Mexico’s failed “No-Drive day” policy.

Following years of strong presence of smog and strong vehicle congestion,  in 1989 Mexico City introduced its “Hoy no circula” program ( Spanish for “No-Drive Day”).  The program was designed to reduce emissions by vehicles by reducing the number of daily vehicles circulating by 20%.  Despite the program being a huge failure it still stands today.  In this blog we will analyze the causes of the failure.

The “Ho no circula” program was designed with an environmental concern and thinking it would also alleviate congestion issues.  The program was designed in a way that depending on the ending number of a vehicles license plate it would be assigned one of five colored stickers and each sticker color will be banned from circulating one day a week from Monday to Friday.  The program applied to all vehicles disregarding if they are private or commercial.  Only certain governmental and emergency vehicles were exempt.

The immediate result of the program was an effective reduction of 20% of the vehicles circulating.  However, the effect would not last long.  Households who could afford it bought a second or third car and so did businesses.  Driving increased during weekends to account for what was not done during the week and the use of old cars increased, which actually increased emissions.   In and effort to correct course and disincentivice the use of old cars in favor of new low emission ones, the government introduced exceptions the “No-Drive day policy”.  The main restriction allowed new cars to circulate every day as long as they passed a set of low emission tests ran by specific contractors.

This set of “corrective” measurements ended up correcting nothing.  They made the No-drive policy even more unfair by benefiting the rich who could afford new cars.  They increased the number of average cars per household and incentiviced higher income households to pass down their old cars to lower income households.  A few years after the implementation of the program the effective reduction of cars circulating had fallen from 20% to 7%.

By the mid 1990’s the program was considered by many to be a strong failure.  Its proponents thought of it as a small price to pay for clean air, but its detractors argued it was 1) an inefficient program because it was rationing capacity and constraining overall welfare and  2) an unfair program because it was easily avoided or accommodated  by those who could by two cars or simply drive more  and a burden on the poorest car owners who has to spend extra money on alternatives to commute to their daily destination.  But perhaps the most important argument was that it will not only be an inefficient and unfair program, but it will actually be counterproductive as those who purchased an extra car will end up increasing their overall driving and as a result the total emission and congestion levels.[1]

In their paper ”Rationing Backfire: The Day Without a Car in Mexico City”, Gunnar S. Eskeland and  Tarhan Feyzioglu explore this idea of counter productiveness and find robust results to support it.  They particularly note three features[2]:

(a) “due to the integer nature of cars and the fact that cars effectively come bundled with “work-day

driving permits”, some households will want more cars once their existing cars are made less useful

by the regulation”

(b) ”multiple drivers in a family could mean that total car use increases even though an additional car is purchased primarily to substitute for the family’s existing car on its banned day;”

(c) “effects of congestion, substitution between trips, and differences in fuel efficiency all could blur

the basic expected reduction in gasoline consumption per car. Among these possibilities, we are able

to investigate empirically only (a) and (b). For (c) we can only add some tentative calculations of

plausible numbers.”

The paper addresses the issue analyzing the effect of car rationing by “comparing demand reductions with those one would obtain by market based implementation mechanisms” and presents an empirical framework that estimates the reduction in demand generated by the regulation.  The results are shocking

“The time series analysis indicated strongly that total car use in Mexico City was shifted upwards by the regulation, indicating that positive net car purchases should play a major role (since one would expect the many households that would not increase car ownership to reduce, or keep unchanged, their car use).”

Despite the failure of this policy the no-drive day still stands today.  Today vehicles that are less than 8 years old are allowed to circulate everyday provided they pass the set of tests.  The vast majority of high income households get rid of vehicles before they are banned form circulating and high levels of corruption have been detected in the verifying centers.  There is a general belief that getting rid of the policy at this point will only release a higher number of vehicles into the streets, further complicating transit and increasing emissions.

Defendants of the policy still believe it highly contributed to reduce pollution in the city by incentivicing the usage of new vehicles with low emission levels, however the vast majority of people agree this would have happened anyway due to technology improvements by vehicles makers around the world.  Detractor of the argument allege the introduction of the catalytic convertor in automobiles during the 1990`s was the actual cause why the level of emissions where substantially reduced during this decade.

