buying and selling perspective. Nonetheless, because of the restricted availability of long-term historic futures knowledge, we’d additionally depend on spot costs in our evaluation, since they provide a for much longer knowledge historical past appropriate for learning long-term patterns.

The dataset of spot costs covers the interval from 1842 to 2025 and is compiled from a number of sources. From 1841 to 1944 the information are primarily based on the Wholesale Value of Wheat and for the interval 1944 to 1952 is used Wholesale Value of Wheat once more. From 1952 to 1990 is Producer Value Index by Wheat Commodity utilized and eventually, from 1990 to 2025 is used World value of Wheat. The final two datasets had been initially reported in numerous items and due to this fact needed to be transformed to cents per bushel for consistency.

The spot value of wheat displays a typically upward development notably because the Seventies, accompanied by a number of important drawdowns. This sample could also be attributed to the impact of inflation over time.

In distinction to futures, the benchmark is now constructed as a rolling lengthy place rebalanced month-to-month, reflecting the widely upward motion in spot costs. Nonetheless, as we talked about earlier, this naive benchmark technique doesn’t incorporate storage prices, so we should take all the outcomes from this longer evaluation with a grain of salt.

Let’s examine whether or not the beforehand utilized methods will show efficient on this new context. Given the prevailing upward development in costs, we start by specializing in lengthy positions initiated when the sign falls under the brink. As a primary step, we apply the 4-tranche process (quarterly rebalanced methods, with 12-month holding interval) utilizing threshold ranges set at 20, 30, 40, 50, and 60. 

The appliance of our technique offers a extra secure consequence, evidenced by decrease normal deviation and consequently the next Sharpe ratio, regardless that the returns are usually not considerably increased than these of the benchmark. On this case, setting the brink at 50 seems to be probably the most appropriate, nonetheless, we acknowledge that this can be coincidental, given the negligible variations noticed throughout different threshold settings.

Allow us to now look at the efficiency of methods with longer holding intervals (2-years, and 3-years), particularly with 8 and 12 tranches utilizing the identical threshold worth of fifty.

Altering the variety of tranches didn’t end in any substantial variations, but it surely nonetheless led to a extra secure strategy, with a barely increased Sharpe ratios in comparison with the benchmark. Nonetheless, all Calmar ratios remained unchanged.

Lastly, we had been curious whether or not making use of the best strategy recognized within the earlier evaluation the technique may produce extra favorable outcomes. Subsequently, we tried brief tranching technique, getting into a brief place when the variety of sunspots exceeds a given threshold, anticipating a value decline, with 4 tranches and a number of other threshold values: 30, 50, 80,100 and 150, expressed in logarithmic costs for higher visualisation.

An utility of the brief tranching methods after the brink is exceeded and utilizing 4 tranches didn’t show useful in any case. Detrimental returns, and consequently unfavourable Sharpe and Calmar ratios, underscore the inefficiency of this strategy.

Conclusions

In conclusion, the usage of wheat futures seems not solely extra worthwhile but additionally extra rational, because it inherently accounts for storage prices (which trigger the numerous downwards value drift and we simply must appropriately time entries and exists). If one goals to use a pure phenomenon reminiscent of solar exercise, getting into a brief place when the variety of sunspots exceeds a given threshold with 4 tranches proves to be efficient, notably when the brink is ready to 50, because of the typically declining habits of futures costs, not just for wheat however doubtlessly for different crops as nicely.

As proven in Determine 11, wheat and corn futures exhibit related habits over time. Subsequently, the patterns and approaches utilized to wheat futures are additionally relevant to corn futures.

In distinction, the first benefit of utilizing spot costs lies within the availability of a for much longer historic dataset. Nonetheless, this profit comes at the price of lowered technique effectiveness. A protracted place initiated when the variety of sunspots falls under a given threshold, notably utilizing the 4-tranche strategy, can outperform the benchmark, albeit solely marginally, whereas providing extra secure efficiency. This impact is most notable when the brink is ready to 50. Nonetheless, these outcomes ought to be interpreted with warning, as spot costs don’t replicate storage prices. Consequently, whereas the technique might seem worthwhile, incorporating storage prices may reverse the value dynamics, rendering lengthy positions unprofitable. In such circumstances, brief positioning, as carried out with futures, proves extra applicable.

Creator: Sona Beluska, Junior Quant Analyst, Quantpedia

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