Group Members: Deron Hong (75627117), Yan Chen (47529086)

Topic: Norwegian Nitrous Oxide Tax

Introduction: (Policy’s political origin, its goals and how it works)

Norwegian originally implemented a subsidy system in order to fulfill the agreement that it signed in Gothenburg Protocol in 1997. Its goal was to reduce the amount of NOx emissions from 215,000 tons to 156,000 tons, which is approximately 27% reduction by the end of 2010. However, until 2007, Norway was only able to reduce 8% out of 27%. In order to fulfill the rest of the 19% reduction in 2010, Norway decided to change its policy to impose taxation on NOx. The amount of tax charged for each kilogram of NOx emission is NOK$15.39. There is also an exemption on tax application in Norway, which applies to 650 enterprises in Norway now until the end of 2010. These companies have to pay a less than tax amount to “Business Sector’s NOx Fund,” which the money collected in this fund will be mainly using to measure the NOx emission and redistribute to some sectors covered by the tax by the end of 2011. If the reduction is less than 90% of total reduction requirement indicated in the agreement until 2011, these 650 enterprises will have to pay tax for the non-reduction amount.

1) The coverage of the policy. Discuss the sector covered and exempted. How does the policy implement over time?

The sectors covered in this policy:

-Shipping within domestic area

-Fishing vessels

-Aviation

-Railways using diesel (Railway operations)

-Engines, boilers and turbines used as energy plants within the manufacturing industries

-It only covers land and off-shore activities in Norway geographically under the Gothenburg Protocol that signed in 1997

This taxation also applies to the engines with large capacities only:

-The kinds of motors, boilers and turbines will only be covered if its total installed capacity is greater than 10MW

-The propulsion engines have to be over 750 kW in its installed capacity in order to be covered

-If the oil and gas installations are on-shore, then they will be covered in this tax too

The sectors exempted:

-The engines with capacity smaller than what above indicates

-The areas that Gothenburg Protocol did not cover in Norway

-Foreign sea activities

-Air transport

The amount of tax covered in these sectors represent 55% of Norway’s total NOx emissions.

How does the policy implement over time:

As we mentioned in the introduction, every sector covered in this policy will have to pay NOK$15.39 for every kilogram of NOx that they emit until the end of 2011, except the 650 enterprises which participate in the NOx Fund and temporarily exempted from the policy. The 650 enterprises generally pay NOK$4 for each kilogram of NOx emission, however, if the company is working on oil extraction, then it will have to pay NOK$11 instead. By signing this agreement, the companies are obligated to reduce:

-2,000 tonnes in 2008

-4,000 tonnes in 2009

-12,000 tonnes in 2010

-7,000 tonnes in 2011

2) Discuss the use of revenue from the tax. Is the tax revenue neutral? That is, it is designed to pay back all its revenue collected back to its population. Is its revenue earmarked towards a particular use? Or is the tax revenue put into general tax receipts?

According to our research, there is no any information about how the NOx tax collected by government will redistribute back to its population. We can only find out that what the money generated by the 650 enterprises from NOx emission will be used to. The NOx Fund will be mainly earmarked towards the measurement of a cost-effective amount of NOx in society, so we could assume that the money collected in the fund is designed to pay back to the society since the measurement of a cost-effective amount of NOx will be very important for setting the level of tax. Although the amount of money collected in NOx Fund is redistributed back to the society, we could not conclude that whether the NOx tax policy imposed in Norway is revenue-neutral or not since we cannot get information about how the government is using the NOx tax for.

3) Discuss the appropriateness of the tax rate? Do you believe it is approximately equal to the marginal damage from the pollutant regulated?

• Abatement cost for the 650 enterprises: since after they join the agreement in the NOx Fund, although they are paying the cost of participation in the Fund, which is lower than the cost of tax, the amount of money that they pay for the Fund will not return back to them unless they are working for measurement of NOx and apply to get the fund for support, so they have to incur the abatement costs themselves to reduce NOx emissions in order to fulfill the reduction units under the agreement. Therefore, (their abatement costs) + (the payment to the Fund) + ((the probability that the total reduction in 2011 is smaller than 90%)*($15.39/kilogram of NOx emission) * (estimated non-reduction amount of NOx emissions)) should not exceed their marginal abatement cost plus NOK$15.39, otherwise they will rather pay for the tax instead of paying for the Fund. We can think of the tax is the same as the external cost per kilogram of NOx emission, which means the marginal total cost to the firm should be the sum of marginal abatement cost plus the tax/external cost. Now since most of the companies are applying to join this agreement instead of paying the tax, it implies that the tax is actually higher than the payment which is calculated by the above underline function, so the negative externality cost to society is overestimated by the tax. Therefore, we can conclude that after the tax adding to the marginal abatement cost of firms, the marginal total cost (equals to marginal abatement cost + tax) is higher than marginal damage from the pollution. Since we cannot get the data for the probability that the total reduction in 2011 is smaller than 90%, and estimated non-reduction amount of NOx emission, we cannot estimate how much the marginal total cost is higher than the marginal damage to society.

In conclusion, about cost-effectiveness of tax policy in NOx: this tax policy is not cost-effectiveness since in part (2), we know that the government will have to use the NOx Fund to make measurement of the cost-effectiveness level of NOx emissions. Also, by implementing a tax policy in environmental issues, it is very hard to determine a cost-effective level of tax since the company has to know the abatement cost curve in each company covered in the sector in order to equalize them and decide a cost-effective level of tax. However, the abatement cost curve of each company is hard to obtain in reality.

Also, we can think of the other way. If there are more firms joining the agreement, it will be easier to measure how much tax it should exactly charge since this Fund is used to measure the NOx emission. Now they realized that the tax might be higher if more firms are joining , it will eventually reach a cost-effectiveness level after all of the firms join. So they could know how much they should charge for the tax in the future.