The “No-Drive” day policy in Mexico City is a perfect example of how careless policy design might not only result in “disappointing results by creating high welfare costs and delivering none of the intended benefits”, but in a counterproductive strategy that leads into an even worst scenario.  As exposed by Eskeland and Feyzioglu, rationing usually leads to humans finding a way to bypass the constraint.  Careful though should be given to this in future policy development.

References

[1][2][3] Eskeland, Gunnar.  Feyzioglu, Tarhan.  “Rationing can backfire: The Day Without a Car in Mexico City”  Policy Research Department.  The World Bank.  1995

http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-1554

Mahendra, Anjali.  Congestion Princing in cities of the developing world: Exploring prospects in Mexico City.  Department of Urban Studies and Planning.  Massachusetts Institute of Technology. 2004

Velioz, Jimena.  Article.  Does the World´s Most Congested City Want More Cars?  This Big City.  2011

http://thisbigcity.net/does-worlds-most-congested-city-want-more-cars/

As we have seen through the term on the Environmental Economics and Policy course, there are several policy mechanisms to regulate the exploitation of fisheries.  Some of these focus on controlling the amount of fish captured or landed, others focus on the period of time or “season” when certain species can be captured and some others on the tools, technology or methods that can be utilized to operate the fisheries.

The mechanism I would like to focus this article is Individual Tradable Quotas.  Commonly know as ITQ’s, Individual Tradable Quotas is a system for managing fisheries that focuses on assigning a share of an established total amount of catch to a party, which is usually an individual fisherman or the owner of a vessel.   Once this quota is allocated and distributed, parties are allowed to sell, buy or trade their ITQ’s with other individual fisherman or vessel owners, including those who were not originally allocated any quota.[1]

ITQ’s are thought to be the best way of managing fisheries by many economist and policy makers.  “Supporters of ITQ programs argue that compared with other fishery management options available, ITQs represent the most cost effective and socially beneficial means of promoting a sustainable fish industry”.

The concept of ITQ’s was first introduced in the 1960’s as pollution control quotas and was adopted for fisheries management in the 1980’s.  New Zealand introduced the first major ITQ program in 1986 and today many countries have ITQ programs in place including the United States, Australia, Canada, Iceland, Italy, the Netherlands and South Africa. [2]

For this blog we will analyze a particular ITQ system implemented by the United States in the state of Alaska to manage fisheries for halibut and sablefish.  This program is defined as in individual fishing quota program (IFQ) for halibut and a Community Development Quota (CDQ) for sablefish and was developed and implemented in 1995 by the National Marine Fishery Service with aid from the North Pacific Fishery Management Council and the International Pacific Halibut Commission.  The program was a response to declining quality of catch and low catch per unit of effort experienced by fisherman after a very high number of vessels had created a “race to fish”.[3]

This IFQ/CDQ program is considered to be one of the best ITQ programs in the world in terms of profitability and fish stock replenishment.  The program regulates the fishery by gear, number of vessels and geographic areas.  In terms of gear it includes all “fixed gear” fishing which is defined as all hook and line fishing such as longlines, jigs, handlines, and troll gear.  The fishing area covers the entire Atlantic and Bering Sea coast of Alaska from the border with Canada to the Aleutian Islands and is divided in regulatory areas by species.   Regulatory areas are geographically similar but yet, as seen in the following figures, they vary in area for both species [4].

Source: [6]

The program is composed quotas shares, and permits to operate them.  A unit of Quota Share (QS) represents a percentage of the quantity determined by the National Marine Fisheries Services (NMFS) to be harvested every year.  As explained in the National Oceanic and Atmospheric Administration’s (NOOA) web page,  “Quota Share (QS) was initially issued to persons who owned or leased vessels that made legal commercial fixed-gear landings of Pacific halibut or sablefish during 1988-1990 off Alaska”.  Quota share can be bought, sold or transfer either to other owners of quota or to those approved by the NMFS.

