Commodity buying and selling in Mexico (fruits/avocados) – primarily based on (micro/macro/modelling/logic) – and forecasting droughts

A reddit person requested me to develop on how I construct and improve my (asset class) screeners primarily based on earlier examples i've posted. I may mix just a few request in a single article; to supply you ways we did it as practitioners in a financial institution. This text can be about creating an exterior variable in your backtesting technique after you outlined your variables (micro/macro/logic/manufacturing chain) – and when you understood the commerce logically you can begin on the lookout for the nuggets you’ll be able to commerce on this.

I understand we already did Mexico as soon as; metal associated sensible;

https://www.reddit.com/r/RossRiskAcademia/feedback/1fdw65c/fx_trading_continued_how_to_profit_more_and_more/

However that was the identical; you perceive the entire manufacturing chain from micro to macro after which your; consolation to commerce it; a lot larger. And therefore your threat urge for food (do I perceive why this commerce strikes?) – decrease therefore you threat extra.

Okay; so

1. screener for anomalies
2. primarily based on details
3. coding
4. on the lookout for alternatives
5. hook as much as an API and sleep like a child.

To begin with, let's choose mexico once more, and let's choose agriculture; to start with; if you wish to commerce a agency which has a product that may be a spinoff of 'agriculture' – to be able to absolutely perceive; it’s worthwhile to understand (snap out of your head) what the highest agriculture / GDP nations are;

https://preview.redd.it/4p0cfd1xjvzd1.png?width=905&format=png&auto=webp&s=1b67fde96d3a8b968b45eea7e35ab07ef741a83a

no surprises

https://ourworldindata.org/grapher/agriculture-share-gdp

Now again to Mexico; I've written a article already about scrape information; and since I don't fake that complexity is required to earn cash, however generally only a easy head and logical deductive reasoning we return into Mexico to examine their agriculture.

https://oec.world/en/profile/hs/tropical-fruits

I as decribed in a distinct article; scrape from many web sites, that is certainly one of them. Why? It exhibits me how the nations, merchandise, corporations, the hamster cage is correlated. My eye spots;

Mexico exports fruits; veggies, tomatoes;

https://preview.redd.it/eqjnpqa1kvzd1.png?width=871&format=png&auto=webp&s=25cabae5445bca9a707dcd0762c57fdfc9d1dc95

oke; nicely; this pretty web site drills down totally free; the place I can hyperlink it too?

https://preview.redd.it/4y7iekl2kvzd1.png?width=863&format=png&auto=webp&s=89a44015680e434bdafc94a62bd58374b35396a5

Oh what a stunning web site giving all of it to me totally free;

Hey, i all the time prefer it after we bought a 'large kahuna' – with a easy vanilla (USA) comparability – tropical fruits! >1 mexico! export – and nr 1 import USA. And it's a cloth endeavor! These will not be small numbers.

Oke; truthful; nobody will dispute mexico has some lordy lord; agricultural merchandise; en masse; large numbers, smells like on the lookout for extra logic; A rustic is ineffective, I need a variable that enhances my backtesting of a possible technique; so I have to look within the nation; the place on earth is all these things made!

https://preview.redd.it/purx2i94kvzd1.png?width=746&format=png&auto=webp&s=033286856395ed63a6521935ff480954924073ae

Properly nicely nicely, we have now a map which states kind of the place all of the stuff comes from. Okay. now subsequent one; everyone knows the world is stuffed with droughts! and heating up; we additionally know Mexico earns on agriculture as main exporter, so we have to drill down by (droughts) and we have to rill down by climate precipitation to 'forecast' xxth path's if that space goes to get beneath extra stress coming years.