Resources

http://ec.europa.eu/environment/enveco/water/pdf/ANNEXES.pdf

http://www.ssb.no/english/magazine/art-2009-05-19-01-en.html

http://ec.europa.eu/transport/maritime/events/doc/2011_06_01_stakeholder-event/item14_norway_business_sector_nox_fund_brochure.pdf

Topic:  New Zealand Fishery

Policy: Individual Transferable Quota (New Zealand ITQ System)

Group Members: Deron Hong (75627117), Yan Chen (47529086)

Introduction

Policy’s political origin and its goals:

New Zealand first started implementing this policy in the early 1986. This was the year that Individual Transferable Quota was created. The initial goal of creating this policy in fish industry is to ensure the amounts of fish catches in New Zealand to be kept in a sustainable level for long term to avoid species distinction. And the Total Allowable Catch in New Zealand is identified at a level that satisfied the Maximum Sustainable Yield (MSY).

1)

-Sectors covered and exempted:

·      In 1998, there are only 30 species covered in this policy scheme; until 2010, the types of species covered have already reached to 100 under this policy.

·     Each species has its own amount of quota, and the amount of quota can only be traded within the same fish stock. The quotas could not be traded across stocks or years

·      Also, the New Zealand government also sets up the area that are covered under this policy in Economic Exclusive Zone geographically, and these areas covered depend on the population of fish

·      Only New Zealand citizens or New Zealand-owned companies are allowed to purchase and trade these permits. Foreigners are allowed to purchase but it is in a very restricted and limited condition

·      Many small fishers are excluded from this policy from the time it started implementing

-How does the policy implement over time:

The total amount of quota is originally allocated to fishers every year according to their catch level, and this amount is fixed perpetuity. The Ministry of Fishery identifies the amounts of Total Allowable Catch based on the evaluation on the biology, environmental, social and economic factors in that year, so that the total amount of allowable catch will vary in different years. How could government give them fixed amount every year and still achieve different level of total allowable catch? The government puts itself in an open market situation, so that if it does not want fishers to catch as much as last year, it will purchase the permits back from fishers. This acts as a subsidy on helping firms in New Zealand to reduce the amount of fish catches. Also, fisherman can purchase permits which identify the year of holding. The more years the permit is valid, the more expensive the permits. It depends on the applicant’s decision and the application fee that he is paying. The more years indicated in the permit, the fisher spends less in the future. However, it faces price fluctuation of the permits that they are holding. This also works the same as carbon emission trading since if fishers catch within the quota stated in the permits, then they do not have to pay extra. If they want to catch more, they have to buy permits from other firms.

-Evaluation of the cost-effectiveness of the policy:

1. Small fishers always sell the permits to large quota holders, such as Maori (indigenous New Zealanders), a major fishing industry player in New Zealand. This will increase the price of the permits because Maori easily collects large amounts of permits and becomes an oligopoly in the fishing permit industry.  Thus, Cost-effectiveness is hard to achieve since when permits are largely held by these oligopolies, the amounts of permits available in the market will decrease and market price will increase. This price will be higher than the cost-effectiveness level and deadweight loss will be created.

2. Since the permits can only be traded and held by New Zealanders or New Zealand-owned companies, they could not be traded with outside of the world. Thus, if the permits are over held by New Zealanders, supply of permits increases and price of permits will increase. Therefore, government will have to decrease its supply of permits. As we mentioned before, when government tries to decrease the amount of permits in the market, it will have to increase its funding to purchase the permits back. This could be a solution to achieve cost-effectiveness; however, the taxpayers might have to suffer from paying more tax.

2) Discuss distribution of permits in the mechanism.

Most of the permits are distributed to large New Zealand-owned companies because of the allocation of permits depending on their historical catch levels, so the companies with bigger catches every year will get bigger quotas. However, the fishing permits do not allocate to artisanal fishers (artisanal fishers is a term to define a group of fishers who are small-scale low technology fishers),fishing community and most of the small fishers from the beginning of this ITQ system, since they do not have a lobby group. In addition, Maori holds one-third of the permits in New Zealand fishing under this policy, which are collected from fishers who hold permits. By implementing this policy, the ITQ system could be more administratively manageable since the permits from small fishers are mostly collected by Maori, so that the government does not have to deal with a large number of small number of trades in the permit market. However, this method of distribution creates a perverse incentive. Since most of the permits are held by large New Zealand-owned companies and Maori, these companies and Maori act as oligopoly in New Zealand fishing industry, and the oligopolies will set a price for fishing permits that is higher than the competitive market. If artisanal and the small fishers who do not hold permits want to catch, they will have to buy from these oligopolies. Therefore, the small fishers will become poorer since this policy increases the cost of purchasing permits for them. It becomes harder for them to survive. Nevertheless, the oligopoly becomes more powerful since they earn more from selling permits at a higher than competitive market price.

3) Discuss any administrative challenges.

Although ITQ system in New Zealand does not have the challenge of large number of small number of trades in the permit market, there are other administrative challenges:

1.     It is very difficult to calculate the accurate number of fish and to determine the level of Total Allowable Catch each year since the population of fish in a certain region could vary in different time due to the fish flows. They might overestimate the population of fish since one species of fish could flow quickly to another region within Economic Exclusive Zone. If the scientists do not count the amount of fish in different regions at the same time, the amount of fish for a certain species could be double counted. Also, as we mentioned before, different quotas are set to different species. It is very hard to calculate the amount of fish and its rate of reproduce.

