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Commodity markets are markets that track the price of real commodities, or valuable trading items. The trade in commodities is one of the main foundations of the global trading system. For the serious investor, knowledge in how to trade commodities is vital. Great profits can be made if an investor has an in depth knowledge of the issues surrounding globally traded commodities, and knows the mechanics of how to trade them. But though this trade has a long tradition, innovations are still occurring: advances in technology mean that new commodities are coming onto the market all the time, while the advent of online commodity trading means that access to global markets is now available to even private investors with a small amount of capital. This article focuses on the history and current debates regarding global commodity markets. The modern commodity markets have their roots in the trading of agricultural products. hile wheat and corn, cattle and pigs, were widely traded using standard instruments in the !"th century in the #nited $tates, other basic foodstuffs such as soybeans were only added %uite recently in most markets. For a commodity market to be established there must be very broad consensus on the variations in the product that make it acceptable for one purpose or another. The economic impact of the development of commodity markets is hard to overestimate. Through the !"th century &the e'changes became effective spokesmen for, and innovators of, improvements in transportation, warehousing, and financing, which paved the way to e'panded interstate and international trade.& (ast few years commodity prices specially grain commodities prices have large ups and downs. That)s why the world grain market has effected largely. *n this article we will focus mainly the trading of agricultural commodities like corn and wheat.
COMMODITIES
Commodities are a range of primary resources that can be traded in %uantifiable amounts and have minimum %uality standards. The establishment of such basic parameters means that the commodities can be traded in large volumes or numbers in international commodity e'changes, with traders being reasonably certain that the commodities being traded are not deficient. Commodities may be divided into a number of classifications: agricultural commodities +corn, coffee, cocoa, pork bellies, fro,en orange -uice, etc., energy commodities +oil, gas, etc. and metal commodities +gold, silver, iron ore, copper, etc.. There are also a number of commodities that fit no classification. The spread of technology has allowed the introduction of new commodities, as technology for producing hi/tech products is disseminated around the world. $ilicon chips are one such e'ample, and a new commodity e'change dealing in nanomaterials +the *ntegrated 0ano/$cience Commodity 1'change. is due to launch in early 23!!. *n addition, the recent focus on the environment has led to the establishment of e'changes that trade in environmental commodities. This includes trading in carbon emissions +both carbon offsets and carbon credits. and renewable energy certificates.
COMMODITY MARKET
Commodities are traded on the commodity market. This market is comprised of a number of international commodity e c!anges, notable ones being the Chicago 4ercantile 1'change, the 0ew 5ork 4ercantile 1'change and the (ondon 4etal 1'change. 6fficials of each e'change act to regulate transactions, amongst their responsibilities being the duty to ensure that the commodities traded meet minimum %uality and %uantity standards. The e'changes themselves are regulated by the appropriate national regulatory bodies.
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7 knowledge of the workings of these e'changes and the commodities they trade are essential for any investor wishing to learn how to trade commodities.
E c!ange C41 Group Tokyo Commodity 1'change 05$1 1urone't 9alian Commodity 1'change 4ulti Commodity 1'change *ntercontinental 1'change
;istorically, dating from ancient $umerian use of sheep or goats, other peoples using pigs, rare seashells, or other items as commodity money, people have sought ways to standardi,e and trade contracts in the delivery of such items, to render trade itself more smooth and predictable. Commodity money and commodity markets in a crude early form are believed to have originated in $umer where small baked clay tokens in the shape of sheep or goats were used in trade. $ealed in clay vessels with a certain number of such tokens, with that number written on the outside, they represented a promise to deliver that number. This made them a form of commodity money / more than an *.6.#. debt but less than a guarantee by a nation/state or bank. ;owever, they were also known to contain promises of time and date of delivery / this made them like a modern futures contract. <egardless of the details, it was only possible to verify the number of tokens inside by shaking the vessel or by breaking it, at which point the number or terms written on the outside became sub-ect to doubt. 1ventually the tokens disappeared, but the contracts remained on flat tablets. This represented the first system of commodity accounting. Classical civili,ations built comple' global markets trading gold or silver for spices, cloth, wood and weapons, most of which had standards of %uality and timeliness. Considering the many ha,ards of climate, piracy, theft and abuse of military fiat by rulers of kingdoms along the trade routes, it was a ma-or focus of these civili,ations to keep markets open and trading in these scarce commodities. <eputation and clearing became central concerns, and the states which could handle them most effectively became very powerful empires, trusted by many peoples to manage and mediate trade and commerce.
