(i) What Went Wrong
(ii) The Road Ahead
For my first trade I chose a long buy March soybean contract (S3H) hoping that there would be the shortage of supply in long run because of a severe drought which has destroyed virtually well over 50 percent of USA’s harvest. There was estimation by United States Department of Agriculture (USDA) on September 12, 2012 that the soybeans harvest would be less than forecasted, so USDA made a cut in its forecast on Wednesday last week.
The first reason for my choice was USDA’s forecast; I was hoping to make money in long run, so if I buy at a current price, after I can sell it at a higher price. Furthermore, I looked at the USA’s this year’s soybeans production and export, from that it’s clear that there global supply will remain extremely tight after the worst drought in USA. In addition to USDA’s forecast, China, a number one importer of soybeans, buys about 60% of globally traded soybeans, so there was expectation that it would incur shortage of supply in fall that would lead to a price increase.
see at “http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/soybean_learn_more_reports.html”
However, my expectation did not prove itself because everything went different from anticipated. Even though analysts believe that global supply of soybeans will be lower due to a severe drought, the reality was better than expected that caused a price decrease at the Chicago Board of Trade. The extreme drought has damaged the US soybean crop; however the later planted soybeans and double crop soy took advantage from a late rain. “We went up on soybean yields because of late rains and actual harvest results. We’re hearing better yields across the crop belt. The late rains really did help,” said Don Roose, president of US Commodities, Des Moines, Iowa. Therefore, this week’s events were different from USDA’s September survey.
Furthermore, China, the world’s number importer, cut its purchases because China has switched its export to import that means China will carry its selling soybean reserves into 2013 to ease tight suppliers from USA. Thus, China may reduce its amount of imports.
Briefly, all these events leaded to the loss in my account.
(i) The Road Ahead
Although taking a long buy position was not good idea, I will hold this position next week.
Last week China’s slowing imports was one of reasons for a price decrease, China buys 60 percent of globally traded soybeans in 2012-2013, so these reserves may reduce its import, but it could reduce by a small amount because it is estimated that Beijing’s stockpile is sufficient no more than approximately two months of consumption. Thus, I am still hoping that there will be jump, so I can offset my position. Also, worsening weather outside of America could cause prices of grains and oil seeds to be higher. According to USDA, South America will not have sufficient soybean supplies to sell to China until March 2013 at the earliest. Moreover, although a late rain has improved soybean harvest, the damage of soybean production was significant,so still hoping that overall supply will be less.
In addition to soybean, I am going to trade a short sell wheat contract because I am anticipating an increase in wheat prices. It is expected that as of October Russia will constrain its overseas shipment as it was in 2010. The government considers regulating its domestic price for wheat by imposing restrictions on its export. If it happens, the price will drive up significantly in future markets. (see for more details a previous post on September 21 titled “The Road Ahead”)
References:
http://in.reuters.com/article/2012/09/17/markets-grains-idINL3E8KH0L120120917
http://af.reuters.com/article/commoditiesNews/idAFL4E8KK0IO20120920
Hi, Gulsana!
How’s your weekend going so far?
Finally we finished our first trade. Yay 🙂 I am so looking forward to start new trade.
Anyway, I felt bad that USDA’s forecast about the amount of soybean harvested was incorrect. I think that the real word can never be accurately expected. Who could expect that there would be a late rain after extreme drought and soybean production doubled by rain? Do you think weather forecast could predict the rain? It seems like there are more uncertainties as time goes by. It becomes more difficult to predict the future price of commodities…
By the way, do you have any idea why China suddenly changed mind to export less? I guess that China might harvest larger amount of soybean than expected. And if you don’t mind, can you explain that why import decreases even if China buys 60% of globally traded soybeans in 2012-2013 (From “The Road Ahead”) ? Did you mean that China imports more soybeans in 2012-2013 then less supply will be available for other importing countries and the price goes up?
I definitely agree with you that there will be an increase in wheat price. I found that Russia, one of main wheat exporters, have been suffering from the drought. Less wheat will be harvested and exported, so I predicted that the price will go up. I am going to be in long position for 2012 December or 2013 March Wheat. And the chart “Russian Federation Wheat Exports by Year” you posted in your blog is another reason that I decided to be in long position. I really appreciate you for this useful information 🙂
You also got really good sources!!! I also have been using the USDA for my second trade. But I am going to use other two sources you gave! When I post my blog, come to check if there are any sources you are interested! I really hope that we can earn profits following trade! Unfortunately, I lost about $500 from the first trade.
I think that your blog is well organized in a good format! Have a good weekend and see you on Monday in class 🙂
Hi Cindy,
Yeah, I am enjoying weekend doing some reading for 501.
Thank you for your comment.
Yes, you are right, there was forecast that there would be wet weather that it could improve yields; however, there was also estimation that the soybeans plants were already mature, so the appearance of wet weather could not ease the damage of a summer drought. I also looked at USDA’s weekly weather forecast and its highlights. In USA the main producer of soybeans is Midwest and soybean plantings begin around the first of May to June, and according to USDA’s weather forecast, the rain was insufficient to ease the repercussions of a heavy drought.
If you wish the weather forecast is available at “http://www.usda.gov/oce/weather/pubs/Weekly/Wwcb/wwcb.pdf”
And, also about China’s import of soybeans.
China is a number one importer of soybeans from USA, so because of a high price for soybeans in the world market caused by a tight supply from USA, China has switched its import to using its state reserves because it has internal state reserves at this moment to shrink its import. Therefore, China is planning to compensate its domestic deficit for soybeans, implementing through its state reserves. However, this trend can lead to a substantial reduction of internal soybeans reserves as of February 2013; as result it may strike a benchmark price for soybeans.
And, China is also one of world exporters of soybeans, so if it incurs shortage of soybeans, it might reduce its export of soybeans, it is only my prediction, because now China is using only its state reserves.
Briefly, what I mean if, eventually, China runs out of stock, it has to import, so it might push the soybean prices up. And, also world is expecting a reasonable supply from South America to replenish world demand, but there is also expectation of dry weather in that part of the world. Also, according to experts, South America’s harvest is not sufficient to ease China’s demand for soybeans.
As you said, the world market is volatile, all what we can do follow the news and trends, and learn from our mistakes.
Sources:
http://www.canadiancattlemen.ca/news/u-s-soy-driven-to-six-week-low-on-harvest-technical-selling/1001710593/
http://www.spectrumcommodities.com/education/commodity/statistics/soybeans.html
http://www.china.org.cn/business/2012-06/07/content_25586894.htm
Hi Gulsana,
Wow, I really appreciate your detailed answer !!! 🙂
Now you are a soybean trade expert!!!
I didn’t know that China is both importer and expoter of soybean! Your information really inspired me!!
If you don’t mind, can i ask you an advice when I trade soybean?? 🙂 Thanks again for your answer and have good night! See you in class 🙂
I like your clear explanation on the strategy. Very good! Please include comment on the equity balance on your next posting. And if you need help, please let me know.