2.     Quota prices are very hard to set for every individual species. It is not only because the number of each species are hard to count, but also because the quota prices in interrelated species are affecting each other’s prices. It will be hard to set a price to reach its cost-effectiveness level and without deadweight loss, especially within the oligopoly environment in fishing industry in New Zealand.

Resources:

http://motu-www.motu.org.nz/wpapers/03_02.pdf

http://www.teara.govt.nz/en/fishing-industry/7

http://fs.fish.govt.nz/Page.aspx?pk=81&tk=248

http://en.wikipedia.org/wiki/Artisan_fishing

Group Members: Deron Hong (75627117), Yan Chen (47529086)

Country: New Zealand

Policy: Emission Trading Scheme

Brief Introduction:

In New Zealand, the amount of emissions in 2003 has been 22% higher than the level in 1990. The climate change will have large impacts on business opportunities since the productions in agriculture, forestry and horticulture will be affected if there are unexpected weather conditions which caused by climate change occur. In order to prevent global climate change, to assist business sectors and to protect future generation, the government of New Zealand made a commitment in Kyoto Protocol and set its political goal to decrease their green house gas emissions during 2008-2012 to the level in 1990. The policy that they decided to implement is Emission Trading Scheme. We will introduce the details about how it works below.

1) The coverage of the carbon policy. Discuss the sectors/fuels covered. Discuss, what sectors/ carbon equivalent emissions are exempted. How does the policy implement over time? Use the information about the policy’s coverage to inform an evaluation of the cost effectiveness of the policy:

The sectors/fuels are covered or exempted:

• Jan 2008: Forestry entered the Emission Trading Scheme, and it was the first sector that entered the scheme in New Zealand
• Jul 2010: Liquid fossil fuels, stationary energy and industrial processes entered the scheme
• Jan 2013: Waste and synthetic green house gas sectors will enter the scheme
• Jan 2015: Agricultural sector will enter the scheme

In conclusion, until Jan 2015, New Zealand will cover all the sectors which are the direct sources of green house gas emissions, so there are no sectors will be exempted from this scheme up to this point.

How does the policy implement over time?

We will focus on how the price cap implement over time here, and the following is an option that is suggested by the government:

1. Until 2012, the following three sectors, including liquid fossil fuels, stationary energy and industrial processes only have to pay 1 emission unit for 2 tonnes of carbon dioxide equivalent (“One-for-two”), which is $25/unit and $12.5 for 1 ton of CO2-e. However, from 2013, this scale will gradually increase. Until 2015, these three sectors will have to pay 1 emission unit for 1 ton of carbon dioxide equivalent, which is $25/unit and $25 for 1 ton of CO2-e, which means the price gradually increase.
2. Waste and synthetic green house gas sectors will not use the “One-for-two” as the above three sectors, instead, when it starts entering the scheme in 2013, it will use 67% scale, which is $25*67%=$16.75 for 1 ton of CO2-e. It will gradually increase its price until 2015 to pay full cost of CO2-e ($25/ton).
3. When Agricultural sector enters the scheme in 2015, it will use “One-for-two,” and its price will gradually increase until 2019 to pay the full cost of CO2-e.
4. Forestry sector will not use the “One-for-two.” Instead, it will be the only sector that can export its emission units out to the other countries. The non-forestry sectors are still not allowed to export their units out.

Use the information about the policy’s coverage to inform an evaluation of thecost-effectiveness of the policy:

1. New Zealand government actually abandoned carbon tax in 2007 and instead implementing Emission Trading Scheme as their carbon policy to reduce emission in order to delay climate change. The reason why they decided to use ETS instead of Carbon Tax is because Carbon Tax will restrict households and business to a certain tax level so that they are forced to decide how much they need to reduce in order to minimize the total abatement cost and tax payment. Also, we have to know the marginal abatement cost of each firm in order to equalize them and generate a cost-effective level of tax. ETS works more efficient and flexible. Given the price cap of the emission unit, each firm have the option to decide and buy the unit of emissions that they want to produce. We do not have to know the marginal abatement cost of each firm in practice, and if they save emission units by abating more with energy efficiency, they could even sell rest of their units out. This makes ETS more easily to achieve cost-effectiveness level of emission.

2. The government suggests increasing the scale of price cap gradually. However, this policy will increase incentives for firms to impose the costs of emissions to the consumers since firms are afraid to bear the costs by themselves. If the price of good increase, consumers will decrease their quantity demand, which will cause the retail suppliers to decrease in their supply. The decrease in supply will cause their emissions to go down because of less outputs being produced, so their abatement costs will go up. If every firm has the same situation, then every firm’s abatement costs will go up, and this will lead to surplus of emission units in domestic market. Since most of the emission units could not be traded outside of the country except forestry, the cost-effectiveness will be hard to achieve since they could not decrease their surplus emission traded units and make their marginal abatement costs equalized.

3. The emission from agriculture sector, methane and nitrous oxide emissions from livestock and soil, is exempted until Jan 2015. According to our research, the agriculture sector actually represents half of the total emission in New Zealand, however, it is not imposed any policy for it to reduce its emission until 2015 since it requires the agricultural sectors to voluntarily do research and development to find their own ways to reduce emissions. However, this will be very hard to achieve cost-effectiveness since if there is no policy imposed to them, they will always want to emit until their marginal abatement cost equal to zero, which means their total marginal benefits from emission is maximized. We suggest that there should be at least a policy to impose on them, such as ETS, which is a flexible way to help them to achieve the cost-effective level and reduce the amount of risk to society as a whole.