This was largely a result of the growing attraction of commodities as an asset class and a proliferation of investment options which has made it easier to access this market. The global volume of commodities contracts traded on e'changes increased by a fifth in 23!3, and a half since 233=, to around 2.> billion million contracts. 9uring the three years up to the end of 23!3, global physical e'ports of commodities fell by 2?, while the outstanding value of 6TC commodities derivatives declined by two/thirds as investors reduced risk following a five/ fold increase in value outstanding in the previous three years. Trading on e'changes in China and *ndia has gained in importance in recent years due to their emergence as significant commodities consumers and producers. China accounted for more than @3? of e'change/traded commodities in 233", up on its A3? share in the previous year. Commodity assets under management more than doubled between 233= and 23!3 to nearly BC=3bn. *nflows into the sector totaled over B@3bn in 23!3, the second highest year on record, down from the record BD2bn allocated to commodities funds in the previous year. The bulk of funds went into precious metals and energy products. The growth in prices of many commodities in 23!3 contributed to the increase in the value of commodities funds under management.
Commodities trading
T!e trading o# commodities is a com%le %rocess& and !as traditionally 'een undertaken 'y %rivate traders and commodity 'rokers( )owever& recent ra%id growt! in t!e availa'ility o# online commodity trading !as allowed many amateur investors to trade on t!e commodity market #rom t!eir own !ome or 'usiness(
Commodity trading is a method of investing that involves the international trading of primary goods. These primary goods, or commodities, have several characteristics. First, commodities must be standardi,ed, both in form and in %uality. This uniformity is essential for there to be a set price on commodities regardless of where they are produced or who produces them. The cru' of commodities trading concerns how this set price fluctuates over time. 7lso, standardi,ation
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over the global commodity market is necessary in order to comply with the standards set by regulatory bodies for trade. $econdly, commodities must be in a raw, basic state +hence the title Eprimary) goods.. *n order for commodities to be applicable to the largest possible market, they must be in the simplest possible form. This allows them to be molded and manufactured into whatever product the buyer produces. For e'ample, a miller wishing to sell his produce would have access to a much larger market if he sold w!eat rather than flour, for he would interest buyers looking to produce all wheat/based products. Commodity trading is done either on spot markets or in futures.
S%ot trading
$pot trading is any transaction where delivery either takes place immediately, or with a minimum lag between the trade and delivery due to technical constraints. $pot trading normally involves visual inspection of the commodity or a sample of the commodity, and is carried out in markets such as wholesale markets. Commodity markets, on the other hand, re%uire the e'istence of agreed standards so that trades can be made without visual inspection.
*utures trading:
7s the name suggests, involves the buying and selling of contracts for certain commodities not to be delivered immediately but at some predetermined point in the future. Commodity trading has traditionally taken place in designated Econtract markets), such as the Commodities 1'change Center in 0ew 5ork, yet now is increasingly found on the internet through online commodity trading.
*orward contracts
7 forward contract is an agreement between two parties to e'change at some fi'ed future date a given %uantity of a commodity for a price defined today. The fi'ed price today is known as the forward price.
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*n essence, a futures contract is a standardi,ed forward contract in which the buyer and the seller accept the terms in regards to product, grade, %uantity and location and are only free to negotiate the price.
)edging
;edging, a common +and sometimes mandatory. practice of farming cooperatives, insures against a poor harvest by purchasing futures contracts in the same commodity. *f the cooperative has significantly less of its product to sell due to weather or insects, it makes up for that loss with a profit on the markets, since the overall supply of the crop is short everywhere that suffered the same conditions. hole developing nations may be especially vulnerable, and even their currency tends to be tied to the price of those particular commodity items until it manages to be a fully developed nation. For e'ample, one could see the nominally fiat money of Cuba as being tied to sugar priceF, since a lack of hard currency paying for sugar means less foreign goods per peso in Cuba itself. *n effect, Cuba needs a hedge against a drop in sugar prices, if it wishes to maintain a stable %uality of life for its citi,ens.
A+RIC,"T,RA" COMMODITIES
The largest classification of commodities traded on national and international commodity e c!anges is that of agricultural commodities. 7gricultural commodities are commodities that
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have their origins on farms and plantations, and are either primary products, or products that have undergone minimal processing, such as free,ing, cleaning or portioning into cuts. $ome agricultural commodities can also be referred to as soft commodities: this refers to the fact that they are grown rather than mined. $ome traders, however, do not refer to meat commodities as soft commodities, even though they have been farmed, preferring to classify them differently.7mong the agricultural commodities grain commodities are mostly traded.
+RAI- COMMODITIES
7mong the agricultural commodities grain commodities are the foundation of commodity trading, being among the first commodities to be traded when the modern system was set up. The primary commodities of this group are w!eat, corn, 'arley and roug! rice. These are traded on most of the world)s ma-or e'changes, and are traded in contracts of >333 bu +bushels., save for rough rice which is traded in contacts of 2333 cwt +hundredweight.. 6ur main concern is rises of corn and wheat prices worldwide.
