Category: Commodity Trading

Week 1: The Road Ahead

I believe that my logic behind this week’s trade should lead to a discussion of stocks to use ratio as a determinant of price. How lower expected yields influence storage of old crops as opposed to their consumption at harvest time, and how early harvests may affect price in the short run are all questions that I was not able to address adequately. I believe that based on historical data, benchmark ratios for various commodities have been established. For instance, a stocks to use ratio for corn that is under 12% strongly indicates price rise (1). For my next transaction, I’d like to explore this further. The goal will be to become confident enough to go long on corn and stay in the contract for a few weeks to realize profits from the expected price rise.

Also, an assumption I made this week was that the price of corn is predominantly determined by the situation in the U.S. However, I realize that this is a myopic view of the market and therefore, in future transactions, I’d like to explore data on stocks and consumption in other corn-producing countries as well, in order to more accurately predict world supply and demand.

http://futures.tradingcharts.com/learning/stocks_to_use.html

Commodity Trading

Week 1: What Went Right

This week, I decided to trade in the December 2012 contract for Corn. To my delight, my simple analysis was sufficient to earn me $287.

Due to the drought in the U.S., I expected that corn yields would be lower this year. And since the U.S. is the largest producer of corn in the world, the price was bound to rise. I then started to look for news articles that would confirm that such a rise in price is in fact taking place. However, something seemingly counter-intuitive emerged in the literature. The usual harvest period of corn in the U.S. is October to November (1). This year however, 9% of the acreage was harvested by the end of August as compared 2.5 % in previous years (2,3). I realized that since excessively hot summers speed up the growing season, an early harvest is only natural and is thus being observed.

Perhaps due to the expectation of a shortage of corn in the future, farmers decided to continue storing their old crops and as a result, the higher projected “carryin stocks” of corn more than offset the expected deficit in production (4). Add to this an early harvest, and at this point in time one finds that supplies of corn are higher. I therefore went short on corn this week and realized some gains as a result.

Commodity Trading

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