From the November 2013 issue of Futures Magazine • Subscribe!

Third Street Ag: Fundamentally sound

Chad Burlet and Bob Otter became friends when Burlet directed the cash/futures convergence trade for Cargill and Otter executed Cargill’s soybean trades on the floor of the Chicago Board of Trade (CBOT). More than 30 years later, with many stops along the way, that friendship turned into a partnership leading to the creation of Third Street Ag, a commodity trading advisor (CTA), in 2012. 

“Fundamental, discretionary, agricultural; those three terms capture it pretty well,” says Burlet, who grew up in Minnesota and began working for Cargill immediately after college. He had numerous positions over nine years for Cargill, ending up as the head of oilseeds trading. From there he went to Goldman Sachs in New York where he helped establish its grain trading business. 

After 16 years of proprietary trading for large institutions Burlet decided to trade for himself and moved to Chicago in 1996. 

Otter says his story is pure Chicago. He got a job on the CBOT as a runner and became an early employee of brokerage start-up Iowa Grain in the 1970s. He would move up the ladder for Iowa, becoming general manager, while also purchasing a membership and starting a trading career. 

Their friendship was part of why Burlet moved to Chicago and is the genesis of their name as they both live on Third Street in the same Chicago suburb. 

In 2008 Burlet began trading for a large customer — which is part of the track record of Third Street until the summer of 2012 — utilizing his decades of fundamental knowledge of the grain sector.Since teaming up in August 2012, reducing leverage and applying more vigorous risk management procedures, the program has returned 14.5% with a worst drawdown of 2.05%.

Burlet trades relationships in the grain sector by analyzing thousands of fundamental inputs. “One of the important things to ask every day is what are the most important fundamentals at any given time. What is currently driving the market?” Burlet says. “There are thousands of things that we are monitoring on a regular basis.”

 Burlet’s performance in this period was strong but also volatile leading to a 53.53% drawdown in 2010. He dropped 28.41% that year but followed it up with a strong 2011, earning 44.58%. 

The two had broached the subject of teaming up before but in 2012, with Bob leaving the floor, the timing seemed right. So they decided to launch a CTA based on Chad’s trading and Bob’s risk management expertise. 

“The market analysis has not changed, our trading philosophy has not changed, what has changed is our risk management and our risk appetite,” Burlet says. “If our risk management guidelines had been in existence, 2010 would have been a very profitable year. Things that Bob and I have implemented as partners, with Bob being the chief risk officer, would have taken what ended poorly in 2010 and left us highly profitable.”

The program trades the grain complex and soybean products. “At times the strength or weakness in the cash grain market might be a dominant feature, at other times cash markets are more neutral so we watch global production, global consumption, trade flows, weather and everything that has to do with both the supply side and the demand side,” Burlet says. “What are animals eating? Which importing countries are buying and what are they buying? Is it wheat? What class of wheat?”

Most of their trades are spreads but theirs is not a spread program per se. They trade spreads, outrights and options. Otter says it is based simply on selecting the right tool.

“If we think there is an opportunity in the futures market, then how best to trade it,” explains Burlet. “Very often for us it is a spread, [like] a calendar spread within corn or soybeans; it might be an inter-commodity spread, corn against wheat, soybeans against corn or it might be an inter-exchange spread, Kansas City [wheat] against Chicago, Minneapolis against Kansas City. Those are some of the tools [we use]once we identify an opportunity through our constant monitoring of the fundamentals.”

He adds, “What we are watching for is price dislocations. Price relationships that are unsustainable over time. When we see those situations occur, they’re going to resolve themselves through a combination of price and time.”

Third Street has a global perspective. They ask, “how does the trade fit into the world economy?” “China is the easiest example because they import 70% of all the soybeans shipped in the world,” Otter says. “Having an awareness of what is going on in the consuming economies is important, and also awareness of what is going on in the various currency markets, especially the South American currencies, because the world soybean trade is priced in dollars. When their currencies change in value, it affects the marketing patterns of producers in South America.”

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