CORThe most common variety of corn traded on the commodity market is known as field corn, or dent corn. This variety is higher in starch and lower in sugar than table corn, which is another popular variety. $weet corn is also popular, but field corn is known to account for appro'imately D3? of the corn grown in the #nited $tates, which itself produces over half of the worldGs corn. There are around =3 million acres dedicated to its production. Corn is traded in commodities e'changes under the ticker code of C, and sometimes traded electronically under the ticker code of HC. Trading in the corn market is appealing because of the wide scope of products for which corn is used for. *n addition to its primary use as a feed for livestock including cattle, hogs and poultry and its use as a food for human consumption, an increasingly large share of ,(S( corn
%roduction is now used to produce et!anol for fuel. 7mong the many widely used byproducts into which corn can be transformed are corn oil, corn starch and corn sweeteners used in soft drinks in the food area and absorbing agents for disposable diapers and adhesives for paper products and plastics in the non/food area.
Corn commodity.
The most striking feature of corn as a commodity is that it is one of the worldGs most versatile agricultural products, with myriad uses and therefore a massive demand. This is why it is sometimes collo%uially referred to as Gyellow goldG
Corn Trading.
The main commodity e c!ange for trading corn futures in the #nited $tates is the C41 Group subsidiary the Chicago Board of Trade +CB6T.. *n this e'change, corn trading occurs in both open auction and in electronic media, utili,ing the two different ticker codes mentioned above. *n 1urope, corn is traded on the -YSE commodity e'change, which is a purely electronic platform. 6ther e'changes that trade in corn futures include the Tokyo Grain 1'change +TG1., the $Io Jaulo based /M0* /oves%a, the 4arche a Terme *nternational de France +47T*F., the Et!io%ia Commodity E c!ange and *ndiaGs Multi Commodity E c!ange. Corn has a wide variety of applications and so corn options are utili,ed by many different business markets. Corn is primarily used as a food product for animals, with livestock feed accounting for the largest portion of its market share.
Corn 1roduction.
7merica is the largest producer of corn, where corn e'ports are generally seen as making the largest net contribution to the agricultural trade balance in the #.$, and are thus hugely important to the 7merican economy. ;owever, an interesting result of the 7merican dominance of the corn market is that corn prices worldwide are determined by relationships in the #.$ market, leaving the rest of the world to ad-ust accordingly. This allows farmers in countries such as 7rgentina to plant their own corn after the si,e of the crop in 7merica has been learned, which results in a dynamic market response to any shortage in 7merican crops. 6ther countries such as Bra,il, #kraine, <omania and $outh 7frica have all been known to be ma-or corn producers at various points at time, with 8apan being the worldGs largest importer of corn. 7s per the 8anuary 23!! report, the #$97 pro-ected a !.> bu.Kacre yield decrease, outweighing a 23!3 acreage increase of !=C,333 acres. Corn carryover dropped to DA> million bushels, which is =D million bushels lower than the 9ecember 23!3 report. Corn for grain production is estimated at !2.A billion bushels, down !? from the 0ov. ! forecast and >? below the record/high production of !C.! billion bushels, set in 233". This implies a stock/to/use ratio of >.>?, the lowest since !"">/"@. Larieties of corn are grown in a number of areas of the world including Bra,il, 7rgentina, China and elsewhere, but corn #utures traded at the CB6T are based on #.$. production. 4uch of the #.$. corn cro% is grown in the Corn /elt stretching from 0ebraska to 6hio and from 4innesota to 4issouri. The number of acres planted is a critical starting point for the si,e of the #.$. corn crop. Compared to other feed grains and soybeans, input costs for corn are higher, and prices for fertili,er, fuel and other input items sometimes influence farmers to plant other crops that have lower production risk. hen all goes well, corn can also produce the highest return per acre. 4ost of the corn in the Corn Belt is planted in 7pril/4ay. The most critical period for determining yields and the amount of corn %roduction in a given year is during 8uly, when pollination typically occurs. 7lthough other crops can recover from unfavorable weather conditions, corn is especially sub-ect to yield losses from hot, dry conditions during this 2/C week pollination period. 4ost of the corn harvest takes place in 6ctober/0ovember. 7bout "3/ "2 percent of planted acres are harvested for grain with the remainder being cut for silage, abandoned due to the effects of weather or not used for grain production for some other reason. The timing of these periods depends, of course, on the planting and emergence dates of the corn cro% and the progress the crop makes during the growing season.
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The pricing unit for corn futures trading is dollars and cents per bushel with a minimum price fluctuation of one/%uarter of a cent per bushel or B!2.>3 for a full/si,e, >,333/ bushel contract.
The CB6T also offers a mini/si,ed corn futures contract of !,333 bushels +about 2> metric tons..