4. Only the emission units in Forestry sector are allowed to export. All the other sectors still have not been allowed to export them outside of the country. If the permits are allowed to trade internationally, New Zealand will be easier to achieve cost-effectiveness. Since it is possible that there are shortage or surplus of permits within a country, if these shortage can be gained from other countries or surplus can be sold to the other countries, it will be easier for the firms within a country to decrease their shortage or surplus to achieve the cost-effective level of emission, which means to equalize their marginal abatement costs.

2) Discuss distributional effects of the policy. One of the primary concerns around a carbon policy is that by raising the price of energy it disproportionately impacts the poor. How do these policies address such distributional concerns?

At present, the price of NZ units is fixed at $25 until the end of 2012, which is fully exchangeable with Kyoto units, so NZUs can be traded between firms in New Zealand, and exchanged for Kyoto units for trading overseas. To reduce the effect of the ETS on the economy, the Government of New Zealand has introduced a transitional phase that the emissions obligation placed on liquid fuel, gas and electricity companies is halved, which means they will only be required to surrender one emission unit for every two tonnes of emissions.

There are also free emission units to be allocated for some certain industries. The government of New Zealand has acknowledged that the NZETS places some energy-intensive, trade-exposed companies at risk because their overseas competitors do not have to pay for their emissions. These companies will receive a free allocation of NZUs covering 60% or 90% of their emissions, depending on their activities and on whether they meet the thresholds for assistance (The thresholds are defined in terms of tonnes of emissions per $1 million of revenue). Not all companies receive NZUs, for example, electricity generators which are able to pass on their increased costs to customers. Also, the food processing sector just receives little or no allocation. For example, the world’s largest dairy exporter, Fonterra, gets only a very small allocation (covering 2-3% of emissions) as most of its operations do not meet the threshold for free NZUs. In all cases, the free allocation of NZUs is temporary, with assistance decreasing by 1.3% per year from 2013.

However, with the ETS and raising the price of energy in New Zealand, emitters are so far from covering the full costs to the taxpayer. And since the government in New Zealand does not implement carbon tax, there will be no revenue-neutral policy that can return tax back to personal, business and redistribute for other projects. Therefore, there is no revenue to recycle into projects to lessen the effects on the poor, or to assist in reducing emissions, such as improving public transport, helping farmers develop greener farming methods, and developing renewable energy. Therefore, the Green Party of New Zealand believes the best assistance is to lower people’s power bills by improving the energy efficiency of their homes, and lower their petrol bills by providing options like better public transport so they can use their cars less. They would also support doing it by taking a hard look at pensions, benefits and the minimum wage.

Resources:

http://www.climatechange.govt.nz/emissions-trading-scheme/ets-review-2011/review-report.pdf

http://www.redpathaghort.com/bulletins/AboutCO2Tax.html

http://www.climatechange.govt.nz/emissions-trading-scheme/about/questions-and-answers.html

http://www.beehive.govt.nz/node/22885

http://climatelab.org/Carbon_tax

http://www.climatechange.govt.nz/emissions-trading-scheme/about/what-it-means-for-me/

http://www.gpcnz.co.nz/Site/The_Kyoto_Protocol_/NZ_Status.aspx

http://www.carbontax.org/progress/where-carbon-is-taxed/

Nov 15, 2011

Today I earned a small amount of money only because of luck since I was holding 1 long contract for corn, and I did not offset it. However, based on the technical indicators, they indicated that the market just started bearish. I did not think that it would be bullish again that fast unless there are some significant news happened in the market.

I found out that the major reason why the corn market surged today was because Sinograin bought 1 million tons of corn from the U.S. Usually I was easy to disregard these kinds of news since it did not make too much effect on market price. However, this was the major reason why all the markets of the three commodities surged today (Sinograin did not just buy corn, it also bought soybean). So I marked down this news as an important news to affect the market price in order to be more sensitive about these kinds of news in the future.

Today I took 2 short positions for corn and 1 short position for each of soybean and wheat because of the following reasons:

For Corn and Wheat:

Technical indicators are still the major strategy that I used in my bidding. The indicators suggested that corn and wheat were all in the bearish mode, and they suggested that their prices would fall for a little while before they increases to cross the slow moving average again.

Soybean:

At the end of the following news, it suggests that “Still, China’s imports from Argentina and Brazil will rise, which may decrease U.S. exports to the Asian nation, Oil World said yesterday.” So I believed that the factor that affect the price today can only have effects in a very short time, probably just one day. Thus, I decided to take 1 short position for soybean.

Reference: http://www.bloomberg.com/news/2011-11-16/sinograin-said-to-buy-600-000-tons-of-u-s-soybeans-to-boost-state-stocks.html

Nov 16, 2011

I earned around $440 today according to yesterday’s strategy.

I did not do anything today since I believed that the market would still be bearish for a little while according to the technical indicators.

Nov 17, 2011

Finally, based on my bidding and strategy yesterday, I earned almost $3,500 profits today by holding 1 short contract for each of the three commodities. It was quite a big success for me today since I think I did not earn that much profits before…

This is our last day of bidding in the trading game in this course…but I start missing it already…how come? aii…

Today I took 2 long contracts on Soybean and 1 long contract on Wheat for Friday based on the following reasons:

Soybean:

-China purchased the inventories of soybeans holding in the U.S, which decreases the domestic supply in the U.S. So the price of soybean will increase temporarily.

Why do I think that this news is important and significant?

Actually I was confused by all kinds of demand and supply news from all over the world before. For example, the news always said that China will import more soybean from the U.S, but it just never happens to be the case to drive the price up…However, in this news, it was stated clearly by a commodity strategist that they have observed significant purchases of soybean and the export amount of soybean from the U.S increase significantly in the past few days. And according to the news from these days, the situation matches his speaking, so I think that this might be a significant news again.

Why do I think that it was temporarily?

