Yearly Archives: 2012

Be confident in my speculation! Don’t have too many second thoughts and try taking some small risks by investing in two-three contracts.

Close monitor of changes in market sentiments, and global supply and demand helps improve my strategy on trading

I will not trade on long term basis for my short/long position contracts, since there are many market uncertainties.. I would rather trade on weekdays going in and out of the market before TradeSim System stops trading on weekends.

I should also consider upgrading my cellular to a smartphone for updates on price quotes on a more regular basis. This keeps me in sync with the market.

With the lag in the tradeSim system in executing my contracts, I should invest few hours in advance before any price change takes place that affect my position value, causing unnecessary losses.

This past week, December wheat prices rose from a low of $846.6 to $860.20. Similarly, corn prices rose from a low of $626.3 to $634.6. I think prices for wheat and corn will trend down at the beginning of this coming week. Therefore, for next week or so, I will stick with short on wheat and/or short on corn in the first three days. Later on, depending on the market situation  I might stay on or change my position to long again.

On October 18^th 2012, I re-entered the market, with an expectation that corn prices would continue to increase in the next couple days. As I read through the commodity news on Huff Business Post, the commentator indicated that soybean, corn, and wheat prices will rise as some South American farming regions either get too much or not enough rain, particularly Brazil and Argentina.

In the case for Argentina, there has been too much rain in the wheat and corn growing regions, whereas Brazil was experiencing a problem of a lack of rain.

By taking a long position, I have made a small gain of $275.00 on one contract when the price in was $755.25, and price rises to $760.75. This helped me to increase my equity to from $27464.80 to $27739.80.

Thus, I was satisfied with my investment decision. However, if I were more confident, I could have invested on more long contracts to offset the huge losses of $12,536 in the past week.

I then decided to take on a short position since China’s economic slump signals a lower import in food supplies and raw materials. According to Huff Business Post on Oct 18, China’s economy grew 7.4% in July through September which was slower than 7.6% growth rate in the second quarter last year.

Although the corn futures were on the rise on Thursday, investors become increasingly concerned about the slowdown of global demand due to lower growth in the global economy. Thus, it is valid to take into consideration how the slowdown in quarterly growth in the Chinese economy relative to the previous year when I was making my investment decision.

At the end of Friday, when I checked my trade account balance, I made a loss of $100. Ultimately, I did not do very well on my investments. There is almost no gain, no loss. After all, I have only gained $175.00 from my previous long position on corn. Thus, as a short term investor, I should have listened to my instinct and stay long for corn until the market closes on Friday.

In the very end, my equity balance becomes $27576.34, with a net loss of $12,324.50.

http://www.agriculture.com/markets/analysis/corn/marketing-rules-f-success-in-2013_9-ar26629

Although this is not directly relevant to speculators’ investment strategy, I’ve found this interesting article via agriculture.com. It mentions farmers’ perspectives on investments. It has provided valuable advice to farmers as investors for their productions. Essentially, they have listed the following tips in this article for the farmers:

1. Get your inputs secured. With the large increase in global wheat and feed grain acreage in 2013, fertilizer and seed prices will be moving higher.

2. Try to arranging a flex-rent lease with your landlords. With corn at $8 and soybeans at $16, there are some unrealistic rent expectations for next year.

3. Stay realistic and disciplined in your marketing. The worst thing to do is to sell ahead a lot of crop one year and then sell none the next year. You could end up wrong two years in a row.

4. Stay aware of the global economic problems and the challenges we’ll face after the election this year. A strong U.S. dollar could pressure grain exports and grain prices. Farm prices and farm profits will be pulled down in the next one to two years unless some fundamental changes in how global governments – including the U.S. government – handle the current debt problems.

