British Columbia is imposing the highest carbon tax ($30 per tonne of CO2e on July 1, 2012) not only within Canada but also among the world. The carbon tax was implemented on July 1, 2008, with tax rates for each fuel equal to $10 per tonne of carbon dioxide equivalent (CO2e) emissions.¹ When the policy was first launched, it was doubted in terms of its potential negative impact on economy and its efficiency in reducing the Green House Gas (GHG). Intuitively, the high carbon tax would leave no benefit to those directly affected including both the individual and the related industry (e.g. fuel, diesel, mining). At the meantime, it might also lower the competitiveness of local firms in face with the global trade market. But what really arose the public’s controversy is about the efficiency of the policy.

Here are some points regarding the carbon tax that are worthwhile to be mentioned. Firstly, most of the industries that release carbon dioxide during operation can’t be off the hook. B.C.’s carbon tax applies to 70 per cent of total greenhouse gas emissions. Of the remaining 30 per cent, about 14 per cent are associated with emissions produced by agriculture and decaying garbage in landfills. Another 16 per cent are associated with industrial emissions that do not come from burning fossil fuels.² Most of the tax payers have strong incentive for seeking maximum profits, which in turns results in higher costs or even lower production for the industry. They tend to respond with behaviors such as lowering daily production in order to reduce the emissions, introducing innovative technology that enables them to maintain the production without burdening them with high costs, or switching to green energy rather than GHG. However, all the abatement behaviors done by the firms who release CO₂ are based on the assumption that the tax level set by the government must exceed their abatement costs. Only under this premise will the business owners have incentives to take actions to lower emission level. Therefore, it’s essential for the government to come up a reasonable and effective tax rate to guarantee that majority of the industries will restricted by the carbon tax policy rather than keep emitting because of the gap between their abatement cost and tax rate.

With no doubt, the dramatic increase of the fuel and diesel price will influence household’s daily life. For the whole society, people tend to take their daily emissions into consideration. However, there are still some sectors that are excluded by carbon tax, such as landfill emissions and industrial process emissions: emission leakages from gas pipelines, venting of emissions during oil and gas production, and emissions associated with the production of some metals such as aluminum. The B.C. government has chosen to exclude these sources of emissions at this time, indicating that they will be subject to regulations that cap industrial emissions and reduce them over time (called a cap-and-trade system). ³ The latest exemption set by the BC Government, effective January 1, 2014, is for colored gasoline and colored diesel fuel purchased by farmers for the same farm purposes that farmers are authorized to use colored fuel under the Motor Fuel Tax Act. Furthermore, BC government provides some tax relief for some special sector such as agri-food and agriculture sector giving their indispensable position in British Columbia. For instance, the greenhouse growers have been offered some discount since 2013 and this relief will continue in the next few years. The grant will be set at 80 per cent of the carbon tax paid on natural gas and propane used for heating and carbon dioxide production.⁴ The strict regulation in defining the group of people who are required to pay for the carbon tax rendered the outstanding effect of reduction in CO₂. According to the GHG emissions data from Environment Canada, the GHG emissions within BC decreased by 1.5%, 6.7%, 1.1%, 2.4% respectively from 2008 to 2011. The total per cent of reduction during the four years were added up to -10%, comparing with that in the rest of Canada -1.1%. (The calculation has excluded aviation, fugitive emissions, and electricity & heat generation GHG emissions.) It can’t be denied that the carbon tax has made BC one of the greenest provinces in the world.

Second, the “revenue neutral” principle reduces pressure from high carbon tax payment. The government sticks to the principle that all of the carbon tax revenue will not be used for any funding programs, instead, all of the tax revenue will be used to reduce corporate and personal income tax rates. Additionally, it compensates people with low income in the form of low-income tax and provides northern and rural BC homeowners with a rebate up to $200.⁵ What should be noticed is that British Columbia has the lowest income tax rate within Canada, which alleviates the monetary pressure of the households, especially the poor, but the high tax rate will still leave inevitable influence on them. The lifted living expense rendered from extra fuel expense may lead to the proportionately reduced budget on food expense. Obviously, there exists diminishing marginal effect in that the increased cost of fuel may leave relatively small impact on the rich compared with the poor. As one’s income increase, he or she will have more strong capacity to pay for goods with high price, the high tax rate may not be a strong trigger for them to abate their fuel usage. While for the poor, their budget for each category of living expense is limited. If cost of fuel expense has to be lifted, cost of other expense such as entertainment, food and education will has to be cut to compensate the gap. Thus, they will have stronger incentives to cut down their fuel usage to control their fuel expense within an affordable range. Even if the government put certain programs targeted at the low-income group, the effect on the poor will still be different between people with various levels of income.

