What is a Carrying Charge?
Sometime referred to as the cost of carry, a carrying charge has to do with the charges associated with storing and caring for physical commodities. This cost of physical commodities care may include such important factors as physical storage, insurance, interest rate futures generated by the commodities, and opportunity costs. In addition to these usual costs involved in caring for a commodity, other ancillary charges may also be included in the overall carrying charge. An illustration of how the carrying charge works can be found in the example of grain. Since grain is a valuable commodity that is subject to decay, it is often necessary to take steps that will extend the life of the asset. One of the central means of preserving the grain is physical storage in a silo or other facility that helps to minimize the impact of temperature and humidity on the grain. This means the lease or construction of the storage facility, as well as the installation of systems that will keep the grain
Normally, it is considered to be the amount charged for storing, insurance, handling and financing the cost for any storable commodity. So, what is a carrying charge spread? It is a spread between two different futures delivery months of the same commodity. The distant month would be at a higher price than the nearby month. If the distant month’s price is equal or greater than the near month’s price, plus storage, interest and insurance for the period between, the spread is called a “full carry” spread. (The exception is in Frozen Pork Bellies, which I won’t cover now). To enter a carrying charge spread, the trader would buy the nearby month and sell the distant month. He knows that if he sells the distant contract at or near full carry to the nearby contract, the chances are slim that he will have much risk. Unless there is some unusual factor influencing the market, such as the possibility of rapidly rising interest rates. Most of the time a full carrying charge does not occur. Somet