A QS holder or recipient of a transfer should also obtain a permit to participate in the harvest of halibut on every regulatory area and for most regulatory areas in the case of sablefish.  The permits are not assigned to vessels but rather to individuals operating the quota share.  “Authorized pounds for annual IFQ permits are determined by the number of QS units held, the total number of QS units in the “pool” for a species and area, and the total amount of halibut or sablefish allocated for IFQ fisheries in a particular year”.

Another characteristic of this IFQ program is that is operates under seasonality.  The fishing start and end dates are established jointly by the Pacific Halibut Commission in the case of halibut and by the NMFS in the case a sablefish.  The season is typically established from March to November and operates halibut and sablefish simultaneously in order to discourage discarding.[5]

Regarding enforcement, the Alaska Enforcement Division of NOAA together with the U.S. Coast Guard have developed a strategy that includes sea monitoring as well as offload inspection and after hour surveillance.  The U.S. coast guard constantly patrols fishing areas with patrol boats, buoy tenders and airplanes and helicopters.  The AKD also independently patrols the waters with boats and develops compliance inspections as well as technical and compliance

assistance.  Investigation regarding reports or complaints of violations are analyzed by the AKD and enforced by NOAA and the U.S. Coast Guard or the State of Alaska Wildlife Troopers.  In addition to enforcement activities the AKD provides information sessions and compliance assistance seminars and workshops to regulatory information is understood by quota holders and operators.[6]

The Alaska Halibut/Sablefish IFQ/CDQ has proven to be a good system to manage these fisheries, being its main advantage the reduction of the “race to fish” problem.  Fisherman are now guaranteed a specific amount of landings, giving them flexibility to allocate their fishing times as most convenient while increasing safety for both the fisherman and the environment.  However the advantages a program like this brings do not come without disadvantages.  The main criticism the program has received is it creates an incentive for fishermen to “high grade” their catch, meaning they will discard the lowest value fish that goes against the quota to fill it with high value fish.  Strong criticism also focuses on the monopoly this system creates as the high capital investment needed to obtain quota and participates deters new participants for entering the industry.  The high cost of enforcement and compliance assistance is also a high criticism against the program [7].

Despite the criticism and the opportunities for improvement, the program has proven to be and effective way to manage this particular fisheries.  Stocks have been maintained, the health and overall quality of fish seems to be improving and fisherman had been able to have stable year-to-year catches with increasing profits.  Weak areas like the propensity to “high grade” catches should be addressed and new methods like value-based quotas should be explored in order to improve operations and the overall sustainability of the fisheries.

References

[1] The Red Snapper Fishery, Part Two.  Standford Law School.  Environmantal and Natural Resources Law and Policy Program.

http://media.law.stanford.edu/organizations/programs-and-centers/enrlp/doc/slspublic/snapper-2.pdf

[2] [7] Buck, Eugene.  Individual Transferable Quotas in Fishery Management.  CRS Report for Congress.  National Library for the Environment.  September 25, 1995.

http://dlc.dlib.indiana.edu/dlc/bitstream/handle/10535/4515/fishery.pdf?sequence=1

[3] Catch Shares/Individual Transferable Quotas.  The Fish Project. 2011.

http://thefishproject.weebly.com/catch-sharesindividual-transferable-quotas.html

[4] Muse, Ben.  Schelle, Kurt. Dinneford, Elaine. Iverson, Kurt.  Changes Under Alaska’s Sablefish IFQ Program.  CFEC Report Number 96-11N.  Alaska Commercial Fisheries Entry Commission.  September, 1996.

http://www.cfec.state.ak.us/RESEARCH/96_11n/SBTITLE.HTM

[5] Restricted Access Management Report.  NOAA Fisheries (NMFS), Alaska Region.  February 3, 2014.

http://alaskafisheries.noaa.gov/ram/reports/ifq_cdq_seasons.pdf

[6] Pacific Halibut-Sablefish IFQ Report.  Fishing Year 2012.  NOAA’s National Marine Fisheries Service, Alaska Region.  March 2014.

http://alaskafisheries.noaa.gov/ram/ifq/rtf12.pdf

Despite its detractors and the multiple attempts minimize its impact in climate change, awareness on global warming and its environmental consequences continues on the rise. Traditionally, developed countries (or states within them) have led the way in developing strategies to mitigate it.  But today, new policy initiatives are being put into place by developing countries to contribute to reduce the effect of greenhouse gas emissions.

