A true summary

This week, I kept shorting and covering wheat and soybeans, though the contract amount is quite small. But the high price of soybean and wheat still made me trapped in the negative return. I kept reminding myself that I shouldn’t be a lazy trader even if it was the end of the game.

After six-week trading experience, I found myself understand the market much better than before. But what made me regret was that I still haven’t used more technical tools into my analysis and decision-making. All the graphs and data I dragged into my past blogs were in an entry level.

But looking backwards, I can still see my progress. At the very beginning, all I have done was just “stealing” some pictures which demonstrated the price tendency of different crops and crude oil and editing some media news to support my decision-making. In the next few weeks, I started to realize the importance of combining various factors with the crop market, such as weather, demand and supply in export and import countries, etc. I continued to learn lessons from my past trading experience, finding that things that can lend me a hand to make wiser decisions should not be limited within news.

Thanks for the practice

The knowledge learnt in undergraduate study was always regarded as too theoretical and hard to apply to the real world. However, the trading game did grant me a great opportunity to apply the economic theories into practice.

The Law of One Price seems to be not that boring and hard to understand when I played the true but artificial game. When I observed the updating price of the future contract, it’s also a good chance to trace back to the history to brush up on something that may be missed by me. The following graphs demonstrated the volumes of production, export and end stock in US from 1993 to 2013. You can easily find how important the stock was for the commodity market. In 2007-2008, the world food price crisis has brought out great shocks and volatility, not only to commodity market but also to the whole society.

The low production in US and the low ending stock resulted in the unprecedentedly high price in this period (2007-2008). Maybe that’s the reason why more and more developing countries, like China and Brazil, have increasing incentives to purchase large orders from US to protect themselves from a potentially sudden increase of demand and an unpredictable decrease of supply. As we have learnt in FRE501, given the concept of convenience yield, stock-out will never happen in the real world. Both merchants and local government will choose to store more when the stock has a subtle tendency of diminishing. The benefits brought by the convenience yields weighed much more than the cost of storage. With the absence of commodity stock, the whole world will be hard to sustain no matter how well-developed the country is. The high price of essential crops is a vital threats for people’s life quality, and for parts of the world like Africa, it can undoubtedly threat people’s life.

Process is bigger than result!

Although “texting messages when driving” is such a high-risky and impossible task, we all accomplish it well with different “harvests”.  The uncertainty and unpredictability are what made this game more charming and harder to control. I’m pretty sure that I’ll continue to keep my eyes on my portfolio performance and make some unpressured trades in the following weeks. What made it much more relaxing is no need for writing something after trading any more~

Cons, MFRE-er!

Vanilla

This week, I sold corn at the price of 4.4 and 4.43 and shorted soybeans at the price of 12.74. But price of soybeans still tends to rise after my trade. I’ve experienced positive returns in the mid of the week, but what made my portfolio so embarrassing was the immediate increase of wheat price.

My history of wheat trading

In the first two weeks, I bought and sold wheat at a high frequency. But at the point of 6.74, I started to think that the price should drop in the near future because the news impact of lack of supply of Argentina would fade away soon. So I shorted wheat and waited for its drop. In the fourth trading week, I shorted and covered in a short run, which won me a little profit. But it still can’t fix my former mistakes of shorting at such a low level. And now the price is even far away from what I expected it to be. We can never predict accurately for the future, the only way to know why we made a wrong decision is look backward.

The media can never give the answer

The media reported that the demand of import countries and their additional orders for the future wheat supply in US is the reason why there was a surge in wheat price in the end of this week. They also predicted that the price will keep rising. After China’s announcement of purchasing more wheat, the wheat price soared to a high level.  And because of the decrease in wheat supply caused by the bad weather conditions in several major export countries, such as US, Australia and Russia, the storage and output have to not only meet the domestic demand, but also satisfy all the demand of import countries like China and Brazil. Both sides have suffered from serious problems in respect of production, it’s easy to understand why the price has been so volatile in recent months.

I searched on the Internet and found that there were several big purchasing orders from China happening in the 2013. (Table 1 & Graphs below) And I also observed the relationship between China’s purchase and tendency of wheat price.

According to the graphs, we can see that although right after the purchase, the wheat market will have a big shock, the tendency of the price will not change in the following trading dates.  From the beginning of 2013 to October, the price has been decreasing though with some volatility resulting from factors like big orders from importer and bad weather in major exporters and importers.  From my point of view, there will be some fluctuations of price, just like any period in the past, up and down trends will finally bring the price back to the formal level. And hope that I can cover my “high-price” wheat  at a proper price sooner or later.

What’s next?

Next week will be the last trading week. Should I say “Hallelujah”?! It seems that I just experienced the process that trade like a gambler- trade like a theoretical economist- trade like a gambler – trade like a theoretical economist. The busy midterm week nearly occupied most of my time, the advantage is that it keeps reminding me of the message that you shouldn’t trade like a gambler.

Please let me enjoy the foggy Vancouver before we start to prepare the next mid-term! Keep finger crossed!!

Vanilla

Decision I made this week, wrong judgment again?

