Grow Your Finances in the Grain Markets

Temperature, precipitation, and changing customer needs contribute to supply and demand for raw materials such as wheat, corn, or soybeans. All of these changes have a profound effect on commodity prices, and grain markets are essential in handling these price fluctuations and providing global benchmarks. Read on to learn more about the top seven products in the cereal markets.





What Are Grain Futures Contracts?

Anyone looking to invest in futures should know that the risk of loss is significant. This type of investment is not for everyone. An investor could lose more than he initially invested and therefore only risk capital should be used. Venture capital is the amount of money that a person can invest and that, if lost, would not affect the investor's lifestyle. A grain futures contract is a legally binding agreement for the future delivery of grain at an agreed price. The contracts are standardized in terms of quantity, quality, time and place of delivery through a futures exchange foreign exchange market today. Only the price is variable. For example, a soybean futures contract is worth 5,000 bushels of soybeans. Therefore, the dollar value of this contract is 5,000 times the price per bushel. If the market is trading at $ 5.70 per bushel, the contract value is $ 28,500 ($ 5.70 x 5,000 bushels). According to the trade margin rules as of April 6, 2021, the maintenance margin required on a soybean contract is approximately $ 3,350.1.

Advantages of Futures Contracts

Because grain is a tangible product, the grain market has a number of unique properties. First, grains have less room to maneuver than other complexes such as energies, making it easier for speculators to engage. Grain is generally not among the largest contracts (in total dollar amount terms), constituting the lowest margins forex trading platform in India. The basics of grain are pretty straightforward: Like most tangible products, supply and demand will determine the price. Climatic factors will also play a role.

Contract Specifications

Seven different cereal products are traded on the Chicago Stock Exchange: corn, oats, wheat, soybeans, rice, soybean meal, and soybean oil  about foreign exchange market.2 Similar cereal products are traded in other commodity markets around the world , like Bangkok, India, to name a few.

1. Corn: Corn is used not only for human consumption, but also as fodder, such as cattle and pigs. Additionally, rising energy prices have led to the use of corn to produce ethanol. The corn contract is for 5,000 bushels. For example, if corn is trading at $ 2.50 a bushel, the contract is worth $ 12,500 (5,000 bushels x $ 2.50 = $ 12,500). A trader who is long at $ 2.50 and sells at $ 2.60 will make a profit of $ 500 ($ 2.60 - $ 2.50 = 10 cents, 10 cents x 5,000 = $ 500). In contrast, a trader who is long at $ 2.50 and sells at $ 2.40 will lose $ 500. In other words, each penny difference is equivalent to going up or down $ 50. The unit price of corn is in dollars and cents with a minimum listing of $ 0.0025 (a quarter of a cent), which equates to $ 12.50 per contract.3 Although the market does not sell more small units, it certainly can be traded. in whole cents in "fast" markets. The busiest months for corn deliveries are March, May, July, September and December.3 The stock market establishes position limits to guarantee an orderly market. A position limit is the maximum number of contracts that a single participant can have. Speculators and speculators have different limits. Corn has a maximum daily price movement.3 Corn traditionally has more volume than any other grain market.

2. Oats: In addition to being used as food for farm animals and humans, oats are also used in the manufacture of many industrial products such as solvents and plastics. A contract for oats, such as corn, wheat and soybeans, is scheduled to deliver 5,000 bushels. It moves in the same $ 50 / cent increments as corn. For example, if a merchant sells rolled oats for $ 1.40 and sells them for $ 1.45, he would earn 5 cents per bushel or $ 250 per contract ($ 1.45 - $ 1.40 = 5 cents. pennies x 5,000 = $ 250). Oats are also marketed in quarter-cent increments.4 Delivery oats are marketed in March, May, July, September, and December, like corn. Oat futures, like corn, have position limits.4 Oats are a difficult market to trade because they have less daily volume than any other market in the grain complex.2 Their daily spread is also quite low.

3. Wheat: A wheat contract provides for the delivery of 5,000 bushels of wheat. Wheat is priced in dollars and cents and measures a quarter of a cent ($ 0.0025) like most other commodities traded on the CBOT. A price movement with a check mark results in a contract change of $ 12.50.5. The most active months for wheat deliveries are, based on volume and open interest, March, May, July, September and December. Position limits also apply to wheat.5 Wheat is a fairly volatile market with wide daily ranges. Because it is so frequent, there can be large daily fluctuations. In fact, it is not uncommon for a message to quickly move that market cap up or down.

Centralized Market

The primary function of any commodity futures market is to provide a centralized marketplace for those who have an interest in buying or selling physical assets at some point in the future. Due to the great variety of manufacturers and consumers of these products, there are many hedging operators in the cereal markets. These include soybean crushers, food processors, grain and oilseed producers, ranchers, grain elevators, and traders.



Using Futures and Basis to Hedge

The main premise on which hedgers rely is that while the movements of the spot price and the futures market price are not exactly the same, they may be close enough that hedgers can reduce their risk by taking a position. opposite in futures markets. By taking the opposite stance, gains in one market can outweigh losses in another. This allows hedging traders to set price levels for spot market transactions that will take place several months later. Let's take the example of a soybean farmer. While the soybean crop rests on the ground in the spring, the farmer wants to sell his crop in October after harvest  best brokers in India for forex. In the language of the market, the farmer has long been a position in the spot market. Farmers fear prices will drop before they can sell their soybeans. To compensate for losses due to a possible drop in prices, the farmer will now sell a corresponding number of bushels on the futures market and buy them again later, when it is time to sell the crop on the spot market. Any loss resulting from a drop in the spot market price can be partially offset by a gain from short sales in the futures market. This is called short coverage.

The Bottom Line

In general, hedging with futures contracts can help the future buyer or seller of a commodity by protecting them against unfavorable price movements. Hedging with futures contracts can help determine an approximate price range months before the actual physical purchase or sale. This is possible because the spot and futures markets generally move in parallel and the gains of one market outweigh the losses of another.

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