Simulation

ARECclass

Commodity
Trading Project
Team ARECclass: Shelby
Fisher, Brook Childers, Jiaxin
Liu
 ARECclass 2

I INTORDUCTION

On February 2nd, 2017, the ARECclass team began trading after some

preliminary research about the futures market. The trading took place on a

simulation platform at Stocktrak.com, where we competed against other

groups in the class. Contracts were originally intended for farmers to produce

a commodity and then deliver it to a buyer at the price previously

determined. Over time, this changed with the contract switching hands many

times, creating a price flux. Now, this is all electronically done, where

speculators can invest in different commodities on the Futures Market

without ever having to deliver a physical commodity.

Trading Charts briefly describes the history of the futures market as

follows:

[they were] used as collateral for bank loans. They also began to

change hands before the delivery date. If the dealer decided he didn't

want the wheat, he would sell the contract to someone who did. Or, the

farmer who didn't want to deliver his wheat might pass his obligation on

to another farmer The price would go up and down depending on what

was happening in the wheat market. If bad weather had come, the people

who had contracted to sell wheat would hold more valuable contracts

because the supply would be lower; if the harvest were bigger than

expected, the seller's contract would become less valuable. It wasn't long

before people who had no intention of ever buying or selling wheat began
 ARECclass 3

trading the contracts. They were speculators, hoping to buy low and sell

high or sell high and buy low

Some producers choose to utilize the futures market for hedging rather

than speculation, which allows them to decrease their risk when they believe

there may be an unfavorable price change in the market. This is for people

who own the commodity, or want to in the future. In this exercise, we acted

as speculators, not hedgers. The assignment was to try to be successful at

commodity trading in the Futures Market by analyzing charts, worldwide

news, and making educated guesses on what we thought the market would

do. As a whole, the ARECclass team made 10 complete trades with 20

offsetting transactions making 9.09% back on investments.

II TRADES

Wheat March 2017

Due to our predictions of how we thought the market was going to

fluctuate over the following months, we chose to buy March 2017 wheat

futures. The market symbol for this is ZW/H7. Wheat contracts consist of

5,000 bushels. Since we bought ten wheat contracts, our total volume of

grain came to 50,000 bushels. At the time of the trade on February 6, 2017

the price of wheat was $4.23 per bushel. One contract was worth $21,150,

calculated by multiplying the quantity (5,000) by the price ($4.23). Since we

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bought ten contracts, the total price of this transaction came to $211,500.

The margin for the trade was listed in $2,700.

We searched many different articles, but we liked the simple

justification Ag Market.com published in a short video on February 6th, 2017

explaining that, even though the wheat market had been exhibiting low

prices, they were expected to rise. Jim McCormic of Allendale Inc., backed

this saying, Internationally, were starting to see the crisis pick back up

again in Ukraine. (Second), near term, the dollars been working weaker the

last few months. Wheat is more driven by the dollar than any of the

commodities we have. (Last), Winter wheat acres were down, and I think

they got the market a little bit excited. With this in mind, our team felt as if

it was a prime time to buy wheat futures since we expect that the price will

increase and we can then sell at a higher price. We know that we only have a

little over a month to increase our profits, but we feel that this short time

frame may lower our risk for a large loss that could accumulate over

additional time. Just as with every other trade, we plan to watch the market

closely and sell whenever we feel we have made a maximum profit.

On March 2nd, 2017 we decided to offset our trade with a selling

transaction of March Wheat. This commodity would of must be offset

because we do not want a delivery of March Wheat with the contract we had

bought when the trading time was closed for that commodity. We profited by

$7,500.00, because we sold at a higher price than we bought, at $4.37 per

bushel. We studied that the day before, the market took a small increase in
ARECclass 5

price, and thought that we could see some more increasing trends before we

offset. Unfortunately, that isnt what happened and we sold our Wheat

contract before it could decrease anymore and lost more chances for

profitability.

Soybeans July 17 (ZK/N7) [view appendix for graph Fig. 1-2]

On February 6th, we decided to take a short position on July soybeans.

