What is the grains market?
The grains trade is the oldest market out there, likely predating recorded civilization by several millennia. For almost as long as we’ve grown grains, we have been trading them and while stocks, forex and hard commodities like gold and oil grab most of the attention these days, grains markets remain of great significance. However, they can be notoriously volatile, which results in high risk/reward opportunities for traders. Substantial gains and losses are commonplace.
Grains future market
Unless they work for a company that processes significant amounts of grain, most traders operate in futures markets, rather than physical ones. Like all futures trading, this effectively involves speculating on what the price of the commodity will be at the time the contract is delivered. This can be done via a number of exchanges across the globe, including the Sydney Futures Market, Chicago Board of Trade and the London Commodity Exchange. Most of the trading action centres on a handful of widely consumed grains, including: wheat, corn, soybeans, rice, and oats. There are smaller markets for other types of grains as well, including barley and canola.
Capital requirements of grains
For many traders, one of the advantages of trading in soft commodities like grains is that it can be done for a relatively small capital outlay. Because these are tangible contracts representing actual physical commodities, brokerage firms are willing to lend at a lower margin, allowing for greater financial leverage. Trading on leverage involves opening up an brokering account and opening up a margin loan. In commodity trading, this allows you to borrow most of the value of the contract, limiting your up-front capital contribution. This will amplify any gains significantly and exacerbate any losses.
Why are grains markets so volatile?
As stated before, grains markets can move sharply and prices can swing significantly from one day to the next, which of course creates opportunities as well as dangers for traders. So what causes these price swings?
