Commodities

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Commodities

The functioning of the agricultural commodity market, denoted by the term Commodity, is based on the steadily increasing demand for food products and raw materials for light, woodworking and other industries, caused by the growth of the population of the Earth. Futures and options contracts for wheat, corn, rice, sugar, oats, soybeans, cotton, coffee, cocoa, orange juice, pork and cattle are the main instruments of the agricultural market that are traded on commodity exchanges. Commodity exchanges are divided into specialized and universal or international (ICE). The largest ICEs are: The Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBOT), the New York Mercantile Exchange (NYMEX), the New York Board of Trade (NYBOT), the Pan-European Stock Exchange (EURONEXT), the London Commodity Exchange (LCE) and international network of exchanges and clearing houses.

Example of a trade transaction in the commodities market

Prices for commodities, especially for cereals, are quite vulnerable to unfavorable weather events, such as droughts, floods and frosts, as well as seasonal factors. A fresh example of the direct dependence of prices on one of the most popular agricultural commodities on climatic conditions can be the situation with cocoa beans, the value of which has increased by 25.3% since the beginning of this year. According to the London Mercantile Exchange, the price of a ton of cocoa beans on April 4, 2018 was £ 1733, whereas on January 2, 2018 it cost £ 1383. This leap in global prices for cocoa was caused by a sharp deterioration in the forecasts for the future harvest of this one of the key raw materials for the confectionery industry in the main countries of its production - in Ghana and Cote d'Ivoire. During the first 3 months of this year, you could earn $ 5,600, having invested initially $ 18,700. Having bought one futures contract (10 metric tons) for cocoa beans at $ 1870 / t on January 2, 2018 and having sold it in 3 months on April 4, 2018 at a price of $ 2430 / t, you could earn 560 points of profit, which equals $ 5,600.

 

Commodities Market Features

  • In the commodities market, instruments are traded only in the form of futures and options contracts that have a strictly defined validity period and expiration date (execution), so it is urgent;
  • Commodity trade is carried out on certain multi commodity exchanges having their own schedule of work, which must be taken into account while making a trading plan;
  • A peculiarity of the agricultural commodity market is a clear relationship between the increase in demand for commodities and the growth of the population and its welfare, as well as seasonal and weather factors;
  • Prices for commodities in most cases directly correlate with oil quotes, because the cost of fuel takes a significant part in the cost of their production;
  • As a rule, there are no sharp intraday changes in quotations and pronounced speculative movements in the commodities market, what creates quite comfortable conditions for trading.
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