Corn futures contract months are 4arch, 4ay, 8uly, $eptember and 9ecember..
a ma-or fuel source in recent years as a result of government mandates to include ethanol in gasoline. Corn is the primary source of ethanol, causing a huge increase in the amount of corn consumed. That means corn #utures traders now need to watch developments in the energy market very closely for clues to corn prices for several reasons. The first is the price of crude oil and its impact on the consumption of gasoline. 6n the one hand, !ig! oil %rices su%%ort !ig! corn %rices. 6n the other hand, high oil prices could lead to less demand for gasoline and the need for et!anol in a recessionary environment. The second reason is government policy for energy prices and ethanol usage and any ad-ustments the government might make in those policies. #ntil another source for ethanol comes along, consider corn as one facet of the energy industry.
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*n the second half of the !"=3s, #.$. e'ports rebounded, reaching @3 million metric tons in !"="K"3 because of large domestic supplies and more competitive prices as the government reduced commodity loan rates. 1'ports in the early !""3s declined again because of e'ternal factors, notably the breakup of the former $oviet #nion and rising Chinese corn e'ports. 7s biofuel production develops and e'pands, it will continue to put pressure on #.$. corn and other feed grain production, e'ports, livestock feeding, and other domestic uses. The #nited $tates e'perienced record demand and corn production during 233DK3= that pushed #.$ corn e'ports to @! million metric tons. ;owever, a slowing world economy and reduced demand for corn are pro-ected to dampen corn e'ports in the near future. 0onetheless, global population increases and consumer demand for meat products will continue to support e'panding feed grain e'ports in the long term.
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China has been a significant source of uncertainty in world corn trade, swinging from being the second/largest e'porter in some years to occasionally importing significant %uantities. ChinaGs corn e'ports are largely a function of government e'port subsidies and ta' rebates, because corn prices in China are mostly higher than those in the world market. (arge corn stocks are e'pensive for the government to maintain, and Chinese corn e'port policy has fluctuated with little relationship to the countryGs production, making ChinaGs corn trade difficult to predict. orld corn trade peaked in !"=3K=!, with large imports by the $oviet #nion and 1urope. $ince then, corn imports by 1# countries have declined steadily as the Common 7gricultural Jolicylimited grain imports and 1# membership e'panded. For e'ample, as countries like ;ungary -oined the 1#, their corn shipments that previously went to the rest of the world were diverted to the 1#. 7t the end of the !"=3s, the $oviet #nionGs political and economic reforms led to a li%uidation of livestock herds and a drop in corn imports in the former $oviet #nion and 1astern 1urope. 9uring the same time period, 8apan, $outh :orea, and Taiwan continued to increase corn imports to support increasing meat production and consumption.
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9eveloping countries worldwide have continued to increase corn imports at a fairly steady pace since !"=3. This growth in developing/country imports has propelled global corn trade above D3 million metric tons each year since !"""K2333. Jro-ections for #.$. corn e'ports are in #$97Gs 7gricultural Baseline Jro-ections, which provides !3/year pro-ections for the #.$. and world agricultural sector for selected commodities. 8apan is the worldGs largest corn importer by far. hile producing almost no coarse grains, 8apan
is a very large meat producer, so the country is a steady buyer of corn, with attention to %uality. *n recent years, 8apanese imports of corn for livestock feed have stagnated, while imports for industrial use and starch manufacturing have increased. $outh :orea is the second/largest importer of corn in the world. $outh :orea is a price/conscious buyer, willing to switch to feed wheat or other coarse grains, and ready to buy corn from the cheapest source. 4e'ico is a growing importer. hile a large corn producer, 4e'ico processes much of its production of white corn into human food products, but has turned to imported yellow corn and sorghum for livestock feed to support increased meat production. Foreign demand is dependent not only on importing countriesG demand for feed ingredients but also on those countriesG internal policy changes that ad-ust prices andKor the availability of competing products. Coarse grains can often substitute for each other in feed use. Corn competes with other feed grains, as well as with wheat and no grain feedstuffs such as cassava. 6ilseed meal and other protein sources serve mostly as complements to grains, but can also be substitutes, especially those protein meals with low/protein content. Fle'ibility in many markets, however, is limited by the types of animals fed, the desire to maintain stable rations, local preferences, and import tariffs and laws. *mporters not only substitute among grains, but may switch suppliers of the same grain based on price, %uality, availability, credit, or other trade services. 7gricultural tariff schedules for orld Trade 6rgani,ation + T6. member countries report the current ma'imum permissible duties.
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Corn O%tions
Contract Si$e 6ne Corn futures contract +of a specified month. of >,333 bushels Tick 3minimum #luctuation4 Strike Intervals 1rice Trading shall be conducted for put and call options with striking prices in integral multiples of five +>. cents and ten +!3. cents per bushel. 4ore details on strike price intervals are outlined in <ule !373!.1. Contract 4arch +;., 4ay +:., 8uly +0., $eptember +#. N when the front month is not a standard option contract. The monthly option contract e'ercises into the nearby futures contact. For e'ample, an 7ugust option e'ercise into a $eptember futures position. Daily "imit 1rice B3.C3 per bushel e'pandable to B3.A> and then to B3.D3 when the market closes at limit bid or limit offer. There shall be no price limits on the last trading day. "ast Trade Date For standard option contracts: The last Friday preceding the first notice day of the corresponding corn futures contract month by at least two business days. Si$e !K= of one cent per bushel +B@.2> per contract.