According to the news on Tuesday, the price surged on that day was because China increases its import of soybeans from the U.S by 600,000 metric tons. However, this surge in price only affects the market for one day. Today, according to the news again, China purchased the inventories of soybeans holding in the U.S. I think this will be a temporary surge in price since the Euro depreciated against Japanese Yen at this moment, and it implies that the Debt crisis in EU will continue to be a factor that affects the prices. (“The euro is poised for its second-straight weekly drop against the yen amid concern European policy makers can’t stop the region’s debt crisis from spreading to larger economies including Spain, Italy and France.”)

Reference: http://www.bloomberg.com/news/2011-11-18/soybeans-rally-from-five-week-low-as-china-boosts-purchases-for-reserves.html

-Also, according to MACD and SMA, the fast moving average is converging to the slow moving average, and the fast moving average was about to cross the slow moving average from the above. This indicates clearer in MACD. This may imply a significant change in price movement again: the market might be bullish in the near future.

So, I took 2 long positions on soybean.

Wheat:

According to my observation about prices in these two weeks, the price movement of corn and wheat are in very similar trend (I also learned this from Rick’s class and Nick’s blog). So if either corn changes in its price movement, the price of wheat will follow its change in a small lag of time.

Also, according to the technical indicator, the market of corn and wheat should still be in a bearish mode, so I think even the movement of price of wheat changes its direction due to some reason, it will come back to bearish in the near future.

So I took 1 long position on wheat to offset the contract, and kept 1 short position on corn according to the analysis above.

However, I forgot to consider that this could be a signal for wheat to increase its price first, and corn might follow this price movement since the market bearish signal now from technical indicator was not as strong as before. So it might imply that the price of corn might increase tomorrow…

Anyway, let’s see what is gonna happen tomorrow…

Nov 18, 2011

Result: Corn kept decreasing as the technical indicator suggests, even though it does not decrease a lot. However, the price of wheat moved the opposite way as corn did: its price increases today.

The price of soybean did not increase or decrease today, so I think my strategy did not work that well today loh…but just did not lost money anyway…

Anyway, I felt so happy since I earned almost $5,000 in total in this week. I start making money!!!~Although my margin balance is still negative…but it doesn’t matter, since I think the most thing I “earned” from this game is I “learned”!!!~

Finally, my summary of this trading game (these are just my summary and the experience that I gained from playing this game). It will also be the part of my memories or strategies if I am going to continue playing this game in the future:

-Do not consider too many factors at a time

-Read more news, and sometimes we do not have to bid very aggressively. We can read news for a few days in order to consider which should be the most important factor to affect the price during the week (since we all know that the factors that significantly affect prices were different from each week)

-I start having more senses about the market and about the game after 10 weeks of bidding, and in these few weeks I figure out more about which kinds of news will affect the price after regular discussion with my classmates and reading their blogs

-Combining technical analysis and news is an effective way to bid successfully for me

-Marking down the news which has significant effects on prices for everyday or every week is very useful

-Looking at the price change at the end of the day before we bid will be helpful sometimes since sometimes it indicates a right track of price movement

…I forgot…

But I think I have already written down some of the useful strategies in my previous blogs…so I can take a look at it if I am going to play this game again in the future…

Guys, now we need to start working on our final presentation, project and exams, and good luck for all of you!!!~

It is unbelievable that it has been week 9 already…Four weeks later, the first semester of our grad school will finish…Suddenly feel that time flies really fast…

In this week, I basically used one simple strategy to estimate the prices: look at the price changes at the end of the day for a few days. If the price was increasing at an increasing rate for two days, that means the price might reach its maximum point during the week, it might probably decrease in the following day; if the price was decreasing at an increasing rate for two days, that means the price might reach its minimum point during the week, it might probably increase in the following day. This strategy actually helps me to earn a little bit money this week although sometimes I could not estimate the maximum and minimum price accurately, and I had to bid very aggressively to get in and get out of the market. I was very conservative this week since if I found that the price might reach the maximum point today, I took short contract for that commodity immediately tonight even though I might be able to earn more in the following day.

Then at the end of this week, now I am going to combine this strategy and the news that I read to figure out whether this kind of price trend matches what the news predicted. Also, Simple Moving Average helps me a little bit during this week. By combining these strategies, I could not only figure out whether the price trend matches what the news predicted, but also I will not rely too much on the news…

Nov 2, 2011

I followed the expert group’s information to do my decision today.

It seems like every group are predicting different results for the three commodities.

Finally we finished the two midterms and the midterm case…woohoo…^0^…feel a little bit relaxed right now although we still have the coming presentation on Monday…aii…

Actually I really want to use the price spread to do analysis this week. However, I am still not sure how to find out the transportation costs…so I decided to use MACD and SMA to estimate the price this week…

Oct 26, 2011

According the MACD and simple moving average, the price of corn is in a bullish mode since the fast moving average across the slow moving average from the below and never across to the slow moving average again from Oct 11. Also, according to RSI, the volume is in the middle of 20 and 80, which means the market was neither overbought or oversold, so I decided to take long position on corn since although it fluctuated day to day last week, it is still in the bullish mode. I still use a similar strategy from last week to estimate the price. Since I am going to take a long position, and the prices appear to increase for one day and decrease in the following day, so I used the price from yesterday to add the largest change in low price from the last few days to bid. The largest change in low price was 0.6 cents, so I bade a little bit higher in order to enter the market, which means I chose to add 1 cent from the lowest price yesterday to bid.

I did not bid for soybean since the price of soybean was more fluctuated than I can expect.

