Important Things to Know Before Trading Agricultural Commodities
Cocoa Beans on a tabletop
You’ll often hear people talk about investing their disposable income in multiple investment vehicles. Stocks, gold, cryptocurrencies, and forex are all popular choices. Traders and investors flock to these options because they generally generate sizable returns. However, you’re very unlikely to hear people talk about agricultural commodities.
Given that agricultural commodities are essential for our sustenance, you would think agricultural commodities trading would be more popular, but that isn’t the case. Research shows agricultural commodities only account for approximately 12 percent of all commodity trading. While that number isn’t minuscule, it pales compared to energy and metal commodities. In addition, when you consider that the global population is expected to exceed 9 billion by 2050, the importance of agricultural commodities becomes even more apparent.
Agricultural commodities trading can be very lucrative if done right. Some savvy traders often dabble in these commodities because it’s an excellent way to diversify their portfolios. In addition, since market forces influence the agricultural commodities market, you can make sizable returns by making calculated trading decisions.
Cotton fields
An Overview of the Agricultural Commodities Market
You’ll be surprised to learn the first futures traded in the United States were agricultural contracts. The earliest reports of agricultural contracts traded as futures date to 1848. Farmers and merchants would come to Chicago to trade in the commodities market.
Today, the agricultural commodities trading market has become globally widespread. You’ll find them traded on some of the largest commodities markets worldwide.
Naturally, you might be interested in trading agricultural commodities too. However, before doing so, you’ll want to know more about the market because agricultural commodities require specialized knowledge.
What Are Agricultural Commodities?
Commodities refer to raw materials used in producing finished goods. Generally, when people refer to commodities, they mean mineral ores, fossil fuels, oil, natural gas, metals, edible products, etc. Most commodities are essential products that people need.
Agricultural commodities encompass edible and non-edible goods that people use. For instance, sugar, cocoa, wheat, barley, grain, palm oil, orange juice and more are good examples of edible goods. Likewise, cotton, , and rubber are some examples of non-edible goods.
Understandably, some people will also often include cattle and livestock with agricultural commodities.
Wheat in a basket
What is Commodities Trading?
Commodities trading refers to the exchange of different commodities between buyers and sellers in a marketplace. You can trade commodities in several ways, including through future contracts, physical commodities purchases, contracts for differences, and commodities stocks. Let’s explore each option in detail:
Commodities Futures
Commodities futures are arguably the most common way to trade agricultural commodities. Futures are exchange traded contracts on commodity exchanges like ICE (Intercontinental Exchange) or CME (Chicago Mercantile Exchange). A futures contract is an exchange traded contract to deliver or acquire a specified quantity of a particular commodity at a specified expiration date of the contract. At the point of expiry, a contract holder can either take physical delivery of the commodity or opt for a financial settlement of the difference between price at the point of entry into the contract and price at the point of expiration of the contract. Futures trading on most exchanges is accessible majorly to commodity trading companies, banks and other institutional players, because of the huge capital requirement to fund initial and daily variation margins on each contract held. This is typically beyond the reach of most retail traders, as a typical standard lot will require initial margin/ capital of about $100,000, for instance.
Physical Commodities
Buying and selling physical commodities is another option for traders. Trading companies like Cargill and Louis Dreyfus specialize in physically trading agricultural commodities. However, it’s not a popular option for individuals because you would have to create the ideal storage conditions and bear the cost of logistics for tons of cocoa, sugar, or any other agricultural commodity. However, some individual traders with the requisite liquidity typically purchase physical commodities of non-edible products for export/import purposes
Commodities Stocks
Another alternative for traders and investors is to purchase commodities stocks. Commodities stocks refer to purchasing stock in a company that produces or sells commodities. For instance, you could invest in a cocoa producers’ stock and, as a result, enter the commodities trading market. If cocoa prices rose, the company’s stock would also appreciate, leading to sizable investment returns for you.
CFDs
CFDs, an abbreviation for contract for differences, are an excellent way to enter the agricultural commodities market. Buying CFDs of agricultural commodities enables traders to trade with leverage without owning the physical commodity. CFD trading has been rising exponentially over the past few years because it lets traders bet on price fluctuations and profit from them without requiring substantial capital investment.
Crystal Ball Markets is an excellent online trading platform for those looking to trade agricultural commodities. We enable traders to use our Mobius Trader 7 trading platform to trade CFDs for popular agricultural commodities like cocoa, sugar, cotton, and more with leverage.
Investing and Trading in Agricultural Commodities
If you’re looking to trade agricultural commodities, you’ll want to start by researching and studying the market because commodities investing is suitable only for seasoned investors. In addition, agricultural commodities require specialized knowledge. Otherwise, you’ll set yourself up for failure. You’ll want to ensure you understand the factors affecting agricultural commodities prices. In addition, you’ll have to learn to read commodity price charts.
Generally, agricultural commodities are an excellent addition for investors and traders with a vast portfolio. They’re an excellent diversification option, enabling you to reduce and spread market risk. Commodities trading is an excellent choice if you’re looking to use a small percent of your portfolio for higher risk and reward.
Sugar cubes in a mug
Trade Agricultural Commodities with Crystal Ball Markets
Are you interested in trading commodities? You’ll need an online trading platform that enables you to trade commodities without any hassle. Crystal Ball Markets is one of the best energy and agricultural trading platforms you’ll come across. Visit our website to learn more. Alternatively, register with us today to get started.