For serial option contracts: The last Friday which precedes by at least two business days the last business day of the month preceding the option month.
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E ercise
The buyer of a futures option may e'ercise the option on any business day prior to e'piration by giving notice to the Clearing ;ouse by @:33 p.m. Chicago time. 6ption e'ercise results in an underlying futures market position. 6ptions in/the/money on the last day of trading are automatically e'ercised.
E %iration
#ne'ercised Corn futures options shall e'pire at D:33 p.m. on the last day of trading.
Trading )ours
Globe' @:33 pm / D:!> am and ":C3 am / !:!> pm central time, $unday / Friday Central Time 6utcry ":C3 am / !:!> pm 4onday / Friday Central Time
6utcry C
+Trading Floor. E c!ange Rule These contracts are listed with, and sub-ect to, the rules and regulations of CB6T.
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2)EAT
2!eat is a grass that is cultivated worldwide. heat, while coming second to mai,e in total
production as a cereal crop, is in fact the most important food grain in the world, and therefore an essential component of the world)s commodity network. The global grain trade has always been of interest to investors because w!eat represents one of the single most important components of world food consumption. heat is one of the worlds key staple products, with about !3 percent of production traded on world markets each year.
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*t is believed that wheat may have been harvested for at least !2333 years, so its pedigree as a food item can not be underestimated. The crop itself is thought to have evolved from a type of wild grass native to the arid terrain of 7sia 4inor, although as it can flourish in many different climates it is not limited to that region. There are more varieties of wheat than any other cereal crops and these generally fall into two categories Q winter wheat and spring wheat Q depending in which season they were harvested.
2!eat Commodity
The most special feature of the wheat commodity must surely be its worldwide prominence as a foodstuff. *n terms of production, it sits between mai,e and rice as the second most produced food grain in the world, and yet despite these massive yields of it as a crop, the market never becomes saturated. The wheat market benefits from the fact that wheat can thrive in many different climates making production relatively easy, and it can be harvested in a relatively short space of time. hile such a ready supply may not always track with demand heat commodities in commodities without such worldwide appeal, in the case of wheat this works to its advantage as the demand for wheat is believed to be increasing to even higher levels. futures market will be acutely aware. can thus be guaranteed to have a buyer somewhere, a fact of which every trader in the wheat
and allows traders to enter into a global environment to create a broad trading strategy using wheat alone or in combination with other grains.
2!eat 1rice
There are many factors that can affect grain market prices generally, and as with most grain commodity prices, the wheat price is particularly susceptible to changes in the weather. 4assive droughts or floods can negatively affect the supply of wheat, which will in turn increase the price of wheat options. *t is reasonable to conclude that wheat futures charts will generally always show an upward curve for demand, but sometimes factors such as a change in government policy concerning import can affect wheat trading, and therefore wheat commodity %rices. 0ew agricultural technologies can also affect the price of wheat, as production costs will vary depending on the method of harvest, and this can also sometimes create a temporary surplus of
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the crop, which could decrease spot prices for a time. *t is also worth considering the conditions affecting competitor commodities such as corn and roug! rice, as changes in demand or price for these can affect the wheat price. The main w!eat #utures contract at all three e'changes where wheat is traded is for >,333 bushels of the specified wheat although C41 Groups Chicago Board of Trade also trades a mini w!eat #utures contract of !,333 bushels. The minimum price fluctuation is !KA cent per bushel, indicating a change in value of B!2.>3 for the >,333/bushel contract. months. heat contracts are traded on 8uly, $eptember, 9ecember, 4arch, and 4ay calendar
2!eat 1roduction
S%ring w!eat is planted -ust prior to or in 7pril in the #nited $tates and Canada and generally follow the pattern of spring planted crops. These wheat crops do not go through a dormant stage but mature until harvested in late summer.. $owing of winter wheat begins in $eptember in the northern #nited $tates and continues through 6ctober in the southern regions. These &winter&
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wheat crops will sprout and grow in the fall until a winter free,e occurs, and the w!eat will then become dormant until spring, when it breaks out of dormancy and matures until harvest in 8une/ 8uly. 7lternating free,ing and warming periods can damage the winter w!eat cro% and reduce yields, especially if there is no snow cover protection. #.$. wheat ending stocks for 23!3/!! have been pro-ected to be A3 million bushels lower in 8anuary 23!! as a reduction in e'pected feed and residual use is more than offset by higher pro-ected e'ports. 1stimates of global 23!3/ !! wheat supplies have been raised slightly this month, as increased beginning stocks are mostly offset by lower foreign production. orld wheat imports and e'ports for 23!3/!! are both raised slightly. Global 23!3/!! wheat consumption is pro-ected to be !.2 million tons lower, mostly reflecting reduced wheat feeding in the 1#/2D, the #nited $tates, and :a,akhstan.