We bought 5 contracts at a price of $10.59 for a total price of $264,750.

Because we sold, we were bearish, meaning that we believed that the price

would decrease and allow us to sell at a high price and profit by later

offsetting our contract at a lower price. One of the main reasons that we

predicted this was due to agricultural conditions in Brazil this year. An article

on AgroSouth cited predictions from AgRural about a plentiful soybean

harvest due to a long growing season and beneficial weather. In addition, the

parts of the country that had already harvested their crop were reporting

record yields. This would increase worldwide soy supply. If we assume that

demand remains constant, this would drive prices down due to basic laws of

supply and demand (a shift of the supply curve to the right). [Fig 1]

On February 27th, we closed the trade by purchasing 5 contracts of

July soybeans at a price of $10.32 for a total of $258,000. This gives us a

total profit of $6750 on this trade. We decided to offset our position now

because prices had dropped enough to give us a profit of approximately

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2.5% of our original invested amount. When we first sold our contracts, the

price moved in an unfavorable direction (upward), and then began to

decrease as we had hoped. We did not want to risk more of this upward

movement and jeopardize our potential profits. The following photo from the

Chicago Mercantile exchange shows the relatively steady decrease in

soybean prices over the second half of February when our position was open.

[Fig 2].

Brent Crude Oil April 17 (BZ/J7) [View appendix for graphs Fig 3]

After doing some research on how the crude oil market is going to

fluctuate over the coming weeks, we chose to buy April 2017 Brent Crude

Oil. The market symbol for this is BZ/J7. Brent Crude Oil consist of 1,000

barrels per contract. Since we bought 5 such contracts, our total volume of

oil came to 5,000 barrels. At the time of the trade on February 9th, 2017 the

price of the crude oil was $53.53 per barrel. One contract is worth $55,530,

calculated by multiplying the quantity (1,000) by the price ($55.53). Since

we bought 5 contracts, the total price of this transaction came to $277,650.

Backing up our purchase of the Brent Crude Oil futures, we thought we

could take a big risk at making money quick in a highly volatile commodity.

We watched the charts for a few days before making the decision solely off

the chart. On February 7th, 2017 The Brent Crude Oil futures decreased

drastically to a closing price of $52.78 a barrel. The next day, the price

stopped dropping and slightly increased at a settled price of $52.91, and we

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thought it would be a prime time to invest as we hoped it would keep

increasing. These numbers can all be viewed respectively in the chart below

published by The CME Group. [Fig 3].

We Decided to sell our share of Brent Crude Oil futures at $55.70 a

barrel on February 14th, 2017. We sold all 5 contracts, totaling $106,800,

making only a $40.00 profit. We may not have made a lot of money quick

like we planned, but we didnt lose! We noticed (as seen in Figure 3) that the

price increased quickly after purchasing but later decreased a good amount

quickly, and we figured it was too risky to keep our money in this commodity.

For this reason, we sold while we could still make a profit, even though it was

only $40. Now looking back, it probably would have been smarter for us to

hold our position, because by the next day the price increased again.

Crude Oil April 17 (CL/J7)

We also invested in two regular contracts of April 2017 Crude Oil

Futures (CL/J17) on February 9th, 2017. The contracts we bought were priced

at $55.58 with a multiplier of 1,000 barrels per contract, making our total

price of $277,650. Just as with the Brent Crude strategy, we took interest in

the crude oil future with the intent of making money quickly.

Our research for this futures purchase was based on a finding from the

author for the Daily FX website, Walker England, who published a blurb about

how crude oil is bouncing back from a low, and predicted that prices would

increase. He wrote, Crude oil prices are recovering, after initially trading to
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new monthly lows earlier in the week. Despite this bounce, crude oil could

still be classified in a developing short term downtrend, with prices trading

below the displayed 10 day EMA (Exponential Moving Average) found at

$53.31.