Why? Properly; earlier than I did this (i've accomplished this work solely in Africa) – the primary assumption was already (lack of knowledge – and scarce information) – however you don't want a lot. However you do go in with the belief; gosh; the place they produce probably the most; in all probability least rainfall or most droughts!

https://preview.redd.it/zndsmk6akvzd1.png?width=847&format=png&auto=webp&s=74cc53e9589b17094fd88ddf78256fdb86b6c643

Oke; speculation confirmed. Agricultural space's are partially, generally massively impacted by the droughts (which might be forecasted) – and given Mexico is world chief on these things; export sensible; I already know a 'drought variable' in forecasting MXN/USD can be statistically vital (we did the work for African nations 10 years again for Uganda, Kenya, Rwanda and so on. and offered it as an algorithm.).

Now 1) extra droughts 2) in areas we don't need them. Crap. Now let's take a look how the climate kind of compares by way of the years; and by space;

https://preview.redd.it/2mbreixakvzd1.png?width=850&format=png&auto=webp&s=9a229fc15b2fa35887c5281cfe137df364b708b2

Properly; that ain't good; that’s MASSIVE discrepancies… hmm, what's a superb estimate by way of out the yr by space;

https://preview.redd.it/hd35wv6ckvzd1.png?width=1028&format=png&auto=webp&s=8f42fc40549df587e5fd0452cb0e8ff8d8f15df8

makes senses!

Oke; I consider the trifecta of;

1. mexico exports a shit tonne of fruits; nr 1 export; it's a 'wise deduction' that in all places on the earth droughts are f*ing shit up. We have now now information that that’s the case. We even have kind of an concept how the raining season is; and on prime we all know the place the merchandise sit and we all know the largest hyperlink sits between (MXN/USD).

GOSH WHAT HARD THIS IS ALL LOGIC; sorry dudes. Now clearly is there a hyperlink between 'droughts' and 'veggies' in Mexico;

https://preview.redd.it/k7xw74zdkvzd1.png?width=873&format=png&auto=webp&s=68a8194518c0fa2cbcf9fffc4f0965ee4bc03599

yeaah, we're getting someplace.

That already tells me primarily based on wise guestimates, logical pondering and customary sense:

1. the mexico ETF, the primary listed MXN fruit shares are extremely correlated to the mexico ETF; and given there may be clearly competitors in Mexico, some corporations would possibly do it higher than others; and in the event you had a variable that would forecast if a drought would come; you’ll be able to already 'bayesian fashion' alter the value of forecasted cashflow. That provides a superb indication if the agency can proceed to develop; or truly must eat their buffers.

That tells me primarily based on the easy preliminary information above; that round April/Could we would see some correlations hocks and paradigms between shares/fx/etfs, with the ability to be extra forecasted by creating your personal predictor variable; 'droughts'. Purely wanting one stage decrease; the avocado belt nonetheless sits in a comparatively dry space (round it's extra moist) – the avocado belt appears very in land. Nonetheless confirming that droughts have affect on Avocados, fruits, tomatos, and henceforth my declare on the ETF/Foreign money and imply reversing over the precipitation/drought

https://preview.redd.it/xxv27hhfkvzd1.png?width=806&format=png&auto=webp&s=e2fbe5b37ae8c4396a2e7ac24742a6aaca816108

Oke, let's wrap this up as a result of that is one other field of >xxth trades.

To begin with; in right here I defined the Bayesian prior estimates;

https://www.reddit.com/r/RossRiskAcademia/feedback/1eo5e4d/a_path_to_become_an_more_experienced_genuine/

Please particularly watch this idea once more;

And right here I wrote concerning the climate forecast variable how we construct it up;

https://www.reddit.com/r/RossRiskAcademia/feedback/1ffsh15/trade_events_opportunities_and_investments_over/

You need to use 'historic information' – throw it within the mannequin;

https://preview.redd.it/il7mni1ikvzd1.png?width=983&format=png&auto=webp&s=9c4ef193cc49d13bfdb00b3fbe1159b904aa6baa

