The agricultural and soft commodities arena is a lesser known space in the financial markets made up of the likes of wheat, corn, cocoa, coffee, cotton, orange juice, sugar and more while comprising some of the oldest markets still in existence today, with roots dating back thousands of years.

The importance of these markets cannot be overstated – their wares form the basis for consumables just as the basic materials do for construction and technology. While we pointed out recently that the old adage ‘sell in May and go away..’ is losing validity in today’s equity markets, it’s clear that old habits die hard as traders aplenty take flight into agricommodities with summer fast approaching.

A handy hedge in uncertain times…and a speculator’s dream

Agricultural producers, as well as providing the underlying commodities, commonly use these markets to hedge their exposure to volatile prices through the use of derivative products such as options and futures contracts – and such products have proved hugely popular for those looking to purely speculate on rising and falling prices, although with considerable risk when used this way.

Recent additions to the trader’s arsenal – namely Contracts for Difference (CFD) and Spread Betting – have made the agricultural and soft commodities ever more accessible to those seeking convenient ways to hedge risk, an alternative way of investing or simply one whose underlying common stock is familiar (or both).

In this exclusive report we will provide you with an essential overview of the traded agricultural and soft commodities together with some examples of and insight into how you can trade them using CFDs. Now let’s take a closer look at a few of the players.

Grains: Corn

Wheat and corn have been the basis of our diet for centuries and the use of corn in consumables has ballooned of late as the grain is brought it as a replacement for sugar whose artificially high prices are driving a search for cheap alternatives. Almost every edible product consumed by Americans now contains corn in one way or another and around 525mn metric tons of corn is now produced each year, with the US being the leading grower putting out roughly half of that total and China coming a close second.

With an absolutely colossal consumer base (despite the best efforts of the planet’s well-meaning health crusaders) and with supply to match and even exceed this, corn prices have been in a downtrend from August 2012 highs and are currently trading close to their lowest level since mid-2010. As things stand, rising CO2 levels in the atmosphere can actually increase crop yields while more extreme weather – especially flooding and drought – will pull in the opposite direction and the result has been fairly flat price action of late.

Corn; 8-year, Daily

Source: AlphaTerminal

Green and red lines indicate potential support and resistance

What drives corn prices?

• Increasing cultivation of ‘tropical maize’ in the US for use in biodiesel is competing with more traditional corn planting.
• Genetic engineering. More than half of the US’s planted corn has been genetically modified to resist disease and herbicides. This is a potential nerve-toucher that could be subject to tighter regulation further down the line.
• USDA publications (Prospective Plantings, Grain Stocks) that detail which and how many crops have been planted – an indication of supply and quality
• The weather – adverse or good, weather is an important indicator of the quality of the upcoming harvest as well as the quantity.

Low prices themselves and wet weather are undermining a hitherto bullish outlook for corn with many producers simply not seeing the incentive to go out and plant for next year. But with supply seemingly losing weight and consumers the world over eager to keep putting it on, could this in fact be a case of ‘bulls dressed as bears’? The price of corn doubled in 1996. Will it do so again?

You already have the knowledge to offer educated answers to these questions – it’s your area of expertise. How good would it feel to be able to take things one step further, reducing your risk exposure and even profiting from price volatility with just a fraction of the initial outlay normally required to trade these markets?

Corn; 12-month, Daily

Source: AlphaTerminal

Green and red lines indicate potential support and resistance

Look out for: USDA monthly Net Export Crop Sales and Sweetener Market data.

Softs: Sugar

Most people in the developed world are hopelessly addicted to sugar. Formerly known as ‘white gold,’ nowadays you’ll no doubt be aware that with sugar added to virtually everything we eat not to mention its use in the production of ‘future fuel’ ethanol, the sugar market is absolutely huge.

Sugar No. 11, 6-year chart

Source: AlphaTerminal

Huge, yet somewhat eccentric…

One factor that weighs heavily in the sugar market is government intervention. Sugar is, for the most part, not traded on the open market. But producers do make use of heavily subsidised ‘dump’ markets where massive government subsidies enable them to offload their surplus sugar, this time on the open market, at near-loss making (if not for the subsidies) prices. It is essentially these dump markets that accommodate the rollercoaster that is Sugar Futures.

NY Sugar No. 11; 12 month, daily

Source: IT-Finance

Green and red lines indicate potential support and resistance

What else drives sugar prices?

• Health concerns encouraging industrialised nations to seek alternatives could reduce demand and weigh on prices.
• EU (world’s #2 sugar exporter) policy is currently* to subsidise its native production while imposing high tariffs on imports. Any change in policy could impact prices accordingly.
• Weather: Plants are naturally sensitive to changes in their environment. Climate change presents a real threat to crop yields.
• The US operates a protectionist policy for sugar prices, so that US producers enjoy a higher price for what they produce and consumers are forced to look for alternatives. With more of those alternatives becoming available (think corn syrup…), demand for sugar could shrink.

The difficulty in tracking global sugar demand coupled with the level of government involvement in protecting prices make the sugar market somewhat murky, so that no-one really knows the true price of sugar. But that’s not important. What matters is that real opportunities exist to capitalise on market swings and you should already be realising that when the word ‘volatile’ crops up it is always accompanied by its friend ‘opportunity.’

Sugar is no exception, and the clues to where the market is going next are sparse and subtle. It’s an area that offers fantastic prospects to those that know about agriculture.

*as at 19 June 2015

Look out for: USDA monthly Sweetener Market Data; Grain Market Reports.

