Month: September 2012

This was a week away from market news, which made me appreciate my last strategy of getting out of the volatile corn markets and moving into the more stable wheat markets. I ended the first week up more than $2000 from being active in the corn market, but after a second weekend “playing” in the wheat market, my balance had only dropped $37.25.

Had I been keeping up with the markets, I could have followed the drop and subsequent rise toward another equilibrium in the corn market, because according to Bloomberg and Rabobank, the dynamics reflect the USDA predictions of stock and production levels and corresponding supply and demand effects. According to a Bloomberg article from September 27 titled Corn Retreats as USDA Reports Declining Export Sales, “U.S. exporters sold 368 metric tons in the week ended Sept. 20, compared with 69,578 tons a week earlier, the Department of Agriculture said today. Corn prices are down about 15 percent since the worst U.S. drought in half a century spurred a rally to a record $8.49 a bushel on Aug. 10. Wheat export sales at about 426,000 tons were 13 percent below a week earlier.” [1]

Meanwhile, I was short in the wheat market, which, as reported above, dropped from the previous week. Luckily, this market is less volatile, so my damage was minimal.

This week I experimented in hedging by going both long and short in the same commodity. I successfully spent a few days making money in a short corn contract, but I wanted to try something more complicated, so I took the advice of Andrew Bordern and “Sold High and Bought Low.” I got out of my corn contract and went long in a December wheat contract, with a plan to sell it on Friday. Reuters reported a “recent surge in wheat prices” in their September 18 article “OUTLOOK-India wheat seen stable after fall in global prices,” [1] so I expected prices to drop soon. Therefore, just in case Reuters was wrong, I decided to see what would happen to a long position for just a few days. By the end of trading on Thursday, I had – as predicted – lost just over $112.

My short corn contract, on the other hand, did quite well, as predicted. I was skeptical of judging my trades on the production in one country – India – but covered those hesitations with my split position.

This analysis did bring up a question, however – how quickly does it take for the market to respond to actions in one producing country? How long does it take the Law of One Price and Adam Smith’s promise of equilibrium to balance out prices for such a commodity?

“A sharp fall in U.S. wheat prices weighed on grain prices across the globe and its impact was felt in India as it could cut export demand for Indian wheat,” according to Reuters.  “Wheat futures in India, the world’s second-largest producer, are likely to remain stable for the rest of the week, after falling on Monday on global cues.”

The last two days of my held contracts fall in line with these observations and predictions, however, suggesting perhaps one major producer can effectively predict the market movements.

[1] http://in.reuters.com/article/2012/09/18/markets-india-wheat-idINL3E8KH59X20120918

I decided to start my trading with corn, since I am most familiar with the sight of expansive fields of it, as a former US Midwesterner. My few farmer friends are in the Midwest, and the drought this year has meant I am most comfortable with speculation in the media about its effect on corn and corn’s various food byproducts. A novice in the circles of options and futures trading, and the stock market, I let the experts at Bloomberg explain recent trends and expectations for me.

“Corn Bulls Retreat as Near-Record Costs Curb Demand” appeared to be a simple headline to guide my first trade [1]. It serves well to first understand that a bullish market is optimistic, and therefore invests more in the future at stake, and a bear market is pessimistic and therefore dominated by sales (short) of futures at hand. The 13 September Bloomberg article states that “the US government said the worst drought since 1956 will damage the crop less than analysts had expected and on speculation that near-record prices will curb demand.” This shrinking demand means prices will decrease, suggesting a short position is desirable. While Damien Courvalin, an analyst at Goldman Sachs, wrote that “Prices may have to rise further before consumption is constrained,” the argument that “The USDA lowered its estimate for U.S. exports by 3.8 percent from a month earlier to 31.75 million tons, down 19 percent from a year earlier” appeared on a more influential scale and with sufficient evidence to convince me to go short on my first corn future speculation.

I made the trade on Thursday, so one day of trading later, my decision looks good, as my marked to market balance has increased by approximately $37. I anticipate seeing what week opening patterns exist in this market before making my next trade.

[1] http://www.bloomberg.com/news/2012-09-13/corn-bulls-retreat-as-near-record-costs-curb-demand-commodities.html