Signed in 1992, the Kyoto protocol classified countries in different categories depending on their level of development and based on it defined and assigned objectives to reduce global warming.  The majority of the developed countries where classified in the first category and have committed to reduce emissions to specific levels while providing support to developing countries to reduce their emissions via the transfer of technology.[1]  To achieve these goals some developed countries have implemented strategies such as greenhouse gas taxes, cap and trade systems and sets of incentives for their industry to reduce their greenhouse gas emissions.

Although most developing countries are not required by the Kyoto Protocol to reduce their emissions, some are already defining reduction strategies and incorporating specific measures to achieve those objectives in their environmental policies.   A good example of this case is México, a fast growing economy composed of more than 114 million people accounting 1.42% of the world CO2 emissions according to the World Bank.[2]

Less than two years ago, in June 2012, former Mexican President Felipe Calderón signed the “General Law of Climate Change” which has the objective of “guaranteeing a healthy environment and establishing faculties for federal, state and municipal authorities to develop and enforce public policies focused on mitigating climate change effects trough regulating greenhouse gas emissions”.  Through this law, the Mexican government is seeking to reduce the vulnerability of its population to the adverse effects of climate change and to promote education, research, development and technology transfer that generates a transition to a sustainable and competitive economy[3].  It establishes the goal to reduce its CO2 emission 30% by 2020 and 50% by 2050 with respect to 2000 levels.

Since the approval of this law there have been political transitions and a new federal administration is in place, however, the base the law set seems to be working as new policy has recently emerged both at the federal and local levels.  The new administration commanded by president Enrique Peña Nieto has been drafting and approving reforms to Mexico’s’ legal framework in a magnitude not seen in the country for decades.  In the past few months, radical reforms dealing with taxes, telecommunications and energy have taken place.  Although one could assume the energy reform might be relevant to our topic, it is actually the tax reform the one that brings interesting news regarding climate change.

In accordance to the National Strategy for Climate Change[4] introduced by Mr. Peña Nieto in 2013, Mexico’s’ tax reform has included a provision to tax activities contributing to climate change, in particular those dealing with greenhouse gas emissions.  The federal government proposes to tax CO2 emission per emitted ton with the intention of disincentivicing the use of fossil fuels.  According to the reform proposal a carbon tax is the most efficient and less costly way to achieve this goal and motivate the development of technologies that induce energy efficiency and promote alternative forms of energy.[5]

As a reference to calculate the price of carbon emissions that will be set as tax level, the Mexican government developed an index of different international carbon markets, obtaining an average price of US $5.70 per ton.   Furthermore the carbon content of different fuels was determined to establish a per-unit of volume tax, which resulted in $70.68 pesos per ton.  Fuels that will be subjected to this tax are natural gas, coal, propane, butane, gasoline, jet fuel, turbosine, kerosene and oil and coal clinker.   The calculated taxable emissions are around 376 million tons, which would signify a tax revenue of $26,600 million pesos or 2,000 million dollars.

With the purpose of controlling collection and simplifying its enforcement the tax was designed in a way that producers and importers are the ones responsible to pay and it and establishes that any transaction done by third parties will not be subjected to any tax.  As a payment mechanism the law also contemplate that this tax can be paid by the delivery of carbon bonds obtained from projects that have been developed in México and are approved by the United Nations Convention on Climate Change.

The Mexican government has reiterated this tax is meant to make those who pollute pay, therefore that the tax is applied to fossil fuels per unit of emission.  Every industry or household that makes use of fossil fuels will indirectly pay for a proportion of the tax.  It is expected that 52% of the tax burden on gasoline falls on 20% of the Mexican household with the highest incomes since this household segment is the one that relies more heavily on private transportation.

