Learn from Three Commodity Trading Blow Ups

Nick Horob

Given today’s low commodity prices, I’m seeing more and more companies coming to market to help farmers “fix” their grain marketing.

While it’s definitely an area of improvement for many, be wary of anyone or any company who comes to you with a “sounds too good to be true” system.

There will be plenty of beneficial tools and contracts that will be developed over the next few years but there will also be plenty of people selling/promoting a fool-proof system.

Furthermore, many from outside the ag community tend to underestimate the nuances involved with crop insurance, basis, cash flow, grain discounts, etc.

We’re going to touch more on grain marketing in the coming weeks but first we want to share with you a few stories from so-called financial market experts.

Many of these firms had great track records of beating the market until they got severely punished by the multitude of unpredictable forces that influence commodity markets!

The good thing about your farm’s grain marketing…..you don’t have to beat the market, it’s simply one component of your revenue. Plenty more on this to come, but find a system that allows you to take advantage of seasonal rallies while adding to your bottom line by thinking like a merchandiser (easier said than done, I know!).

If you’re interested in trying out a free trial of our software, enter your email below.

Let’s learn from the past that beating the market is incredibly difficult……

Amaranth Advisors - A $6 Billion Natural Gas Ass Whooping

During the summer of 2005, Amaranth Advisors star trader Brian Hunter spotted a bargain in the natural gas markets.

There were plentiful supplies of natural gas in a period of growing production. The natural gas market was viewed by most industry participants as a dog. Hunter decided to make a contrarian bet by buying millions of dollars of call options (unsure if these were calls on straight futures or calls on calendar spreads).

In late August 2005, Hurricane Katrina came to Brian Hunter’s aid. After hammering Florida, Katrina restrengthened in the Gulf of Mexico and battered Louisiana and its natural gas infrastructure. This was followed by Hurricane Rita which smacked Texas and even more energy infrastructure.

The Henry Hub, which is the primary delivery point for natural gas futures, was under water.

Hunter’s positions paid off handsomely. The multi-billion dollar fund ended the year up 15% and his personal bonus that year was rumored to be $113 million.

He was the king of the hedge fund world, a 31-year old energy trading prodigy.

Following his hurricane-fueled windfall in 2005, he started to devise is a strategy for the natural gas markets in 2006 heading into 2007. Following a record warm January 2006, Hunter developed a thesis that natural gas prices would drift lower throughout the year but then firm dramatically the following winter when his data gave him the confidence of a cold winter. He put this into practice by shorting 10,000’s of Nov 2006 contracts while going long Jan 2007 contracts. This was a multi-billion dollar bet.

He was building an enviable track record. In February 2006, his streak of success continued and he earned the firm a whopping $320 million.

It all came to a screeching halt in one week in September 2006. Mr. Hunter’s leveraged futures spreads went against him to the tune of $6 billion (he lost $6 billion in a week!). He was overleveraged and simply wrong.

He had a system that he devised that performed spectacularly in 2005. Mr. Hunter had access to the best weather data money can buy and it did nothing to ensure that he was smarter than the market.

Unfortunately, it’s incredibly difficult to predict Mother Nature…..a primary driver of short/intermediate term natural gas markets.

What other market is greatly impacted by weather?!

(Source, Source)

Long-Term Capital - Nobel Prizes Don’t Ensure Market Success.

In 1998, some of the smartest men in the world almost broke the global financial system.

Two of Long-Term Capital’s board members where famed financial experts and Nobel Prize winners Robert Merton and Myron Scholes.

The firm traded complex financial derivatives and believed they had found no-lose trading opportunities. These opportunities were small but had always produced profits, until they didn’t…..

Heading into 1998, LTCM had approximately $5.0 billion in equity capital, experienced 30%+ annual returns, and were likely spending $50 million+ per year in salaries and overhead to generate the “best” research in the world.

It turns out some of the most intelligent men in the world with tens of millions of dollars of research capital couldn’t predict the 1997 Asian financial crisis and the 1998 Russian financial crisis. These “black swan” events caused their highly leveraged portfolio to collapse forcing the Federal Bank of New York to intervene and organize a $3.6 billion bailout. Most global banks participated in the bailout as there was real concern that LTCM would take down many of the these banks.

This group of extraordinarily intelligent men personally lost $1.9 billion of their own capital in the aftermath of their can’t-lose strategy blowing up. Think about that….a collective net worth of $1.9 billion gone in the span of a few months!! (On an unrelated note, if I had a billion dollars I’d be sipping Mai Tai’s on some remote island not utilizing 20:1 leverage betting on exotic, risky securities but that’s beside the point!)

This reminds me of the famous saying….“The market can remain irrational longer than you can remain solvent!”

Cook Industries’ Soybean Debacle

Cook Industries was a grain trading business built by entrepreneur Ned Cook. The company started in cotton trading but expanded into grain and oilseed trading around the US in the early 1970’s.

The company was a prime beneficiary of the growth of the global grain trade. In particular, the opening of the Soviet market.

Cook Industries grew into a major player in the US corn and soybean market. However, the firm collapsed in 1978 on the back of large speculative positions in the soybean market. Cook believed soybean prices would decline and when the market disagreed, these speculative positions cost the company in excess of $80 million.


I could go on and on discussing many instances of very smart, rich, and connected firms failing to out-guess a futures market.

The grain marketing holy grail, a price prediction service that notifies you of highs and lows in real-time, simply doesn’t exist. In this period of low prices, be on the lookout for those trying to make you think different.

Instead, focus on being the most cost-efficient farmer you can and put systems in place that allow you to more easily take advantage of seasonal rallies. Often times a trusted advisor is a valuable part of this system, just know it doesn’t come with a crystal ball.

See the links below this blog post for more content on grain marketing.

Nick Horob

Nick Horob

Passionate about farm finances, software, and assets that produce cash flow (oil wells/farmland/rentals). U of MN grad.

Fargo, ND
Related Posts
Grain Marketing can be an Emotional Roller Coaster

Grain marketing is hard! Volatile commodity markets lead to frustration, greed, and indecision. Today's farmer needs to work hard to find a risk management system that allows them to make less emotional, and more profitable, grain marketing decisions.

Read More »
New Feature Friday - Grain Marketing Plan Builder

In this post, we discuss a valuable feature of our farm business software: a grain marketing plan builder. Grain marketing is emotional! This tool allows producers to minimize those emotions by implementing a sound grain marketing plan.

Read More »
Be Cautious With Exotic Grain Marketing Contracts

In this blog post, we discuss the dangers of exotic grain marketing contracts. They often sound great on the day they are presented to producers but they come with a lot uncertainty. This uncertainty can lead to producers passing up profitable grain marketing opportunities. Remember, there's no free lunch in grain marketing.

Read More »