Ishrat Gadhok

I started reading the Wall Street Journal this week. They had an article on declining corn and wheat prices that explained the relationship between supply and demand forces at the different price levels in layman’s terms. Many of the sources I had been reading previously would present useful information, but which was laden with technical jargon that I didn’t fully understand.  Their page on “Market Data Centre” also offers some neat features. If you click on their “Commodities and Futures” tab (http://online.wsj.com/mdc/public/page/mdc_commodities.html?mod=mdc_topnav_2_3000). Beside the prices and changes of the various commodities, the website allows you to see a chart of the price (over days, weeks, months or years) of one commodity and compare this to the price trend of another commodity on the same chart. I had been looking for something like this so I am glad to have finally found it.

The wall street journal article also led me to look up one of the trading analysts they cited. Four Seasons Commodities Corporation is a commodity trading advisor firm owned by Steve DeCook. On their website, I found monthly trading reports (released in the middle of every month). They basically provided a summary of the information I had been gathering from other news sources over the last few weeks. Reading some of these also helped me understand the supply and demand forces at work at different points in the market. To see these reports, go to http://www.fourseasonscommodities.com/.

It is expected that US Wheat exports will pick up as we move towards the end of the year because global wheat prices are expected to rise worldwide and demand from North Africa and the Middle East rises (1). I will be keeping this in mind as I make future trades in wheat. I expect weekly fluctuations, but I will do some more research before adopting a longer term long position in Wheat.

Also, this week’s trade was a great learning opportunity for seeing demand and supply forces at work. For instance, I realized that although lower supply had been keeping prices of corn high, at a certain price level, demand would fall, causing prices to trend downwards. For corn, an analysis I read informed me that if the price of corn gets up to $8, then demand is lost. But if price comes down to $7 or lower as a result of this, then at this price level, demand will exceed the supply that is currently available, driving prices up again (2). Therefore, for my future trades in corn, I will be looking at this window between $7 and $8 to determine the effect of demand on prices, and make a trade accordingly.

1. http://www.thecropsite.com/news/12295/cme-corn-futures-closed-lower-thursday
2. http://online.wsj.com/article/DN-CO-20121025-017867.html

This week I went short 1 contract each of December Corn and Wheat and realized total gains of $889 ($237 on Corn and $662 on Wheat). I also entered into the market for only 1 day (on Friday) because I was not sure whether the bugs in TradeSim had been resolved. To be cautious, I decided to trade fewer contracts for a shorter period of time.

Prices had been declining for corn in the latter part of the week due to an appreciating US dollar. Although corn prices have risen dramatically since the news of the drought, the sources I consulted pointed to the fact the current higher price levels are “rationing demand” (1) and the low export sales this week (slower experts to China and Japan in particular) are leading to a downward trend in prices. This view was supported by technical analysis done by other experts (1) as well so I decided to go short on Corn for Friday. This was a good decision because prices did in fact drop as expected.

[price in:       742.50;        today’s price:  737.75;        committed:      $1080.00;        gain/loss:      $237.50]

Wheat prices also declined in the later part of the week, due again to a higher US dollar. I expected that since wheat and corn are substitutes as animal feed for which reason their prices generally move in tandem, wheat prices could also be expected to decline following lower corn prices. Wheat price did in fact fall on Friday due to pressure from lower corn prices.

[price in: 877.00;        friday’s price:  863.75;         committed:      $2025.00;         gain/loss:      $662.50]

1. http://www.thecropsite.com/news/12295/cme-corn-futures-closed-lower-thursday

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.