Week 3 Trading – what went wrong

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.