The Market is not Efficient ... Sometimes

First, an update on the results of the corn trade from last month. Two weeks ago, I sold my corn future for 354.75 cents per bushel, netting a tidy sum of $800. Not bad, but what happened after that? It's climbed to almost 400 cents per bushel in fits and starts. Why? According to the news outlets, autumn rains across the Midwest have slowed down the harvest, raising worries that the predicted yields will be impacted. The harvest rate has been even slower than last year, and has fallen far short of the average rate of the last 5 years. The last 5 years saw some incredible droughts though, so there wasn't much to harvest to begin with especially in 2011 and 2012. I thought I would sell ahead of a week or so of good weather in Iowa, and then re-buy if the price dipped lower, but the price started going up on the USDA's crop progress reports. Essentially, the market didn't take the publicly available information I referenced last time until almost a month later, something you wouldn't expect the market would allow to happen if you believe in efficient markets.

In my courses at the University of Chicago, two of the basic assumptions that are taught are that arbitrage does not exist, and that the market is efficient in the sense that all "relevant" information is priced in at all times. I can understand that these assumptions are necessary for some of the models we study to hold up and/or to not be overly complicated, but time and time again they are clearly violated. In the corn example, all I looked at were USDA websites and some University of Nebraska sites on corn farming. Hell, the USDA reports even did the hard work for me of comparing this year's harvest rate to last year's and the average of the past five years. The farming sites told me that farmers will leave the crops to dry in the field instead of harvesting wet crops and spending money to dry them out mechanically.

Back in January, some of you might recall the polar vortex brought frigid weather across much of the US. One Thursday morning after the first polar vortex, I turned on the tv in the gym and heard the local WGN station reporting on a shortage of propane across several northern states. I thought, "Oh that's interesting, natural gas prices must be skyrocketing." On the contrary, natural gas was only up 1-2% on the day and had crawled up maybe 5% over the previous month. I tried to do some research during down time at work, looking for data on propane demand, any past shortages, natural gas availability, but didn't find any compelling evidence either way. At the end of the day, I figured that the market would have priced in wintry events like these and took into account the demand for heating fuels. Boy was I wrong. The next morning, I turned on the tv again, and that day all the national news outlets like CNN had picked up on the story. I flipped over to CNBC and sure enough, natural gas futures had opened up over 10%.

There have been other opportunities recently too taking advantage of lags in market response time. Hazmat suit makers' stocks didn't take off until after the man in Dallas died, despite the fact we've known about a case of infection in the US. The Hong Kong stock market didn't really plummet until mainstream news outlets gave it more attention even though democracy protests and violence had been going on for days.

My next idea revolves around natural gas. One of the reasons contributing to a propane shortage last year was that last year's huge corn harvest needed to be dried and stored. Under normal circumstances, corn can be dried efficiently by air. But the unprecedented harvest meant grain storers had to add some heat to speed up the process. If this year's harvest pans out, we might see a repeat of a shortage. In fact, I contemplated buying natural gas anyways as the price fell in October. It's not a terrible idea going into the winter as heating demand rises, and there's so much supply from the fracking revolution that some gas field operators flare the gas from their wells. That's when they would burn the gas right away rather than shipping it and storing it at some terminal overflowing with gas. Alas, natural gas prices jumped up 20% in a matter of weeks as I dawdled. (It has since come back down some.)

I'd love to hear everyone's thoughts and ideas.

How Low Can Corn Prices Go?

It's been a while since I've posted... Since then, I've started trying to put my money where my mouth is, so to speak, and dabbled in some speculative trading in options and futures. I'm also starting a financial math masters program, so I thought it would be neat to talk about applying things I learn in the classroom to my own trading ideas. The lessons I've learned from trading on my own to date could be multi-page posts, but today I wanted to write about corn prices and get your thoughts/perspectives on the corn market.

For a little bit of background, corn prices have plummeted from over $8 per bushel during the droughts of 2012 to a little over $3 per bushel today. This summer has been very mild, and the growing conditions near perfect, leading to a record estimate of over 14 billion bushels of production in the US. Driving through rural Illinois, Indiana, and Michigan, I've frequently seen happy and healthy stalks of corn as far as the eye can see.

Last week, I bought 1 corn future expiring in December for $3.3875 per bushel. So far, I feel like I'm trying to catch a falling knife: the price has since dropped to $3.23 per bushel. But here's why I'm still betting on the price rising. That record harvest is still just an expectation. Only 7% of the acreage planted has been harvested. An early freeze, a wet autumn, or anything that limits the harvest will make that projection fall short.

My one concern is the timing of the price rise. I can always roll over the future contract when it expires, no problem, but how long will I have to wait for the price to rise? A friend I talked to recently said his parents are farmers and that over the past year, they saw a lot of cash renters come in to rent farmland and grow corn. The renters were hoping for prices of $6 - $7 per bushel, so $3 per bushel will very likely be disappointing for them and will drop out of the business in droves next year.

What do you guys think?

*Disclaimer: This is not a sales pitch to invest in corn. I am not responsible if you do and end up losing money.