Category: Commodity Trading

Earlier this week, I decided to look at the soybean market more closely to examine the effects of harvests in other countries. I found a cool website called soybean and corn advisor. (http://www.soybeansandcorn.com/). It provides up-to-date information on soybean and corn production in both North and South America, but with a focus on the South American crop conditions. Most websites that I have consulted to date have been focussed on U.S. conditions, so it is interesting to read more closely into the news and events of the other major producer of these commodities.

The other kind of news I looked at was experts’ expectations of the USDA crop report. In the process, I found another great news site devoted to presenting information on commodities. It is called AgriMoney (http://www.agrimoney.com/), and the particular opinion I acted on can be found in this article (http://www.agrimoney.com/news/usda-will-cut-wheat-estimates-further—goldman–5096.html). However, I did not want to rely solely on new sources of information before making important trading decisions this week, so I turned to Reuters which I had been reading in previous weeks. Specifically, I decided to go long on corn after reading this article: ‘USDA could peg corn crop at 6-year low, slash end-stocks’ (http://www.reuters.com/article/2012/10/08/usa-agriculture-grain-idUSL1E8L8A1320121008).

I plan to go long on corn and possibly short on soybeans for my next trade, based on the situation a week from today. The USDA report that was released last Thursday stated that corn and wheat harvests are down, so prices have been up. In fact, prices were nearly limit up for corn on the day the report was released, validating that speculators are pessimistic about the supply of corn. Soybeans on the other hand have been more unpredictable. Although the price went up on the day of the report (possibly due to lower dollar), they have been trending downwards since then, because the USDA report was encouraging about the global supply of soybeans. Not only are the stocks in the northern hemisphere expected to be higher than what was predicted last month, but South American harvests are also predicted to be a record high this year (1). While there has been a drought in the U.S. this year, Brazil is said to overtake U.S. as the world’s largest exporter of soybeans as their climate has been conducive for the crop’s maturity. That said, since at this time South American harvests have not started coming in, the prices are expected to remain high for the time being (1).

1. http://www.businessweek.com/news/2012-10-12/corn-trims-weekly-advance-on-speculation-rally-may-cut-demand

I have again lost money in Trade Sim this week when in actuality I would have gained. All the positions that I have been taking should have earned me profits (based on the daily price changes that I observed on the CME website), had they been processed in a timely manner. However, due to the lag on the part of Trade Sim, I have incurred losses instead.

Before the crop report:

Early in the week (on Tuesday), I decided to go short on Soybeans. I, along with a number of my classmates had concluded last week that prices of soybeans were trending downwards because of the larger expected harvests in South America. I therefore decided to keep that strategy and went short two Nov 2012 contracts and short another two November 2013 contracts. I ordered this on Tuesday night, and price in was Wednesday’s opening price $15.37 (Nov 2012) and $13.34 (Nov 2013). Since prices did infact drop 26 and 3 cents for the 2012 and 2013 contracts respectively, I was happy with my trade and decided to liquidate my contracts at the end of the day on Wednesday. However, this transaction was processed the following morning when the release of the crop report had played a significant role in driving the prices up. Therefore, instead of the price out being the last price on Wednesday (i.e. $15.23 and $ 13.31), it was a much higher value ($15.54 and $13.53). Ultimately, this translated into a loss of $876 on each of my 2012 contracts and $951 on each of my 2013 contracts, when it really should have been a gain.

After Crop report

Later in the week, I discussed with my classmates their strategy regarding the crop report. Many of them decided to close all contracts to avoid large losses. However, others saw it an opportunity to recover the losses of previous weeks. I agreed with this opinion. However, instead of waking up at 5 am on Thursday morning to read the report before making a trade, I decided to look up expert opinions on what the USDA was expected to report on Thursday – essentially, expectations of expectations. To my delight, I found many. The consensus there was that corn harvest was certainly going to be low as has been predicted before; USDA was to reinforce this thought. With this in mind, I decided to go long two contracts of Corn. Again, due to the lag in processing, my price in was $7.72 (almost the closing price of Thursday, when it was intended to be the opening). Further, even though I pulled out on Thursday night, the price out was reflective of trading on Friday wherein prices dropped. I lost another $421 per contract in total.