5. Take a long-term view by following the roadmap in the business plan. For instance, when the author has talked to his Illinois farmer, the author reminded him that despite the losses he suffered from many farms, he should look back at what he succeeded and calculate risks by being a disciplined “scale-up” seller and “a seasonal seller”

References

Grains-corn eases on harvest pressure, soybean level (Oct 5 Friday, Reuters)

http://af.reuters.com/article/commoditiesNews/idAFL3E8L53Y120121005

Corn Prices Jump, report on shrinking supplies  (Wallstreet journal, sept 28, 2012);Owen Fletcher and Bill Thompson  

http://online.wsj.com/article/SB10000872396390443389604578024180178198160.html

Marketing rules for success for 2013

http://www.agriculture.com/markets/analysis/corn/marketing-rules-f-success-in-2013_9-ar26629

Chicago corn,wheat edge lower on corn harvest, Business recorder; Pakastian’s Financial Daily. Oct 5, 2012.

http://www.brecorder.com/markets/commodities/europe/83943-chicago-corn-wheat-edge-lower-on-harvest-progress-.html

I do not have a particular strategy prepay, but I should definitely consider placing a price limit on orders to minimize my losses for all commodities contracts. Even when I am holding my contracts over the longer term period, I should be consistently checking the daily news to see what goes on in the market such that I would become more reactive to what goes on in the market, and would be able to minimize losses and recoup more profits.

Since we have a decline in corn imports by China, this also hurts US corn prices. China, as one of the world largest importer, also produces large quantity of corn along with other stocks.

This sufficiently helps domestic demand, but at the same time, the country could import supplies from the US to build its reserves

According to the US Grain Council, production is expected to increase by 5 million to 6 million tones yoy both yields and planted areas, but the group did not estimate the total size of the China’s 2012 corn harvest by looking at historical harvest in 2011.

This info indicates that we are not aware of the decrease in size of corn imports from the US to China as a result of higher harvest. All we know is that US imports of corn to China’d decrease.

As I observed a decrease in corn imports by China from the latest news this past Friday, I expect that, over a short period of time, there are profitable opportunities by putting on short positions for wheat and corn.

As risk averse investor, I will try putting a price limit prior to investing.

With a huge loss of over $12,000, I’ve learned my painful lesson.. to become a more prudent investor.

On the other hand, if I were to invest in soybeans. I would consider setting a limit and take on a long position. As I’ve seen from the USDA weekly report, soybeans sales has reached its highest in three months at 1.3 million tonnes of exports (as indicated in Business recorder, Pakastanian ‘s Financial Daily). I expect demand for soybeans would continue to increase as imports increase.

Hopefully, the snowfall is not so severe in the United States.. as this might create damage to soybeans and corn crops in the Mid-Northwest areas.

This week’s investment, with Dec corn and Dec wheat contracts, I ended with a loss of -$12,536, and an ending equity balance of 27,464.94.. a drastically increased in loss due to wrong investment approach.

My friend Brady advised me to withdraw from long positions for wheat, and corn.. and set a limit when selling for three of my futures contracts.

By setting a limit, it would have minimized losses by having a certain fixed price set prior to executing the futures investment.

During the week, I did not expect an increase in harvest for corn and wheat at all. However, the USDA report indicated that there is an increase in both commodities as a result of a bumper crop year for the US. However, I persisted in my belief that a rise in corn and wheat prices would continue to occur due to tight inventory supplies. As reported in the USDA in a quarterly grain supplies report on 28^th Sept, “Domestic corn inventories totalled 988 million bushels as of Sept. 1, the lowest level in eight year. Corn supplies were below the average analyst forecast of 1.126 billion bushels in a Dow Jones.”

However, on Oct 1^st and onwards price for corn and wheat continue to decrease. On the 28^th, Informa Economics said that it expects a raise in corn production forecast to 11.194 billion bushels, based on a yield of 127.0/acre. Since corn production is expected to raise, the availability of corn in market increases. In effect, wheat also declines due to its close relationship with corn for production substitutability in cattle feed.

Thus, we can see that the crop damage from the most severe US drought was not as bad as expected. In particular, crop harvest for wheat and corn revive in a timely fashion as rain pattern resumes in August.

Even though I was taking a long position in wheat and corn, believing that prices would raise steadily in the next few days of the week, I should still bear in mind that prices for both commodities are highly volatile, and that I should regularly monitor the USDA announcements to anticipate the potential consequence to crops’ supply and demand; and predict the reactions from majority of the rational speculators.

