Commodities

Commodity Futures are Complex Creatures

dondawson
Don Dawson
Instructor

The Commodity Futures markets are truly a complex creature with all of the different standardized contracts to trade, multiple market hours, unique tick and point dollar values, etc.  A new trader may feel like all they need to know about trading as a professional is understanding technical analysis and placing orders.  Guess what?  That is only the beginning and least important part of trading.

Anybody who thinks trading professionally is that easy probably thinks that because a teenager can get behind the wheel of a car, see above that wheel and turn the key, that he/she is a qualified good driver.  After 8 years of instructing at Online Trading Academy, I often hear from my past students that they agree that they knew little about trading even after learning to read a chart.  It’s important as a trader you understand the mechanics of the markets as well as the technical aspects.

In the articles I write and classes I instruct, I bring a lot of these mechanics to the table.  It is up to the individual to take the material and put in the time to better understand the products they will be trading.  Trading is an income generating vehicle, not an ATM machine that hands out free money.  All professional traders put in a lot of effort to extract every dollar from the markets they trade.

Now let’s talk about a couple of Futures markets that have the same name but trade on different Futures Exchanges and/or are planted/harvested at different times of the year.  These differences call for a different Futures contract for the same named Commodity.

The first one is the Wheat market.  Unlike Soybeans and Corn, Wheat has 3 different types that are planted and harvested at different times of the year.  This can create opportunities during the year while Corn and Soybean prices are relatively flat between the harvest season and the next planting season.

  1. Soft Red Winter Wheat – Primary growing region is the Southern parts of the Mid-West down to Texas. This Wheat is planted during the winter months and harvested in the spring months.  This crop usually sees a Seasonal high between September and January.  The Seasonal low usually occurs between April and June.  A trader would trade this Wheat contract on the *Chicago Board of Trade Exchange (CBOT).
  2. Hard Red Winter Wheat – There is more of this type Wheat grown than any of the other Wheat crops. This Wheat is planted during the winter months and harvested in the spring months. A Seasonal High can be expected around September – January.  The Seasonal low usually occurs April – August.  These wheat futures trade at the *Kansas City Board of Trade (KCBOT).
  3. Spring Wheat – The planting season for this crop tends to follow the Corn and Soybean growing season more than the other two Wheat crops.  It is usually planted in the spring and harvested in the fall.  The Seasonal highs tend to come November – April.  The Seasonal lows occur in August.  These Wheat Futures contracts trade at the *Minneapolis Grain Exchange (MGE).

*Exchanges listed are now all a part of the Chicago Mercantile Exchange Group (CME).

Be aware of these reports as they have a significant impact on Wheat prices:

  • Grain Stocks
  • Prospective Planting
  • Monthly Supply/Demand

Refer to the Futures Trading calendar which shows thee release dates for these reports.

Sugar is another market that has multiple contracts trading for the same name.  When a trader looks up the margin (good faith capital deposited with the broker while the trade is open) for trading Sugar, they will notice Sugar #11 and Sugar #16.  Sugar can be traded as Sugar Beet or Sugar Cane, but most Commercials prefer producing Sugar Cane.  Out of all the Sugar produced, about 73% is Sugar Cane and refined locally for cost and transportation reasons.

The difference is where the Sugar is produced.  Sugar #11 is produced worldwide and is priced about half of Sugar #16.

Sugar Cane: Brazil, India, China and Thailand

Sugar Beets: Europe, United States, China and Japan

The United States produces both types, but is not a major player in the world wide Sugar Cane market.

Sugar #11 is the market where the most speculators are trading due to much higher volume of contracts traded.

Sugar #16 is produced in the United States and has been for a couple of hundred years.  While the price is usually twice as much as Sugar #11 it is not due to a better quality of Sugar.  Unfortunately the growing conditions in the United States are not as naturally conducive to growing Sugar as they are in other parts of the world.  Therefore, more work needs to be done to produce Sugar here in the United States.  Our government has created all kinds of subsidies and tariffs to protect our Sugar producers almost guaranteeing the producers a floor price for Sugar.  This higher pricing has made United States Sugar much less competitive on the world market.  But with the tariffs and taxes on imports U.S. citizens are forced to pay the higher prices of Sugar #16 not only at the grocery store but in the taxes we pay to support the Sugar producers.

Sugar is one of the only world traded Commodities that is grown in both hemispheres at the same time of the year.

The Seasonal pattern for Sugar #11 can find highs December – January and the lows June or September.

Free Trading WorkshopWith all the competition from natural sweeteners one would think that would cause more threat to Sugar prices, but like other supply driven Commodities that are grown, weather has the biggest impact.  Monitor excessive rainfall in the producing countries to stay on top of the fundamentals of Sugar.

“You get in life what you have the courage to ask for” Nancy Solomon

Don Dawson

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.