The balance of  margin accounts

What I went wrong

From my last blog, I was a long position for wheat. I expected that demand for wheat to increase by two factors: USDA reports and substitution effects. USDA released on SEP 28^TH that all wheat stocks decreased by 2 Percent and corn stocks decreased by 12 Percent from what they expected. From that, I assumed that greater demand would occur. However, the fewer stockpiles seemed not to influence on consumer behavior to buy more grain. Also I thought that high corn price was going to affect increasing demand for wheat. However, wheat price was decreasing from   890.75 to 857.50. So my potential loss would be -1662.50. I could not offset it. I am going to offset it when unexpected fluctuation happens.

About corn price, I chose short corn when the price was decreasing. I expect corn price would decrease more since corn reached limit up price. Based on supply and demand curve model, when current price of corn remained too high, not many people could afford that price.  Demand for corn decreases. Less consumption leads to decreasing price.Then I gain profits 311.5

Cool Source of Information

http://www.fao.org/giews/countrybrief/

This website give information on the food security situation of developing countries. For me I got information from this website about the reason why Egypt is the largest importer in wheat market with some back ground. It explains the country’s current agricultural harvest forecast and technological condition, and finance states as well.  This website is updated no less than four times per year. We could get quite current data.

http://www.agrimoney.com/

http://www.brecorder.com/

I think both websites gives current news of agriculture field. It is updated every day. The first one website also shows price change for the major commodity, and second website shows the change in currency.

The Road Ahead

I expect that world productions of wheat are expected to decrease due to shift in supply curve. Russia and U.S.A, main producer of wheat, suffered from severe drought condition, leading to higher price. Also, again Russia’s restriction on exportable wheat will affect the price. In addition to Russia and U.S.A, UK wheat farmers are worried about this winter harvest due to bad weather. In time of harvest, it rained over the weekends and is expected to rain following week. All affects to shrink supply curve in wheat.

As well, when we look at stock, the current wheat stock reduces by 2% from USDA report. It causes price increasing. It is enough alarm to get traders’ attention and to increase demand of wheat. Traders will store more today for future. It means that less available now, so price is expected to increase.

Also from 2^nd assignment of FRE 501, we found that corn and wheat have high correlation because they are substitutes. Regarding Corn market, U.S corn prices is increasing by 50% compared to the price before severe drought came along.  China, largest corn consumer, reduced its import form U.S due to high costs. And China’s domestic output growth is not efficient due to bad weather. USDA expects that consumption in wheat reduces by 9% this year.  The article says that livestock farmers have been substituting expensive corn with wheat. So I anticipate wheat demand will increase. It is caused by more consumers choosing wheat instead of corn.

In the end, I expect the wheat price is going up due to increasing demand and decreasing supply.

http://www.agrimoney.com/news/rains-return-forces-growers-to-mull-ditching-crop–5038.html

http://usda01.library.cornell.edu/usda/current/GraiStoc/GraiStoc-09-28-2012.txt

http://www.brecorder.com/agriculture-a-allied/183/1242536/

The balance of  margin accounts

What I went wrong

Last week I went Long on wheat. I expected that wheat price was going to increase. It was because of decreasing in exportable wheat from Russia. However, the price kept on decreasing by $855.5 on Sep 26^th from $890.75 on Sep 24^th.

I assume that the news that Russia is going to export less amount of wheat has not impacted on CBT. I read an article. It says that Egypt, the world’s largest importer, has been the main customer of Russia; however, Egypt makes a contract with France instead of Russia.  It seems that the biggest importer finds another supplier in Europe which sells wheat at cheaper price.

However, on Sep. 27^th wheat price increased by $902.5. It was expected to increase by +44.4 from CME group. One of reasons is report released by NASS and USDA on September 28, 2012. It says that Corn stocks decrease 12 % and wheat stocks by 2% (provided by Roson’s blog). This means there are less stocks of grain available due to bad harvest. It refers that future price of grain is higher. This calls higher demand of grain. This increasing demand leads to higher price of wheat.

Even though my prediction was right, I did not offset because I misunderstood the closing market time.

http://www.fao.org/giews/countrybrief/country.jsp?code=EGY

http://www.agrimoney.com/news/paris-wheat-prices-hold-firm-after-egyptian-order—5034.html

The balance of  margin accounts

What I went wrong

I anticipate the price will increase due to shortage of corn supply.  The article supports that the amounts of corn harvested have reduced by 13% in the drought condition in U.S. In addition to the decreasing the supplied quantity of corn, I assume that the higher willingness to buy corn tends to increase price. It is because consumers are likely to hoarding up corn in order to prepare shortage of corn.

