Thursday, February 16, 2006

Close Escape!

Well after topping $.18/pound, the Oct '06 sugar contract started dipping a bit. Then last Thursday, I was watching CNBC and they popped the one year chart of sugar up on the screen. I thought "Oh God, if they're showing the chart of sugar up on CNBC, it is getting close to selling time." After two down days in a row, I closed out all of the sugar positons at the following prices on 2/13:

(1) Oct '06: 16.72 +$8,982.40
(1) Mar '07: 16.55 +$8,388.80
(2) Oct '07: 15.50 -$1,400.00

While I was a bit disappointed not to get out "on top", I had to remind myself that you never buy at the bottom and you never sell at the top. Just be glad that there is money to be made in the middle.

Today sugar was down nearly 1 cent/pound early on, but later rallied and right now is only down about .3 cents/pound. I have no idea whether it's going higher or lower from here, I just know that the trend no longer appears to be up. Also, the margin of safety is gone, as the price of sugar is no longer "low". Finally it's getting way too much mainstream press for my liking. So we'll keep an eye on sugar in case it absolutely tanks, but for the time being I think it's time to move on.

One last thought on why this month might be especially volatile for sugar - March is "delivery month", as sugar contracts are delivered in Mar, May, Jul, Sep. So speculators can bid up sugar as much as they want, but somebody actually has to take delivery of the contract! So is this a big game of chicken with speculators hanging on until the very last minute, then dumping their contracts, stay tuned!

A day after closing out the sugar contract, I closed out the coffee position on St. Valentine's Day. Now coffee prices are still low and I believe they are going much higher eventually, but the trend had turned down and I had (stupidly) bought another coffee contract just in time to catch the down trend. So with images of Indiana Jones running away from the boulder in the beginning of Raiders of the Lost Ark (dunnnn dun dun duhhhhhh, dun dun duhhhhhhhhhhhhhh), I closed out the coffee positions and managed to dodge 300 poisonous darts at the same time!

So here's the updated portfolio. You might notice a MAJOR haircut due to the trend turning on coffee and sugar. At it's peak, the total value was about $35,000 - now it's back down to around the $20,000. Which is still higher than at the start of 2006. So while the loss from the top is enough to make one throw up, I gotta remember that we started all of this with $2,000 last spring, so a %1,000 return in under 12 months is pretty awesome!

Here are the current positions. One thing to note, I placed a stop order around 62.00 on cotton since this trend appears to have turned down a bit. I probably could have saved some of the haircut if I had kept some tighter stops in there when the trend turned down, so I'm trying to "not get fooled again".

And coffee will see it's day again, but once it appears to reach a bottom. I still love the fundamentals and will talk about them once the price has stopped dropping through the floor.

Date Position Qty Month/Yr Contract Strike Call/Put Entry Price Last Price Profit/Loss Market Value
01/18/06 Long 1 SEP 07 Corn 257 261 $200.00
01/27/06 Long 1 DEC 07 Cotton 63.00 62.85 ($75.00)
01/24/06 Long 1 JUL 07 Soybeans 623 637 1/2 $725.00

Total Equity: $20,144

Monday, January 30, 2006

Portfolio Update, Sugar, Ethanol

Here's the portfolio as of the end of the day today. Couple of things worth noting today:

1. Bush is supposed to talk about ethanol in the State of the Union:

The main way that the US produces ethanol is from corn. The corn usage for ethanol has tripled over the last 7 years and I expect this pace to continue until oil prices drop in, oh, around 2015 or so. Ethanol is the 2nd largest use of corn (animal feed being a dominant #1).

We saw what happened in the past year to sugar prices when Brazil started converting sugar into ethanol, and the same thing could very well happen with corn. I will look pretty hard at picking up some more corn contracts in the near future.

For a quick price history of corn, it has pretty much bounced around between 200 and 360 cents per bushel since the mid 70's. I'll try to put some price charts up soon.

