Trading commodities

[farming101]

Graham summed it up well.

While Minneapolis best reflects the Canadian HRSW market, it is a lot smaller. Liquidity or at least the ability to execute a trade when you want can be an issue. Usually that does not present a problem for a producer because he is in the market to hedge production, not speculate.
A market order gone wrong can have you running to the bank. I would not advise anyone to trade on their own if they do not have experience in the futures market.

During the wheat market run up this summer MW was at best a little under 11% of Chicago total volume. Recently it is about 6% of Chicago total volume. Kansas wheat is around 50% or less of Chicago recently.

[farmaholic]

"Are "average" trading account profits measured in thousands, tens of thousands or hundreds of thousands?....serious question!".............

come one guys, just wondering if I'm missing out on something and possible early retirement, freedom 55 or something better! A hobby?

[GDR]

The first question is how many transactions are you planning on? If you are going to be trading actively the commissions at a full service broker will eat you alive. Assuming you are comfortable with online order entry IB (Interactive Brokers) is probably your best bet. They used to not trade canola there but it looks like they do now. On the other hand if you are doing 1 hedge per year the a full service broker is fine and you can just call up the broker to place your order.

You shouldn't need 2 brokerage accounts for wheat and canola, unless the broker doesn't offer them both. If you open 2 brokerage accounts (big traders do this in case one of their platforms goes down or there is ever problem with the solvency of one of the firms) the only thing you have to be aware is not being simultaneously long and short the same commodity in different accounts. This is illegal.

CBOT is largest wheat market however Minneapolis most closely reflects Canadian HRS.

Why would you want to be short and long at the same time? Wouldn't equal volumes just cancel each other out? Or do you mean more with options where you would only lose the option cost on one side and gain full market move on the other?

[farming101]

Profits? See Blackpowder's post.

Among accounts that are profitable, 10's of thousands would certainly not be out of the question for a sizeable hedge.

[farmaholic]

Profits? See Blackpowder's post.

Among accounts that are profitable, 10's of thousands would certainly not be out of the question for a sizeable hedge.

Thank you.

I guess we'd each have to assess our risk tolerance.

[Grahamp]

Why would you want to be short and long at the same time? Wouldn't equal volumes just cancel each other out? Or do you mean more with options where you would only lose the option cost on one side and gain full market move on the other?

You are correct.
For a small trader it would be an inadvertent mistake. You are short wheat in one account and you want to take position off but if you log into wrong account and buy one there rather than being flat you are now long and short. They probably aren't going to haul you to jail for this but it's something you don't want to do.

Large traders would do this to manipulate markets, especially thin markets. Suppose Minneapolis wheat (thin market) is in a tight trading range and very close to top of the range and they want to establish a short position. They may try buying aggressively with relatively small volume at a slow time of day to try and trigger all the buy stops that have accumulated above the range from the people who are short. As the market moves through the top of the range all these buy stops become market orders giving volume and a good fill price to the large trader trying to get short. Although I never traded lumber it was notorious for any stop you put in was virtually guaranteed to be hit.

If you are interested in stock market/commodity market wisdom, wit and sometimes manipulation I suggest reading Reminiscences of a Stock Operator. It is a very fun and informative read.

[macdon02]

I use RJO. Hypothetically and theoretically if hedging your trade account will only lose small amounts while you recognize your physical grain is dropping in value and you pull the pin and sell physical. Of course boredom sets in and you get an opinion on orange juice or coffee or you want to get fancy and cover your fuel exposure, which usually involves tears on your end and a phone call saying you need to pony up. Rule #1 as a grain farmer, you have a long position on everything in the bin and next year's crop and the crop after that and the crop after that until you retire. So I recommend only playing the short side. If your wrong the value of your physical goes up offsetting the loss and your breaking even on futures. Best of luck. The majority is always wrong.

[Crestliner]

I use RJO. Hypothetically and theoretically if hedging your trade account will only lose small amounts while you recognize your physical grain is dropping in value and you pull the pin and sell physical. Of course boredom sets in and you get an opinion on orange juice or coffee or you want to get fancy and cover your fuel exposure, which usually involves tears on your end and a phone call saying you need to pony up. Rule #1 as a grain farmer, you have a long position on everything in the bin and next year's crop and the crop after that and the crop after that until you retire. So I recommend only playing the short side. If your wrong the value of your physical goes up offsetting the loss and your breaking even on futures. Best of luck. The majority is always wrong.

Macdon02, your comments so true. You have made one of the most intelligent posts I have seen on AV. You should get paid for your advice. Nice to see informative comments.

[Bowerpower]

Personally I think only worth hedging when new crop prices are great. Than you can get aggressive in preselling lots of production. I will buy put options from time to time on sold crop. Has worked out from time to time. Probably break even scenario so far. Lol.
Sell enough to cover COP and have cashflow. Gamble with the rest.
Also try to capture carry as much as possible. This does play into grain co hands somewhat as they do have gauranteed supply.

[farmaholic]

Bowerpower....IMO, nothing wrong with forward selling grain on a DDC if you're happy with the price...even if you think you've given them a "guaranteed supply"...to me whats important is you're not carrying all the price risk anymore....and "no one else's" price risk either.