While searching for graphs/charts for commodity prices, I stumbled upon a website that has the display of various technical analysis of the on-going market trend. The corn futures price chart is attached to the link below.

http://futures.tradingcharts.com/chart/CN/C2/?anticache=1349047528

Although I do not understand how most of the types of indicators work, I do get a grasp the general direction of the market from the analysis.

In addition, I particularly like the daily market analysis section of the website http://www.futuresmag.com/. They do have some interesting commentaries supported with charts and details that are clear to understand. Furthermore, the education section has articles on trading. Although most may be irrelevant to the trading game and some can be a little obscure, they do shed some lights on how commodity futures and options work.

Less than half of the corn crop was harvested as of September 22, and thus, the biggest price factor for corn over the next month will be the size of the harvest. Although prices resurged on Friday due to the decrease in stockpile as stated by the USDA’s quarterly grain stocks report, the price of corn may feel the downward pressure again due to the on-going harvest. In fact, the lack of demand (such as the decrease in export) may continue to dampen corn prices. Hence, I may continue to short corns.

http://www.futuresmag.com/2012/09/28/us-corn-stockpile-unexpectedly-drops-sparks-price

In addition, wheat consumption increased by almost 30 percent during June to August as compared to last year. This is due to the increased demand to use wheat as a food source to feed the livestock as the corn price soared and corn supply decreased during this period. Hence, wheat substituted corn as the feedstock and this explains why the price of wheat is highly correlated to the price of corn. Although wheat harvest was ample this year (2.27 billion bushels and a record high in eight years), there may not be enough wheat to meet the demand because of the shortage of corn supply. Hence, the price of wheat may rise, especially if corn prices remain high.

http://af.reuters.com/article/commoditiesNews/idAFL1E8KSBZ820120928

I continued with my short positions on corn this week by holding onto two December 2012 contract (C2Z) and two March 2013 contract (C3H) in the CBOT corn market. After I received my trading report on September 27^th, I was brimmed with joy because I made quite a significant sum. The profit for the two December 2012 contract was 2*5000*(7.56-7.195)=$3650 and the gain for the two March 2013 contract was 2*5000*(7.25-7.1625)=$875. In total, I made $4525.

There are several factors behind this plunge in corn prices. For one, there was a substantial drop in US corn exports. Corn sales were only 368 tonnes (approximately 1.5 loads of a large lorry!) as compared to 69,578 tonnes last week. Secondly, some suggested that the US corn is overpriced in comparison with other origins. This caused some local US hog producers to buy corn from Brazil (North Carolina hog producer Prestage Farms sign a largest import of corn on record by demanding 750,000 tonnes of corn from Brazil).

http://www.agrimoney.com/marketreport/evening-markehs-data-fears-keep-grains-from-market-revival–1808.html

However, when I woke up on Friday morning (September 28^th), the direction of corn prices reversed. In fact, the upward surge in corn prices exceeded the daily price limit of $0.40 per bushel for both C2Z and C3H. I even had a margin call of $1562.50 per contract on C2Z because the contracts have lost an excessive amount of value and thus need to be topped up. I lost 2*5000*(7.595-7.56)=$350 for the two C3H contracts and 2*5000*(7.5625-7.25)=$3125 for the two C2Z contracts. My margin account balance is 4*1080-350+2*1562.50-2*1562.50=$3970.

The grain stock report released by the US Department of Agriculture caused this fast and dramatic upswing of corn price. In the report, it was mentioned that US corn inventories totaled 988 million bushels on September 1, 2012, down 12% from September 1, 2011.  The number represented the lowest carryout in eight years, as a result, the price of corn bounced up sharply again. From this, I learnt that information get assimilated in a super duper fast manner and close tracking of the current news is critically important in the trading market. In addition, USDA’s inventory reports are key drivers and predictors of the market movements.

http://www.usda.gov/nass/PUBS/TODAYRPT/grst0912.pdf

http://www.agrimoney.com/news/sharp-fall-in-us-corn-stocks-revives-grain-prices–5044.html

I am writing this entry to substantiate on what I have learnt in class about price spreads. Mark had already written in his first blog entry about entering the market with a spread. So, I am here to elaborate more on his entry about the various kinds of spreads and why people hold them.  Basically a spread is a combined holding of one short futures position and a concurrent long position of another related futures contract.

There are several types of spreads:

1. An Intra-Market Spread is the holding of two contracts of the same commodity and exchange but of different delivery months. It can be intra-seasonal (two contracts that trade within the same crop year) or inter-seasonal (two contracts that are in two different crop years). One thing to note here is that a crop year is defined as the year based on the period from one harvest to the next harvest. However, a harvest may take a few months within the crop year because of differences in growing seasons in various areas. For instance, the wheat harvest begins in south Texas in mid-May and finishes in southern Canada in late August.
2. An Inter-Market Spread is the holding of two contracts of the same commodity and delivery month but of different exchange. For example, there are three different wheat market traded at the Chicago Board of Trade, Kansas City Board of Trade and the Minneapolis Grain Exchange. Although wheat is being traded at all three exchanges, the type, use and delivery points of wheat vary at each exchange. Hence, each market has dissimilar fundamentals.
3. An Inter-Commodity Spread is the holding of two different but related commodity contracts of the same delivery month (the individual contracts may or may not be from the same exchange). For example, corn and soybeans have a spread relationship because the commodities compete for planting acreage with each other. The price of soybeans is usually 2.5 to 3 times the price of corn due to differences in yield. In this way the return per acre are kept around the same. In addition, the corn and wheat spread exists because different crop year cycles creates a combination of seasonal and spread harvest and planting pressure.

