Up in Corn, Split in Wheat
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
One Comment