Category: Commodities Futures

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.

Commodity trading is a battle between return and risk. Because of the leverage involved, you can achieve a higher rate of return than from most other forms of investment, but at a higher risk. Commodity trading is speculative, involves a high degree of risk, and is designed only for sophisticated investors who are able to bear the loss of more than their entire investment.

You should keep in mind that past performance is not necessarily indicative of future performance. Commodity trading is just one step in solving the complex agriculture problems. Interestingly the concept of futures trading started from farming when a French wine merchant started locking prices for his wine produce even before his grapes were ready.

Commodity trading is speculating on the future price movements of the basic raw materials on which global trade is based. The two most traded commodities are oil and coffee; however, all the other basic materials are also included in this market. Commodity trading is reaching an all-time high in popularity. Although many individuals are able to make a profit with futures trading, there are also those who end up losing money. Commodity trading is a big arena, just like the stock market.