Corn (1 long contract): (-1)*(648-637.2)*50=-540

Soybean (did not bid)

Wheat (did not bid)

Margin Balance: -11230-540=-11770

For Oct 27 and Oct 28, I did not make any decision for neither soybean nor wheat since I felt a little bit risky to take any position right now since I was really confused by the price trends. However, I still kept my long contract of corn since although I know it was a little bit fluctuated for the last few days, the price was still in a bullish mode, and the RSI was still in the middle of 20 and 80, so I decided to hold it even though I realized that I will lose a little bit of money by the fluctuation.

In this week, I was a little bit conservative about bidding since I kept losing much for the last few weeks, and the price trend was not too clear this week. I think we could earn a little bit if we bade more aggressive to make small amount of money by taking positions of corn since it seems like the price follows “up today and down tomorrow” for these two weeks, and nothing big happen to make the price slump or rally heavily.

Oct 27, 2011

Corn (did not bid): (-1)*(637.2-651.4)*50=710

Soybean (did not bid)

Wheat (did not bid)

Margin balance: -11770+710=-11060

Oct 28, 2011

Corn (did not bid): (-1)*(651.4-655)*50=180

Soybean (did not bid)

Wheat (did not bid)

Margin balance: -11060+180=-10880

Although last week had the long weekend, I did not actually feel it was a long weekend since the assignments made me feel frustrated. Until today, although I just handed in Rick’s assignment, I did not feel relaxed at all since there will be more stuff coming up this weekend…>”<…

Actually I feel pretty good to write blogs every week if it is not that busy since I can always summarize what I have learned from the week. I did not know from when, I started thinking that I should not waste of my life of doing something nonsense. I should at least learn a little bit from the things that I have done. So when I feel frustrated, I usually think what it has brought to me. It does not have to be substantial, but at least, it could make myself feel better. However, for this week, I almost forgot what I want from my life. I was too focusing on the stuffs that I learned from classes…maybe I was just feeling too busy…

Oct 11, 2011

Since I was busy doing my assignment today, I did not have time to read any news. And today I suffered a disaster of my margin balance again…However, I still want to review the news and do a little bit analysis although I did not bid or offset:

Complicated relationship between Ethanol and Corn production:

On Oct 10, 2011, after the German Chancellor and French president announced that they would deliver a plan to settle the Greek debt crisis, the price of Ethanol and Corn increase, which the price of Ethanol increases 9.5 cents, and the price of Corn increases 5 cents. When the price of Ethanol increases, suppliers would like to produce more Ethanol since they would like to sell them at a higher price. Since it requires Corn to produce Ethanol, the demand of corn will increase which causes the price of corn to increase. This is a positive relationship between the price of ethanol and corn. However, I just read a news today which indicated that the price relationship between corn and ethanol should be more complicated that we think. Since if the price of Ethanol increases, the supply of Ethanol will increase too, so it will probably drive the price down again.

I did a little bit analysis about this since I did not focus any news about ethanol before, and I did not realize that the price of ethanol could have effects on the prices of corn. So I think I should start focusing on the demand side and supply side of corn to figure out more. Also, since Economists are still doing research about the complicated price relationship between ethanol and corn, the relationship might be complicated than we think, so we should pay attention to it and cannot overvalue the effects of ethanol on corn.

Reference: http://www.good.is/post/chart-the-complicated-relationship-between-ethanol-and-corn-production/

Corn (did not bid): (1)*(600-645)*50=-2250

Soybean (did not bid): (1)*(1158.2-1235.4)*50=-3860

Wheat (did not bid): (1)*(607.4-660.6)*50=-2660

Margin Balance: 140-2250-3860-2660=-8630

Oct 12, 2011

Since the price from yesterday increases sharply, I felt that it may be a good time to take long contracts due to yesterday’s news (since we can only depend on the news from Oct 11 to make decisions of Oct 12), so I decided to offset my contracts and take 1 long position for each of the three commodities since the traders seem to start take long position in such a low price in the market due to yesterday’s situation…

However, I forgot to consider that the amended USDA report was going to come out today…I knew that there will be big effects on prices, and the news from last week indicated that the amount of harvest of corn, soybean and wheat are underestimated on the last USDA report. Since the harvest is underestimated, the supply of corn, soybean and wheat should increase and indicated in the new USDA report, so the price of these three products should decrease. As a result, the prices of these three products turn out to decrease today. Since the price surged yesterday, it covers the slump of the price of overharvest, so the price did not decrease that much today.

Corn (2 long contracts: 1 long contract, offset; 1 more long contract)

(-1)*(645-645)*50=0

(-1)*(645-640.6)*50=-220

Soybean (2 long contracts: 1 long contract, offset; 1 more long contract)

(-1)*(1235.4-1235.4)*50=0

(-1)*(1235.4-1239.4)*50=200

Wheat (2 long contracts: 1 long contract, offset; 1 more long contract)

(-1)*(660.6-660.6)*50=0

(-1)*(660.6-626.6)*50=-1700

Margin Balance: -8630-220+200-1700=-10350

Oct 13, 2011

The prices of Corn, Soybean and Wheat became a little bit fluctuated again, although holding long contracts are at risk for me since Greek debt crisis would not be settle down for a while, I decided not to bid since small factors might affect the price sometimes and may earn a little bit from it. Since I have lost large amount of money, how about try a little bit more…although I know that sometimes I will be wrong…

Corn (did not bid): (-1)*(640.6-638.2)*50=-120

Soybean (did not bid): (-1)*(1239.4-1257)*50=880

Wheat (did not bid): (-1)*(626.6-618)*50=-430

Margin Balance: -10350-120+880-430=-10020

Oct 14, 2011

Since next week we have two midterm exams coming up and may not have time to read news or bid, and I am afraid that next week the price will fluctuate frequently, I decided to offset all of my long contracts of corn, soybean and wheat.