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areas where the weather is favorable to them, and any change in weather will impact the yields. *n other words, itGs most likely that any news will be bad. heat is a good e'ample of a CF9 commodity play on mainstream news. 6ne CF9 is typically !33 bushels, which weighs around C tons. 7 futures contract covers >,333 bushels. ;ere)s a chart of the price in recent years.
5ou can see that wheat prices have -umped about D>? since 8uly, and the chart also shows clearly how volatile the price of wheat has become. 7ny trader with a CF9 account could have %uickly gained leveraged access to this market with a long commodity CF9. #p until 8uly 23!3, some e'perts were e'pecting wheat prices to fall because inventories were at a 2C year high and farmers were planting more wheat. The news in 7ugust that <ussia was banning e'ports changed that, and some are now looking for a year like 233=. Canada, another ma-or e'porter of wheat, is also reporting very low yields, perhaps down to 2332 levels. $ome have also attributed the recent spike in the dollar price for wheat to the declining value of the #$ dollar. Certainly, the #$ dominates the market and is the worldGs biggest wheat e'porter. France is 1uropeGs biggest grower of wheat, but does not appear to be able to have the capacity to gain much market share against the #$ to make up the shortfall from <ussia. *t is also handicapped in that most of its wheat is GsoftG wheat which is more suited to making pastries than bread. The Germans have recently bought GhardG wheat from the #$ for the first time in three years.
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From a consumer point of view, the increasing price of wheat should not affect bread prices too much, as wheat only accounts for !2? to !A? of the cost. Farmers around the world are facing a difficult decision about how much wheat to plant, as itGs still not clear how much 7ustralia is able to make up the shortfall. The 7ussie crop was looking good, but there has been a spell of dry weather. 7ll this adds up to ongoing opportunities for CF9 traders to make money from commodities, but as you can see from the diverse news stories above, it is essential to stay in touch with the world markets in order to be on the right side of the trade. Fortunately, if you do work on keeping up with the news, you should be able to make your trades in time to benefit from the fluctuations. *tems such as a poor harvest can be seen coming for some time before the market is hit.
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6ne reason #.$. wheat e'ports grew at the e'pense of other e'porting countries is that in 233DK3= the #nited $tates had large stocks, which subse%uently fell by A million metric tons. 7n important complementary reason was depreciation of the #.$. dollar vis/R/vis other ma-or world currencies. From 233@ to mid/233=, the #.$. dollar depreciated by about 2> percent. The dollar)s fall in value reduced the price for #.$. wheat compared to that produced by other countries. This boosted #.$. e'ports in 233DK3=, and lowered e'ports by other ma-or wheat producers.
d #.$. imports of wheat grain, mostly from Canada, are small +2/C million metric tons., but have grown from less than a !33,333 metric tons in the !"D3s to an average of 2.> million metric tons over the last !3 years. *mports of wheat products consist mainly of pasta and noodles from the 1uropean #nion +1#/2D., Canada, and 7sia. ;istorical information on #.$. imports and e'ports is available from #$97Gs Foreign 7gricultural $ervice +F7$. at #.$. Trade *nternet $ystem. 7 long/term perspective on pro-ected #.$. wheat e'ports is available in the 6utlook chapter. The pages provide further information on the supply and demand issues for wheat underlying
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#$97Gs 7gricultural Baseline Jro-ections, which provides !3/year pro-ections for the #.$. and world agricultural sectors for selected commodities.
d The diversity of e'porting countries provides significant stability to world wheat trade and prices. 4ost of the worldGs wheat production is grown as winter wheat in the 0orthern ;emisphere, but Canada, :a,akhstan, <ussia, and the #nited $tates have large spring wheat production, which is planted much later. 4oreover, in the $outhern ;emisphere, 7ustralia and 7rgentina plant after the 0orthern ;emisphereGs spring wheat. ith wheat being planted and harvested at different times, countries can respond %uickly to changing market conditions.