Piles of assignments made me have no eyes to keep focusing on the trading game, though I did try to focus on. I have made a little bit trade, as you can see in the following graph. I longed 2 units of corn at the price of 4.38, and the limited order I set last week came into effect on Friday morning (when I was still enjoying my lazy bedtime), which won me a little profit by shorting-and- covering soybeans.

But What made me shocked was the down-side trend of corn happened just the time period when I was sleeping in the shining Friday morning, my return fell down to only negative 6.9% !

Oh My Corn!

Starting from September when the trading game was kicked off, the price of corns continued its trend of steadily decline. And as a new-hand, I always responded to the shock of market quickly. The orange notes can tell you all the decision points I’ve made up to now. I seem to be highly elastic with the respect of the price changes.  In a long-run perspective, all the price points I bid were just like one stop of a long-distance journey, and the difference between them is that you’ll surely know your destination on your journey while you can never predict accurately where the price will go in the future market.

Although I have made my determination last week that I would not be interfered by the media voices of  the commodity market, I was still curious about why the corn price declined this time. The news just told me that diminished ethanol demand undercut corn prices again overnight.  If it’s really the story, what happened in corn market should also occur to the soybeans market, because both of them are the major raw materials for ethanol.

What about Soybean?

There seems to be a little shock to the soybeans market. Maybe the diminished demand was just part of the reasons why price declined. Soybean has been maintaining the most leading role in the US export market, accounting for nearly 17.5% share of US export in 2012. Though the total grain and feed export was down sharply last year, but soybean export soared and is likely to continue its growth in the future year. Its growth may have some connections to the increasing demand of biofuel, but it was not the whole picture.

Considering that the continuous drought in US, we can see that the US supply of soybeans was not stable enough. Even though US can’t do a good job of supplying enough soybeans or other agricultural commodities, other countries like Brazil can fill the gap in the world market and took over part of the supply missions. Brazil sent more ethanol to the US than what it bought from it (3 times more in value and volume), meanwhile its imports fell down by some 50%. (Do you remember the assignment#2, question 9? If the supply of exporter decreased, the former importer will change into exporter, while the exporter like US may become importer.) This kind of global trading can definitely release US some pressures caused by decreasing production of biofuel feed.

Tired, but still have to trade!

Before Friday morning, market seemed to be quiet and peaceful though we all have very tough and busy week days. I still have to keep learning and trading (there’s only 2 or 3 weeks left!) no matter how wrong the decisions turned out to be.

Good luck, everyone~ No only in the game, but also in your following mid-term!!

Vanilla

Poor decisions in shorting wheat

Driven by the high demand of Asian countries caused by the floods in China, and also the bad weather in Argentina, one of the largest producers of agricultural crops, the wheat price has been soaring during the past week, ending at 6.865.

Buying corn— The lowest price in mind didn’t equal to the real bottom-line in the real world

The shutdown of US government this week partly influenced the commodity market. The limited information caused by the shutdown makes it more difficult to determine the reasons why there was a big fluctuation in price. The stock and production data yielded by the US government is always regarded as one of the most essential roles in leading the tendency of market. The missing sources will definitely raise a sense of nervousness in the market. Will the price of this week be the real bottom-line? Will buying corns at the end of this week become a smart decision? All I can do is just to wait!

A messy trading week, but still embracing some lessons learnt

1.To make long-run decision without distraction from the media

From the first week to the third week, I always tend to follow the market news to make my trading decisions. Sometimes, they’ll lead me to make wiser decisions and win me a small amount of money. But if there’s a 50/50 chance of winning money, there must be another 50/50 of losing money. It’s more sensible to make your own benchmark in determining what’s the best portfolio instead of lingering between what’s the media talking about and what’s the expertise thinking about. Making more “original” decisions based on the facts and data, even though they’ll turn out to be wrong afterwards. After several contract-buying, I came to realize that the effect of current news was always temporary. The small fluctuations day by day were just interludes in the annual price changing.

2.Demand and Supply—The timeless principle

It’s easy to figure out that the price will keep unstable if the demand and supply can’t balance with each other. The same story in the commodity market. The graph above illustrates that China has been the most important importer from US from 1992 to 2012, and China accounted for larger and larger share in US export. So it’s easy to understand why the flood in China recently has such an impact on US crop price. Asian nations with large populations to feed will not reduce their stockpiles unless they see inventories rising in top exporting countries such as the United States. “Higher grain stocks reflect the government’s priority of having a more-than-sufficient buffer to avoid any shortage and to run its welfare food programmes,” said N. R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy in New Delhi.

From the supplier side, most parts of western US are undergoing drought to different extents. It drove the market volatile. If there’s any lack of supply in importing countries or any unpredictable over-demand in these countries, price will rise, especially when the inventory in exporting countries drop down.

How about next week?

I decide to trade from a more far-sighted view instead of highly-frequent buying-and-selling actions, though there’s only three weeks left. Corn price is at a relatively low level, I will find a better chance to sell my 13 units with various buying price. And for wheat, as the disasters in both China and US pass away, the price of wheat may tend to be stable again and retrieve to its previous level.

Vanilla Chen