On February 14th, 2017, we sold our Crude Oil future at $53.40 a barrel

with the same multiplier of 1000 barrels per contract. Selling both contracts,

our income totaled $278,500. After being in the Crude Oil futures for 5 days,

we made a $850.00 profit. The Crude Oil futures almost mirrored the Brent

Oil futures in its chart trends, which is what ultimately led us to sell our

contracts. Although again, if we would have kept our contract open for a few

more days, we would have been able to make a larger profit since the price

increased. We decided that was difficult to invest in crude oil future sorts,

due to the mixed trends and not having adequate time to follow them

closely.

Wheat May 17 (ZW/K7) [View appendix for graphs fig. 4]

On February 14th, 2017, we decided to invest in May 2017 Wheat, after

seeing the profit we had obtained through our other previously purchased

wheat futures. We invested in 40 contracts at a multiplier of 5,000 bushels

per contract. On February 14th, the price of May Wheat was $4.65 per bushel,

times the multiplier (5,000), times the 40 contracts we purchased, totaling a

$930,500 purchase. This was taking a larger risk than our 10 contracts we
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bought with March 2017 Wheat, but we feel confident due to how much we

have profited thus far with those contracts.

To support our predictions on the wheat futures, we obtained an article

explaining how India, the 2nd largest wheat producer in the world plans to fall

short in production, which would increase the price of wheat in the United

States. Pratik Parija, author for Live Mint writes, Indian imports are a big

factor globally. It painted a bullish picture for wheat and supported global

prices.

On February 17th, 2017, we decided to shift our thinking about the

Wheat futures due to the huge drop in price on February 16th (see figure 4).

After the decrease in prices, we unquestionably chose to close our position

so that we could make a profit while we still could.

Wheat July17 (ZW/N7)

Following our decision to close our May 2017 Wheat contracts on

February 17,2017, we decided to sell again, knowing that we could increase

our possible future profit by buying July 2017 Wheat at an even lower price.

On the 17th of February 2017, we sold 70 contracts of July 2017 Wheat at

5000 bushels per contract, at the price of $4.69 a bushel. Our total price

came to $1,641,500.

Ed White, author for Western Producer, wrote an article entitled, Too

Soon to Give Up on Wheat: Expert, which explained why he expected wheat

prices to drop in the coming weeks and months. White writes, This year
ARECclass 10

should see about four million fewer acres of U.S. wheat as farmers stampede

into soybeans, Krueger said. The acreage reduction, coupled with a return to

normal yield after record breaking high levels last year, should result in a

significant production decrease. We plan to watch the wheat futures closely,

as they were increasing significantly weeks before the drop, and could do so

again.

On March 21st, we closed our trade by buying back our 70 contracts at

$4.41 a bushel. We gained a sufficient profit doing this, as the price lowered

by $0.28 per bushel, which allowed us to buy back our contracts at a lower

price. Through closely watching the wheat market, we noticed that the price

had been dropped consistently since we made our first transaction over 4.5

weeks ago. We felt that, since the wheat market had been down for a long

time, it would soon start to increase again in response to weather changes in

the United States. Times of India explains, Euronext wheat futures extended

losses on Tuesday to touch their lowest in almost seven weeks, pressured by

a rise in the euro and weakness in Chicago as rain relief was forecast for dry

U.S. wheat belts. We were happy with the amount of profit that we had

made through this trade, and decided that it was better to keep what we had

then risk the market making an unfavorable turn and losing some of our

money.

Corn May 17 (C/K7) [View Appendix for graph Fig. 5]

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After researching recent corn market trends, we decided to buy May 17

corn futures on Feb 15, 2017. We bought 100 contracts, each of which

consists of 5000 bushels, for a total of 500,000 bushels. At the time of the

trade on Feb 15th, 2017, the price for the corn was $3.85 per bushel and the

total price of the transaction was $1,926,250. Before we made the decision,

we analyzed the data for the corn market from the end of 2016 to February

2017, and found that the corn price has gone through several rounds of

drastic fluctuation during this time span. However, the overall trend is

positive (see figure 5). Our decision to invest in these contracts was based

on our confidence that prices would continue to increase.