Transportation is also expected to be an industry that will indirectly absorb a heavy part of the tax burden.  The lack of efficient urban transport in most cities makes citizens rely heavily on small commuter trucks instead of efficient modern city buses.  A similar situation is experienced in long-range transportation.  Mexico lacks and extended network or suburban trains and long-range passenger train transportation is inexistent.  A fleet of millions of passenger buses fulfills the role of transporting millions of Mexicans from city to city and therefore prices of transportation are expected to reflect an increase given the tax.

I believe the Mexican experiment of taxing carbon can set a precedent for developing countries to start disincentivizing the use of carbon emitting fuels and shift towards energy efficient technologies.  Latin American countries like Brazil and Colombia are in the process of developing carbon taxes and could highly benefit from the results obtained by Mexico.  However, it is extremely important that the government actively contributes to this shift by investing in quality public transportation and providing the means for the private energy sector to thrive.  As mentioned previously, important energy and telecommunications reforms are also in progress in Mexico.  These changes in policy will provide strong economic incentives for growth by reducing the power of state and private monopolies.  The energy sector in particular will suffer a profound transformation, as private enterprises will be allowed to participate in exploration, production, distributions and commercialization of oil, gas and energy.  The degree in which this parallel reform contributes to the modernization of Mexico’s` energy sector will highly contribute to the success of Mexico’s climate change law and carbon tax policy in reducing carbon emissions.

Hello.  I wasn’t really aware this was our last week of trading.  It seems like i’m gonna end the game pretty much with the same money as when I started.  I lost a lot of money on my first week of trading, but as coffee prices are going down the normal trend given the current coffee industry situation my loss is becoming smaller.  I did not get back all my money

on coffee but combined with the wins I had from trading other commodities I am now on the positive side of the rankings.

As I talked on my previous blogs, coffee prices are very volatile.  As seen on the following figures this week they fell from 117 to 112 cents/pound.  Which transformed my 7% loss to a 2% loss in coffee.

I have learned a lot from this game.  My main lesson is that markets almost immediately discount or account for most of the factors that are supposed to affect price.  We sometimes think prices are going to move because of a certain situation when prices already moved because of that situation.  Before we even knew about it!  Of course markets always over/under account and it’s precisely there where we can make good profits/losses.  But, well, being able to determine this is every traders dream!

What can we expect for coffee…..

The following article is very interesting if you want to understand a bit about coffee price fluctuations in time.  I recommend to read it.  It summarizes what I think will happen, which is the story of coffee always and kind of goes like this.

1. There is a huge surplus of coffee at the moment so prices will keep on falling for a bit and stay low for some months.
2. Farmers will receive for their coffee less than its cost, so they will not fertilize and take care of the plantations anymore.  Some will abandon them and farm something different.
3. As this happens the surplus will start to shorten and prices will start to rise again during the next harvests and like a pendulum they will sore in a few years as farmers cannot suddenly start planting again because coffee trees take several years to yield.
4. As everybody planted coffee to take advantage of high prices, within a few years we will come back to today’s situation, with record crops like the ones metioned on the article.

http://www.agrimoney.com/news/supersafra-talk-sends-coffee-price-to-4-year-low–6413.html

I hope we can keep on trading even if the official game is over.

Hasta luego!

This week I decided to try a new strategy.  I decided that instead of waking up early to trade I would stay up late.  It worked great!  Right when the markets open there are always interesting movements as new information built up expectations during the closing hours.  Using this strategy I can trade with stop/limit as the market opens and then go to bed.  When I wake up I just readjust and get ready for the market close.

I have diversified my portfolio and its been paying off.  Now my coffee losses are not as bad and I’ve been making some money on fast daily trades.  Going long on wheat gave me good gains this week.  It could have given me more but I decided to sell and make some gains instead of taking the risking the gain.

I’ve been slowly getting into technical analysis.  I have been trying to apply forecasting techniques learned on FRE 585 to aid on my decision making.  This week I started analyzing moving averages.  I pulled out MA for 20, 50 and 100 days for wheat because this commodity has been having constant, well-defined ups and downs that if understood can help us generate some profits

I remember that moving averages a do not have forecasting capabilities but are more than anything follow what happens.  Despite this traders use them a lot to identify the underlying trend and as an aid to decide at what point to enter or exit the market.

