Candy Corn?
In what I believe is evidence of how backward many US agricultural policies have become, candy has become cheaper than corn (and, more importantly, fresh vegetables for humans to eat).
However, imagining cows eating gummy worms does bring a smirk to my face.
http://www.dailyfinance.com/2012/10/10/cash-strapped-farmers-feed-candy-to-cows/
Does this mean we should be considering sugar as a substitute for corn in evaluating market supply and demand? But aren’t gummy worms made from HFCS anyways? – meaning this practice is even more convoluted than it seems, hence the nutritionist’s observation that candy provides cows with “the same kind of energy as corn.”
The Road Ahead – Week 5
The news from the USDA will likely start a slow reaction in the markets; wheat is slow moving but pretty consistent, in my limited experience, so I will try to observe it a bit better and maybe go long in corn, depending on demand fluctuations, next week.
I haven’t had my eye on wheat, but this week I will get back into it, observing news about the Australian harvest in particular.
Lessons Learned – Week 4
I ended the week in not a bad position, despite the massive jump in prices after the USDA report was released on Thursday, but the progress I thought I’d made earlier this week on understanding what I’d convinced myself was a confusion about short and long trading was overturned. As it turns out, I hadn’t been confused at all before – I just convinced myself that my confused classmate was right.
Nevertheless, I proceeded to lose nearly $10,000 in one day, only to rebound the following day by more than half of that loss. I’m holding only short contracts, which seemed like a terrible idea at the end of the day on Thursday, but perhaps isn’t so bad in the medium to long-term.
(Above: Equity Balance for Week 4)
The prices jumped on October 11 because the USDA report saw smaller world supply. [1] However, this was offset quickly (seen in the recovery of prices on Friday) by a drop in demand for US exports, too. [2] According to Bloomberg, wheat is still overpriced, so I will stay in my short contracts and hope that drop was a short-term effect of the USDA report. After all, the CBOT reflects supply and demand on a global scale, and prices will likely recover after the USDA’s United States focused news and forecasts. Already, corn, wheat and soybeans prices are back down, with wheat and soybeans lower than they were before.
Cool Source of Information – some fun this week
Something fun this week – after screwing up royally with what I thought was a profound revised understanding of basic market dynamics, I returned to my finance class notes from last winter, and I found the link to this movie clip from Trading Places, with an excellent explanation.
http://www.popmodal.com/video/1277/Trading-Places-Final-Exchange-Scene-amp-Explanation
The Week Ahead: Oct 8-12
The drought’s affect on corn prices is still dominating most of the information sources I have found. I am still struggling to understand which factors trigger the Stockout Property of the LOP, since decreasing stocks due to the drought should (intuitively) increase prices with increasing demand. However, corn prices are falling. Forecasts for increased demand from Korea and storms in the Midwest lead me to predict further increased demand and spot price increases. The USDA is “is expected to say this year’s US corn harvest was the smallest in six years and that corn supplies could hit 17-year lows by the end of next summer due to crop losses from the worst drought in over 50 years.” [1]
I decided to take a general view to determine which of the infinite factors at play to observe. If stocks of corn come close to running out, storage costs will decrease. If we follow the logic that the cost of storage is the only driver of price increases, corn prices should decrease. However, lower supply should increase prices. This puts us in a (relative) equilibrium position. Therefore, prices for corn should stay relatively stable, and other global pressures will be the instigators of price changes.
Perhaps decreasing liquidity is an issue; “Volume in Chicago continues to shrink, falling 9% Monday to just 146,212 contracts, according to the preliminary report from the CBOT. Open interest was off 3,163 on modest fund selling.” [2] I am not sure what all of that means, but less liquidity should lead to an increase in prices.
Therefore, we’re looking at three drivers of corn price increases:
- lower supply
- higher demand (from Korea)
- decreased liquidity
Why, therefore, have prices been dropping? Will they continue to fall this week? Bloomberg provides one possible answer: “Corn Prices Set to Drop as South American Farmers Boost Planting.” [3] And while the harvest isn’t set to be ready until later next year, anticipated future supply means there is less need for more storage of low stocks of corn in the near future since they will be replenished in 2013.
Therefore, I have revised my prediction, and in anticipation of lower prices, have reversed my long position for two short December contracts, and two short May contracts, so I can observe the spread over the next week.
My wheat contracts continue their slow progress, so I will hold onto my short contract for at least the next few days.
[1] http://www.brecorder.com/markets/commodities/america/84567-cbot-corn-falls-on-seasonal-harvest-weight-.html (Thanks for the reference, Ishrat!)
[2] http://farmfutures.com/story.aspx/morning-market-review-bryce-knorr-0-30780
Lessons Learned – a reflective look
I learned a few things over the last few weeks, most notably that trading in speculation is really, really complicated to conceptualize.