And at that time; since you in all probability received't have a lot information; use the bootstrap I supplied; and on prime of that; within the information you DO have; the great thing about Bayesian arithmetic is nothing else however (you have got prior static information on one thing) – however given the tail threat is all the time not sure; by way of Bayesian (subjective inputs) you will get statistically nearer to the reality. And it may be as wild as attainable; from the 1) droughts extra + much less water irrigation 2) to the earth will get their shit collectively and we are going to cool off, much less droughts, and extra irrigation. Regardless, you’ll be able to bootstrap this (posterior) information; and that’s what you employ to pattern that variable to have affect on the MXN/USD, MXN ETF, and the MXN Fruit shares.

https://preview.redd.it/t62uijmjkvzd1.png?width=900&format=png&auto=webp&s=cb445ce4393fc5b76c76cd49e38e0963b3891cb6

to place into 'historic information' to make sure that your 'new information' to check with and calculate with all kinds of ideas by way of a mcmc simulation to examine 9999xth paths of how usually droughts would possibly occur going ahead. We already noticed they have been on the rise; so primarily based on historic information we all know two issues;

1. droughts occur extra
2. and avocado is a little bit of an alcoholic, drinks loads (irrigation)

In different phrases, we are able to mannequin in a (prior historic distribution of rain information) – the belief (from wildest – > extra droughts) – Mexico is getting extra poor -> no more cash for irrigation (a double hit).

And; I did the checks; I did the checks; it really works; which is logic; as a result of from begin to starting all we did was merely observe a logical line of micro – macro – (manufacturing chain in between) – variables that would impair it – and as soon as we understood the commerce; you’ll be able to search for trades that fill in that field;

So let's randomly choose 1) is correlation trades attainable? Aka (commodity) – (lag) – (inventory) – (lag) – (etf) – after which made one codependent on the opposite?

https://preview.redd.it/j9m1fzylkvzd1.png?width=726&format=png&auto=webp&s=590c998d34a0e04841058928cf108b4e74eb8aab

Okay that appears promising; that provides me the 'wise deduction that the (correlation itself doesn't matter – in fact not – it’s associated to droughts and rain bear in mind!) – what we wish to see if the sample of the correlation is definitely following;

https://preview.redd.it/gih3hx1nkvzd1.png?width=1001&format=png&auto=webp&s=4f4945ab9146af3a143081e256420c087783aba0

BINGO! Rolling correlation is hereby a assured commerce; as a result of in the event you can't see the overlap between these 2 – aka the 'inventory following % location with the 2 ETFs) is the usual correlation commerce. Except you actually can't see that these two charts have ZERO resemblance, in that case, 'dm me' – i'll get you new glasses.

Extra enjoyable trades;

https://preview.redd.it/rpikxbaokvzd1.png?width=1080&format=png&auto=webp&s=46a7a611003541f94d2604ca646971bc83753981

As a result of we missed on variable; per product in agriculture….

And now you get; okay; not solely are these correlation lagged trades that imply reverse by way of an ETF; not solely that; the above tells you there may be competitors; and take a guess; it imply reverses; you bought that proper; it imply reverses by way of the seasonality per fruit;

https://preview.redd.it/hq3b6uqpkvzd1.png?width=788&format=png&auto=webp&s=cae5d599c583578a401800ca131e79b8f6bb78a8

Which brings you again by creating an EDI variable in some method of a non linear OLS equation; to examine it's predictor capability on the 'anticipated cashflows' within the corporations itself; as a result of the mexican listed fruit corporations; (i had the code prepared and posted right here so it took me a couple of minutes) – it imply reverses by way of the seasons.

… Which sadly, sorry, is smart. An entire 360 chain of logic

1. what do you commerce
2. why
3. what’s a jeapordy for my commerce
4. is there a solution to improve new variables to statistically be extra correct than the conventional technique (i hate historic information, i moderately throw in assumption of what would possibly come), and bingo, from Monday i’ll have a Mexico field.

Thanks for the nameless redditor who wished to know the place I scrape macro (OECD) + and mix it with code (EDI) – and the rationale on 'placing in priors' of your personal perception to boost the probability of success.