Ag trade ideas

MidwesternTrader said:
Question for the Ag traders here:

Do you find that the softs and grains have limited downside potential as price begins to settle near multi-year lows? The thought being that as store-able, but more perishable than other commodities (CL, NG, GC, etc) and they are part of a fully mature supply chain for agricultural and consumer marketplaces, so there is essentially a price floor for these items that is very unlikely to be penetrated with velocity to the downside?

The KC chart for instance. Is there a structural element that will prevent it from dropping below the 110 - 120 price zone rapidly?

View attachment 183082
More...

Interesting question. If there is a tangible price floor when it comes to calendar spreads( Carrying charges = storage + insurance + financing in non-VSR commodities ), it is hard to calculate an absolute price floor for a given commodity. The ultimate one is when nobody is able to produce in large quantities, ship it abroad and turn a profit anywhere in the world, and it never happens given the volatility of the currency markets. For any commodity, the most important dynamics in establishing an intermediate price floor are perhaps the price of related products. Here, for arabica coffee, perhaps it can't sustend an unlimited premium to Robusta. One day or another, buyers will turn to the lower quality if arabica is too expensive. This is perhaps where you can find not an absolute price floor but a stronger one...( Edit : You have got a nice illustration of this in the previous post with London Cocoa vs NY one ).

By the way, you may check the CRB commodity almanachs with monthly charts on 50 years. Production costs and price floors are almost visible but they vary during history.
 
Last edited:
TraDaToR said:
Interesting question. If there is a tangible price floor when it comes to calendar spreads( Carrying charges = storage + insurance + financing in non-VSR commodities ), it is hard to calculate an absolute price floor for a given commodity. The ultimate one is when nobody is able to produce in large quantities, ship it abroad and turn a profit anywhere in the world, and it never happens given the volatility of the currency markets. For any commodity, the most important dynamics in establishing an intermediate price floor are perhaps the price of related products. Here, for arabica coffee, perhaps it can't sustend an unlimited premium to Robusta. One day or another, buyers will turn to the lower quality if arabica is too expensive. This is perhaps where you can find not an absolute price floor but a stronger one...( Edit : You have got a nice illustration of this in the previous post with London Cocoa vs NY one ).

By the way, you may check the CRB commodity almanachs with monthly charts on 50 years. Production costs and price floors are almost visible but they vary during history.
More...

Good points all around. Yes, not necessarily looking for an absolute price floor, but a potentially stronger floor area. An area where downside velocity is less likely. Price from this area may move lower, but likely in a slower, more measured move. Whereas this price area could have more potential for a sharper, higher velocity upside move.
 
Actually, since we are talking commodities, at any given time there is more upside price risk than downside. The volatility/velocity increases when prices go up contrary to equities. Here calls are quite always pricier than puts. But to come back to your coffee trade, I don't know if that current support is fundamentally driven. The brazilian real can also change the situation a lot. Seriously, you should have a look at monthly or even yearly charts and try to find price floors across decades( Perhaps adjusting to inflation is a good idea ). Also profit margins( cattle, soy crush, oil cracks, corn/ethanol) are interesting to study to find when trying to find a long term bottom.:)
 
TraDaToR said:
I just put a new long term trade. -MWH18+2*KWH18-ZWH18 @ 199.75. The wheat class butterfly.

-KW too undervalued compared to ZW and MW
-KW H18 seems undervalued and MWH18 overvalued on their respective curves.
-MW conditions have been improving and the stocks to use ratio is nowhere near 2007 when MW exploded.
More...

Out @ 110.75. Happy about this long term trade.:) Initially had a closer target but decided to hold until expiry when the cold snap/dryness came.
 
TraDaToR said:
Interesting question. If there is a tangible price floor when it comes to calendar spreads( Carrying charges = storage + insurance + financing in non-VSR commodities ), it is hard to calculate an absolute price floor for a given commodity. The ultimate one is when nobody is able to produce in large quantities, ship it abroad and turn a profit anywhere in the world, and it never happens given the volatility of the currency markets. For any commodity, the most important dynamics in establishing an intermediate price floor are perhaps the price of related products. Here, for arabica coffee, perhaps it can't sustend an unlimited premium to Robusta. One day or another, buyers will turn to the lower quality if arabica is too expensive. This is perhaps where you can find not an absolute price floor but a stronger one...( Edit : You have got a nice illustration of this in the previous post with London Cocoa vs NY one ).

By the way, you may check the CRB commodity almanachs with monthly charts on 50 years. Production costs and price floors are almost visible but they vary during history.
More...

They have limited downward potential compared to others products because as you say they are storable & marginal cost is not that different between producers (contrary to oil for instance). So there is a bottom somehwere. I remenber that I read that in US corn it's around 80 % of the cost of production (be also careful that charts are in a given currency even if producer can be in another).
However, even if you have the bottom, there is the contango ! If market is stuck on this bottom which is often the case for months if not years, you are going to pay the carry at every roll..

On the long term, carry is more important than price move. That what make a commodity's positive or negative return. On high contango commodity, like cbot wheat, it's really difficult to be long..
 
Cocoa%2BCC%2BMay%2B2018%2Bcontract%2B2018%2B02%2B27.PNG

Some very exciting price movement in cocoa at the moment with another bullish candle posted on Monday. The price has moved up in a very direct way towards the top highlighted in the chart from October 2017 which was very close to the fire made in March 2017. I expected it to be slower going in the run up to significant resistance at 2240, however there have been only limited pullbacks which at this stage is a good sign. Given last night's candle I'm looking to add to my position which I will either do at the open tonight or intra-session if my entry order does not get filled close to yesterday's close.
 
You must log in or register to reply here.
Back
Top