After two crazy weeks of travel and work, I finally got a chance to look at what my various contracts had done over the last 3 weeks. Unfortunately, it didn’t look great. First, I think I misinterpreted my research and the markets in going long on corn last week. Compared to my classmates, I am not a very active trader.
My research from last week clearly told me that the corn markets were not looking spectacular, but for some reason that meant I went long.
More importantly, though, I spent some time working through my fundamental understanding of the role of producers, buyers, and speculators in the market, thanks to my classmates. This is a completely foreign language to me, unlike many of my MBA colleagues. Therefore, the lessons learned below may seem very simple; but for me, they are valuable.
1. Both corn and wheat prices fell at the end of last week. This was good for my wheat contracts, because I was short, but not good for my corn contracts, because I was in a long position.
2. I would be a really bad day trader, and an even worse scalper. I am perfectly happy to check my balance at the end of the day and try to do better in the next few days, as opposed to making multiple trades in one day and track short price changes. I don’t consider myself a risk-averse person, but I do consider myself patient, and I certainly feel overwhelmed by the huge number of influences on the markets.
3. I thought I would enjoy learning about agricultural markets because agriculture is an industry based in tangible production with tangible inputs and outputs. As it turns out, even agricultural futures markets aren’t real either. Everything in the markets is about trading and guessing about money that doesn’t really exist. Determining value based on someone else’s estimation of your determination of value fundamentally makes no sense to me.
Cool Source of Information: CME Group Volume and Open Interest Report
In researching the decline in the corn markets over the last week, I found the CME Group’s Volume and Open Interest Report, here: http://www.cmegroup.com/daily_bulletin/preliminary_voi/VOIREPORT.pdf
It would doubtless be a lot more interesting if we were trading options, but there is interesting information about the volume of trades in various futures markets as well.
See page 2 for daily volumes in agricultural futures. I hope to keep track of this over the next few days (weeks?) to get a sense of whether liquidity affects the futures prices or volatility.
Also, what is a swap, is it more associated with options trading, and does it affect futures trading?
Return to Corn
On September 27, Bloomberg reported on what I feel (intuitively, and probably naively) was an inevitable plummet in the corn markets, due to the lower stocks and fragile demand patterns. “Corn for December delivery fell 0.8 percent to $7.19 a bushel at 8:07 a.m. on the Chicago Board of Trade, after touching $7.185, the lowest for a most-active contract since July 12.” [1] By the end of the week (according to September 30 TradeSim prices), December corn had risen again to 756.25. Similarly, December wheat had risen to 902.5 from its September 27 decline of ” 0.1 percent to $8.6825 a bushel in Chicago” [1]
The following day, corn rebounded; “Corn futures for December delivery rose by the 40-cent limit on the Chicago Board of Trade to close at $7.5625 a bushel at 2 p.m.” reports Bloomberg in its article, “Corn Futures Jump Most Since June on Unexpected U.S. Supply Drop.” [2]
Bloomberg also reports that “The USDA this month predicted a harvest of 10.727 billion bushels, a drop of 13 percent from last year and down from 10.779 billion forecast in August.” [2] This means that the upswing from Thursday’s low point, combined with greater demand than last year because of lower supply, will make December (and maybe March) futures contracts worth more.
Rabobank’s September report agrees, reporting Corn as Bullish and below normal stock levels. [3]
As of my trade on September 30, December corn contracts were selling for 756.25, and March contracts for 759.50. Since I am not confident enough to risk too many corn contracts, bought (long) two December contracts and look forward to seeing the market activity in both December and March contracts next week.
[1] http://www.bloomberg.com/news/2012-09-27/soybeans-set-to-gain-as-drop-to-seven-week-low-may-boost-demand.html
[2] http://www.bloomberg.com/news/2012-09-28/u-s-corn-stockpile-unexpectedly-drops-sparks-price-rebound-1-.html
[3] http://www.rabobank.com/content/images/Agri_Commodity_Markets_Research_Grain_Stocks_Sep2012.pdf
Rabobank AgriCommodity Markets Research
Since I am in Europe this week, I thought I would look into some European news sources. Rabobank is familiar to me as a sponsor of the Tour de France, but they produce monthly agricultural commodity reports with good summaries and comparisons of production, stock, and market levels of various agricultural commodities.
It reports basic market trends and predictions, but it also simply links market movements with related products, like ethanol for corn (below), and different grain usages like feed and residual production.
This report, combined with more recent information about contract prices, was useful in determining whether the recent fluctuations in the corn markets were an indication of upcoming volatility, or a fluke.
Find the Rabobank September report here: http://tinyurl.com/8v5kser
Missed the boat on an active week in corn markets
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.