New Weekly Strategy: Wheat-Corn Price Spread

I am inept at Excel so I had to change the dates into numbers from 1-34 also I wanted to have clear trend lines so had to divide the y-axis into 2 cent intervals but this mangled the readibility =( sorry!

The price spread is a little easier to understand though.

 

By tracking the corn minus wheat spread, the trend seems to be:

• If corn is more expensive than wheat: the spread seems to like to be around the 18-20 cent range, if it narrows the spread seems to bounce back after a day or two.
• If wheat is more expensive than corn: the spread seems to like to be around the 16 cents range. If prices go over this they seem to return to this level after a day or two.

Fundamentals: During Jim’s lecture we learned that corn and wheat can be substituted as food and commercial feed and there would be an optimal price ratio that bounced back and forth in response to shocks. So this week I decided to focus on if this price spread was too narrow, the spread would widen and vice versa.

October 24, 2011

October 23 night time:

I decided to offset my 5 open short soybeans contracts so I could pursue a new strategy this week. Wheat versus corn spread.

(Wheat is always red and corn is blue. Charts created from http://markets.ft.com/research/Markets/Overview?ftcamp=traffic/email/tools/W1//memmkt)

Historical Charting Research – 9 month trend:

1 month trend:

5 day trend:

Strategy: The chart above uses 20 day moving average (orange line), not included but the 10 day moving average is even sharper and both trend lines lay above corn and wheat so I decided to go long on both. But to employ this strategy I had to offset my open 5 short soybean contracts.

Evaluation of strategy: Success, even though outside market played a role in giving commodities a bullish push, the spread widened from 8.6 cents to 14.4 cents.

October 25, 2011

Oct 24 night:

Source http://www.pitnews.com/marketwrapup.htm  (sorry I’m directly quoting but I don’t feel comfortable paraphrasing technical analysis):

Corn Technicals: “Momentum studies are trending higher but have entered overbought levels. The close above the 9-day moving average is a positive short-term indicator for trend. The market has a slightly positive tilt with the close over the swing pivot. The near-term upside objective is at 670. The next area of resistance is around 657 3/4 and 670, while 1st support hits today at 640 3/4 and below there at 636 1/4.”

Wheat Technicals: “Stochastics are at mid-range but trending higher, which should reinforce a move higher if resistance levels are taken out. A positive signal for trend short-term was given on a close over the 9- bar moving average. With the close higher than the pivot swing number, the market is in a slightly bullish posture. The near-term upside objective is at 656 1/2. The next area of resistance is around 642 1/2 and 656 1/2, while 1st support hits today at 621 1/2 and below there at 614 ¼.”

Soybeans Technicals: “The daily stochastics gave a bearish indicator with a crossover down. Momentum studies trending lower at mid-range should accelerate a move lower if support levels are taken out. The close below the 9-day moving average is a negative short-term indicator for trend. The daily closing price reversal down puts the market on the defensive. The market setup is somewhat negative with the close under the 1st swing support. The next downside target is now at 1187. The next area of resistance is around 1229 and 1254 1/4, while 1st support hits today at 1195 1/2 and below there at 1187.”

 

Strategy: since we’re at resistance levels for wheat with no major news and wheat has closed the gap with corn quite well, I’m going to play it safe and offset my wheat but price at 645. Offset corn at 652. These pricing strategies are a bit risky because normally I use overnight trading but this way I can hopefully offset without a loss and channel my resources into much more lucrative soybeans.

• Beans: since resistance is at 1229 and 1254 and yesterday’s close is at 1226; I will only bid 3 long contracts at 1225.3, just over overnight lows
• I will closely watch how the corn-wheat spread goes tomorrow.

Evaluation of strategy: I managed to offset my corn and wheat and still scrape out a profit thanks to soybeans. The corn-wheat spread expanded to 17.8 cents but I get the feeling my spread strategy will be most effective if the spread is too narrow or too wide, it might not be worth it to use this strategy if the spread is within 5 cents as it will be hard to determine which commodity will go up or down.

 

October 26, 2011

October 25 night:

Fundamental analysis for all three commodities: bearish as US consumer confidence report fell to lowest levels since 2009; upturn in US dollar

Strategy: since corn settled around 650 and wheat at 636 I think wheat will rise so I bid 3 long contracts at 635.1 and try to offset soybeans at 1238.

Evaluation of strategy: failed to enter the market because did not anticipate outside markets plunging prices.

 

October 27, 2011

Since I failed to enter the market yesterday I still held 3 open long contracts of soybeans and wheat each. I figured the market would bounce today as such a dramatic drop in prices should stimulate some buying from foreign countries; and thanks to outside markets it did and I made back all of my losses. Not much strategy to that and a bit of luck.