I thought the first contract price such as C2Z is more likely to be affected by today’s bad weather compared to next contract C3H. By the time March 2013, many food suppliers would have sufficient stockpile of corn, which means there would be not much increasing in demand of corn. So I expected that the price of C3H is stable or decreasing. Overall I expect that decreasing supplied corn and increasing demanded corn lead to higher price of C2Z. However, the price of C2Z is decreasing.

As well I make a mistake to do offset. Even though I know the concept of offset, taking position opposite to initial position on the same date, I miss the part of ‘on the same date’. What I have done is buying C2Z expected to be higher price, and selling C3H expected to be lower price. I thought I offset the contract as long as I have opposite decision on the same commodity. But it means I have two on-going contracts. After realizing that, I sell C2Z and buy C3Z in order to end my contracts. Luckily my total gain is 460.50.

The Road Ahead

I will do offset properly for the next trade. I will take opposite position on the same quantity, commodity, and date. From my last record, the corn prices have been decreasing during a week. I will choose short position for the corn next week regardless of wheather condition.  While I am looking for why the contract price of C2Z keeps decreasing, I found an article. It states some parts of Iowa and Minnesota enjoy better-than-expected yields. It could somehow support that the reason why the price of corn would decrease.

http://online.wsj.com/article/SB10000872396390443995604578002130070385440.html?mod=googlenews_wsj

From the next week trade, I am looking for trading other commodity market such as wheat. I think I go with long (buy) of wheat. I read an article. It explains the current situation in Russia, the third-largest wheat exporter. According to Economy Minister Andrei Belousov, the price of wheat is expected to increase.   What happens in Russia is that the country restricts the amount of wheat to export in order to protect domestic wheat market.  The article explains that Russia used to export 18.56 million tons a year when there is free trade, but it reduced to 3.98 million tons in the 2010-11 after applying export restriction. And 8 million tons of wheat is expected to export from Russia in the 2012-13.  Such export quotas result in shortage in world supply and increasing the price of wheat contract in Chicago board. Thus I will buy wheat.

http://www.businessweek.com/news/2012-09-21/russia-may-curb-grains-exports-to-control-domestic-prices

Cool Source of Information

1)      http://www.cmegroup.com/

This GME group website helps manage risk on a daily basis. The chart shows the basis, which is the difference between yesterday’s contracted price and today contracted’ price.  Suppose I am long position with C2Z. From the website, its change value of C2Z is +2.4 on Sep 18^th, and it becomes +2.0 on Sep 19^th. This refers that I lose profits of 0.4. It is just one of ways to predict future contract price.

2)      http://www.usda.gov/wps/portal/usda/usdahome

This website gives the brief explanation of commodity market.  For example, I can get brief information about wheat market in U.S.  The United States is a main country to produce wheat. However, the wheat harvested areas have decreased since 1981. It is because farmers who harvest other crops instead of wheat can get higher profits. As well this website shows numeric data. For example, in the section of U.S. Acreage, Production, Yield, and Farm Price, I could find that US harvested wheat area (million hectares) tends to gradually decrease during 10 years from 222.061 to 218.849, but the yield (metric tons per hectare) has been increasing from 2.53 to 3.03. One possibility to explain the numeric results is that the technology innovation allows farmers to increase yield of wheat.

Question 1

The Alberta Federation of Labour has two main criticisms of the Northern Gateway pipeline: (1) Canadian jobs would be created if the crude bitumen was refined in Canada and then exported rather than being exported directly; and (2) The pipeline will reduce the “Asian” premium, which means a higher price of oil in Canada and job loss due to the higher processing costs for Canadian refineries.

In about 200 words carefully explain why the creation of the Gateway pipeline from Alberta to Kitimat BC will raise the price of crude oil for Canadian refineries. Be sure to include proper references to your background material. In your UBC Blog create an entry that includes the above link, my question and your response.

Answer:

The issue of The Enbridge Northern gateway project has been discussed. It is a proposal to build pipeline between the Alberta oil sands and the west coast (1). Enbridge claims it creates 3000 constructions jobs, and 360 long term positions. As well the group says that as long as Asia is willing to pay high price of oil, called Asia premium, the construction of pipe line leads to high profits in Canada. However, Gil McGowan, president of Alberta Federation of labour, criticizes that the project eventually causes the price of crude oil in Canadian refineries to increase(2). It is because in order to make profits from Asia premium, Canada oil producers would export some portion of oil to Asia. This means, however, less stock of oil is available to Canadian oil refinery sector. As a result, Canadian oil price is increasing. To explain it by graph, the construction of pipeline causes the supply curve to shift to the left, so the initial effect is an increase in price for Canadian refineries.

References

1 http://www.cbc.ca/news/canada/story/2012/01/10/f-northern-gateway-pipeline.html

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

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