Before I usually use the same price as the closing price from yesterday to offset, just want to be more safe and do not want to lose more money. But now I want to try a little bit more risk. Since I am offsetting long contracts by taking short contracts, I am choosing to bid at the price lower than yesterday’s closing price and higher than the estimated low price today. Actually it is really hard to determine the estimated low price, so I just compared the price changes of low prices of yesterday and the day before yesterday, and then add this change to the low price of yesterday. After adding this change, the estimated low price cannot higher than the closing price from yesterday. This will be a little bit risky since I might not be able to sell them out tomorrow, but it is worth trying since I may be able to earn a little bit money from this.

Corn (1 short contract, offset): (1)*(624-638.2)*50=-710

Soybean (1 short contract, offset): (1)*(1247-1257)*50=-500

Wheat (1 short contract, offset): (1)*(618-618)*50=0

Margin Balance: -10020-710-500=-11230

From this calculation, I found that I did a wrong strategy last night. Actually I should choose a price higher than yesterday’s closing price and lower than today’s highest price!!!Make a stupid mistake…>”<…LOL…aii…complicated feelings…but at least, finally I learned about how to estimate the price, and hopefully I will not make the same mistake again^0^…

When I come back to my blog the week after, I want to take a look at the price spread between Dec and Mar’s futures prices to see whether we can use the stuff that we learn from class to analyze…

Now, I think we should start focusing on the two midterms for the next week.

Good luck for all of you guys!~

First of all, I want to say thank you very much for my classmates who commented on my blog last week!:) The comments really inspired me for further developing my interests of analysis although my profits turn out to be negative this week (aii…>”<)~ I think I am very sure what I want to learn from this course now.

Also, from the experience on last Friday and Oct 6, I think reading news could not really help us to estimate the price. It could only help us to develop our sense of how the factors may affect prices and enhance our skills of analysis. So guys, if you are still upset by the negative or closed to negative profits, let us forget about the profits and focus on developing our skills to an expert of analysis. It could have more fun by doing it!!!

 Oct 3, 2011

Since there are limited news provided online during the weekend, it is hard to estimate whether the price will trend up or down tomorrow. Although I lost large amount of money at the end of the last week, I still want to get more information before offsetting my contracts, so I did not bid today.

Corn (did not bid): (-1)*(592.4-592.4)*50=0

Soybean (did not bid): (-2)*(1179-1177.4)*50=-160

Wheat (did not bid): (-3)*(609.2-619.4)*50=1530

Margin Balance: 3650-160+1530=5020

 Oct 4, 2011

-Brazil increases its inflation: increases its commodity prices. As the second last export country of soybean, people will import less from Brazil and will import from U.S instead since the price in the U.S now are relatively lower. People imports more from the U.S, so the domestic supply of soybean in the U.S decreases. Price of soybean in U.S goes up.

-India promises to buy wheat from farmers in a raising price of 15% (India is the second largest exporter of wheat): the farmers will be attracted by India’s wheat price, so that the farmers in the U.S will start selling to the India. The supply of wheat in the U.S will decrease domestically, the price of wheat in the U.S will increase.

I actually wanted to try one more time to use my analysis to estimate the price trend tomorrow. If it does not work, I will continue to do the analysis each day about the news since analysis is more than anything that I want to learn from this course. However, for bidding, I think looking at the price trend in the cmegroup.com and Daily commodity futures price charts could estimate more correctly about the price trends.

Corn (1 short contract, offset): (1)*(592.4-592.4)*50=0

Soybean (did not bid): (-2)*(1177.4-1160)*50=-1740

Wheat (did not bid): (-3)*(619.4-604)*50=-2310

Margin Balance: 5020-1740-2310=970

 Oct 5, 2011 (the news are from Oct 4, 2011)

Obviously, the bidding strategy that I used yesterday was not correct since they were not the major factors that affected prices.

And I think the dominant factors affected prices today were the recession of economic globally and the amount of harvest in the U.S. Since the economic slumps recently, the import demand of corn, wheat and soybean from the U.S might decrease. If the U.S could not be able to export their products out, the domestic supply of corn, wheat and soybean might increase (the supply curve will shift to the right) which causes the price of these products to decrease. Since the amount of harvest in corn and soybean are more than what the USDA expected, the supply domestically in the U.S will increase which cause the price to decrease.

Also we have to take a look at the USDA report on Oct 12 since it will make adjustment about report.

Reference: http://www.bloomberg.com/news/2011-10-04/soybeans-corn-wheat-slide-as-economic-slump-may-reduce-exports-from-u-s-.html

Other factors:

-Morgan Stanley is going to invest $7.5 billion in the farms to grow corn, wheat and soybean in Ukraine: price of U.S goes down.

-China continuously imports corns from the U.S: minor factor, although it will cause the price of corn to increase, the factor could not affect the prices as other factors do.

-Warm and dry weather good for the production of corn, soybean and wheat: price decreases

-U.S dollars continuously to be appreciated: increase price, however, according to the news on Bloomberg.com, this could not dominate the prices.

Corn (1 short contract): (1)*(585-605.4)*50=-1020

Soybean (3 short contracts, offset 2 long contracts and take 1 short position):

(2)*(1160-1160)*50=0

(1)*(1160-1163.6)*50=-180

Wheat (4 short contracts, offset 3 long contracts and take 1 short position):

(3)*(604-604)*50=0

(1)*(604-625.2)*50=-1060

Margin Balance: 970-1020-180-1060=-1290

Oct 6, 2011

According to my analysis yesterday, the price should go down. However, the price becomes unpredictable again since the prices of corn, soybean and wheat all go up today!

