Lessons from the Pros


Exploring The Grain Markets

My first exposure to the grain markets came in 1994 as a rookie commodities broker. It was the weekend of the Masters tournament, and as I watched the rain start to pour down on the players I got a frantic call from my boss telling me to brace myself for Monday: the grains were called limit down. The firm that  I was working for at that time had been accumulating a sizable position in corn and soybeans. This was motivated  because of the near drought conditions, and  the strong rally that had been underway.    So in this scenario ( limit Down)  the firm would stand to lose a lot of money (and clients) come Monday morning. The lesson here is not to buy beans or corn when they’re very expensive, and particularly, when there’s a slight chance of rain in the forecast.

As we can see from my first bad experience in the grain markets weather among other factors plays a key role in the price movement of the grain markets.

For those of you that haven’t traded these markets before let’s start with the basics.  Prior to 1848 farmers in the US had no way of protecting themselves against wild price fluctuations of corn and wheat (which were the main crops in those days).  To add to this risk, during harvest season when farmers went to market with their crop, prices were usually depressed because of the abundant supply. Conversely during planting seasoning the scarcity of the seed would serve to escalate prices. As you can imagine it was a very hard way to make a living.

That changed somewhat in 1848 with the creation of the Chicago Board of Trade. The board was created to allow farmers to hedge against big price fluctuations using forward contracts, or “Futures contracts” as we know them today.  These contracts  control 5000 bushels of the underlying grain product and are used to offset the price movements in the cash markets.  For instance if a  corn farmer anticipates a good crop and wants to hedge against lower prices he would short a corn contract that would expire several months out.   The end result would be that what he would lose on the cash crop, he would make up in the profits in the futures contract.

In today’s market, all the grain contracts are traded electronically since they are a  global market  as countries such as Brazil and Argentina are now major grain exporters. The trading hours are also quite unique as they have a big gap of time where trading is closed.  The trading times for the three major grain markets (soybeans, corn, and wheat) are as follows: Sunday – Friday, 7:00 p.m. – 7:45 a.m. CT and Monday – Friday, 8:30 a.m. – 1:15 p.m. CT.  Note the 5 hour and 45 minute gap between the morning close and evening open.  Also, these markets close for 45 minute (starting at 7:45 a.m. CT) in the morning, and reopen the same time as the US stock market.  This time (8:30 CT) is of importance to traders because similar to stock index futures; there is typically a lot of price movement around this time.

One more element to remember when trading the grain markets is how closely the USDA (US Department of Agriculture) monitors crop progress and inventories.  During the growing season, every Monday they release the crop progress report which, incidentally, is released when the market is closed.  So make sure you understand the risk before putting on a trade in front of  this report.  In addition once a month this same government agency releases the crop production report which is released during market hours and can have a significant impact on price.  To find when these reports are being disseminated simply go to this link http://www.nass.usda.gov/

The three main markets in the agricultural complex — in terms of liquidity — are the soybeans, corn, and wheat, in that order.  Soybeans are the most volatile, and wheat the least but this can change as the crop progresses. One other trait that can be of benefit to swing traders in particular is that these markets can be very trendy.   In the charts below we can see that wheat and corn have been in very strong downtrends for a year now, and based on our long-term supply and demand chart analysis there’s no reason to change that bias.

8-14-2013 Corn and Wheat Daily downtrend

 All told, these markets can open up a new set of opportunities and provide some diversification for traders.   But before you trade any market, make sure you understand all the risks and benefits, and most importantly have  a well-defined strategy.   Incidentally, although Soybeans are one of my favorite markets to trade the only thing I know about them is that they’re delicious with sushi( edamame).

Until next time, I hope everyone is having a great summer.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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