For instance, in my case above, the USDA announced a higher than expected harvest  for the US, this means that I should take into consideration that higher availability of crops in the market puts downward pressure on cash prices such that there’d be more speculators shorting the futures contract to gain profitable returns.  

In effect, I should react more swiftly to the news and change my position and add in a limit to my futures investment sooner rather than waiting till I have incur huge losses, then withdraw the market.

Future Trading charts.com – Wheat Options There but Canola Still a Cashflow King

http://futures.tradingcharts.com/news/futures/Wheat_Options_There__But_Canola_Still_Cash_Flow_King_186306830.html

DowJones, The U.S. Grain and Soybeans Futures Fall on the Pre-USDA Risk Reduction

http://futures.tradingcharts.com/news/futures/DJ_U_S__Grain__Soybean_Futures_Fall_on_Pre_USDA_Risk_Reduction_186302672.html

Grain and Soy Review, Corn Falls on Weak Export Demand

http://futures.tradingcharts.com/news/futures/DJ_USDA_Daily_National_Grain_Market_Summary___Sep_27_186307487.html

Analysts see tighter corn inventory, USDA reports

Technical Analysis – ForexPros (U.S. Corn Futures)

http://www.forexpros.com/commodities/us-corn-technical

Technical analysis – ForexPros (U.S. Wheat Futures)

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

The first interesting info source comes from the DowJones Commodity News Select, via Comtex:

According to the DowJones Commodity News Select, it is interesting to note that, in general, grain market now has a tight-source of supply, particularly corn and soybean at the start of the harvest season.

It is evident that there is a decline in production of soybeans due to the drought in Brazil and Argentina, the largest soybean producers in the world this summer that occurred shortly after the drought in the United States.

As of the beginning of September, soybeans stocks are going to be tight despite the fact that soybeans have better yields in parts of the United States. The most recent USDA forecast indicates a 130 million bushels of harvest for soybeans, however, analysts expect that on average the USDA will report a higher figure of 132 million bushels. Nonetheless, the analysts’ forecasts ranged from 115 million to 152 million bushels.

In addition, after a week of fallen prices in grain and soy futures, there is a general expectation that prices will rise.

Another interesting source of information is from a trade recap on Farming News on September 24^th 2012. There were concerns in the world market about the slowdown in demand for corn. “The USDA states more corn has reached maturity, compared to a year ago and on average 39% is harvested, compared to 12% last year. Supply for corn has improved substantially such which implies a technological improvement in corn harvesting.

Corn Futures prices in turn affects ethanol futures, which brings down prices. In addition, this article in Farming News illustrated various sources of information on increasing corn supply in the international markets. According to the Ukraine’s Ag Ministry, corn exports for the marketing year to date are 1.29 million tons, compared to 58,300 tons from July 1 to September 21, 2011.

Furthermore, I anticipated that wheat prices would fall as it has a strong correlation to corn futures prices. As reported by the DowJones Wire, South Korea’s Nonghyup Feed Inc. bought 65,000 tons of optional origin corn, adding the corn price for delivery to East Asia is at a $20 discount to wheat. The Philippines Department of Agriculture projects a potential decrease in wheat cattle feed imports due to a surplus in corn production. In effect, the country would be exporting corn in 2013.

Although the information above are useful, I need to be careful not to focus too much on one aspect of wheat and corn market supply. Thus, it is necessary to be cautious about the information sources I read in the news and analysts reports, and thus the ability to make credibility judgments is crucial.

Website: http://www.farms.com/news/soybean-corn-wheat-futures-prices-lower-monday-55470.aspx

Despite numerous uncertainties in the market, I am confident that as long as I keep track on the grain price analysis, I will eventually get a good grasp on what positions and contracts are sensible to take on in the market. As a risk adverse investor, I tend to look for conservative investments, in which commodities are relatively less volatile, and thus, I can hold over a longer period of time without worrying too much about price spikes.

I would say, most likely, I will be investing in wheat contracts over a long term period for about two weeks or more. As for other corn and soybeans, I am not entirely confident about these two markets, and thus, if I do invest in either of them, I would need to do my research thoroughly prior to investing.

