Wheat Weather
After Andrew Borden’s talk on Wednesday, I am intrigued by using weather to predict market movement. Therefore, I intend to spend the next week or so betting on global weather patterns. My split wheat position has treated me well, since losses on my long position were offset by greater gains in my short position. Since the next week will keep me further from a computer, I will remain in the market in this (hopefully) less risky position.
According to Spectrum Commodities [1], China is the world’s largest wheat producer, followed by India, the US, France, and Russia. Canada enters the production landscape as the sixth largest, producing over three times the amount consumed domestically. As China is the largest producer, it makes sense to look at Chinese weather patterns. However, India appears to be a more prominent player in winter wheat, so for trading in December futures contracts, the Indian forecasts are more relevant. [1] According to CNN, weather in India is expected to remain consistent, meaning harvests should be good. Therefore, prices should remain constant, and I will go short an additional contract in spring wheat.
[1] http://www.spectrumcommodities.com/education/commodity/statistics/wheat.html
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
Cool Source of Information: Commodity Trends
This week, after entering the market on corn futures, I decided to try a different commodity, since this is a good time to start understanding many sides of the market with simple trades. As a newcomer to market trading of any kind, and as someone much more comfortable with qualitative analysis than quantitative, I have been reading reliable sources like Bloomberg and Reuters.
On the Wall Street Journal, I found market data for each commodity. Below is the chart showing historical trends in the wheat markets.
On this Wall Street Journal Market Data Center website, you are able to see detailed data and trend graphs for (presumably) all the futures on the market for each commodity. With such a great scale of historical information, I was able to notice that wheat futures have been fluctuating in the last two months around a consistent level, so I went long and short in nearby futures to observe the difference between the different contracts of the same commodity.
USDA trends and the resilience of corn influence a short position
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.
Gateway to domestic price hikes
The Northern Gateway Pipeline from Alberta to Kitimat will send Albertan oil to the Pacific Rim, in which the largest market in the current discussion is China. In a simple exercise in supply and demand, this will raise the price of crude oil for Canadian refineries, and lower the sale price realized in Chinese sale of Canadian crude oil, according to Gil McGowan, President of the Alberta Federation of Labor, in his interview with CBC’s Carol Off (“As It Happens, The Tuesday Edition,” 4 September 2012).
Canadian oil producers are currently attracted to selling crude oil in China because of the “Asia premium,” higher prices on crude oil sold in China in particular, presumably even with transportation costs under consideration. This would reduce supply for Canadian refineries and processors, therefore raising the domestic sale price of domestic crude oil. These higher raw materials costs will mean higher production costs and likely lower employment rates in the Canadian oil processing and refining sectors.
Although it seems counterintuitive that exporting Canadian oil can lower profits in both domestic and international markets, the global market is a fascinating circus, as always. McGowan also explains that the Saudi Arabian oil producers who currently supply most of China’s oil can readily lower their prices to compete with the Canadian oil at “Asia premium” prices, therefore eliminating that Canadian premium and reducing profits.
The proposed route of the Northern Gateway pipeline tears through some of the most beautiful and ecologically unique landscape in the world; here, the Sacred Headwaters in Northern BC, by Paul Colangelo for Patagonia (http://www.thecleanestline.com/2012/08/the-sacred-headwaters.html)