Week one of the trading game is over and so far I have started on a positive note. I was able to gain $112.50 for going long on wheat for December 2012. What made me decide to do this? Simple: looking at weather forecasts.
Poor weather conditions will most likely lead to a poor harvest. A poor harvest means less supply and less supply ultimately indicates higher prices. Through my research, I found that accourding to Luke Mathews, a commodity strategist at Commonwealth Bank of Australia, ““Importers around the world are looking to Australia to provide a significant quantity of wheat over the next 12 months and that’s a direct consequence of drought in Russia and the U.S.” (http://www.bloomberg.com/news/2012-09-11/australia-cuts-wheat-output-estimate-on-dry-weather-in-west-1-.html). Based on this, I figured if Australia’s weather condition is as bad as it was over here, then prices would expect to rice and thus I should go long on wheat prices.
True enough, through some more research, I was able to find that Australia’s 2012-13 wheat crop seen shrinking due to, again, dry weather. Forecasts have been that it is not looking to be a great spring for Australian wheat farmers and that the outlook was for things to remain dry over the coming weeks. (http://www.brecorder.com/agriculture-a-allied/183/1237399/). All this then lead to an increase in wheat prices.
As a recap:
- Poor weather conditions (drought)
- Poor harvest leading to less or little supply
- Therefore, with low supply levels higher prices.
Although I was able to make a gain on this week’s trade, why was my gain not as big even if prices did rise? It came to my attention that when making trades last week I failed to take into account stored commodities. Chalk that up to a rookie mistake. Storage costs can be used as a buffer to help alleviate higher prices during times of shortage and can help raise prices when prices are too low. How?
- Prices High: release stored goods; increase supply; helps lower prices
- Prices Low: store goods; reduce supply; raise prices
For next week’s trade, I should take into account storage levels as well.
Now where did I find my information? Bloomberg (www.bloomberg.com) is an obvious choice for anything news but I also tried to make use of any type of financial site. Most are a Google search away. One that I made use of to get a better insight into the wheat market was the Business Insider (www.businessinsider.com). It gave me an idea of who the major players were and who I should pay attention to.
Hopefully I can ride the wave of this week’s success and increase my gains in a new trade. Lets see what week 2 has in store for me.
Hey Dude,
Interesting perspectives, and I’ve learnt a few things reading your post. Great that you had been looking on various websites as well for information.
I had 2 thoughts:
1. How significant is Australia as a world wheat producer (relative to US and CA)? Which helps us understand how badly really it could affect CBOT price.
2. As a user of Bloomberg the past five years, I’ve found that actually Bloomberg isn’t that great a source of news. Its strength is in data and price feed aggregation. Many people in the industry still use Reuters for the news. I also found that Agrimoney is a pretty good source as well because of its focus.
Well done! Did you have any problem on understanding the equity balance on the daily report from TradeSim? Please include comment on the equity balance on your next posting. And if you need help, please let me know.
I enjoyed reading your post, Melo; it was simply worded and to the point, which made for a good read. It was also comprehensive on your part to look up the effect of your variable – weather – in different parts of the world.
I’m particularly interested in what “longing” did for you, based on my own trading experience this week. One would expect the weather to have a similar impact on all the commodities being grown in a region, and perhaps the yields at the end of the harvest season will confirm this. Yet, had you followed your logic for corn instead of wheat this week, you would in fact have lost. It turns out that – as you rightly pointed out – the stocks to use ratio is particularly important for determining prices. As I write this, I was notified that you have just commented on my blog, so I’ll refrain from referring you there for comparison. I’ll just suggest USDA as good source of information for next week, should you chose to base your decision on stocks and consumption information.
Seeing your gains this week, I might start looking into the wheat and corn markets together to see if price patterns can be drawn.