Week 2 Trading
Market Summary
The following is a Bloomberg (BB) graph of this week’s front-month future prices for our three commodities (wheat, soybeans, and corn).
The starkest change over the week is given by the 5.84% increase in the wheat price. The closing price on Friday represents the highest price level since mid-July, as shown by the following graph from finviz.com.
CME Group provides the following reason for the increase: “Talk of lower planted area in Ukraine, possible new demand from Brazil and China and short-covering appear to be the primary reasons for the buying support.” I feel skeptical of the sustainability of this increase. In 2012, Ukraine only produced 2.34% of global wheat production. The increase in China’s demand should have been priced in by earlier news of bad weather affecting wheat crops in China. For example, on July 16th, Reuters published an article titled “Exclusive: China may become top wheat importer after crops ruined” (http://www.reuters.com/article/2013/07/16/us-china-wheat-idUSBRE96F1F120130716). The market had plenty of time to react to this information. Further, wheat and corn are demand substitutes, so any increase in wheat will be dragged down by corn’s not as good performance. Further, the burst in prices may be the cause (not only the consequence) of short-covering and that new short positions will push the price back down. Also, looking back over this year’s prices, week-long price rallies are typically followed by steep price decreases (see the above graph).
Over the week, soybeans and corn also increased (though not as dramatically as wheat), partially due to the spillover from wheat futures. Anticipation over Monday’s USDA Grain Stock Report also caused some stirring.
Something to ponder about is the change in the corn’s futures curve (see the BB graph below). Since last month (the blue line), the price significantly shifted downwards to the red line – the futures curve two weeks ago. The downward shift continued until a week ago (the white curve) and partially reversed during the past week to the green line.
Looking ahead, the USDA’s Quarterly Grain Stocks Report is coming up on Monday.
My portfolio’s performance
My portfolio performed as following.
|
Symbol |
Exchange |
Company Name |
QTY |
Currency |
Price Paid |
Last Price |
Market Value |
Profit/Loss (local curr) |
P/L % |
Margin |
|
ZW/H4 |
US |
WHEAT MAR 14 |
-2 |
USD |
$6.66 |
$6.90 |
$68,950.00 |
($2,350.00) |
-3.528528529 |
$5,400.00 |
|
ZW/Z3 |
US |
WHEAT DEC 13 |
1 |
USD |
$6.56 |
$6.82 |
$34,075.00 |
$1,262.50 |
3.847619048 |
$2,700.00 |
|
C/Z3 |
US |
MAIZE DEC 13 |
4 |
USD |
$4.56 |
$4.54 |
$90,750.00 |
($400.00) |
-0.438837082 |
$6,480.00 |
This week’s price increases helped recover part of my loss on the corn long position I had placed two weeks ago. The December wheat future also increased. However, the March wheat future suffered, but by a lesser percentage than the increase in the December contract.
My reason for buying the December contract and shorting the March contract was that the calendar seemed too large for such short time periods. I thought that if the price of the March contract exceeded the December by too much, some firm would buy corn in December, store it, and sell a March futures contract, booking immediate profit. I realize that storing is expensive and impractical, but, if lucrative enough, some firm would do it. As I expected (though likely by coincidence), the price difference narrowed by 2 cents per bushel or $100 dollars per contract. However, I incorrectly expected a decline in wheat prices thereby loading my short contract by twice as much as my long. So the overall strategy resulted in a loss.
I don’t expect this week’s price increases to be sustainable, as discussed earlier. Monitoring the situation Monday morning, I will sell my long position and keep my shorts. However, just in case I’m wrong, I added a stop order to cover one of my wheat short position if the price increases to above $7.00 to reduce exposure.
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