The objective of spreading is to gain profit on the change in price differential between the two elements (legs of the position). Hence, we do not have to care about the actual price level of the market or the general trend of the market (unlike the outright position trading).

http://www.fxf1.com/english-books/Edward%20Dobson%20-%20Understanding%20Spreads.pdf

As I have no experience in trading futures, I think doing some background research on the corn, wheat and soybean market is necessary.

Here is one concise and simple webpage about corn trading; http://www.tradertech.com/information/corntrading.asp

It not only states about where are the corns grown but also mentions about what are the corns used for.  Corn is important because it is an essential food source for livestock. Hence, the monitoring of animal numbers could gauge the scale of corn usage during the season. One webpage we could visit for information on cattle ranching is http://www.cattlenetwork.com/.

Secondly, corn is becoming an important source of fuel because of the increasing utilization of ethanol in gasoline. Hence, observing the developments and changes in the energy market may shed some lights on corn prices. From one point of view, high oil prices imply high corn prices. However, if we look at the other side of the story, high oil prices also suggests that there will be less demand for gasoline and the need for ethanol especially during recession. The ethanol producer magazine website could give us valuable information on the latest developments in the area. http://www.ethanolproducer.com/

I also found a website with up-to-date and comprehensive news on agricultural commodities. I believe that reading the website everyday would definitely give me some enlightenment on what to do in the trading game when I feel confused or could give me some explanations when the market acts against my actions.

http://www.agrimoney.com

After knowing more about the corn market, I reversed my position in the trading game. On September 19^th, after I offset my long position, I short two contracts of December 2012 contract (C2Z) and two contracts of March 2013 contract (C3H) in the CBOT corn market. At the end of September 21^st, , I gained (7.5000-7.4825)*5000=$87.5 per contract on C2Z and (7.5600-7.5100)*5000=$250 per contract on C3H. Total gain over the two days is $675.

Balance of my margin account is calculated by the sum of the initial margin (committed value) and the gain occurred. Since the initial margin for one contract of corn is $1080, the margin account has (1080*4)+(87.5*2)+(250*2)=$4995 in value.

In the week ahead, I still plan to continue to short on corn since harvest takes a few weeks. I would also like to short on soybeans as well because the harvest just started to kick off last week. Weather conditions are conducive for harvests with occasional light rainfall.  In addition, higher-than-estimated yields and dampened demand from China may decrease the soybean price.

http://in.reuters.com/article/2012/09/20/markets-grains-idINL4E8KK0IO20120920

However, in the long run, prices are going to feel the pressure. People are also keeping an eye on the corn and soybean planting conditions in South America. If everything goes well, the world’ corn and soybean supplies are going to be replenished in early 2013.

http://in.reuters.com/article/2012/09/20/markets-grains-idINL4E8KK3TU20120920

The first week in the trading game was a quite a turmoil for me. I was too impulsive on my actions and entered the market without looking at the bigger picture. Drought in the US and Russia spurred me to long, so, I bought corn which is my favorite commodity of the three.

I started with a $40000.25 equity balance and went long on one December 2012 contract on September 13^th. The price was 782.75 cents per bushel and had since then moved in the opposite direction until I offset it on September 19^th (price was 750.00 cents per bushel on that day). The loss by my hasty behavior was (7.8275-7.5000)*5000=$1637.5. The significant decrease in the price of corn could be due to three reasons. The first factor is what I had just learnt in class; the ‘stock out’ situation. Harvest is on-going at the moment and therefore, price falls. One thing to note in a situation like this is that price does not fall due to the excess of supply of corn during harvest but is due the fact that storage for corn through the non-harvest months is costly. Secondly, the high corn prices in August have prompted cutbacks in livestock production, thus easing the demand for feed. Thirdly, the rain kept drought conditions from worsening and helped corn harvest a little. We can see that the decrease in corn price is due to a multitude of factors that are intricately woven together and I guess I will have to be more extensive in my research in the coming weeks.

Gil McGowan, the president of Alberta Federation of Labour, has strong opposition against the Enbridge pipeline project due to the negative impact of the reduced “Asian” premium has on the Western Canadian labour market. Shrinking “Asian” premium suggests that North America no longer pay less for crude oil than China.

http://www.cbc.ca/asithappens/episode/2012/09/04/the‐tuesday‐edition‐45/

Asia, especially China, is prepared to pay more for raw bitumen because there is reliable and massive expansion of China’s refining capacity. However, if the Northern Gateway pipeline is built and oil sands bitumen is shipped to China, there will be lesser rawest form of crude oil available for the refineries in Canada. Total Canadian refinery market demand for Western Canadian crude oil in 2011 is 876,000 barrels per day. However, it is forecasted that with the Northern Gateway in place, Canadian refinery throughtput in 2018 is reduced to 830,700 barrels per day. This implies Canadian refinery activity is going to be cut down by 5% or 46,000 a day.

http://www.afl.org/index.php/Download-document/728-Shipping-down-the-pipeline-2012Sept04rev1.html

With the decrease in supply of crude oil, the price of crude oil is definitely going to rise when market demand remains the same and is going to rise even more if the market demand increases along the years.