Digging into  moving averages I found that comparing MA’s with different periods can give us a lot of information about the momentum of our trend.  They idea is to compare the convergence and divergence of the two moving averages.  This indicator is called MACD and  oscillates above and below the centerline.  Positive values increase as the shorter MA diverges from the longer MA and means upside momentum is increasing.  Negative values increase as the shorter MA diverges below the longer MA and  means downside momentum is increasing.

It interesting to compare this charts to the MA.  It definitely shows the high upward momentum of wheat has as of today!

By the way  momentum measures the rate of change of price and how fast and strong this changes are.  I will start using this indicators for my futures trades.

You can find much more about MACD here.  http://stockcharts.com/help/doku.php?id=chart_school:technical_indicators:moving_average_conve

By the way I’ve been using stockcharts.com a lot and it is awesome.  Recommended!

Cheers!

As we can see on the graph coffee prices have continued to move horizontally.  We are a few days away form a huge Vietnamese harvest and which might probably start pushing prices down again.  Maybe then I can start making some money.  As I still have cash for trading there is no need to sell with a loss.  So i’ll keep on holding.

As on last week wheat prices went up again on Friday giving me a slight gain.  Unfortunately soybeans when down and will probably continue to go down.  Despite the USDA announcement commented last week supplies are believed to be high and everyone is taking about a fall in prices.  I will cover my position first thing on Monday.

This week I want to try something new.  I’ve been following cocoa for the last week and there are some interesting moves in the market.  People are expecting shortages and low quality due to weather in Africa.  Most farmers do not have adequate storage so product is easily damaged.

The trend is prices will continue to go up but I believe there is a point where the market will exaggerate this and some profits can be made by shorting quick, in a matter of a few hours.  I will try to do some technical analysis during the week to make a better based decision.

The 501 video project has taken all my energy this week and has wiped out my motivation to right this blog.  But despite the fact that is almost 10pm on friday and i’m still at room 366, I will try my best to make it interesting.

This week had some interesting things.  Markets are nervous.  Nobody really knows the impact that the US government shut down will have on them.  Probably a higher one the more it lasts.  What we do know is the USDA released its quarterly stock report before closing for business and it has some interesting news which will analyze discuss further in this report.

First I would like to say this week I had a slight improvement.  My portfolio now shows a couple of little gains overshadowed by the huge hit I took on the first week by trading coffee, which by the way didn’t really move this week.  I’ll keep holding my position.

I decided to buy wheat on Monday because it was in a good streak and analyst said prices will keep on rising.  I had a small gain for the first time!   The December contracts finished a little bit under on Friday, but as an analyst I read from said “it has finished higher 8 out of the last 10 trading sessions”.  Supposedly that definitely marks a trend.  I personally believe wheat will keep on rising next week because there are some signs world output this year will be lower.  Wheat experts are blaming it on heavy rains in Russia and Ukraine.  There is also the expectation that China will have a 9-year high import.  Apart form the USDA news. apparently markets are taking this into consideration and that’s why we have been seeing this upward trend.  I will hold my position.  Probably sell mid week and buy again before the weekend.

After I bought wheat, I heard about the USDA quarterly report mentioned previously and thought it would make prices go up.  It stated stockpiles of all major grains were 20% lower this September than last year so I decided to buy soybeans too.  The markets didn’t seem to care too much about this and just like wheat prices, soybean actually fell during the week.  I though it was going to end up bad again, but surprisingly things recovered by the end of the week and I actually ended up with a small gain.  Maybe markets just took a while to realize we are indeed facing smaller crops, or they were just distracted by the US shutdown.  Judging from this video today at the CBOT they ended up caring a lot.

https://www.youtube.com/watch?v=2eiWYNzF6Uc

Have a great weekend.

