Selling (Going Short) Soybeans Futures to Profit from a Fall in Soybeans Prices

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FUTURES/OPTIONS; Petroleum Prices Fall; Grain and Soybeans Up

By The Associated Press

    June 6, 1985

Petroleum futures prices moved sharply lower yesterday on the New York Mercantile Exchange after Britain announced that it had lowered the price of its North Sea crude oil. Concern that Saudi Arabia might follow up on its threat to increase production added to the selling fervor, said Andy Lebow, a petroleum analyst in New York with Shearson Lehman Brothers.

Further, the American Petroleum Institute reported Tuesday that domestic inventories of distillates, which include heating oil and diesel fuel, increased more than 4 million barrels, to 104.6 million barrels in the week ended May 31. The report prompted heavy selling in the heating oil and gasoline pits, and induced additional selling by traders who follow technical factors such as trends on price charts, Mr. Lebow said.

Prices of gasoline and heating oil fell by the 2-cent limit in several delivery months.

Grain and soybean futures prices were higher on the Chicago Board of Trade. Dry conditions fueled much of the rally, analysts said.

Corn and soybean contracts for delivery in the fall were the strongest because of the weather.

An unconfirmed report that an American company intends to import soybeans from Brazil for processing because of the cheaper price there kept pressure on the soybean contract for delivery in July, said Richard Loewy, a grain analyst in New York with Prudential-Bache Securities. Analysts said they believe soybean oil has already been imported from Brazil. But Mr. Loewy said prices were due for a technical recovery from the prolonged weakness of recent weeks.

The announced sale of wheat to Algeria under the Agriculture Department’s export bonus program buoyed wheat prices, even though details of the sale were scarce, Mr. Loewy said.

Cattle prices were higher and live hogs and frozen pork bellies were mixed in moderate trading on the Chicago Mercantile Exchange.

Much of the buying came from traders who had sold contracts in previous sessions and were taking profits, which ended a steep slide in prices, said Phil Stanley, a livestock analyst in Chicago with Thomson McKinnon Securities.

FUTURES/OPTIONS; Grain and Soybeans Off, But Metals Keep Rising

By H. J. Maidenberg

    May 13, 1987

Prices of grain and soybean futures fell back yesterday, partly because the Government decided to sell more beans from its inventory and partly because it is reportedly balking at paying higher subsidies on wheat ordered by the Soviet Union.

But precious metals continued to rise, despite a firmer dollar, an easing of interest rates and the fall in grain and soybean prices, which many gold, silver and platinum investors use as a barometer of future inflation trends.

Soybean futures were hardest hit, with the spot May delivery down 10 1/2 cents a bushel, at $5.585, and the new crop November futures down 15 1/2 cents, to $5.725. Corn fell 5 to 6 1/4 cents a bushel in sympathy, with the spot May delivery closing down 5 cents, at $1.87 1/4 a bushel. Chicago wheat slipped 2 1/4 to 4 1/4 cents.

But spot Chicago wheat gained a half-cent, at $3.195, largely because there were no deliveries yesterday against the expiring May contract. Government Sales Reported

Richard A. Loewy, grain specialist at Prudential-Bache Securities, noted that bean prices softened after reports that the Government took further advantage of higher market prices and sold more of the soybeans it owns. About 425 million of the 600 million bushels of soybeans left over from past harvests were last reported to be in Government hands, Mr. Loewy said.

While corn prices were influenced by the sharp drop in soybeans, wheat came under pressure for another reason: There were reports in Chicago, Mr. Loewy said, that the sale of another million metric tons of wheat to the Soviet Union was on hold because Washington did not want to grant higher export subsidies than the $44 a ton paid on sale of a million tons to the Russians last week.

But the precious metals market shrugged off the decline in farm crop prices. Spot May gold futures closed up $3.80 an ounce, at $459.70; spot silver jumped a further 16.5 cents, to $8725 an ounce, and spot platinum rose $1.30, to $614.

Alphonse F. Pugliesi, precious metals trader at Bank Julius Baer of Zurich’s New York office, said that, when gold held above $450 an ounce in the face of determined short selling and rumors that Japan was selling bullion, fresh buying entered the market. This lent support to both the silver and platinum markets.

Trading Strategies

Mark Hulbert

Favor commodities whose spot prices is higher than the next nearby futures

Traders are likely to make more money in coming months from holding soybean futures than corn.

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CHAPEL HILL, N.C. (MarketWatch) — Those of you interested in a commodity-trading strategy might consider betting on soybeans over corn in coming months.

That’s because the spot soybeans contract is trading for a higher price than comparable contracts expiring in the near future, while just the opposite situation prevails for corn. If these two commodities adhere to the historical pattern, a trader investing in soybean futures will beat the one in corn.