This year, some analysts stated that after a warm spring and early planting, corn inventories could come in higher than expected due to an unusually early harvest. However, thecorn harvest outcome contradicts with ex-ante prediction of higher harvest. It turns out that corn inventory has a tighter supply. Consequently, one could not predict precisely the outcome of harvest, whether it will be higher than expected based on historical records. In fact, there are many volatile factors in futures contracts such as changes in storage costs, time to delivery or harvest, and seasonal patterns.

Hence, this is consistent with the market analysis for corn stocks on DowJones News Wire. As Brain Hoops one of the analysts from brokerage Midwest Market solutions said, “corn could have a major swing.”

My equity balance is $30272.29, and I have incurred a loss of $1762.50 by selling three December wheat contracts, and selling two December corn contracts. I was taking on short positions for both contracts.

Frankly  speaking, I have not been meticulous enough to read through the futures technical analysis to determine the right position to take on for the market. I have also mistaken the fact that the impact of reduced demand of grain from the cattle-feed sector, ethanol producers and foreign importers would result in low corn and wheat prices for at least two more weeks.

In addition, while I was browsing through the Chicago trading board website for the chart of corn and wheat futures, I thought the market is going to be bearish, such that prices of both commodities are going to fall as the wheat harvest season arrives.

However, it is very unwise to simply speculate the fall in prices based on the downward movement of prices in the past few days for the general grain commodities market. This is due to fact that the market is always full of unpredictable volatility. As a result, I can never fully understand the market situation just by observing recent historical price trends.

In fact, the analysts’ reports indicated that the market for wheat and corn is probably going to be bullish as opposed to bearish. As stated by Derek Squair, president of agri-market trend marketing, “Just because wheat is now easier to sell, it doesn’t necessarily mean that now is the time to sell it. Wheat is a lot more complex than the non-board grains, with additional grading factors and other channels.”

In general, analysts have strong recommendation of BUYING rather than SELLING, which in effect, indicates that the USDA’s announcements of the shortfall in wheat and corn supplies in the market have profound impact on prices.

I)  What went right?
II) Road Ahead
III) Cool Source of information

i) What went right?
Initially, I decided to long for the December corn futures contract in anticipation that the drought in the United States would be highly detrimental to the corn harvest across farms such as in Kentucky, West Texas, South Carolina, etc. In particular, this year’s drought has created a deviation beyond the normal pattern in which rain fall does not resume earlier in this September. It turns out that, according to the latest report from the US Drought Monitor in the US edition of Huffington Post Canada, forecasts have indicated that “drought may persist through early winter, and are projected to develop further through Pacific Northwest and Upper Midwest.”
In addition, according to the news source McCathy Tribune Information Services (Sept 13), james Cromer, the Kentucky Commissioner of agriculture, remarked that farmers suffered from massive losses in corn yields, which resulted in food shortage for cattles and soaring prices at grocery stores and gas pumps. In particular, Green Bowling farm suffered from a hard hit as one of the major corn producers.

I thought this approach was reasonable, since drought drives down supply for corn which in turn results in rising costs for cattle-feed, and thus, demand for cattle-feed reduces the availability of corn supply for human consumption. As supply of corn commodity shifts left, price for corn is higher for every quantity level. Consequently, corn becomes more expensive, and thus, this implies potential profits for buying the corn futures contract in December. 
However, I failed to take into account the possibility of improved situations in some regions in the United States which contributed to substantive amounts of harvest yields. In effect, higher yield regions such as areas between South Texas, Indiana, and parts of Ohio (potentially Alabama, Georgia and South Carolina) could possibly have some improvement in drought conditions which helped outweigh losses in harvest from regions with severe droughts.

Lesson learned: exit earlier on Sept 14th from the market by selling the corn futures contract in December to reduce my losses of $988.50.

Road Ahead
Once dry season ends, rain fall does return gradually in September as the normal pattern resumes. This implies that corn harvest becomes more abundant, and thus, prices become lower when farmers have more supply of corn available in the market. However, I do need to take into account that storage is an important price-controlling factor, as it enables farmers to reduce the rate of decrease in corn prices (in effort to maximize profitability by adjusting market supply).
However, there are numerous inconsistencies in the outcome of corn harvest depending on variations in regional rainfall patterns, soil quality, allocations of corn harvest to production of ready-to-feed corn silage.