My trading week was disastrous!  Coffee futures went up substantially on Monday.  This excited speculators and industry interested in buying, pushing futures even higher during Tuesday and Wednesday.  I was down more than 32% on Wednesday morning!  During the week I read  some expert opinions and as a cause for this price rise most mentioned speculators.   Having been very short (as me), they decided to cover a bit and interrupted the downward trend.  I think in the end people writing this reviews are just trying to justify (just like I am) why they said price was going and it ended going up.  The good thing is we are dealing with fake money and I don’t need to deal with wanting to kill myself for loosing my life savings, or with giving a really good explanation to my boss.

Despite this hit, I am confident on my long-term strategy and will hold my position.  I’ve kept finding indicators that there is a huge coffee supply which is going to push prices down.  One of these was the announcement made last week by the U.S.-based industry research group Green Coffee Association, which said U.S. stocks of unroasted coffee in August totaled to 5.56 million 60-kilogram bags.  This means a 2.4% rise from July and highest level since July 2009!

Knowing the US is by far the worlds biggest consumers and its consumption/demand has huge effects on world coffee prices, I went on to the associations web site and looked at the historical US stocks.  I found that when prices stocks have been very high, prices have been very low (Figure 1).  I’m not implicating causality between this two variables and have not done a correlation analysis.  But high stocks and low prices are often consequences of over supply.  Analyzing this fact together with the prospected good Brazilian and Vietnamese harvests mentioned on last week’s blog, I still believe supply will increase, stocks everywhere will rise, and price will fall.

Figure 1

Having potentially lost all this money, I think I must definitely diversify and start investing in other commodities.  I have bought 15 corn december contracts.  Corn will most likely keep on rising in the long run do to increased demand caused by an increasing bioethanol production.  Now that I’m working on biofuels in my 501 project, and although I personally think fuels made of food are a really stupid idea, I’m all about corn for this game!  I’ve been studying about an increasing number of countries introducing biofuel mandates and how much this, plus projected US consumption, will increase corn based biofuel demand.  I must say it all looks like in the long run prices will rise.  I’m going to take my chances for the short run and go long on corn.

By the way.  I found this really good picture summary of the main factors behind food prices.  When trying to “predict” what will happen, or analyze what did happen with commodity prices, we must always look at this.  It might be useful for your upcoming analysis.

Cheers!

Hola Amigos!  It took me a while to figure out this trading/blog situation, but here I go!

Coffee prices have been continuously falling since the 2011 almost-record prices.  In the long run I expect prices to keep on falling due to high farming caused by the record prices just mentioned and great harvests in Brazil, Vietnam and most Latin American producing countries.  Despite the announcement of measurements to control coffee prices made by Brazilian president Dilma Rouseff last month, prices have kept on falling due to high supply from the other regions mentioned.

Driven by the fast rising prices seen between 2009 and 2011, farmers increased cultivated area and yields, and will now face the consequences of oversupply (we should keep in mind that a coffee plants take from 2 to 4 years to start producing coffee!).  Therefore all those millions of plants planted during high prices are now producing coffee and we are most likely heading to the traditional coffee low-price bottom-of-the-cycle as shown in graph 1.  I do not expect coffee prices to hit all time lows but we will definitely get close to about 70-80 cents per pound sometime in the next two years.

Graph 1

In the short run I expect prices to fall further as this years great Brazilian harvest comes to an end in September and a great harvest is expected for this year in Vietnam and Latin America due to great weather, with particularly good rain in Vietnam.   We might see several small bounces, but prices will most likely keep on falling as they’ve been doing for the past year (graph 2).  It’s also important to know that this expectation of prices to keep falling has escalated the volume of coffee contracts negotiated.  Speculators want to make money and roasters, traders and farmers to protect themselves, but of course there is huge uncertainty of how much and how fast will prices actually fall.

Graph 2

I’ve decided to stick to the idea that the price won’t bounce anytime soon and therefore I have shorted 7 contracts for March 2014 position (KCH14).  They will start trading on Monday, as soon as the exchange is open.  I hope this trade goes well and I don’t end up making some money!!  In the end, as much analysis as you do, there are always unforeseen situations that might end up changing everything.  Have a good weekend!

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