Commodity Trading Advisory

Commodity Trading Advisory

Agricultural commodities include corn, soybeans, sugar ,wheat, rice, cocoa, coffee, and cotton. For investors interested in the agricultural sector, population growth—combined with limited agricultural supplies—could provide profits from rising agricultural commodity prices. 

In recent decades, the agricultural sector has undergone several significant shifts related to technological advances, environmental concerns, changes in market dynamics, and policy shifts. Here are some of the key changes shaping the sector:

Commodities are said to be risky because they can be affected by events that are difficult, if not impossible, to predict, such as unusual weather patterns, epidemics, and both natural and human-made disasters.   

What Moves Commodity Prices?

  • Changes in costs: Basic gains or losses shift based on differences in carry costs, storage, insurance, and financing.
  • Currency fluctuations: Since most commodities are priced in U.S. dollars, changes in the dollar's value can greatly affect commodity prices. A weaker dollar makes commodities cheaper in other currencies, potentially increasing demand, while a stronger dollar has the opposite effect.
  • Geopolitical and economic stability: Political events, economic policy, and instability in key regions can significantly influence commodity prices. Wars, political unrest, or economic sanctions where a commodity is produced can disrupt supply chains and affect prices.
  • Global economic trends: The overall health of the global economy greatly influences the demand for individual commodities. Economic growth typically leads to increased demand, while economic downturns do the reverse.
  • Government policies and regulations: Tariffs, subsidies, trade agreements, and environmental regulations all influence commodity prices. Policies restricting trade or production can lead to higher prices, while subsidies and incentives to certain industries can increase supply and potentially lower prices.
  • Inflation and interest rates: Investments in commodities are usually a hedge against inflation. When there's inflation, commodities typically rise along with it, providing some protection for investors who have them as part of their portfolio. Interest rate changes can also influence commodity prices by affecting the cost of holding or financing commodities.
  • Market speculation: Traders speculating on future prices can drive changes in the current prices of commodities.
  • Storage and transportation costs: The expenses related to storing and transporting commodities, especially for perishable goods, can change, significantly affecting their price.
  • Supply and demand: This is arguably the most fundamental factor. If the supply of a commodity is low relative to demand, prices rise. Conversely, if supply is high and demand is low, prices fall.
  • Technological advances: Technological gains have historically helped lower the cost of commodity production. Alternatively, they can also lead to an uptick in demand for other materials. For instance, advances in renewable energy technology should help, at some point, shift the demand for fossil fuels.
  • Weather and environmental events: The weather is a crucial influence on the production and supply of commodities, especially agricultural products and energy commodities like oil and natural gas. Droughts, floods, hurricanes, and other climatological events can disrupt supply chains and production, leading to price volatility.

Leveraging GrainFuel Nexus expertise in Futures Contracts and options - We also have partnerships with Expert commodity stock-exchange brokers and Clearing firms.

GrainFuel Nexus Advisory Services:

  • Guidance on Timing and Pricing: GFN knowledge of futures markets, direct its clients on the best times to enter into physical contracts for any of our 5 key commodities. For instance, if we anticipate prices rising due to seasonal trends or global supply disruptions, we can accordingly advise buyers to lock in prices early, securing better terms for them.
  • Hedging Recommendations: While we may not directly engage in futures trading, we can recommend that your clients (buyers or sellers) use futures contracts to hedge their price risk. For example, a sugar producer might sell futures contracts to lock in a future sale price, while a buyer might buy futures contracts to secure a stable purchase price.

By understanding how futures prices reflect expected future supply and demand, GFN can negotiate better prices in physical contracts. For example, if futures prices indicate a future price drop, we might negotiate a lower current price for your buyer clients.

  • Risk Mitigation Clauses: We may also use futures to negotiate contractual clauses that tie physical contract prices to future market conditions. This can include adjustments based on a future index price or a market average, offering protection against volatile price swings.

By directing our buyers using futures contracts, GFN locks commodity prices, ensuring cost stability and securing supplies for their clients.

We can also recommend to use Options for Flexibility: Call options provide an additional layer of protection against rising prices while limiting downside risk to the premium paid.

Also Currency Hedging: Managing FX risks ensures that currency fluctuations do not erode profits.

Physical Delivery and Cash Market: You can always choose to take physical delivery through the futures market or procure Sugar, Corn, and Soybeans ,  in the spot market, depending on the most favorable conditions.

Hedging Corn Prices example /Corn trading on the Chicago Board of Trade (CBOT):

Background: A large agricultural cooperative in the U.S. expects a bumper crop of corn this year. The current price of corn is $4.80 per bushel, but there is concern about a potential price drop due to increased supply.

  • Futures Contracts:

Hedging Strategy: The cooperative sells 100 December corn futures contracts at $4.80 per bushel to hedge against a potential price decline. Each contract covers 5,000 bushels, so they are hedging a total of 500,000 bushels.

Outcome: If the price of corn drops to $4.30 per bushel by December, the cooperative would have made a loss on the actual sale of the corn at market prices but gained $0.50 per bushel on the futures contracts, offsetting the loss.

  • Options:

Alternative Hedging Strategy: Instead of selling futures contracts, the cooperative could buy put options with a strike price of $4.70 per bushel, paying a premium of $0.10 per bushel.

Outcome: If corn prices fall to $4.30, the put options allow the cooperative to sell at $4.70, effectively setting a minimum price. The net effective price, after accounting for the premium, would be $4.60, still providing a hedge against the price decline.