WEEK 3 (Part 1): The Went Right/Wrong – Wheat Nightmare

Monday (Sept 24^th)

POSITION	SUBMIT   DATE	TYPE	CONTRACT	QUANTITY	EXECUTED
SHORT	Sept 21st	Market	W2Z	1	Yes
SHORT	Sept 21st	Price Limit	W2Z	1	No – Deferred

As mentioned in last week’s blog, I failed to offset both of my W2Z wheat before closing on Friday, and I had 3 contracts of wheat (2 December wheat and 1 March Wheat) going LONG left in the market. The transaction for going SHORT on one of the December wheat was not processed until today. Unfortunately, wheat future started to drop drastically on Saturday night, and continued on Monday, despite the fact that all the news released favored upward price trend for wheat future. Russia, a Major wheat export country, was still considering export control, and many importing countries were increasing their import due to supply depletion as a result of the drought; I was agitated at the price drop.  In addition, Google news did not report any major reasons as to why the price of wheat fell as of Monday night.

The only reasonable explanation for the price drop in wheat that I could think of was a hasty increase in numbers of scalpers in the wheat market. After predicting the wheat price increase on Friday morning, many traders bought large amount of wheat while the price still remained low, and immediately went short after the price increased later during the day. With scalpers selling wheat at the same time, wheat supply increased abruptly, and caused the price of wheat to drop.

From the news and information gathered, I was still convinced that wheat price would increase due to an increase in world demand and decrease in supply from exporting countries. Hence, I decided to keep my LONG position for both W2Z (Dec wheat) and W3H (March wheat) for another day to see where the market was heading.

Wheat (W2Z) Price In: $897.25
Wheat (W2Z) Price Out: $889.25
Total Gain/Loss: – $401.00

Wednesday (Sept 26^th)

POSITION	SUBMIT   DATE	TYPE	CONTRACT	QUANTITY	EXECUTED
SHORT	Sept 25st	Price Limit	W3H	1	No – Deferred
SHORT	Sept 25st	Price Limit	W2Z	1	No – Deferred

I set a price limit order for December and March Wheat at a price that’s relatively close to my “price in” prices for both contracts. However, wheat price dropped disastrously for the entire day on Wednesday; both price limit orders were deferred.

Thursday (Sept 27^th)

POSITION	SUBMIT   DATE	TYPE	CONTRACT	QUANTITY	EXECUTED
SHORT	Sept 27th	Market	W2Z	1	Yes
SHORT	Sept 27th	Price Limit	W3H	1	No – Deferred

Price dropped drastically since Monday night. Wheat future fell to 2 ½ months low, and dropped for a 4^th straight day on Thursday. The price drop was partially due to technical selling and fund liquation; as well as the rainfall in the Southern U.S. plain winter wheat belt. However, countries were still increasing their demand for wheat import, and experts believed that wheat price is likely to increase. While I was fully convinced that the wheat price could increase anytime, I wasn’t sure how much the price would decrease before it bounces up again. On top of that, since I had 2 contracts in LONG position, one price drop means I lose double the amount. At this point, I wanted to reduce my risk of losing more money, by offsetting one of the contracts, and keeping the other one in SHORT position, so that I don’t lose double the amount even if the price falls even further. Hence, I went short for W2Z with a market order, and kept my price limit order for W3H, which I knew was never going to reach since I set the price at $909.10. Even if the price reached $909.10 for March contract, I wouldn’t lose money.

Wheat (W2Z) Price In: $897.25
Wheat (W2Z) Price Out: $855.00
Total Gain/Loss: – $ 2113.50 

Potential Loss

Wheat (W3H) Price In: $908.00
Wheat (W3H) Closing Price: $868.25
Total Gain/Loss: – $1987.50

Friday (Sept 28^th) 

POSITION	SUBMIT   DATE	TYPE	CONTRACT	QUANTITY	EXECUTED
SHORT	Sept 28th	Price Limit	W3H	1	Yes

Wheat price skyrocketed on Friday morning. December wheat increased by 44.0 cents, and March wheat rose by approximately 41.0 cents since Thursday.

The highest price for W2Z wheat was $907.00, which is higher than my price in for W2Z ($897.25). I should’ve waited for one more day to offset the W2Z wheat that I impatiently sold yesterday. In which case, I could’ve earned a maximum of (907-897.25)*5000 = $ 487.50 ; even if I didn’t end up attaining that much gain, I definitely wouldn’t have lost over $2000.  Nevertheless, I don’t regret making that decision, because wheat future could’ve fell even lower on Friday and I could’ve lost even more money if I didn’t offset one contract to reduce risk.

On the bright side, W3H future reached as high as $916.60 today. As soon as I saw the price raised above $900, I submitted a price limit transaction of $909.10 for going SHORT. As a result, not only did I gain an additional $211.50, I also gained by not losing the potential loss of $1987.50 for W3H from Thursday.

Wheat (W3H) Price In: $908.00
Wheat (W3H) Price Out: $912.25
Total Gain/Loss: + $211.50 

 
In general, for the contract that I lost over $2000 on, I bought it at the highest peak price, and went short at its lowest peak price.

What I learned from the past two weeks of trading was that crop prices usually fluctuate in cycles. There is an upper and lower limit to their increasing and decreasing in price. If there has been tremendous drop in crop price, the likelihood of the price bouncing up is very high. Therefore, it’s always better to be more patient when waiting for the prices to U-turn.

Total for Week 3:

loss from W2Z + loss from W2Z + gain from W3H
– $401.00 – $2113.50 + $211.50 = – $2303.00

 

Reference

http://www.forexpros.com/commodities/us-wheat

http://in.reuters.com/article/2012/09/27/markets-grains-idINL4E8KR2TG20120927