Ishrat Gadhok

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

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.

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

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.

1. http://commodities.about.com/od/researchcommodities/a/corn-seasons.htm
2. http://www.thepigsite.com/swinenews/30945/early-corn-harvest-september-stocks
3. http://www.usda.gov/oce/commodity/wasde/latest.pdf
4. http://www.thecropsite.com/reports/?category=3&id=914

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