Week 5 Trading
EPA on Ethanol Blend
This week in our lab, we discuss an EPA decision to reduce ethanol use in gasoline next year. My immediate thought was that it would lower the demand for both ethanol and corn, reducing both prices. But the opposite happened this week. Upon further investigation, I learned that this piece of news was only a rumor – possibly a wrong one. Reuters, who even reported on EPA documents that showed the agency proposing an unexpected drop in the amount of corn-based ethanol that would be required for blending next year, later admitted that some industry exports questioned the documents’ authenticity. The reversal of this news update, combined with the attention turning on low ethanol inventory, caused ethanol futures advanced (narrowing the spread to gasoline).
Corn Harvest Delays
Increased rainfall in the U.S. Corn Belt is expected to delay corn harvest. See the BB screenshot below for a more detailed description and weather map.
Wheat-Corn Spread
The wheat-corn spread continues to be unusually large – the highest since December 2010. As explained in my earlier posts, corn and wheat are demand substitutes and the spread between them fluctuates significantly.
Today, a Bloomberg article discussed this matter. Here’s a couple of interesting points it made:
- Wheat analyst are the most bearish since July on speculation of the grain’s biggest premium to corn in three years will curb demand.
- Out of 24 analyst surveyed by BB News, 13 expect prices to fall next week, 5 are bullish, and six are neutral, the highest proportion of bears since July 26. Goldman Sachs Group Inc. estimates that prices will drop to $6.50 in three months, 7.4% less than now.
- The USDA raised its estimates of global wheat production
- Canadian farmers may harvest a record 33 million tons, 22% more than a year earlier.
- Brazil and China buying to restock inventories spurred a 3.7% gain in prices last month, the most since April. However, “demand news may not live up to expectations built into the recent rally” said Dale Durchholz, a senior market analyst for AgriVisor LLC, who advises to sell the grain.
Price-Stock Pattern
The theory discussed in class predicts prices rising throughout most of the year as firms incur the cost of storing the commodity and sharply declining during harvest. I was happy to see this concept clearly reflected in the future’s curve for wheat. Here’s an image:
My portfolio performance
During the past week, my portfolio continued to perform poorly. I also traded very little. I only had two open positions (one spread).
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