How to Trade in Agriculture?

Date Modified: 24/03/2024

Agriculture has existed for thousands of years, as even our ancestors depended on it for their existence, and it has significantly influenced contemporary societies.

Consequently, it may not be surprising to learn that this sector plays a pivotal role in overall markets, particularly in the Futures market. Let’s delve into agriculture trading and its role in Futures trading:

An illustration of agriculture futures products.

What Is Agriculture?

Simply put, agriculture is the umbrella term that encompasses the activities of farming, raising livestock, and the processes of planting and harvesting crops. It is often referred to as the “science of farming.” Some examples of agricultural products include corn, wheat, soybeans, live cattle, feeder cattle, soybean oil, soybean meal, and lean hogs.

Why Are Agricultural Commodities Important?

Agricultural commodities have numerous evident uses, not the least of which is their role as essential food resources. Without them, humanity would be famished.

In addition, this type of commodity is considered crucial to the overall development and growth of global economies as the majority of developing countries depend on agriculture as a source of income. It also provides raw materials for many products such as clothing, biofuels, rubber, and pharmaceuticals that play into the growth of an economy.

Moreover, agricultural commodities’ prices can affect export factors such as a country’s export revenues and balance of payments.

How to Trade Agricultural Goods

Trading agricultural goods can be achieved through Agricultural Futures contracts as you can open buy or sell contracts that obligate you to buy or sell the underlying commodity at a preset price and date in the future.

How Can I Trade Agricultural Futures?

Futures contracts can be traded on Futures exchanges such as the Chicago Mercantile Exchange (CME) or the Chicago Board of Trade (CBOT). These exchanges serve as centralized platforms for the buying and selling of standardized futures contracts.

Additionally, traders can trade Futures with brokers like Plus500, who serve as intermediaries. In other words, Futures brokers facilitate trades on behalf of clients and provide supplementary services such as research assistance and risk management tools.

Before deciding on how to trade futures contracts, it's crucial to understand their function and identify reliable trading platforms to safeguard your capital.

What Are the Advantages of Trading Agricultural Commodities?

Engaging in agricultural commodities trading provides an avenue for diversification and the potential for profitability. Moreover, it serves as a valuable tool for hedging, effectively mitigating market risks and serving as a hedge against inflation.

Most Popular Commodities

As of January 2024, some of the most traded agricultural commodities are as follows:

  • Coffee: Grown in countries like Colombia, Indonesia, and Ethiopia, coffee (KC) is traded on the Intercontinental Exchange (ICE) and is among the world's most popular commodities, considered one of the most liquid. Moreover, besides being a popular beverage, coffee is versatile and used in skincare products, as a fertilizer, and even as an insecticide.
  • Soybeans: Soybeans are legumes widely used as a crucial ingredient in various food products, animal feed, and industrial applications such as the production of cleaners or plastics. Soybean Futures are traded on the Chicago Board of Trade (CBOT) under the “ZS” ticker.
  • Cocoa: Cocoa, or cocoa bean, is a type of fermented seed from a tree called Theobroma cacao. This agricultural commodity is primarily grown in tropical regions around the equator, with the majority of production coming from West Africa. Cocoa Futures are regulated on the ICE Futures exchange under the “CC” symbol.

Factors That Influence Agricultural Commodity Prices

Many different factors could influence agricultural commodity prices, and drive futures prices. Some of the factors are:

Supply and Demand

The fundamental principle of supply and demand in finance posits that with an increase in the price of a product, the likelihood of a rise in supply and a decrease in demand also grows.

This principle is equally applicable to commodity prices, where adverse shifts in supply-demand dynamics play a pivotal role.

Contributing factors encompass climate variations, weather conditions, production costs, the availability of arable land, and the sluggish growth of agricultural productivity.

An illustration of the supply and demand rule.

Currency Values

Changes in currency values can directly affect agricultural commodity prices. For example, when the US dollar depreciates, agricultural commodities tend to become cheaper in other currencies. This, as a result, can lead to increased demand and higher prices.

Energy Commodity Prices

Fluctuations in energy commodity prices can impact the costs associated with agricultural products. The volatility and elevation of crude oil prices, in particular, have the potential to influence the prices of agricultural commodities. This influence stems from the effect on production expenses, encompassing fertilizers, fuels, and chemicals. As an example, corn is the primary source for ethanol production, which has its own supply and demand structure.

Economic and Geopolitical Changes

Economic changes, such as monetary expansion, can impact agricultural commodity prices. For instance, low interest rates can contribute to rising prices.

Moreover, geopolitical tensions or changes can influence exports and imports, leading to volatility in agricultural commodity prices.

Weather Changes

Given that agriculture is highly reliant on weather conditions, any alterations can result in either rising or falling prices due to their direct impact on the supply and demand chain.

What Are the Commodity Futures Trading Commission (CFTC) and United States Department of Agriculture (USDA)

Two entities every agricultural Futures trader should familiarize themselves with are the Commodity Futures Trading Commission (CFTC) and the United States Department of Agriculture (USDA).

The CFTC is an independent body within the US government, responsible for the regulation of the Futures markets (and other US derivatives) and the USDA is a federal agency that regulates American agricultural markets and oversees food quality, nutrition, and forestry.

Conclusion

In conclusion, agriculture, a cornerstone of human history, continues to shape global economies, with agricultural commodities trading in the Futures market playing a crucial role for both the markets and the global economies.

As such, traders can utilize agricultural commodities trading for diversification, profitability, risk mitigation, and inflation hedging, making it a strategic avenue for impactful investments.

FAQs

What are agriculture Futures?

Agriculture futures are financial derivatives that obligate the participants to buy or sell an underlying agricultural asset at a predetermined price and date in the future.

Why do farmers and producers use agriculture Futures?

Farmers and producers use agricultural Futures to hedge against price fluctuations and mitigate risks. Additionally, they utilize agricultural Futures to secure incomes by fixing prices for their agricultural products.

Can individual investors participate in agriculture trading?

Yes, individual investors can also trade agricultural Futures contracts.