Another amusing thing to note is that even at today's high fuel prices, ethanol is not yet a better economic alternative than oil and natural gas. It takes too much energy to make it. But thanks to government subsidies, ethanol magically becomes more economic. The push by Dubya for more ethanol can only help the case for corn.

2. From Kevin Kerr in the Daily Reckoning, "Every ton of sugar has the potential to be 1.2 barrels of oil." Nice to know when you are long sugar in a world where there is absolutely no slack in the oil supply/demand outlook. Like corn, high energy prices should provide a floor for sugar prices in the future.

3. Along this same note, I was listening to Science Friday a few weeks back and heard guest Lester R. Brown predict big problems for the world due to food shortages in the coming decade. He also mentioned that high energy prices would cause rising food prices since they could be converted into energy as well. His book can be bought here:

I plan to read it and probably post some comments about it here. Just goes to show that you are often better of following science and investing based on that than just reading the business section or the WSJ, where millions of investors are already trying to get their "edge". You're better off talking to the geeks. Not that I'm one to talk, I'm probably one of three people in the world blogging about commodities. And in a surprising twist, I am not even single, so go figure that one.

And onto the portfolio (with dreams of a retirement at 30):

Open positions as of 1/30/06:
Date.......Contract..Position..Qty..Month/Yr..Entry Price..Last Price..Profit/Loss

1/18/06.......Corn....long............1.........Sep 07..............257..................261.5...........$225.00
1/27/06.......Cotton.long............1.........Dec 07..............63.....................62.65..........($175.00)
12/8/05.......Coffee..long...........1.........Dec 06.............103.40..............130.80.......$10,275.00
1/24/06......Soybeans..long.......1.........Jul 07...............623...................643..............$1,000.00
5/24/05.....Sugar...long.............1.........Oct 06.............8.70.................17.05............$9,128.00
7/27/05.....Sugar...long.............1.........Mar 07............9.06..................16.78............$8,411.20
1/30/06......Sugar...long............1.........Dec 07............15.55.................15.40............($168.00)

Total Profit/Loss on Open Positions: $28,696.20
Cash: $1,888.35

Net Value: $30,584.55

Friday, January 27, 2006

Sugar in Today's Daily Reckoning

Brief bit on sugar in today's Daily Reckoning, a free financial newsletter that I read regularly. The authors are basically angry old men who think America is going down the tubes. They do have very good insights though and I read it for their contrarian views and sense of humor. You can check it out at

*** Sugar is getting a big boost from new reports out of South America.
Our commodities expert, Kevin Kerr, explains why that is...

"Sugar cane is an integral part of the Brazilian people's kitchen. It
the source of many useful products. In industry, it is a big
for warmer climates. And as my Resource Trader Alert readers know, it
also a source of electric energy fuel. It can also be a raw material
paper, plastics and chemicals.

"Sugar cane is versatile, to say the least...and enormously efficient.
Every ton of sugar has an energy potential equivalent to 1.2 barrels of
petroleum. Brazil is the largest world producer, followed by India and
Australia. On average, 55% of Brazilian sugar cane is turned into
and 45% into sugar. Sugar cane is grown in Brazil's central-south and
north-northeast regions, in two harvest periods. When planted for the
first time, sugar cane takes between one and 11/2 years to be ready to
harvest and process. The same plantation can be harvested up to five
times, although significant investments must be made in each cycle to
maintain productivity.

3rd Sugar Serving - Update

Just a quick update, my sugar limit order was not filled today at 15.50. I bumped up the limit order to 15.65, which is what the contract closed at today. We'll see if this gets filled on Monday.

Pour your sugggggar on me!
C'mon fire me up!

Thursday, January 26, 2006

Pour Some Sugar On Me

Yes it's true, that classic 80's/drinking anthem has taken on a new dimension with the rally of sugar. How did it happen, and why did it take nearly 20 years after Def Leppard's peak? Let's explore.