Reference:

1 BC’S CARBON TAX SHIFT AFTER FIVE YEARS: RESULTSAn Environmental (and Economic) Success Story, STEWART ELGIE and JESSIC A MCCLAY

2 The B.C. Carbon Tax: Myths and Realities

3 Carbon Tax Review http://www.fin.gov.bc.ca/tbs/tp/climate/carbon_tax.htm

4 Frequently Asked Questions about the B.C. Carbon Tax, David Suzuki Foundation

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

Trade and portfolio summary

This week my portfolio value finally changed from deficit to profit, gaining a 2.48% return up to Friday morning. My limit order of selling wheat came into effect, which contributed a lot to my return. And I also shorted 2 units of wheat at the price of 6.735, forecasting a tendency of dropping in the near few days. (Though the fact is that there was a continuous rise in the price of wheat.) I’ve set 3 limit orders this week, but none of them were filled because of my wrong judgement of the market.

Why make these decisions and what I’ve learnt?

1.Something about U.S. crude oil

U.S. crude oil ended lower for a fourth straight Tuesday, as the geopolitical tensions in the Middle East easing. The gradually thawing relations between Iran and U.S. directly rendered the decrease of oil demand and price. Thus, I regarded it as a sign of declining in corn’s price and bought corns at the price of 4.5675 which was a quite low price. I was prepared to make the investment in a long run. Plus, the US crude oil report released by EIA (the U.S. Energy Information Administration) this Wednesday morning sent the price tumbling for its increased inventory. I guessed there would be fluctuations this week in the corn’s price.

2.Why wheat price soared at the end of the week

The higher price largely resulted from the strong export demand and problems with Argentina’s winter crop. As Argentina is a major world supplier of wheat, corn and soybeans, the concerns of cold snap may have some influences on the fluctuation in wheat price. The kind of unpredictable factor made the commodity market prices volatile and hard to control. Tomas Parenti, the weather expert at the Rossario grains exchange, said via the media that “The leaves on some of the more susceptible varieties (of wheat) may have suffered from the cold, but the plants themselves can recuperate.” Thus, the effect may not last for a long time. I still stand the point that wheat price is the most stable one among the three crops. When I trade corns and soybeans, I always tend to be more cautious, for there’s too many drivers that can influence the price, ranging from the politics to the weather, from the oil price to the related rumors.

Conclusion & strategy for next week

This week the limit order set last week helped me a lot in trading timely at the ideal price, though I failed to win more because of the unpredictable driver. I’m inclined to be a conservative trader making options on ground of data and facts rather than a gambler hoping for a fat profit without doing anything.

Next week, I will start focusing on the Federal Reserve’s next move on its monetary policy at its meeting in October, and continue to observe the influences from the crude oil price.

Good luck~

Vanilla

The future trading of agricultural goods is a very fresh and challenging thing for me, I guess for most of us. Before I got to know my new friend—Stocktrak, it made me nervous with its profession and complexity. I have been at a loss until I “googled” concepts like what’s limit orders, what’s stop orders, what’s GTD and GTC, etc. After these steps, I finally became a little bit relieved. I found that the trading was similar to the precious metal trading I did during my undergraduate study. The principle is the same, buying at a lower price and selling at a higher price.

After information searching, I got to know some tips when trading for the future contract. A market order won’t be preferred when there’s a low average daily volume in the market. Because it tends to make you end up paying more than you originally anticipated. And the stop order will help you to execute at the price that you ask for, but not to guarantee the price. In other word, the order won’t guarantee your payment or receipts.

As a completely green hand, I tried to make my first trading for future by observing the past and current agricultural market. And the news told that the corn prices were down more than 3% after the USDA unexpectedly increased its corn yield estimates. And the agency is now predicting that 2012 would be the greatest yield since 2009. Maize, as an essential biofuel feedstock, has been experiencing volatility over the past few years. The fuel market has a strong impact on maize market. Compared with the rate of change in wheat’s price, that in maize’s price tends to be more unstable. (Graph1.1) Thus, for my first

Graph1.1

trade, I tend to buy more wheat instead of corns. In this week, we can see that the change of the price of corns was more unstable than that of the price of wheat. Thus, I tried to figure out which factor had such an influence on corn’s price.

I found a piece of news on crude oil, there’s a 2.5% soar in the market. (Resource from: http://www.lse.co.uk/AllNews.asp?code=tcxm5f5q&headline=Crude_Oil_Surges_25_On_Fed_Decision_Supply_Data)It has resulted in the constantly drop of oil’s price. (Graph1.2) Will it correspondingly affect the price of agricultural commodities? Within this week, the price of maize has dropped dramatically since Sep.20. (Graph 1.3) Empirically, the change of the price of crude oil should be in line with that of corn and soybeans. And the fact is that the price of corns has been affected by the price of crude oil and still in the status of low prices.  I’ll keep observing the price tendency of corns next week and find out other factors that will influence the market of corns.

Graph 1.2Graph 1.3

In conclusion, the trade in this week was not good enough. But I tried to connect different sources of information with the agricultural market. As a freshman, I decided to make my decisions based on news and price tendency. Gradually, I’ll start to use more analysis tools and professional knowledge to make deals.

Vanilla Chen

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