Agricultural Commodities: Live Cattle

Naturally, domesticated cattle have had a close relationship with man for thousands of years providing as they do meat, milk and materials for clothing.

And yes, that’s right; there is a futures contract on a live animal. This was first introduced by the Chicago Mercantile Exchange in 1964, allowing meat producers to hedge against seasonal risk. And where there’s risk, there’s opportunity for the speculator. All sorts of factors affect the price of livestock – with the drivers of crop prices having an indirect impact on the livestock market since many crops are grown to feed them.

This makes for many a scenario whereby your grain and soft commodity trades and livestock trades can complement each other. For example, you may view some data that leads you to believe that maize crops in the USA are headed for a bad season following some adverse weather. You may then form an opinion on the price of livestock based on the resultant effect on livestock feed supplies for the coming winter.

Live Cattle; 12 month, daily

Source: IT-Finance

Green and red lines indicate potential support and resistance

What else drives live cattle prices?

• Environmental concerns: Flatulent cattle produce at least 18% of the world’s greenhouse gases. What’s more, the offending pollutant is methane – a greenhouse gas 23 times more effective than CO2. It’s highly unlikely that farmers will be forced to curb production but levies and taxation to offset emissions could drive up costs, which would have to be passed on to the consumer.

• BSE, or mad cow disease, famously wrecked the UK beef market in the 1990s and still periodically rears its head. Resultant import bans and destruction of thousands of cattle hurt the industry badly.
• The US produces 25% of the world’s beef, yet is a net importer. Changes in the dietary habits of US citizens, however unlikely, could therefore have a high impact on the global cattle market. It also smacks of opportunities aplenty with the ever present volatility likely to continue as the likes of China and Brazil enter the fray.

Look out for: USDA monthly Hog & Cattle Slaughter; Livestock, Dairy & Poultry Outlook; Agricultural Prices.

Time to capitalise on volatility.

Uncertainty in today’s world is no longer confined to politics, war and epidemics – climate change is bringing more of the sorts of challenges usually associated with the developing nations to the doorstep of the west. The need to hedge against risk has never been greater.

Meanwhile, low interest rates mean that your cash in the bank earns you next to nothing. Investors are increasingly doing it themselves, unhappy with the costs associated with managed funds, and an industry has sprung up to support them.

As mentioned above, agricultural and soft commodities have long traded on the futures market - an arena populated by well-funded, thick-skinned and even better informed hedgers and speculators. But there are now ways of trading these markets that allow the smaller investor not only to trade with less up-front capital, but also bring the risks well within acceptable levels tailored to the individual.

The commodities described above and myriad other related markets are more alive than ever and can now be traded via CFDs and Spread Betting which offer a cheaper, more accessible and much more flexible alternative to risk-heavy and expensive futures contracts. What’s more, CFDs and Spread Bets are cash settled, meaning you never actually own the underlying commodity.

All trading, like so much in life, does of course involve risk so when you open an account with Accendo Markets, you’ll have your very own dedicated trader who will give you the timely updates and information you need to keep your risk under control and make informed decisions about what, when and how to trade the commodity markets.

Whether you see a particular commodity going up or down in the near future, one thing is for sure - tradable opportunities will present themselves regularly. Below are some examples to help you profit from potential price moves – whatever the direction.

Trading commodities

If you would like to trade the popular US Sugar No.11 index and believe the price will rise back towards Dec 2010 highs of $34.70 per pound (weight) you could take a long position. If you believe the price will keep falling towards $10.00 per pound you could take a short position.

Contracts for Sugar No.11 are worth $11.20 per point (see Appendix on page 9), meaning that for every contract you elect to take long or short you would gain $11.20 for every cent the price moves in your favour and lose $11.20 for every cent it moves against you.

Taking a position on the direction of the price of Sugar No.11 requires your account to contain a minimum of $202 per contract (known as margin). While this allows the trade to be opened, additional margin is required to weather moves against you and avoid a margin call. How much of a buffer depends on how far you would allow the price to move against you before calling it a day.

You can limit potential losses with the use of a stop loss. For example, you might decide to go long 1 contract of Sugar No.11 at $11.20 per point using a 100pt stop loss. If you call the direction wrong and the index falls by 100pts, you would be stopped out with a $1120 loss.

Trailing stop losses can be used to capitalise on any moves in your favour by having the stop loss follow the price up at a pre-determined distance. While initially you might set the stop loss to limit losses to $1120, if the price moves in your favour you may end up being stopped out with losses of only a few hundred dollars – or even a profit.

Of course it is completely up to you, A) how much you go into a particular commodity index (2/4/6/10/20/50/100/1000 pounds per point); B) whether you go LONG (think the index will go up) or SHORT (think the index will go down) and C) how far you place your stop loss away if at all (limiting your potential loss).

The Accendo approach – what’s different?

At Accendo Markets we don’t tell you what to do. It’s your call whether you buy or sell. Our aim is to provide the help you need, highlighting opportunities which may be profitable to you, the trader, and assist you in making trading decisions from which you can benefit via use of leveraged instruments.

Our approach focuses on 3 elements below;

• Education - not obligation
• Observations - not recommendations
• Assistance - not persistence

Our unique and award-winning service provides you with the help and tools you need to make appropriate trading decisions in the financial markets, both to grow and protect your capital.

Beware that the combination of CFD leverage and bigger share-price movements (volatility) can result in bigger than expected losses which can even exceed your original deposit.

For any questions on how to trade stocks and commodities via CFDs or shares,

including ways in which your risk can be managed,

call us to discuss on 0203 051 7461