In my point of view, I anticipate that the drought-stress results in a decrease quality of production for ready-to-feed corn silage due to a lack of moisture for good preservation and storage. In addition, there are more uncertainties associated with how well farmers ferment their corn feed, and the risk levels of buying corn-stand versus corn silage.
Within the next few weeks, since there has been ecoli-infection detected in Canadian beef sourced from the Edmonton-based XL foods, I anticipate a decrease in demand for beef in the market as consumers become increasingly cautious about beef consumption. This adverse demand shock induces farmers to reduce their supply of beef in the market which implies that they reduce their purchase on cattle-meals from corn.

In addition, when we examine the potential consequence of el Niño effect which may profoundly alter the weather pattern by introducing more humidity into the South and the Ohio Valley. However, according to the NOAA climate prediction centre, forecaster High Van Dan Dool claimed, “the effect this year would more likely to be modest, since water temperatures halted their increase during September. In effect, this may prevent a strong El Niño event from occurring. We expect this will intensify a little bit as we get into later fall, but it is probably too late to get a major El Niño.”

Consequently, based on these two causes, the availability of corn consumption for humans will increase, which will, in turn, drive down prices of corn. Therefore, if I were to invest in corn futures again, I would choose to short for corn.

iii) Cool sources of information and references

By far, My favourite article is called “Farmers looking at widely varying yields.” This article is sourced from the Tribune Info Services viz ComTex. Jim Luzar of Vigo County, the theme from “Drought of 2012” predicts the variability in corn yields at Wabash Valley in Illanois and Indiana.

There is data indicating that 70 of the farmers from the south of interstate reported with 15 bushels of corn per acre in some spots but in others up to 140.

In addition, there are variations in amount rainfall. For instance, white City (East of city of Regina) received significantly more rainfall than Vigo.

According to Luzar, the summer drought situation has been worse than the 1988 drought in some aspects. At least, there were 2-3 inches of rain in July ’88 which helped alleviate the dire situation.

In effect, severe drought results in high temperateure and a lack of moisture as more swaths of corn were plowed and harvested for cattle-feed.

My second favoruite was the article from Wisconsin University about the factors that affect pricing of corn silage. The author mentioned factors such as production costs, grain price, harvesting costs, handling and sotrage costs, orgnanic content of stover, quality of starch, and digestibility of the neutral detergent fiber.

Furthermore, the author looked at the perspective of a growers (sellers) who computed prices based on corn grain yield, and diarymen (buyers) who calculated based on availability alternative forages, namely alfalfa. Ultimately, market price is still determined by the invisible hand that comes forth with a price which equalizes supply and demand quantities.

References

“CFIA recalls ground beef product for the fifth time,” Canadian Press September 22nd, 2012. CTV, Bell Media. 
http://www.ctvnews.ca/health/cfia-expands-recall-of-ground-beef-products-for-fifth-time-1.967466

“Corn Agronomy – Price Stressed Corn Silage,” July 10th, 2012.

http://wisccorn.blogspot.ca/2012/07/pricing-drought-stressed-corn.html

“Farmers overcome challenges as agriculture shifts” Sep 13, 2012 (Daily News – McClatchy-Tribune Information Services.
http://futures.tradingcharts.com/news/futures/Farmers_overcome_challenges_as_agriculture_shifts_185492065.html
“Pricing Corn Silage in 2012, Ontario – Ministry of Agriculture, Food, and Rural Affairs”
http://www.omafra.gov.on.ca/english/crops/field/forages/cornsilage2012.htm
“Pricing Drought Stressed Corn Silage” Broad of regents of the university of Wisconsin system
http://fyi.uwex.edu/drought2012/tag/corn-silage/

“Pricing Drought-Stressed corn for Corn Silage”
http://web.extension.illinois.edu/oardc/downloads/43940.pdf

US Drought May Persist through Winter Through Early Winter Forecast Predicts” Huffington Post, Canada (The US. Edition) http://www.huffingtonpost.com/2012/09/21/us-drought-growth-2012-winter_n_1903478.html?utm_hp_ref=green