Recap of last week’s holdings
I was holding 2 short contracts for corn, 2 short contracts and 1 short contract for soybeans and wheat, respectively.
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Tues, Nov. 1st
Since Japan has announced that they plan to buy US dollars to curb the its Yen appreciation, there will then be a limited supply of US dollars leading to appreciation and thus lowering prices of commodities. This downward pressure on prices of commodities would hold for as long as Japan continues to intervene in this manner (http://www.dailymarkets.com/forex/2011/10/31/crude-oil-futures-drop-as-u-s-dollar-rallies-on-japan-move). I predicted that the prices of commodities would continue to look bearish, with further support from news that European Debt concerns are resurfacing again, which is encouraging investors to turn back to the “safe haven” – US dollar (http://toronto.ctv.ca/servlet/an/local/CTVNews/20111031/tsx-stocks-eurozone-deal-fears-111031/20111031/?hub=TorontoNewHome). I bid for 3, 3, and 1 short contracts for corn, soybeans and wheat, respectively.If I were successful, then my open short positions would be 5 contracts in all 3 commodities, which allows me to easily offset should I need to. My margin balance at end of day was 75,800.
Wed., Nov. 2nd
In Jim’s class, we learned that there are correlations in crop prices due to substitution. So, this means there is a fixed amount of land used for planting the 3 different crops. For example, If more land is used for soybean, less land would then be available for growing corn. Thus less corn would be supplied and its price would increase. However, this is not taking other external factors into account. The price could increase a lot due to unfavourable weather, demand increase and such, or it could decrease due to a huge drop in demand for the crop. So, we really need to take into account many factors, but this does give us an expectation and idea into how these prices would change depending on how substitutable the commodities are.
Global economic uncertainties remain from Europe’s debt crisis, so the US dollar is continuing to appreciate because investors are still favouring the relative safety of the US dollar. So the commodities would most likely still be following a bearish trend in the short-run. Also, in terms of weather news, heavy rainfalls have also boosted the harvest of soybeans, and it would likely continue to decrease as well. So it seems reasonable for me to take short positions, however, as I am already holding short positions for all 3 commodities now, I will only bid for 1 more short contract for each commodity, as I don’t want to hold too many should anything changes that will turn the prices from bearish to bullish. My margin balance at the end of the day was 80,580.
I also read the news that Argentina’s soybean processing workers are on strike and export loading has been disrupted. So, this mean the supply of soybeans would decrease and prices would be expected to increase. However, I believe coupled with US dollar appreciation, the increase in price would not have such significant effect. I decided to hold onto my short contracts and wait for more research information before I offset too quickly.
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My current margin balance is 68,690. RIght now, I am holding 6,7 and 6 open short contracts across the 3 commodities for corn, soybeans and wheat, respectively. For the upcoming trading week, I plan to start offsetting some short contracts or continue holding the same amount of short contracts, but won’t bid for more as I feel that I would lose control if I bid more even if prices continue to decrease.