Our research on the forces explaining price changes in the corn market

led us to feel bullish. Todd Hultman, author for Progressive Farmers, writes in

Corn Exports, Please?, that despite all the political uncertainties, Brazil's

[corn] is 27% more expensive, leaving U.S. corn prices with a significant

export advantage that was not there a year ago and that U.S. exports are

likely to remain active.

However, our mindset about the corn market shifted due to an

incredibly quick price drop on the same day. In addition, we encountered

some articles about a Mexican Senator championing a bill to stop U.S. corn

shipments, which made us question our thoughts about the upward

movement of the corn prices. Entitled U.S. Corn to Mexico at Risk, the

article by Chris Clayton mentioned that Mexico, the biggest market for U.S.

corn exports in 2015-2016 year, may switch to Brazil or Argentina for corn
ARECclass 12

imports due to the political unrest and protests by Mexican citizens against

the Trump administrations trade policies involving Mexico. We decided to

close our position before the price sunk too much. We sold our March 17 Corn

at $3.78 per bushel with the same multiplier of 5000 bushels per contract.

After selling all 100 contracts, we lost a total of $36,250 in this trade.

Corn March17 (C/H7)

Following our decision to sell our contracts of May 17 Corn on Feb

15, 2017, we monitored the price trend of corn in the following two days,

and found that the falling prices were not slowing down, but actually

accelerating. After a continuous price deduction on February 15 and

February 16, we decided to sell again, with the hope of offsetting possible

future loss by selling March 17 Corn before the price going lower. On 17th

of February, 2017, we sold we took a short position of 75 contracts of

March 17 Corn at the price of $3.71 a bushel. Our total price is equal to

$1,391,250, calculated by multiplying our price of $3.71 by the 5,000

bushel multiplier, and then by our quantity of 75 contracts.

To come to this decision, we searched some articles and

studies on the corn market. An article published on February 17th, 2017 on

cattlenetwork.com offered a detailed analysis of February corn future price

change and the ensuing impact on farmers.

Marking a historic break-even point for U.S. farmers because

above that level, planting Entitled What February Futures Prices

ARECclass 13

Say About U.S. Corn, Soy Acreage the article written by Karen

Braun explained that the average price of new-crop corn in

February has declined five straight years from 2011 to 2016,

from $6.01 per bushel to $3.86. December 2017 corn is

averaging slightly higher than last year so far this month, with

averages of $3.97 through Thursday. But with revenue

seemingly shrinking each year, $4 December corn in February

might not be enough to convince growers to favor the yellow

grain this spring.

Though the corn market has been at a downfall in the past years, we

believe that the recent growth in price might lead to an increase in planted

corn acres this spring. But as Braun mentioned, the $4 price level marks a

historic break-even point for U.S. farmers because above that level,

planting the crop becomes more favorable. The price for corn in futures

market fell below that level on February 15 for the first time since last June,

and entered the $3 range. Because of this, we closed our position on March

14th, 2017, to avoid any more risk further losses, in that we have made a

profit from the last trade of corn. Overall on March Corn, we profited

$55,312. The corn market is still fluctuating with a lot uncertainties.

Therefore, after this move, we plan to watch the corn market closely before

we decide to buy any corn futures.

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Soybean Oil September 17 (BO/U7) [View Appendix for graph Fig.

6]

On February 28th, we noticed a very steep spike in September 17

soybean oil prices on the Chicago Mercantile Exchange (See Figure 6). We

tried to find information to indicate why exactly it had shot up so

dramatically, but found nothing. Because of this, as well as the fact that in

one of our last trades (July 17 Soybeans) we had watched soybean prices

trend downwards, we guessed that this high price rise would not be

sustained. Therefore, we took a short position, and hoped that prices would

drop. The price at which we bought the soybean oil contracts was $.3453. We

bought 100 contracts, with a multiplier of 60,000. This brought the total of

our transaction to $2,072,400.