This week, since I focussed on the price trend of soybeans, I was constantly checking and refreshing the CME group page on daily settlements. (http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/soybean_quotes_settlements_futures.html). They have charts that show the daily and weekly fluctuations in price, which is useful. There was another section of this website that some might find of interest. Under their ‘Education’ tab, there is a link to ‘Market Insights’ which contains some analysis of oil prices and the drought and so on from a few weeks ago. It made for some good readings for background information to improve my understanding.

I was also referred to the website Business Recorder (http://www.brecorder.com/) by a classmate. It is a Pakistani news bulletin which carried some information on the soybean futures this week, which helped me understand why there was the initial downward, and then an upward trend in prices. Moreover, it was interesting to get the perspective of other countries. For instance, in one of their articles I learned that India is the world’s largest edible oils importer (which it imports unrefined from Indonesia) (1). Due to the fall in prices of crude palm oil (which in turn was due to higher inventories and weak demand in the major producing countries), importers in India are suffering huge losses and are therefore reluctant to sign any new contracts. This because the buyers (Indian edible oil refineries) are suspecting that price will fall even further, given the lack of stability in prices. This lower demand will perhaps drive the price of palm oil even lower, which may then go on to affect the soybean market.

Reading into markets this way is very new to me so I enjoy it every time I am able to connect the dots in this way!

1. http://www.brecorder.com/markets/commodities/asia/83398-indian-importers-shun-new-deals-as-palm-oil-slides-.html

As I had decided after last week’s trade, I’d like to start looking at the market as a whole, and drawing connections between the different commodities. For this, I have summarized some supply and demand information as follows:

The U.S. Soybean harvest is about 41 percent complete whereas corn is 54 percent complete (1), which suggests that hedging behaviour will add pressure to the markets in the short run. Supplies of soybeans are currently bigger than expected (1) which is pointing to a greater supply of vegetable oils, thereby pulling down their price (2). Investment banks like Goldman Sachs are lowering their three- and six- month soybean price forecasts, and are expecting corn and wheat prices to “outperform” soybean prices over the next few months (1). The demand change this week was due to the lower price (due to higher supply) rather than something exogenous. So I will be looking for more demand information before making a trade next week.

I will be observing historical, monthly and weekly trends of soybeans before my next trade. Given what I know now though, I will likely be holding my short position for 2013 harvest-time contracts. I will also be studying the soybean market more closely for the effect of other commodities on its price.

1. http://www.brecorder.com/markets/commodities/europe/83406-us-soy-falls-for-third-day-on-higher-output-forecast-.html
2. http://www.ibtimes.com/corn-palm-oil-soy-wheat-prices-and-trading-799289

I did two things differently this week. Extending my ‘road ahead’ blog post of last week, I decided to trade in a commodity other than corn – namely soybeans. Secondly, since I was new to soybeans, and also because I had been hearing about the volatility of soybean futures from my classmates, I wanted to watch the market for a few days before I made a prediction and entered into a contract; I entered at the end of the week and for a short period of time.

I went long 2 contracts of Nov 2012 soybeans and short 1 contract of Sept 2013 soybeans. I based this primarily on the price trend for the week. Earlier in the week, I found that all of the soybean contract prices had a downward trajectory and in fact reached a three-month low (1) on Wednesday. This was because of forecasts of higher production in the U.S and pressure from Palm Oil losses (2). However, the short term Nov 2012 and Jan 2013 contracts’ prices started to go up on Thursday as traders came in to capitalize on the low prices. Moreover, the fact that the dollar had weakened also played its part in increasing demand for the commodity. Since I believed that price would continue to rise another day due to higher demand, I chose to go long. I also went short on one Sept 2013 contract, because I found prices consistently lowering throughout the week.

I am puzzled by my ending balance though, so I am not sure how to describe this week’s trade. It turns out that the price of Nov ’12 corn was unchanged at the end of the day, and that of Sept ’13 had dropped 12 cents. Yet, I suffered a loss of $575 for each of my long contracts (for which price was unchanged) and realized no gains for my short contract (for which price went down). My balance is now $36,107.

1. http://www.brecorder.com/markets/commodities/america/83755-soybeans-rally-on-bargain-buying-weaker-dollar-.html
2. http://www.brecorder.com/markets/commodities/europe/83406-us-soy-falls-for-third-day-on-higher-output-forecast-.html

I didn’t research too many new sources this week; just a host of news websites like Reuters. I am quite happy with CropSite still for very relevant news and analysis, and also USDA for stocks information.