This greater profit would be realized when the contract you hold approaches expiration and you roll it over to the one whose expiration comes next. If that next contract is trading at a lower price, as currently is the case with soybeans, you pocket the difference as profit. But if that contract is trading at a higher price, your so-called “roll return” will be negative.

Sounds too easy, doesn’t it?

But, historically, roll return has been the source of almost all of the profits from investing in commodities, according to a study that appeared a decade ago in the Financial Analysts Journal: The Tactical and Strategic Value of Commodity Futures, by Campbell Harvey, a Duke University finance professor, and Claude Erb, a former commodities manager at fund manager TCW Group. (The two recently updated that study, with similar results.)

To illustrate the benefit of focusing on roll returns, the researchers constructed a hypothetical portfolio that, each month between July 1992 and May 2004, invested in the six commodities that were then trading most like soybeans is today and shorting the six most like corn currently. This portfolio’s return was 2.6 percentage points per year better than it would have been had it invested equally in all commodities.

Even better, this hypothetical portfolio was 23% less volatile, or risky, than the equally-weighted portfolio. As a result, its risk-adjusted performance was more than four times better.

To be sure, as Prof. Harvey stressed in a recent email, these results reflect an average over many years, and the roll return wasn’t always positive when investing in commodity futures similar to soybeans today (or negative for commodities similar to corn today). So there is no guarantee that you will do well by investing in soybean futures or that you will do better than if you had invested in corn futures.

Another qualification: The pattern the researchers documented applies primarily to futures contracts tied to real assets (such as grains and industrial metals) rather than to financial instruments (like stock market averages, currencies, and even gold). So focus on real assets if you want to try your hand in coming months at basing a commodity trading strategy on various commodities’ term structures.

If you aren’t inclined to trade directly in commodity futures, an alternative is to invest in exchange-traded funds that themselves do so — such as the Tecurium Soybean Fund SOYB, +0.65% and the Tecorium Corn Fund CORN, -0.55% . One possible trade right now, for example, would be to invest in the soybean ETF while shorting an equal dollar amount of the corn ETF.

That hedge will make money even if soybeans go down, so long as they don’t fall as much as corn does.

Finance English practice: Unit 34 — Futures

  • Complete the sentences below. Use the key words if necessary.
    • Commodity futures

    are agreements to sell an asset at a fixed price on a fixed date in the future. are traded on a wide range of agricultural products (including wheat, maize, soybeans, pork, beef, sugar, tea, coffee, cocoa and orange juice), industrial metals (aluminium, copper, lead, nickel and zinc), precious metals (gold, silver, platinum and palladium) and oil. These products are known as .

    Futures were invented to enable regular buyers and sellers of commodities to protect themselves against losses or to against future changes in the price. If they both agree to hedge, the seller (e.g. an orange grower) is protected from a fall in price and the buyer (e.g. an orange juiced manufacturer) is protected from a rise in price.

    Futures are contracts — contracts which are for fixed quantities (such as one ton of copper or 100 ounces of gold) and fixed time periods (normally three, six or nine months) — that are traded on a special exchange.

    Forwards are individual, contracts between two parties, traded — directly, between, two companies of financial institutions, rather than through an exchange. The futures price for a commodity is normally higher than its — the price that would be paid for immediate delivery. Sometimes, however, short-term demand pushes the spot price above the future price. This is called .

    Futures and forwards are also used by speculators — people who hope to profit from price changes.

    More recently, have been developed. These are standardized contracts, traded on exchanges, to buy and sell financial assets. Financial assets such as currencies, interest rates, stocks and stock market indexes — continuously vary — so financial futures are used to fix a value for a specified future date (e.g. sell euros for dollars at a rate of €1 for $1.20 on June 30).

    and are contracts that specify the price at which a certain currency will be bought or sold on a specified date.

    are agreements between banks and investors and companies to issue fixed income securities (bonds, certificates of deposit, money market deposits, etc.) at a future date.

    fix a price for a stock and fix a value for an index (e.g. the Dow Jones or the FTSE) on a certain date. They are alternatives to buying the stocks or shares themselves.

    Like futures for physical commodities, financial futures can be used both to hedge and to speculate. Obviously the buyer and seller of a financial future have different opinions about what will happen to exchange rates, interest rates and stock prices. They are both taking an unlimited risk, because there could be huge changes in rates and prices during the period of the contract. Futures trading is a , because the amount of money gained by one party will be the same as the sum lost by the other.

  • British English or American English?
    • aliminium
      • British English
      • American English

    • aluminum
      • American English
      • British English

  • Match the definitions with the words below.
    • 1. the price for the immediate purchase and delivery of a commodity — . . .

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