 

October 28, 2011

October 27 night:

Telvent DTN Daily Market Commentary suggests to watch overnight trading and news on European markets to get an indicator of how Friday’s trading will go. I strongly agree with this advice.

Turning to my RSS Feeds: as of 10:30 pm there was no new news.

Overnight trading: bearish trend for all three commodities.

Source (http://www.pitnews.com/marketwrapup.htm):

Soybeans technicals: “The consolidation has been mostly between support at the 20-day moving average of 1221.5 and resistance at the 10-day moving average of 1241, but the close above that and the high-range close above the pivot point would suggest a retest of the last swing high of 1283.75.”

Wheat technicals: “December wheat was sharply higher, pushing above the downtrend line drawn off the recent highs. Although breaking out to the upside of the wedge (i.e. 641.5), it is still in the range seen for the month of October. The bounce was impressive today, respecting support of an uptrend line drawn off the October lows (618 for tomorrow). The high-range close above the pivot point suggests a bullish bias for Friday. Next resistance is the October high of 665. Directionals have a choppy, slight uptrend, but hold mid-range values that could support a move in either direction. More of an upward correction has been expected, not even retracing 38% to 675 of the big September decline.”

 

Strategy: Tasha’s article from Twitter (@tashalin)  suggested that wheat sales were at almost five month lows. Also the spread between corn and wheat had narrowed to 7.4 cents and it seems more likely that wheat will fall relative to corn. So I decided to offset my 3 open long soybean contracts as well as my wheat 3 open long wheat contracts but go a little further by bidding on a total of 5 short contracts. I am going to take a risk because, as the graph below indicates, both corn and wheat lie above the 20 day moving average and whenever wheat’s gains (in percentage lies almost 2% over corn, the spread narrows within a day or two. Furthermore, if you look at last Friday, when both price’s lines lay above the 20 day moving average and there was a gap in the price spread, the gap narrowed and plunged below the trend line the next day.

 

 

Daily Profit Summary
	Market Open: Open Contracts			New Contracts			Market Close: Open Contracts
Date	C	S	W	C	S	W	C	S	W	Net Profit
Oct-14	0	-1	1	0	1	0	0	0	1	370
Oct-17	0	1	0	0	0	0	0	0	1	850
Oct-18	0	1	0	0	0	0	0	0	1	120
Oct-19	0	1	0	0	1	-1	0	1	0	2380
Oct-20	1	0	0	0	4	0	0	5	0	-330
Oct-21	0	5	0	0	0	0	0	5	0	3200
Oct-24	0	5	0	-2	-5	-4	-2	0	-4	3505
Oct-25	-2	0	-4	2	-3	4	0	-3	0	635
Oct-26	0	-3	-3	0	0	-3	0	-3	0	-7125
Oct-27	0	-3	-3	0	0	0	0	-3	0	7380
Oct-28	0	-3	-3	0	3	5	0	-3	0	1160

1)      Impose 6 open contract restriction

2)      Set up week for Wednesday’s USDA report: “defensive” strategy.

3)      Evolve my “offset with minimal losses” strategy. Last week: I offset by waiting for the trend to go in the direction I wanted to bid to offset. This week: use charting to offset with minimal losses even if the trend is not in my favour.

Tuesday Oct 11

Strategy: set myself up for Wednesday’s USDA report and get in line with 6 open contract limit. As Andrew the T.A. mentioned last week that the market was due for a rally, and I did a lot of research Sunday night not knowing we would not be able to bid for Monday, I decided to go long using Monday’s overnight trading low prices. Open contracts after offsetting: 1 long soybeans, 2 long wheat.

 

Wednesday Oct 12

Tuesday Night Research:

Soybeans

Fundamental analysis: +   Stronger than expected export demand, talk of China buying, lower expected yields and harvest acreage

Technical analysis: 20 day moving average of 1251 as resistance

Wheat

+  Russia caps exports of grain

+ fund traders actively buyin; strength of soybean rally supporting aggricultural commodity market

Technical analysis: broke through 10 day (625) and 20 day (646) moving averages which were resistance but should now be support.

Defensive Strategy for USDA report surprises: The last two USDA reports I’ve seen a pattern where I use forecasts and predictions to correctly feel which way the market will go. During the morning things seem to go as researched and then the market moves in the opposite direction in a dramatic way. Armed with this knowledge my defensive strategy centered on taking advantage of this reversal. If you have existing short contracts because you predict prices will fall, you will want to defend your margins against a possible sharp rise. E.g. prices are at 10 then drop to 5, then settle at 15 you basically make negative 5. The settle price is usually lower than the high price so I would go short at 20 and the profits I make from this new bid (20-15=5) will offset the losses from my existing contract. Opposite should be true for long contracts which is what I had.