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*n the years before 233>K3@, world wheat trade peaked in !"=DK== at !!!.> million metric tons, when China and the $oviet #nion were importing very large amounts. 7fter that and up until 233>K3@, imports by 1astern 1urope, the former $oviet #nion, and China were much lower and world wheat trade did not match its !"=DK== level despite significant growth in imports by developing countries. *n 233C, the 1# established trade barriers to lower %uality wheat imports, also limiting world wheat trade. *n 233>K3@, world wheat trade reached !!A million metric tons. *n 233@K3D, total wheat trade increased modestly, but in 233DK3= wheat trade stagnated with high prices. <ising population in various parts of the developing world combined with strong economic growth have increased demand for both food and feed grains. *ncreasing amounts of food wheat are re%uired to meet demand for staple food products in countries with low incomes and e'panding populations in $ub/$aharan +0igeria, <epublic of $outh 7frica, $udan, and :enya. and 0orth 7frica +1gypt, 7lgeria, and 4orocco., $outh +7fghanistan, Bangladesh, and Jakistan. and $outh/1ast 7sia +*ndonesia, Jhilippines, and Lietnam., and (atin 7merica +Bra,il and 4e'ico.. 7t the same time, some ma-or importers from 0orth 7frica and the 4iddle 1ast increased wheat imports when adverse weather lowered their supplies. +For detail on the countries in these regions, see the <egions used for F7$Gs Jroduction, $upply, and 9istribution +J$N9. database..
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d hile a handful of nations dominate wheat e'ports, there are many wheat/importing countries. 7 few countries account for a large share of world wheat imports, including the 1#/2D, 8apan, $outh :orea, and Bra,il. ;owever, most wheat is imported by developing countries with limited production potential. Jopulation growth in 1gypt, 7lgeria, *ra%, Bra,il, 4e'ico, *ndonesia, 0igeria, and other developing countries will be the basis of future e'pansion of world wheat trade.
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e'porters, there are a large number of countries importing wheat with ma'imum demand emanating from developing nations. The ma-or importing regions are 4iddle/east 7sia, $outh/east 7sia and 0orth/west 7frica. 1gypt, Bra,il, *ndonesia, 7lgeria are the most important importing nations.
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2!eat *utures
Contract Si$e Delivera'le +rade >,333 bushels +S !C@ 4etric Tons. T2 $oft <ed !A!3A. 1ricing ,nit Tick 3minimum #luctuation4 Contract 4arch +;., 4ay +:., 8uly +0., $eptember +#. N Cents per bushel Si$e !KA of one cent per bushel +B!2.>3 per contract. inter at contract price, T! $oft <ed inter
Mont!s5Sym'ols 9ecember +H. Trading )ours C41 +1lectronic Jlatform. 6pen Globe' @:33 pm / D:!> am and ":C3 am / !:!> pm Central Time, $unday / Friday 6utcry ":C3 am / !:!> pm Central
1rice B3.@3 per bushel e'pandable to B3."3 and then to B!.C> when the market closes at limit bid or limit offer. There shall be no price limits on the current month contract on or after the second business day preceding the first day of the delivery month.
Settlement 1rocedure
Jhysical 9elivery
33
The business day prior to the !>th calendar day of the contract month.
"ast Date
Delivery $econd business day following the last trading day of the delivery month. Globe' H PClearing
6utcry
+Trading Floor. E c!ange Rule These contracts are listed with, and sub-ect to, the rules and regulations of CB6T.
2!eat O%tions
Contract Si$e 6ne heat futures contract +of a specified month. of
>,333 bushels Tick 3minimum #luctuation4 Strike Intervals 1rice Trading shall be conducted for put and call options with striking prices in integral multiples of five +>. cents and ten +!3. cents per bushel. 4ore details on strike price
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intervals are outlined in <ule !A73!.1. Contract 4arch +;., 4ay +:., 8uly +0., $eptember +#. N when the front month is not a standard option contract. The monthly option contract e'ercises into the nearby futures contact. For e'ample, an 7ugust option e'ercise into a $eptember futures position. Daily "imit 1rice B3.@3 per bushel e'pandable to B3."3 and then to B!.C> when the market closes at limit bid or limit offer. There shall be no price limits on the last trading day. "ast Trade Date For standard option contracts: The last Friday preceding the first notice day of the corresponding wheat futures contract month by at least two business days.
For serial option contracts: The last Friday which precedes by at least two business days the last business day of the month preceding the option month. E ercise The buyer of a futures option may e'ercise the option on any business day prior to e'piration by giving notice to the Clearing ;ouse by @:33 p.m. Chicago time. 6ption e'ercise results in an underlying futures market position. 6ptions in/the/money on the last day of trading are automatically e'ercised. E %iration #ne'ercised heat futures options shall e'pire at D:33
p.m. on the last day of trading. Trading )ours C41 Globe' @:33 pm / D:!> am and ":C3 am /
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+Trading Floor. 1roduct Ticker C41 Sym'ols +1lectronic Jlatform. 6pen 6utcry
Globe' 6H PClearing
+Trading Floor. E c!ange Rule These contracts are listed with, and sub-ect to, the rules and regulations of CB6T.