Over the next few days, the prices were very volatile. At many points,

we could have closed my position and lost a decent amount of money, and at

others we could have made a profit. When the price dropped to $.3446 on

March 6th, we decided to close the position. This was due to a few reasons.

First, the prices have been very volatile over the last six months and we

didnt want to risk losing a significant amount of money. In addition, an

article from Benson Quinn Commodities, Inc. (a company owned by Archer

Daniels Midland) caught our eye. The article noted that with the interesting

political climate right now, there had been rumors that there could be

changes to the US Renewable Fuels Standard (Benson Quinn Commodities

newsletter 3/3/17). Since soybean oil is used to create biodiesel, changes in

 ARECclass 15

policy regarding this biofuel could shift demand for soybean oil. The article

then went on to cite the increasing demand of soy oil for biodiesel over the

past decade. If demand did increase while supply held constant, the price

would increase per the basic supply and demand curve. This hypothetical

increase in price would have caused us to lose money, so we closed our

position at a price of $.3446 while we could make a profit. This gave us a

profit of $2,400.

III. Conclusion

At the beginning of the semester, we were given $1,000,000 to

speculate with as an educational tool to learn about the futures market. At

the end of the exercise, we had a total of $1,090,914.85 in our portfolio,

meaning that we had a return of approximately 9.09%. Of the total ending

amount, $6,699 came from interest earned on the account balance. In total,

we made 20 trades, much of which were profitable. In addition to becoming

familiar with some of the logistics of trading on the futures market, we

learned that even with research and educated guesses, the market is full of

surprises. We not only learned from the trades that we made money with,

but also from the trades that we lost money on. Conceivably we were

missing a part of the picture involving something such as global trade or

weather, or perhaps we were just plain wrong. Either way, we saw this as a

valuable experience for the relations of the worlds inputs and outputs

directly relating to the commodities.

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 ARECclass 17

IV. References

AgRuralAdmin. "AgRural updates projection and increases overall soybean output for
Brazil." AgroSouth News. Agrosouth, 2 Feb. 17. Web. 4 Feb. 2017. <http://www.agrosouth-
news.com/agrural-updates-projection-and-increases-overall-soybean-output-for-brazil/>.

Braun, Reuters Karen. "What February Futures Prices Say About U.S. Corn, Soy Acreage." Cattle
Network. CattleNetwork, 17 Feb. 2017. Web. 17 Feb. 2017.
<http://www.cattlenetwork.com/news/industry/what-february-futures-prices-say-about-us-corn-
soy-acreage>.

"Brent Last Day Financial Futures Quotes." The CME Group. CMEgroup.com, 14 Feb. 17. Web. 14
Feb. 17. <http://www.cmegroup.com/trading/energy/crude-oil/brent-crude-oil-last-day.html >.

Clayton, Chris. "Mexican Senator Champions Bill to Stop U.S. Corn Shipments." DTN Progressive
Farmer. DTN Progressive Farmer, 13 Feb. 2017. Web. 13 Feb. 2017.
<https://www.dtnpf.com/agriculture/web/ag/news/article/2017/02/13/mexican-senator-champions-
bill-stop>.

Davenport, Ashley. "Three Things Changing the Wheat Market." AgWeb - The Home Page of
Agriculture. AgWeb, 07 Feb. 2017. Web. 2 Mar. 2017.
<http://www.agweb.com/mobile/article/three-things-changing-the-wheat-market-naa-ashley-
davenport/>.

"Delivering Market Intelligence." Benson-Quinn Commodities, Inc. N.p., n.d. Web. 12 Mar. 2017.
<http://www.bqci.com/index.html>.

England, Walker. "Crude Oil Prices Rebound From Weekly Lows." DailyFX.com. Daily FX, 09 Feb.
2017. Web. 14 Feb. 2017.
<https://www.dailyfx.com/forex/education/trading_tips/chart_of_the_day/2017/02/09/Crude-Oil-
Prices-Rebound-From-Weekly-Lows.html>.

"Futures Markets - Part 1: A Brief History." TradingCharts / TFC Commodity Charts.