First I should say that in my analysis, I rarely crunch serious numbers. Part (and maybe most) of the reason is laziness. But also, numbers can say anything you want them to. So I just look for things that I think will "probably" happen. Charlie Munger said that he never saw Warren Buffett do a Discounted Cash Flow Analysis, and I'm no Warren Buffett so who am I to argue?

Heading into 2005, sugar prices had been in the dumps for the last 25 years. This is very promising. There is a reason that commodity prices follow long term cycles, and it has to do with supply, demand, and prices. When prices are low for a long period of time, the incentive to produce drops. This is what happened with oil. Prices were in the tank since 1980 and everyone stopped exploration, building refineries, etc. Then one day, demand actually catches up with supply and the shit hits the fan. It takes a long time to ramp up supply, and in the mean time high prices persist, usually for long periods of time. So get used to high energy prices.

Back to sugar, it dropped to 5.27 cents per pound in Feb '04. To put this in perspective, sugar traded for 4 cents per pound in 1900. Nineteen freaking hundred! Same price, that is not adjusted for inflation. Given that, it's safe to say that sugar may have some upside. Also, sugar did spike over 56 cents a pound very briefly around 1974 during the last commodities bull market, so in the spirit of NBA Announcer Hubie Brown: "You know the potential is there. Sugar has some good upside."

Over the past several years, another interesting thing happened - Brazil became the lead producer of sugar in the world. Quoting data from the CRB Commodity Yearbook 2005, Brazil produced 23,810 thousands of metric tons out of the 148,874 world total for the 2003-2004 year.

Why does this matter? Instead of selling all its sugar at these bargain basement prices, Brazil started converting some of it into ethanol and running their cars off of it. And with high oil prices, it made sense that Brazil would convert more and more of their sugar into ethanol, which would put a crunch on world supplies. This is exactly what happened, as prices for sugar recently set 24 year highs over 18 cents/pound.

This is where our story begins, on 5/24/05, when I purchased 1 Oct '06 futures contract at 8.70 cents/pound. I went back to the table for seconds on 7/27/05 and purchased 1 Mar '07 contract at 9.06.

Seems silly but at the time I was a bit nervous buying sugar over 9 cents/pound since it seemed "high". Just goes to show the danger of framing prices in your mind. I felt good buying in the 8 cent range since I figured the cost of product of sugar to be around 5.5 cents/pound. How did I figure this? I read in one of the CRB Yearbooks ('04 I think) that when prices dropped this low in 2003 they were below the costs of production. This essentially provides a floor for prices, since if prices drop below this, producers will simply stop producing. This separates commodities from stocks, which can (and commonly do) go all the way to zero.

So here are the gains from the two sugar trades to date. These are still only paper gains since I have not sold yet. I am planning to sell as soon as the trend turns down, but it hasn't happened yet. After looking at the price charts of many commodities over the years, it really seems like they move up and down in consolidated trends. Buying on "drops" is probably not a good idea here.


I wish I could say that is the happy ending of the sugar story, but of course I'm rolling the dice on a third contract. After reading Dennis Gartman's rules of trading in John Mauldin's weekly newsletter (an outstanding free weekly investing newsletter, you can see the issue I'm referring to here:, I'm going to try to keep riding the trend until it turns. In retrospect it would have worked great so far, but of course hindsight is 20/20 and sometimes even better than that.

So I do have a working limit order for 1 contract of Oct 07 sugar at 15.50. We'll see if it gets filled tomorrow. The contract closed today around 15.70, but the bid/ask was closer to 15.50 so I'll try to get this filled. I like using limit orders because sometimes they get filled at better prices than I ever see otherwise.

It is interesting to note that Mar '06 contracts closed today at 18.48 while the Oct 07 contracts closed at 15.50. So the market is anticipating a price drop in the future. I don't see any extra supply coming online myself, so I'm glad to take the discount. Again, I could be wrong, but I just don't see it.