Additionally, I referred to some price data from the following sites:

http://quotes.ino.com/exchanges/contracts.html?r=CBOT_ZC

http://futures.tradingcharts.com/chart/CN/M?anticache=1348799877

The second one is a site for technical analysis of commodity prices. The options to view the price variations are intraday, daily, weekly, monthly and historical, which is very useful.

Again, this week I have been grappling with the question: how significantly is the news information that I am coming across being reflected in the prices. There is so much information out there, but I suppose how much weight to assign to each piece of news is the trader’s prerogative.

This week I learned that one needs to keep a long-term strategy in mind when making trading decisions. Yet, when new information becomes available, it directly informs decisions of traders and therefore prices, so it is important to be well informed and be alert about latest reports. Further, it is important to know which news/factors are affecting prices at that particular time and how significantly they are impacting the price. For instance, in the case of corn this week, the lower prices earlier in the week were due to “terrible export sales and lower ethanol production;” That is, lower aggregate demand for corn, therefore lower prices. http://www.thecropsite.com/news/12092/grain-hedge-chicago-commodities-rally-off-quarterly-reports. However, “these pressures did little to slow the limit up move after Friday’s report” (same reference). That is, the price rise later in the week was due to lower harvests (low supply) – something that could not be overcome by slight price rise due to lower demand.

Based on my trading results this week, I plan on going long on corn next (after substantiating my thought with more research). I’ll also be mindful of exiting the contract at the right time!

This time I also want to explore other commodities like I have been studying corn over the last two weeks. Since prices for different commodities tend to move together, it would be a good idea to see all of them together, as part of a larger picture rather than as isolated markets.

The week, I suffered substantial losses overall. I stayed in my contracts (short on December Corn) for only two days and managed to first earn $237 on day 1 and then lose $1874 the next day (detailed calculations to follow).

The corn futures market closed lower on Tuesday and dropped further on Wednesday for a variety of reasons (http://www.thecropsite.com/news/12062/cme-corn-futures-closed-lower-tuesday) including downward pressures from the wheat market.

Seeing this, I decided to go short on corn on Thursday, which paid modest dividends at best – a gain of $237. The price in on Thursday was $7.21, which dropped to $7.1625. Therefore, by calculation, I made $0.0475/contract x 5000 bushels/contract x 1 contract = $237.5

Although I thought it was time I went long on Corn (given that lower expected harvests should push the price of corn up) I wanted to maximize profits by allowing price to fall to its lowest before going long.

That said, I did know that a quarterly crop report was to come on Friday morning. What I did not know was what to make of it. Will the prices continue to fall (to possibly their lowest), or will they infact assume the upward trajectory that is expected. With this uncertainty in mind, yet encouraged by my gains over the last two weeks, I decided to stay in my contract and infact took another short one.

This was a blunder because prices went limit up Friday morning (http://www.thecropsite.com/news/12093/cme-corn-futures-closed-limit-up-friday). Needless to say, I lost a lot of money. Specifically, prices went up from $7.21 to $7.56 for one of the contracts, so that resulted in a loss of $0.352/contract x 5000 bushels/contract x 1 contract = $1762. For the other contract, the price rose from $7.54 to $7.56, which resulted in a loss of $0.0225/contract x 5000 bushels/contract x 1 contract = $ 112

I decided to kick off the trading game with information from the USDA website (1). I found their report titled “World Agricultural Supply and Demand Estimates (WASDE)” particularly useful as it provided summarized, up-to-date information (as of September 12) on the production, supplies, consumption and exports of a wide array of food commodities. Although I did not read into it too much, the information provided is not limited to the U.S.; rather it is presented with ample references to the major producing and exporting countries for each commodity. Given also, that this information is released on a monthly basis, I found it helpful for making short run decisions.

Another website I came across was the The Crop Site (2). It is one of many agricultural commodity sites like The Pig Site, The Beef Site and so on, which share news stories and insightful analysis of these markets. In addition to updating the reader on weather, currency and other such news, The Crop Site articles summarize data from USDA and other sources that may otherwise be challenging for a newbie to assimilate. I think I will be following this one quite religiously; if only they had an android app, I’d be too cool for school.

1. http://www.usda.gov/oce/commodity/wasde/
2. http://www.thecropsite.com/news/newshome.php