Commodities Trading – Forex Academy

Negotiating the realm of raw materials may be new to many of you, but in the end, doing so is very much like negotiating any other financial instrument. The first thing to decide is which broker you will use. There are CFD markets, futures markets, and a variety of options markets that can help you access commodity markets. To help you make this decision, just look at how much money you have available to negotiate.

Size Matters (When It Comes to Trading Raw Materials)

Size matters when it comes to raw materials. This is because of futures markets. Futures markets are defined contracts that give you the option to trade several raw materials. To place a transaction in the commodity market of your choice, you need to have the necessary amount of margin to open that position, just like in the Forex world. In this situation is where futures markets could be a little expensive for some people. While some raw materials are cheaper to trade than others, some raw materials require an initial margin of more than 5000 USD for a contract. Beyond that, standardized contracts mean there is only one tick value available. For example, if you sell crude oil, each tick is worth 12.50 USD. There are “mini contracts”, but they are usually not as liquid and are still very expensive for some traders.

This is where CFDs suppliers of raw materials come into play. These contracts allow you to negotiate less than one full contract, mainly because you are not actually operating in the futures market. You are negotiating a contract with your broker to pay or receive the difference between the opening price and the closing price. This is why your broker can offer the equivalent of 1 bale of wheat compared to the standard contract size, for example. In that sense, CFD brokers may be a good option to consider.

A final option may be to trade raw materials in the options markets, but lately, the options have been extraordinarily volatile and costly. Similarly, binary options have had a lot of bad press lately and, in general, can be extraordinarily dangerous because of the large amount of leverage they offer.

The Fundamental Factors Differ

Keep in mind that the fundamental factors in commodity markets can be quite different from the factors you are used to if you are a stock trader or foreign exchange trader. This is because these are real “things” and not necessarily about companies or economies. To take an example, several years ago there was a long series of floods along the Mississippi River and the surrounding area of the United States. This had a great effect on the price of wheat because of the floods they became a problem. The destruction of crops reduced the supply of wheat to the market, which naturally led to an increase in prices.

This is why so-called “soft” commodities in futures markets, which are usually products that grow on the ground, can be a little difficult for some traders to negotiate as weather patterns become very important. Usually, when a currency is traded, you don’t have to worry about the weather, unless there is some kind of anomaly like a tsunami in Japan. In general, climate rarely enters the equation for Forex traders. However, traders in agricultural raw materials trading in wheat, maize, soybeans, and many other products are totally dependent on weather reports.

Precious metals are also a completely different financial instrument, as they often react to interest rate expectations from the Federal Reserve. Similarly, the price of metals is directly affected by the strength of the dollar, as most of the larger precious metal markets are denominated in this currency. This is why it is very important that you have knowledge about how the US dollar has high volatility before trading in gold, silver, or other metals.

The Liquidity Varies

Another thing to consider when operating in commodity markets is the liquidity of the market where it is traded. The fact that your futures broker offers the wood markets does not mean that you should participate in them, as they are very illiquid and are usually used for hedging more than for anything else. This would not be the place for retail traders to participate. There is a contrast with the pair of EUR/USD and you can notice that there is a big difference between the opening and closing a position. Many retailers have been adversely affected by the lack of liquidity in a market they do not understand.

Stick With What’s Important

It’s really funny that I recommend this because I don’t think it’s the case in the currency markets, (although many traders will argue the opposite). This is because the commodity markets have variable liquidity and, if you are involved in a futures contract, that liquidity may hurt you, as the value of the tick may be extraordinarily large in some of these contracts. This is why typical retailers should trade assets such as crude oil, gold, silver, corn, wheat, soy, natural gas, etc. Participating in milk, wood or even palm oil may sound exotic and therefore intriguing, However, it’s an excellent way to lose money.

This does not mean that you cannot deal with these raw materials, but you only need to have the right account size, something that is within the reach of very few retailers. At the end of the day, it is better to stick to markets that are much more stable.

In Summary

Find a broker, one that hopefully is regulated by a strong market authority, or maybe use one that you already have and that offers CFDs markets. As a retail trader, it is much better to initially use the CFD markets, because you can trade penny-worth ticks, compared to those large positions that are required in some of the markets. Remember that technical analysis, to some extent, works the same in all markets. The more liquidity the market has, the more likely the analysis is to work. That is the beauty of some commodity markets like crude oil because they are highly technical in nature.

Fundamental analysis can also be important for the negotiation of raw materials, as mentioned above, and news can also be important. Agricultural markets obviously focus more on climate, while crude oil can focus more on the Middle East. Demand is also a determining factor in the prices of raw materials. Beyond that, I have discovered that commodity trading works in much the same way as foreign exchange trading and is an addition worth considering for your long-term trading plan.

Coffee is one of the most interesting assets for trade. Although it is also one of the most volatile. Coffee is one of the raw materials of the soft complex and the vast majority of these products are characterized by being affected by sudden price changes.

There are two main types of coffee: Robusta and Arabica. Coffee is marketed under the ICE Futures contract in the U.S. It is Arabica. Robusta coffee beans are considered more bitter and also contain more caffeine.

History of the Coffee Trade

The International Coffee Organization reports on international coffee production and sales statistics and is a good promoter of coffee trade among nations. This organization is based in London, the ICO is composed of 55 member countries that produce and consume coffee and offers coffee futures traders a good deal of data and other information.