233= when average F6B monthly prices e'ceeded #$BAC" per tonne. *nterestingly, movements in wheat prices are as much related to production as to e'isting stock levels. hile production of a specific commodity can be relatively weak at a specific point in time, stocks can always be used by suppliers to satisfy current demand. This means that a relatively poor crop does not automatically translate into a price increase. 7ccording to F76 estimates, wheat stocks in 23!! will stand at a similar level to the previous season / !"@ million tons +233"K23!3. versus !== million tons +23!3K23!!.. 1ven factoring in a drop in production of around !D million tons +C3? of total <ussian wheat crops., ad-usted stock levels will likely remain only slightly lower than 233=K233" levels of !D= million tons. *nterestingly, the impact of recent wheat price rises has to be assessed in the broader conte't of #$ dollar fluctuations. $ince 7ugust 23!3, the #$ dollar has lost around !3? of its value relative to the euro. 7 weak dollar means lower real costs for global commodities in 1# countries, which therefore suffer less in terms of the impact of dollar/based wheat price fluctuations.
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this year. (inking demand of corn to pro-ected sales for a single industry could prove potentially misleading. 7lthough used primarily to feed livestock, corn is a versatile grain with a diversity of uses. *t is also processed into a multitude of food and industrial products, including starches, sweeteners, corn oil, beverage and industrial alcohol and fuel ethanol. Thousands of foods and other everyday items / from toothpaste and cosmetics to adhesives and shoe polish / contain corn derivatives.
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*uture direction
<elatively good prospects for wheat and corn production and ending stocks should mean that a repeat of the price hikes seen in the first half of 233= remain fairly unlikely. That said, according to 1uromonitor *nternationalGs pro-ections, stronger demand from emerging regions andKor relatively poor crop yields in specific countries at particular times could push up wheat prices in real terms +e'cluding currency fluctuations. by between C/>? from 0ovember 23!3 through to the end of 23!!. Corn prices, currently under pressure from stronger demand for fresh meat and milk in emerging countries, could see this range increase to @/=? over the same period, according to 1uro monitor *nternationalGs pro-ections. Trading movements linked to worsening prospects for crop yields in any of the key producing markets could, however, push up predicted wheat and corn prices further than presently e'pected in the short term. *f the current weakening of the #$ dollar continues, the impact of such price rises on food manufacturers heavily reliant on the 0orth 7merican market could be even
39
stronger. The underlying driver behind overreactions of wheat and corn commodity is, however, not entirely un-ustified. There are concerns in the industry about the medium/term capacity of food producers to meet the needs created by future population growth. Between 233" and 23!A alone, the global population is pro-ected to grow by around A33 million, according to #nited 0ationsG estimates. 4ost of this growth will take place in meat, wheat and corn/hungry emerging economies in 7sia/ Jacific, 0orth 7frica and (atin 7merica. By 23>3, according to the same #0 pro-ections, the world population could reach the nine billion mark, an increase of around 2.> billion over 233". This is the reason why, despite the relative stability of year/ending stocks and crop output, wheat and corn commodities are predicted to remain under pressure over the medium to long term. Crucially, the underlying population growth trend makes them particularly vulnerable to the nervousness currently pervading global food commodity markets. (arge international companies whose activities rely heavily on wheat and corn should try and establish a sustainable sourcing strategy in the medium term. 4anufacturers relying on short/term trading will be highly e'posed to price hikes linked to Gnervous tradingGQ like the ones seen in wheat immediately after the recent wildfires in <ussia. *nterestingly, geographical diversification might also help international food manufacturers to offset price increases linked to the volatility of a particular currency. 6verall, research suggests a moderate but sustained increase in wheat and corn commodity prices over the 23!!/23!> period. Crucially, those food manufacturers offering high added value bakery and cereal lines will be in a far better position to pass on price increases to consumers. This is because premium consumers show higher elasticity to prices than those in the mass marketKmainstream. *n addition, private label bakery manufacturers will be in a relatively good position to internalise some of the commodity/induced price increases through economies of scale linked to mass
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production. Those which occupy a space in between the premium and economy price bracket will, however, be the most heavily affected by prospects of food commodity inflation in the medium term Q and will accordingly have to ad-ust their sourcing strategies the most.
Conclusion.
orld commodity prices are rising day by day. ;igher farm commodity prices and energy costs are the leading factors behind higher prices. Farm commodity prices have surged because demand for corn for ethanol is competing with food and feed for acreageO global food grain and oilseed supplies are low due to poor harvests, the weak dollar has increased #.$. e'ports, rising incomes in large, rapidly emerging economies have changed eating habitsO and input costs have increased. ;igher energy costs increase transportation, processing, and retail costs. 7lthough the cost of commodities such as corn or wheat are a small part of the final retail price of most food products, they have risen enough to have an impact on retail prices. *n future this price is e'pected to be risen more. $o world food price is in a risky position.
/i'liogra%!y.
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