• Wheat: I used 625 as support for my defensive strategy and bidding 628.9
• Soybeans: I used 1192.8 which is 18.6 cents below overnight trading lows which show a about 10 cents drop from prior settle; overnight lows are about 15 cents below last price. So if they drop another 10 cents or so I will probably enter the market just above the low and at if the last and low prices remain about 15 cents apart I should make 15 cents profit. But if the market actually moves in the direction I predict then I will not enter the market.

Evaluation: Did not need my safety net for soybeans. How about for wheat?

Critical flaw in my logic: if the market does not exhibit a bell shaped curve pattern and just bottoms out I double my losses.

Lessons: wheat is no longer in a Stockout situation based on CBOT price spreads for next couple years.

Next version of defensive strategy: instead of doubling up the type of open contract that I have, I should use the 20 day moving average as my safety-net prices but bid long if I have open short contracts and vice versa. If I had in the case of wheat I would have entered market at 646 and then I would have offset my long position and made profits at the same time.

 

Thursday, October 13

Wednesday night research:

–          Checked that soybeans are stocked out by looking at cbot prices. Prices seem to be moving in the right direction, so I decided to keep my long contract.

–          Wheat: The lows found support at the 10-day moving average of 623.

–          Strategy offset: my long wheat contracts (miscounted though and accidentally went short by one too many).

Friday, October 14

Thursday night research:

+ Soybean harvest in Midwest slowed again due to weather

+ Smaller US supply of beans

+ (Telvent DTN Daily Market Commentary) strong buying from commercial and non-commercial traders.

Strategy: Offset my contracts because I probably will not trade next week, but if I go short with soybeans strong rally I will lose profits. I took the difference between yesterday’s close price and the 20 day moving average; added this difference to overnight trading high price and went short at 1269.

Evaluation: success I offset without having to wait for a day that soybeans will fall and only lost $40, which my gains from my open contract more than offset.

Note: miscounted how many open contracts of wheat I had and did not offset.

 

Daily Profit Summary
	Market Open: Open Contracts			New Contracts			Market Close: Open Contracts
Date	C	S	W	C	S	W		C	S	W		Net Profit
Oct-11	0	3	-6	0	-4	4		0	-1	-2		7420
Oct-12	0	-1	-2	0	0	-2		0	-1	-4		-3430
Oct-13	0	-1	-4	0	0	5		0	-1	1		1135
Oct-14	0	-1	1	0	1	0		0	0	1		370

Weekly Strategy:

1)      Get “gambling” under control. Focus on how to offset with minimal losses or maximum gain.

2)      Leave corn out of my portfolio.

3)      Use more charting in my strategy.

 

 Monday October 3

Sunday night open contracts: 4 long corn, 2 long soybeans, 7 long wheat.

Sunday night Fundamentals Research

Corn:

(-) USDA finds extra corn

(-) Grains stockpile could be indicative of demand slump

(-) European wheat prices down making them more attractive compared to US wheat

Strategy: bid for 5 short contracts on corn, soybeans, wheat.

Outcome: failed to enter market for wheat by bidding too high; positive profits on soybeans, negative profits on corn and net positive profits from open contracts.

Lesson: getting out of the corn market as there are too many factors to take into account.

Tuesday October 4

Monday night open contracts: 1 short corn, 3 short soybeans, 7 long wheat.

Monday night Fundamentals Research

Corn: no significant news

Soybeans: no significant news

Wheat: no significant news

Overnight trading

Corn and soybeans seemed bearish.

Strategy: heed Jim and Andrew’s warning of too many open contracts so offset by bidding on 4 short wheat contracts, leave my open contracts for other two commodities.

Outcome: Bid too high on wheat and failed to enter the market thereby making negative profits from open 7 long contracts.

Lesson: start to pay more attention to resistance levels when going short and support levels when going long. Combine with last week’s strategy of using overnight trading as reference point.

Wednesday October 5

Tuesday night open contracts: 1 short corn, 3 short soybeans, 7 long wheat.

Tuesday night research

Fundamentals research:

(+) not much fundamental action going on with corn and soybean but pay attention to wheat for a rally because prices seemed to have found a bottom.

(+) la Nina would have biggest impact on wheat raising concerns of drought

Technical Analysis:

Corn: overnight trading seemed to be bullish.

Soybeans: overnight trading seemed to be bullish.

