Archives: 2008 June

Brazil is a huge country with plenty to offer in the fields of commodities, commerce, and vacations, no matter a persons individual preferences. In fact, there are so many things to do in Brazil, many tourists will return for a second or third visit and businessmen want to camp out there.

Brazil is to commodities what China is to manufactured goods. A large share of the world’s beef, orange juice, soybeans and iron ore comes from the great green giant. With the recent discovery of two huge oil fields off the coast of Brazil, the most important oil field finds in the world in decades, Brazil is set to advance fast in an energy short world. The Brazilian oil firm, Petrobras, is an expert in developing deep water fields as these fields are.

While the deep water development costs will be tremendous at current prices for crude oil Brazil will reap huge financial benefits as the fields start producing oil, probably by 2015. The United States will be eagerly seeking to import oil from Brazil as the Canteral major field of the number two exporter of oil to the US, Mexico, is already in a serious state of decline. The US will soon need to find a replacement for oil it is now importing from Mexico.

Commodity prices have in many cases reached new record high levels over the past year. In spite of high prices the long term trend is still up and likely will be for a long time to come.

Commodity prices are volatile because they respond to many unpredictable factors. Weather, labor strikes, inflation, foreign exchange rates, government monetary policies, and well intentioned but flawed government programs, like the US ethanol production program, all have their part to play in the pricing of commodities on open markets.

In an individual commodity trading account, because your position in futures and options is usually highly leveraged, even a small move against your position may result in a large loss, including the loss of your entire initial margin payment and liability for additional losses. Commodity prices are a double-edged sword for the world economy. High commodity prices are a negative for commodity importers, but a positive for commodity exporters. Commodity prices are currently at or near all time highs. Producers are retiring debt and replacing worn-out equipment but consumers are starting to scream as food shortages and prices beyond what many consumers can readily pay are developing in many countries.

Commodity prices are more volatile than exchange rates and interest rates. Hence commodity price risk represents a more important source of risk to corporations in altering their production costs. Higher prices for raw materials are soon priced into increases in prices for finished goods.

The commodities futures market has been described as continuous auction markets. It is a clearinghouse for information about supply and demand. The futures market reflects the cash market.

The difference between futures prices and cash prices at any moment is called the basis. Compared to the stock market the futures markets are exceptionally prone to false breakouts and trends have wilder swings, tempting traders to leave early or enter late, possibly with a loss. Just have a look at commodity futures charts, and compare them with stock market charts. The difference in trading pattern will be apparent.

The futures markets enable buyers and sellers to hedge against, or cushion the impact of, pricing changes. Buyers and sellers set up trades to minimize potential losses from rising and falling prices on spot markets through these hedges in the futures market. The futures market is used to help determine the price for future deliveries. It is used to purchase a contract today to guarantee a future shipment of commodities like coffee and copper.

The commodities futures market attracts speculators due to the nature of rapid changes in price levels as well as the large amount of financial leverage offered on trades. A commodity speculator may be required to deposit only $5,000 to control $100,000 or more of a commodity. This leverage increases the profit potential on trades but as many traders soon find out also increases the risk of loss.