Tradingcharts.com, n.d. Web. 12 Apr. 2017. <http://futures.tradingcharts.com/tafm/tafm1.html>.

Hultman, Todd. "Corn Exports, Please?" DTN Progressive Farmer. DTN Progressive Farmer, 10 Feb.
2017. Web. 11 Feb. 2017.
<https://www.dtnpf.com/agriculture/web/ag/perspectives/blogs/market-matters-blog/blog-
post/2017/02/10/corn-exports-please>.

Parija, Pratik, and Manisha Jha. "India seen importing more wheat on shortfall in no. 2
producer." Http://www.livemint.com/. Livemint, 21 Feb. 2017. Web. 21 Feb. 2017.
ARECclass 18

<http://www.livemint.com/Politics/fJve6kadGhjG1iROuAhnjN/India-seen-importing-more-wheat-
on-shortfall-in-no-2-produc.html>.
Reuters. "EU wheat slips to near 7-week low on euro rally, U.S. rain relief - Times of India."
Business. The Times of India, 21 Mar. 2017. Web. 21 Mar. 2017.
<http://timesofindia.indiatimes.com/business/international-business/eu-wheat-slips-to-near-7-
week-low-on-euro-rally-u-s-rain-relief/articleshow/57758561.cms>.

"Wheat Contract Specifications." The CME Group. Thecme.com, n.d. Web. 2 Mar. 17.
<http://www.cmegroup.com/trading/agricultural/grain-and-
oilseed/wheat_contract_specifications.htm>.

White, Ed. "Too soon to give up on wheat: expert." The Western Producer. Producer.com, 23 Feb.
17. Web. 23 Feb. 2017. <http://www.producer.com/2017/02/too-soon-to-give-up-on-wheat-
expert/>.
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V. APPENDIX

Fig 1. Soybeans July 17

Fig 2. Soybeans July 17

Fig 3. Brent Crude Oil April 17

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Fig. 4 Wheat May 17

Fig 5. Corn May 17

Fig 6. Soybean Oil Sept 17

Fig 7. All Trades

Product / Quantit Buy Price Sell Price (Date) Profit/Lo

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Symbol y@ (Date) ss
Multipli
er
Wheat March 10 @ (2/6/17) $4.23 = (3/2/17) $4.37= +
17 (ZW/H7) 5000 $211,500 $218,750 $7,500.0
mult 0
Soybeans 5@ (2/27/17) (2/6/17) $10.59 = +
July 17 5000 $10.32= $2657,875 $6,687.5
(ZK/N7) Mult $264,562.50 0
Brent Crude 5@ (2/9/17) $55.53 (2/14/17) $55.70 +$850.00
Oil April 17 1000 = $277,650 = $278,500
(BZ/J7) Mult
Crude Oil 2@ (2/9/17) $53.38 (2/14/17) $53.40 +$40.00
April 17 1000 = $106,760 = $106,800
(CL/J7)
Wheat May 40 @ (2/14/17) $4.65 (2/17/17) $4.56 = -$18,000
17 (ZW/K7) 5000 = $930,500 $912,500
Corn May 17 100 @ (2/15/17) $3.85 (2/16/17) $3.78 = -$36,250
(C/K7) 5000 = $1,926,250 $1,890,000
Corn 75 @ (3/14/17) $3.56 (2/17/17) $3.71 = $55,312.
March17 5000 = $1,335,000 $1,391,250 50
(C/H7)
Wheat 70 @ (3/21/17) $4.41 (2/17/17) $4.69 = $98,875.
July17 5000 = $1,541,750 $1,641,500 00
(ZW/N7)
Soybean Oil 100 @ (2/28/17) $.3453 (3/6/2017) $.3446 $2,400
September 60,000 = =
17 $2,072,400 $2,070,000
(BO/U7)
Lean Hog 100 @ (2/25/17) $0.68 (3/23/17) -
April 2017 40000 = $2,720,000 $.6805 = $32,990
(HE/J7) $2,721,000