Overnight intraday wheat trading:

According to Pittnews.com: 596.75 should be support with resistance at 637. I checked overnight trading and price for wheat was around 610.4

 Strategy: since corn and soybeans overnight trading was bullish and I held open short contracts, today would be a good day to offset them and possibly make a profit. Since I failed to offset my open long wheat contracts yesterday and took a loss on them, I decided to let them ride today to recoup some contracts rather than offsetting by going against the grain (pun intended).

Outcome: Positive profits across the board.

 

 

Thursday October 6

Wednesday night open contracts: 7 long contracts of wheat

no major changes in fundamentals but lots of outside market influences: European finance ministers agreed to help struggling banks; euro rose against other currencies

Strategy: offset 4 of my long contracts to bring myself within a day’s bid of a quick turn-around in anticipation of the Non-Farm Payroll release on Friday. Building on Tuesday’s lesson, using 596.75 as support and 9 day moving average 633.2 as resistance, I decided to bid at 631.9 (0.1 cents below overnight high price):

Overnight intraday trading:

Outcome: success

  Friday October 7

Thursday night open contracts: 3 long wheat.

Thursday night fundamental research

Soybeans: (+) Next year Brazil’s output in soybeans predicted will fall for the first time in three years. Using the Intertemporal LOP, lower supply of soybeans in future will raise the price of soybeans today. Looking at overnight trading, Aug 2012 contracts dropped 2 cents (compared to other future contract expiry months this was the least) from prior day’s settle. But September Expiry I noticed a big price drop of 5 as cents as well as further decreases until November which indicates a stock-out.

(-) (-) (-)  “The Cropcast estimate for 11/12 world oilseeds production is 438.05 MMT, up 380 TMT from last week due mainly to improved rains in Brazil soybean areas” so increased Brazilian supply will lead to lower US prices. Also limited rains in will help harvesting to go well. In Brazil and Argentina more will allow planting and germination there to improve for next year’s crop. Using Intertemporal LOP again this should depress current prices.

Wheat: (-) (-)(-)  Rain would help the US, eastern Europe, western FSU, Argentina, and South-eastern Australia.

(+) Yesterday’s report of US wheat exports was in line with USDA expectations.

(-) (+)  EU granted export licenses for 349,000 tonnes of wheat but cumulative exports of wheat were almost half compared to last year.

Technical Analysis: my usual site was down so I turned to overnight trading which I address further on.

 Macroeconomic factors: Non-farm payrolls

(+) non-farm payrolls predicted to be optimistic

(+) this link corroborates the above link

 Strategy: Andrew’s lecture on Tuesday suggested that non-farm payrolls have a pretty strong effect on commodity prices.

 

Soybeans: Given the demand group’s research that global demand for soybeans has fallen this year, and prices have fallen 15% over the last 4-5 weeks (http://www.thecropsite.com/news/9238/soybean-prices-down-on-consumption-uncertainty). Given that we are in a stockout situation, the low prices should have stimulated consumption especially since soybean harvest is ahead of schedule (http://www.argusleader.com/article/20111007/NEWS/110070312/Season-wild-weather-produces-hit-miss-harvest). So I postulate that forces driving a lack of demand for soybeans beyond income are at work and decided to go short on soybeans for 3 contracts.

Outcome: made a positive profit.

Wheat: According to Rick from 502 consumption of meat increases with income and wheat is used as livestock feed. Furthermore, exports of wheat were in better shape than corn and soybeans. Demand group research showed that Japan, Mexico, Korea and Taiwan are the top importers of US wheat so aggressive pricing from the Black Sea region would have less of an impact on US markets. Thus, the income effect from the non-farm payrolls should have a much more significant effect on wheat. I went bid for an additional 3 long contracts of wheat on top of my 3 open long contracts.

Outcome:

The chart above shows my predictions were probably correct as the non-farm payrolls were released we see a huge jump in the prices. But then prices crashed probably due to outside markets.

Lessons: Research the link between wheat and copper to incorporate into my bidding strategy. Find out exactly what happened after 10 am.

 

Daily Profit Summary
	Market Open: Open Contracts			New Contracts			Market Close: Open Contracts
Date	C	S	W	C	S	W	C	S	W	Net Profit
Sep-30	1	3	-2	-5	-5	-5	-4	-2	-7	-25750
Oct-03	-4	-2	-7	5	5	0	1	3	-7	1910
Oct-04	1	3	-7	0	0	0	1	3	-7	-2540
Oct-05	1	3	-7	-1	-3	0	0	0	-7	6990
Oct-06	0	0	-7	0	0	4	0	0	-3	-40
Oct-07	0	0	-3	0	3	-3	0	0	-3	-1260