One other intestesting thing of note - sugar can be produced two ways, by sugar cane or sugar beet. Sugar cane is grown in tropical climates, and beets in colder climates. The production of sugar has been shifted towards the tropical climates, which means sugar cane accounts for a larger amount of production than in the past. Why does this matter? It takes longer to plant and harvest new sugar cane than it does for sugar beets, so it takes longer to ramp up supply than before.

Open sugar positions (Sugar #11) as of 1/27/06:
Date........Position...Qty...Month/Yr...Entry Price...Last Price...Profit/Loss

5/24/05.....long............1.........Oct 06............8.70.................17.05............$9,352.00
7/27/05.....long............1.........Mar 07...........9.06..................16.78............$8,646.00

Working orders (not filled yet):
Oct 07 limit @ 15.50 good til cancelled

Running of the Commodity Bulls

The Commodity Bull is off and running...either get behind it or get run over! This site is intended to be a place for the average investor to gain some information about the commodities market, and most importantly hopefully make a lot of money. I believe that we are still in the early innings of a stock bear market and a commodities bull market, and I invested what little I had in this theory starting May '05.

Let me first start by talking a little about my personal preferences. I like to make money and the less work I have to do, the better, because working sucks. If work was fun they would call it "fun". Now the most effective ways to get rich are really not through investing - if you look at the Fortune top richest people, most of them started their own business. Buffett is one of the only people who got rich through the stock market. But personally, I don't need (or really want) billions. I'm fine with one mil, which means I can basically be financially independent. And starting your own business is too much work for me...I even tried that before, failed miserably, spent a lot of time on it, and lost money. Screw that. Real estate investing is supposedly a good way to make some cash, but again - too much work. I want a way to make money from the comfort of my big leather chair in front of my computer. So that's where I'm coming from. And I also like to roll the dice a bit and spice things up...not afraid to lay it on the line, especially if I think it might pay off. I've got nothing to start with, so that does help.

Last May I plunked down the $2,000 I had to my name into a futures account for the purpose of trading commodities (this was the minimum required to open an account), and since the sum has grown much so that it's astounding. For the gains, I can thank some solid research, fortunate timing, and the use of margin. Most people will not condone the use of margin on futures accounts, but when you are starting with only a few thousand dollars, you don't have much of a choice (for example, my first buy was one sugar contract which would have cost about $10,000 at the time).

Around the end of November or early December, my account topped the $10,000 mark thanks to a big rally in sugar, and I began to think a little bit loco, to the tune of: "Hey, I just added one "zero" to my account in 6 months...why not go for $1,000,000? It's only two more zero's!" So here I am starting my blog to track the account. I suppose you could do this with an "imaginary" portfolio but that would be pretty freaking lame. So I intend to boom or bust using my actual money for your amusement and hopefully education as well.

In the next few posts I'm going to try to get "caught up" - what trades I made, why I made them, what the current positions are, and what I think the current outlook is. If you haven't yet, pick yourself up a copy of Jim Roger's latest book "Hot Commodities". It really helped me learn how to analyze commodities themselves (hint: it's all supply and demand). I should note that Jim does not advocate trading on margin and I think he is do as I say and not as I do.

There are very few good resources (especially free ones) that actually cover commodites. The WSJ has only one small writeup each day. By the time the Commodity Bull is starting to run out of steam, there will probably be plenty of free resources covering commodities just like there are covering stocks today. When that happens I'll cash out and hopefully buy a nice little condo in Kauai where I can drink Anchor Steam and listen to Eddie Money all day long.

So what I'm going to do is start at the beginning and catch up to the present day. Then I will continue to post and track my real time trades. I have a pretty short attention span so there's a good chance that not all of my commentary will focus on commodities, but that's OK because if more than 3 people read this thing I will be impressed.

Finally I should say that I didn't really know what I was doing when I started and I still don't really know. To this point that has been an advantage. I have traded according to the only 2 rules I know:

1. Supply/demand
2. The trend is your friend

Now that I'm getting "smarter" I actually have a few more rules to incorporate, and these will probably be the ones that ultimately sink me.

In the next post we'll get started with the resource that got my dillusions of fortune started - sugar.

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