The Agricultural Foreign Service of the US Department of Agriculture also provides a wealth of information and statistics on coffee, including country and world production data, import and export data, etc. The various exchanges that trade in coffee futures also have a lot of information.

The contemporary history of the coffee market and its prices can be summarized in two periods: the period regulated by the International Coffee Agreements (AIC), from 1963 to 1989, and the subsequent period of free market, which followed the breakdown of the AIC negotiations in 1989.

The collapse of the 1989 Agreement was disastrous for many along the supply chain, as the International Coffee Organization (OIC) composite coffee target price fell by almost 75 percent in the following five years, from $1.34 per pound in 1989 to an average of $0.77 per pound in 1995.

During the regulated period, the average price difference between Arabica and Robusta was about $0.149 per pound. An annual peak of $0.475 per pound was recorded in 1986, following a shortage of supplies to Arabica following a drought in Brazil in 1985.

But why is coffee important to merchants?

With more than 2.2 billion cups of coffee consumed daily, coffee beans are one of the most commercially traded soft commodities in the world. Today, the coffee market is worth more than $100 billion annually. With growing demand, it has become one of the most interesting, albeit volatile, investment tools for trade. While some use futures and coffee options to cover their portfolio, others speculate.

Coffee is derived from a plant grown in more than 50 countries, all with tropical and subtropical climates. Brazil is the main producer, providing around 35% of the coffee grown in the world. The other main producers include Vietnam and Colombia.

Coffee Market and Price

Coffee futures and options are negotiated in New York on the Intercontinental Exchange (ICE, formerly the New York Board of Commerce) through CFDs.

The size of Coffee Futures Contract “KC” is £37,500

Trading in coffee commodities is now done electronically.

The value of coffee futures is quoted in cents per pound, and the price fluctuates at least 5/100 cents per pound, equivalent to USD 18.50 per contract.

A 1 cent change in price equals $375.

The months of March, May, July, September, and December are the months of the coffee futures contract.

International Coffee Market and Price

London coffee futures are traded at Euronext.liffe.

The equivalent to this contract for coffee futures is approximately 10 metric tons.

The prices of coffee futures are quoted in US dollars per metric ton with a minimum price movement of $1 per ton or $10 per contract.

The contract delivery months are January, March, May, July, September, and November with 10 delivery months available for trading.

Other international exchanges trading in coffee futures include the Singapore Commodity Exchange (Robusta), the Commodities and Futures Exchange (Arabica), and the Tokyo Bean Exchange (Arabica coffee and Robusta coffee), and (BM & F) in Brazil.

The largest coffee importers are the United States, the European Union, Japan, Canada, and South Korea. Global grain consumption continues to grow at a constant annual rate of over 2 percent, and artisanal coffee shops are rapidly consolidating into the retail business of modern society.

As an important staple of the diet, this agricultural product has generated a large economy of its own. Only in the US, the economic impact of coffee exceeds $220 billion and represents approximately 1.65% of the country’s total GDP. The coffee industry is estimated to represent 1.7 million jobs in the United States. Thus, the prices of coffee commodities have a determining role in the global economy.

Is Coffee a Good Investment?

Like any other asset, the coffee trade offers no guarantee of financial success. For years, however, this agricultural product attracted the attention of international investors and traders seeking to add substantial growth and diversification to their portfolios.

Why trade in coffee?

There are several important reasons to trade in coffee, however, the most common are the following:

Diversification

The presence of coffee in a capital-only portfolio may reduce volatility due to the absence of a correlation between this commodity and other asset classes.

Safe Haven

Raw materials can serve as a safe haven in times of global economic uncertainty and market turbulence, providing operators with protection against inflation and the fall of the US dollar.

Speculation on Coffee Prices

Commodities could be very volatile, experiencing strong price swings. Trading in coffee CFDs is a way of trying to take advantage of the drastic fluctuations in the price of silver. Operating with coffee requires some consideration, due to the occasional high volatility of the market and the wide range of instruments available, from coffee derivatives, futures, and options, to the shares of those companies that are dedicated to this industry.

The Main Coffee Market Industries

One way to invest in the coffee industry is to buy shares in a company that produces or sells the product. The shares of these companies are strongly influenced by the coffee market and can offer a good value compared to the trading of the commodity itself. Of the countless companies in which one can choose to invest, a few names dominate the industry.

Expert operators often suggest investing in more than one company in order to cover their bets and avoid having all the eggs in one basket. Another way to protect against potential risks is to buy shares in a company whose product portfolio includes more than just coffee so that its return does not depend too much on the raw material.

Veteran traders share some tips on climate-related trade:

Never short in January.
Never short with coffee until July.

The reasoning is always the same: the proximity of the winter cold. In the case of the future of coffee, a freeze or threat of freezing in Brazil could be as serious as to damage coffee plantations and reduce coffee production, perhaps for several years, may have a substantial impact on raw material prices due to Brazil’s dominant role in the world coffee market. Depending on the situation of coffee supply in the world, some traders insist on shorting with coffee after May, looking towards the southern hemisphere winter season. However, this seasonal trend is not very strong because other countries, such as Mexico, can source coffee.

What to Expect for 2021?

The most recent estimates indicate that global production would be around 169.1 million sacks (-3.1% annually), mainly marked by lower production in Brazil (-8.5%), which will enter its biennial valley-year. The other producers would keep their production virtually unchanged: Vietnam (29.1 million bags); Central America (19); Colombia (14.3); and Indonesia (9.5).