Real Melo: A Master Of Food & Resource Economics Candidate

To regain my lost fake money I plan on keeping an eye out on how Russia and Australia are doing in regards to wheat production. If they are doing bad, then expect wheat prices to rise due to not only smaller harvests but due to higher demand on US wheat that is gaining steam from better weather.

I will take a look also on US currency compared to these countries. If the value of the US dollar depreciates compared to the Euro or Australian dollar, and if production continues to be bad in the EU and in Australia, expect demand for US wheat to increase and prices to increase as well.

http://www.insidefutures.com/article/800247/Morning%20Grains%2010/4/12.html

Week 3 has ended and I seem to be in an ongoing losing streak. My equity has fell to $32371.51. What happened?

Well, the first thing that happened is whenever I made a trade I was surprised by my price in. I’m always trying to buy low and sell high but my price in is always higher than I expected. So even if I get the trend right, often times I’ve made a trade at a much higher price so I don’t receive any gains. For example, I knew the price was going to drop after the USDA report so I wanted to go long on wheat. Upon entering the trade instead of the lower price I still entered at a price of $902.75. The price end of Monday was much lower and even if prices rose within the week there was no way it was going to go in the 900s.

The major thing that went wrong with my wheat purchases is that weather seems to be improving in the Great Plains. As a result, prices have been going down instead of up like I thought it would due to the production problems in other wheat producing countries. It seems planting progress has been good recently. (http://www.insidefutures.com/article/799703/Morning%20Grains%2010/3/12.html)

Read my next post to see what my future plan is.

A pretty cool site that I’ve discovered recently is the inside futures website, www.insidefutures.com The site contains various articles by different authors and useful insights to what is going on in the futures market. The entries in this website are easy to understand and they are very helpful in strengthening the position you want to take or help you take a step back to reanalyze how you want to go about doing a particular trade.

Check it out!

With a loss finally under my belt it’s time to rethink and reorganize my strategy for this trading game. Well, not really. I will still continue to keep it simple but I plan on being more diligent on what positions I take and when I close them. Also, I will do more research on who the major players are and keep a closer eye on what’s going on domestically in these countries with regards to weather and possible policy changes.

I have once again taken long positions on wheat. Why? The USDA crop report indicated lower yields from last year (http://www.insidefutures.com/article/796199/Wheat%20Prices%20Seem%20Strongest%20of%20the%20Grains.html). Combined with the dry spell in most wheat producing nations and the speculation of Russia possibly banning wheat exports (http://www.brecorder.com/agriculture-a-allied/183/1243221/) prices of wheat will most likely increase (with demand the same, lower yields, less supply, higher prices).

If weather conditions do not improve and if Russia does indeed ban wheat exports, expect prices to rise indeed.

If week 1 was about where I went right, Week 2 is about how I did wrong (my equity balance is now $38046.8, down more than $1000!).

One of my mistakes came with misunderstanding when I could put in a trade. I thought that trades could go through when markets open and when markets close. I was wrong and it cost me. Basically I closed my trade too late.

I thought I could make a quick buck by going short on Dec 2012 wheat to capitalize on the price drop before the release of the USDA crop report on Friday, September 28, 2012. Reading an article earlier in the week about a large domestic stockpile and low export demand (http://www.brecorder.com/markets/commodities/america/81579-us-wheat-stocks-to-grow-on-big-crop-poor-exports-.html) made me feel confident that I could go short early in the week and close it before the release of the report. Made sense right? Prices were going down the whole week. At one point during this week I made more than $600 on the two trades I put in. I was doing great.

However, I forgot to close the trade on Thursday. By the time I tried to close it the market was closed and it went through Friday’s end. By that time the crop report was released, indicating that stocks were lower than last year’s harvest, and prices (as expected) rose. Loss taken.

If I was able to execute my plan correctly I would’ve closed the short position on Thursday and go long at the same time to take advantage of the low price (and just close as prices would continue to rise).

Read part two of week two to see how I plan to rebound from the debacle.

Week one of the trading game is over and so far I have started on a positive note. I was able to gain $112.50 for going long on wheat for December 2012. What made me decide to do this? Simple: looking at weather forecasts.

Poor weather conditions will most likely lead to a poor harvest. A poor harvest means less supply and less supply ultimately indicates higher prices. Through my research, I found that accourding to Luke Mathews, a commodity strategist at Commonwealth Bank of Australia, ““Importers around the world are looking to Australia to provide a significant quantity of wheat over the next 12 months and that’s a direct consequence of drought in Russia and the U.S.” (http://www.bloomberg.com/news/2012-09-11/australia-cuts-wheat-output-estimate-on-dry-weather-in-west-1-.html). Based on this, I figured if Australia’s weather condition is as bad as it was over here, then prices would expect to rice and thus I should go long on wheat prices.

True enough, through some more research, I was able to find that Australia’s 2012-13 wheat crop seen shrinking due to, again, dry weather. Forecasts have been that it is not looking to be a great spring for Australian wheat farmers and that the outlook was for things to remain dry over the coming weeks. (http://www.brecorder.com/agriculture-a-allied/183/1237399/). All this then lead to an increase in wheat prices.

As a recap:

• Poor weather conditions (drought)
• Poor harvest leading to less or little supply
• Therefore, with low supply levels higher prices.

Although I was able to make a gain on this week’s trade, why was my gain not as big even if prices did rise? It came to my attention that when making trades last week I failed to take into account stored commodities. Chalk that up to a rookie mistake. Storage costs can be used as a buffer to help alleviate higher prices during times of shortage and can help raise prices when prices are too low. How?

• Prices High: release stored goods; increase supply; helps lower prices
• Prices Low: store goods; reduce supply; raise prices

For next week’s trade, I should take into account storage levels as well. 

Now where did I find my information? Bloomberg (www.bloomberg.com) is an obvious choice for anything news but I also tried to make use of any type of financial site. Most are a Google search away. One that I made use of to get a better insight into the wheat market was the Business Insider (www.businessinsider.com). It gave me an idea of who the major players were and who I should pay attention to.

Hopefully I can ride the wave of this week’s success and increase my gains in a new trade. Lets see what week 2 has in store for me.