Global Commodity Future Trading Opportunities
Since the mid-19th century grain markets of the North America, commodity future trading has been the driver of commodities markets, linking producers and users through a network of exchanges across the world.
Commodity future trading makes dealing in commodities much easier because there is no need for the buyer to see or touch the product.
What is the futures contract? The contract is simply a piece of paper or electronic transaction traded on the market.
This standard agreement consists of four parts. Firstly, the delivery date and location needs to be specified.
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There are fixed times throughout the year when commodities are delivered, for example, a farmer may deliver grain to an elevator in Omaha in March, July and September. A proper description must be stated, so that for example heating oil is distinguished from crude, or that it states clearly that it is a contract for soybeans and not soybean oil.
The quantity of the commodity being bought or sold must be clear; for example, one contract will be 100 troy ounces of gold or say 10,000 barrels of crude oil or 25,000 pounds of copper.
What makes the futures contract interesting is that while it fixes the price for future delivery of the commodity, the price of the contract itself will certainly change over the period until it expires, that is, on the day of delivery. Cocoa future prices may change on the basis of say political conflict in Ivory Coast or those of copper due to, for example, breaking news of industrial action in a mine in Chile, or gold as a result of power cuts in South African mines.
An important consideration in commodity future trading is how much money is needed to set up an account with the broker firm. They will place the trade, whether this is done by telephone or far more likely today, via an online trading platform.
You will not need to put down the full value of a futures contract when you trade. Putting a small deposit down is called margin trading.
So you have decided to have a go at commodity future trading. When you set up a margin account with a firm you should check the margin agreement which states the minimum amount to be deposited when entering futures contracts.
What type of futures order do you use? To enter a contract you place and order. There are different types of commodity futures orders available, depending on your strategy. It is this concept of leveraging in commodity future trading that makes it possible to achieve big profits relatively quickly but equally you can rack up significant losses if you make the wrong call and the market moves the other way. Here are some futures you can trade on the global commodity exchanges:
Gold in backwardation, negative basis for the yellow metal Why trade futures? Some look to hedge and avoid losing money, while others aim to profit in the futures market? Let’s say you are a small oil producer with significant oil reserves in the ground, and you will want to sell 100,000 barrels. Today crude oil is around $100 a barrel, but you can’t be sure you will get that price in several months from now. At the NYMEX you sell in the futures market those 100,000 barrels at $100 a barrel. Let’s say OPEC increases production over coming months or global demand falls, the oil price will fall but you use hedging to protect your revenue with this futures contract.
If the crude price goes south, then of course he will make a loss.
But the oil producer above, who hedged will still get $100 even though the price may have fallen to $80 per barrel.
If a speculator thinks prices will fall he can go short (sell now to buy back at a lower price). He sells a contract to deliver 25,000 pounds of high grade copper. Three months later just before delivery is due, he buys a similar contract at a lower price, making a profit on the difference.
All he had to do for this was put up a deposit of say 5% of the contract value as collateral.
This is commodity future trading and it means you trade on a thin margin, with high leverage and so with high profit or loss potential.
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