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.