Filed under: Commodities trading | Tags: association, bailout, bear market, causation, chicago board of trade, euro, financial markets, futures contract, greece, mini-wheat, statistics
If you follow commodities prices, you may have noticed that the they have dropped quite a bit since my last post – in fact, since I bought in the market has pretty much done little but go down. Several days after I bought in, wheat prices started to falter, brought on by all that stuff going on in Europe with Greece needing to be bailed out, Germany balking and the Euro falling. I sold as things began turning bearish, and am now sitting on the sidelines, waiting to jump back in the game at a point where I might recover what money I lost on the way down. My losses didn’t add up to a lot, but they were apparently enough for me to start, as we urban planners like to say, “engaging in the process.” I am now dilligently checking prices, trying to make some sense out of these daily market reports as they come in, and even got up a little bit early this morning so that I could call broker Jim before the trading floor opened.
The market reports, however are full of advice like “we have no new passion for new positions” and “stay bearish.” We seem to be in the midst of a rally in grain prices, which was why I was up out of bed before the opening bell, but when I spoke to Jim he’s convinced that the rally is unsustainable, prices are still up about 15 cents too high, and “as soon as Greece coughs, it’ll go back down.”
This has all spurred me to think back to a conversation I had with another Jim – Jim Braun – back in Chicago in December. For those of you who don’t know Jim, he’s an Iowa hog farmer turned advocate in favor of small farmers, local food and organic agriculture, and was one of the brains behind Illinois’ groundbreaking Food, Farms Jobs Act passed by the state legislature in 2007. Jim pointed out to me that all these market reports continually make up reasons for why the market is moving up or down as if they know exactly what’s going on – it might be that the weather is bad, it might be that a certain country is deciding whether or not to import a bunch of grain from the US, it might be the larger economic conditions (which seems to be the consensus this week) or index fund movements driving prices – and usually all of these factors at once pushing and pulling the price around.
Anyway, Jim’s point was that no one ever really knows what is causing the price to move, and while it could be any of these things it could also be something else entirely. Because my day job involves social science research – trying to tease out the multiple factors that influence whether people walk, drive or take the bus – I know that people equate association with causation all the time. Just because your statistical model says that two factors are associated, that doesn’t mean one factor is causing the other. If carrying umbrellas is associated with traffic accidents, it doesn’t mean that umbrellas cause traffic accidents. Rather, carrying umbrellas and traffic accidents are both associated with rain, and if you don’t pick up on this, you’re going to have a hard time getting that journal article accepted.
The thing is that with the markets, you can do all the statistical modeling you want but ultimately it doesn’t really matter what the cause actually is, it only matters what people think the cause is, or what people think that others think the cause is (and so on, ad infinitum). Talk about speculation! Jim B. and I talked about the huge agricultural corporations that grow commodities on contract with farmers, own their own networks of grain elevators, trucks, barges and mills, get large payments from the government, export massive amounts of grain and also trade on the CBOT. Surely, they wouldn’t ever take advantage of the knowledge and influence they have in order to make money as the rest of us stand on the sidelines, guessing…
Filed under: Commodities trading, project updates | Tags: chicago board of trade, commercial grain inc., futures contract, futures contract delivery, grain elevator, hedging, mini-wheat, wheat
Well, yesterday morning I became the proud owner of a July Chicago Board of Trade wheat futures contract (the 1000-bushel “mini” contract) – so perhaps it’s time to start telling the story of how all the pieces of this project will connect.
A futures contract is, in essence, an agreement to buy a certain quantity (in my case, 1000 bushels) of a certain grain (wheat) by a certain date in the future (July). Buying a futures contract is one thing, but actually following it through to delivery is pretty rare – out of the millions of bushels of wheat that are traded as futures contracts on the Board of Trade, only a very few end in the exchange of actual grain. So, futures contract delivery is a specialized and complicated transaction, and most commodities brokers don’t deal with it very often, if ever (within the commodities brokerage world, there are folks that specialize in deliveries of futures contracts). With help from Joanna, some of her co-workers, and a contact at the Board of Trade, I found out a few months ago that to actually deliver on a mini-wheat contract (1000 bushels), I’d need to have 5 mini contracts, or 5000 bushels. That’s not only too rich for my blood, but 1000 bushels is going to be tough enough to deal with, thanks.
So, we (they, really I can’t take any credit for this), devised an alternate approach. Basically, I’m going to be using my futures contract to hedge, or manage risk – exactly the same way a baker or miller would use it. The contract I bought today will basically lock in my price – any increase in price between now and then will make me money on the futures contract, offseting the higher price for the wheat on the “cash” market. Instead of letting the contract expire and taking delivery, I’ll settle the contract shortly before its expiration date and then, in a separate transaction, go pick up the grain at an elevator. I’ll be getting the wheat from the only grain elevator in Chicago that is certified for CBOT deliveries, a 12.3 million bushel behemoth on the Illinois River, now owned by Nidera.
My brokers Jim and Steven at Commercial Grain, Inc. (out of Arkansas, of all places) have been great to work with and super helpful and patient explaining how our relationship works and what my hedging strategy should be. The lower I can get “in” to the market, the better covered I’ll be in the case of price increases between now and when I pick up the grain. I was advised that $5.00 / bushel is probably a good point to jump in (and that’s basically what I’ve budgeted for), that although prices are on the upswing they aren’t expected to swing too wildly before we close out the contract, and that I should watch the weather reports and the upcoming USDA crop report to make sure (full disclosure, for those who might be inclined to nitpick my brokers’ advice: my notes on this conversation are not that great, so it’s my translation, not the actual advice, that would be the issue – if there is an issue. Do I sound like a lawyer yet?).
So there were a few quiet days in which I filled out the requisite forms and pretended to understand the significance of the daily grain market reports these guys were sending me. Then, there was that inexplicable insane swing in the markets last week, which I missed the day it happened. The next day when I talked to Steven he was like “What?? You don’t know??” like there had been a nuclear explosion or something, although I’d probably miss that too because I’m apparently living under a rock out on the edge of the continent here…
Anyway, we played it cool for another day or two, and then Monday morning, just as I was reading the grain market report saying prices seemed to be headed up and up above $5 for the foreseeable future, I got the call from Steven that the trigger had been pulled – he’d jumped on it first thing in the morning while prices were still low, and I was in at $4.99 3/4!
Industrial Harvest 