So let the analysis comes out to my mind and to see what is happening:

Since the U.S reported more hog and cattle, and the price of corn, wheat and soybean are very low relatively, the costs of feeding these livestock decreases, so the farmers will demand more of these commodities. Thus, the demand of corn, wheat and soybean will increase which cause the price to increase.

I think this is the major factor that causes the price to rise today since the farmers could generate profits from purchasing more corn, soybean and wheat to feed livestock at a low price.

Although they happened, I still want to observe what will happen in the next few days to see whether I should offset my contracts and take long position. Since I think this is only a factor that could affect the price in one or two days and could not make great effects on prices. So I did not do anything today.

Corn (did not bid): (1)*(605.4-605.4)*50=0

Soybean (did not bid): (1)*(1163.6-1163.6)*50=0

Wheat (did not bid): (1)*(625.2-616)*50=460

Margin Balance: -1290+460=-830

Oct 7, 2011

Actually I have already found out that the Technical Analysis tools (by looking at the indexes) that I learned from every week’s group discussion are very helpful for estimating prices. However, sometimes the index is very confusing, such as RSI since there could be more oversold when it has already been oversold. From discussion with Lixi and Tasha, I found out that the index of MACD is a very good index of price changes, so I want to take a look at MACD to see what the price trend is.

Corn: the fast moving average (12-week) crosses below the slow moving average from (26-week) from the very beginning of September, and it never crosses above it until now. However, I could see that the spread between fast moving average and slow moving average is getting closer during this week.

Soybean: the MACD trend of soybean is very similar to corn. However, the price spread between the slow moving average and fast moving average is still holding the same.

Wheat: the fast moving average (12-week) crosses below the slow moving average from (26-week) from the very beginning of September, and the price spread between these two moving averages are getting closer and closer, that means the fast moving average might cross above the slow moving average very soon.

However, the news indicates that the production of soybean in South America (Brazil and Argentina) is decreasing which might cause the price increasing in the U.S. I think it might cause the price of soybean to increase by a little bit tomorrow, but it will be affected by other factors very soon later, just like last week, so I do not want to do anything today and just want to observe for few more days.

First of all, I really want to say thank you to my classmates who kept listening to my concerns and helped me out with the housing problems that I faced. If I did not get support from you guys, I think I would still feel depress by now. Fortunately, the housing problems are all settled and everything has gone back to normal. Thank you so so much guys!!!

Since I lost large amount of money last week, I decided to offset all of my contracts at the beginning of this week if the trend of price still kept decreasing. I knew that I would lose money since I was taking long position all the time for the contracts, but I really wanted to get started again. Just like the last time I said, how about just let it lose and get it back later? I will not give up…

Sep 26, 2011

Since the news from Saturday and Sunday is very limited, I did not want to take risk to take long or short position when there was no information provided, so my margin balance on Sep 26 is:

Corn (did not bid): (-3)*(638.4-648)*50=1440

Soybean (did not bid): (-1)*(1258-1259.6)*50=80

Margin Balance=12360+1440+80=13880

Sep 27, 2011

It looked like the price trend went up a little bit by today, but gradually decreased after that. To prevent further decreasing in price, I decided to offset my corn and soybean.

Corn (3 short position, offset): (3)*(649-648)*50=150

Soybean (1 short position, offset): (1)*(1260-1259.6)*50=20

Margin Balance=13880+150+20=14050

Sep 28, 2011

Since I did not have time to summarize the news today, I only looked at the price trends. The price of corn seems like going up a little bit by today, so I was hoping that it would continuously go up a little bit by tomorrow to make a small amount of money. So I decided to take a long position to try it out.

Corn (1 long position): (-1)*(645-630.6)*50=-720

Margin Balance=14050-720=13330

Sep 29, 2011

According to the news, Brazil was threatened by La Nina, which would cause the production of soybean to decrease. If its production of soybean decreases, the price would increase. Farmers would like to increase selling their soybean to Brazil at a higher price instead of selling to the U.S, and importers would like to import from the U.S since the price of soybean is relatively lower than Brazil. As a result, the domestic supply of soybean would decrease in the U.S and the price of soybean would go up. So I should decide to go long on soybean.

I thought this was the main factor to affect the price on Sep 29 since Brazil is the second largest exporter of soybean in the world. If its production was threatened by weather or other factors, it would have effects on the price of soybean. And I think my analysis was correct on this day since the price of soybean really went up on Sep 29.

However, since I drew a wrong diagram when I was doing my decision, which made me think that the price was going down. Instead of going long, I accidentally went short. Fortunately, I did not successfully sold out since the selling price that I bid was too high.

Corn (1 long position, want to offset, but did not success): (-1)*(630.6-632.4)*50=90

Soybean (3 short position, but did not success)

Margin Balance: 13330+90=13420

Sep 30, 2011

Almost all of the news that I read yesterday indicated that the price of soybean and wheat would increase by today:

-China increased its imports of soybean from the U.S

-Drought weather delayed the planting of wheat, and U.S was facing stress of cropping of wheat

-Website of Bloomberg and dairy herd all predicted that the price of wheat and soybean would increase by today…

However, when I woke up this morning and check the prices, they all went down SHARPLY!!!…

Corn (did not bid, so did not offset): (-1)*(632.4-592.4)*50=-2000

Soybean (2 long position): (-2)*(1215-1179)*50=-3600

Wheat (3 long position): (-3)*(637-609.2)*50=-4170

Margin Balance: 13420-2000-3600-4170=3650

T^T…T^T…T^T…

Continuously losing money…so I think I really have to find out the reason why I lost again…and also, although the closing prices have not shown by now, I am quite sure that my profits would be quite negative by the end of this week…

Lessons that I learned at the end of the week: don’t be afraid of losing money, and don’t be afraid of losing money again. Be afraid of losing money again and again…