Commodities Word Doci.investopedia.com/inv/pdf/tutorials/commodities.pdf · not the commodity itself but rather a contract to buy or sell it for a certain price by a stated date in

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Commodities By Noble Drakoln http://www.investopedia.com/university/commodities/ Thanks very much for downloading the printable version of this tutorial. As always, we welcome any feedback or suggestions. http://www.investopedia.com/investopedia/contact.asp Table of Contents 1) Commodities: Introduction 2) Commodities: Cocoa 3) Commodities: Coffee 4) Commodities: Copper 5) Commodities: Corn 6) Commodities: Cotton 7) Commodities: Crude Oil 8) Commodities: Feeder Cattle 9) Commodities: Gold 10) Commodities: Heating Oil 11) Commodities: Live Cattle 12) Commodities: Lumber 13) Commodities: Natural Gas 14) Commodities: Oats 15) Commodities: Orange Juice 16) Commodities: Platinum 17) Commodities: Pork Bellies 18) Commodities: Rough Rice 19) Commodities: Silver 20) Commodities: Soybeans 21) Commodities: Sugar 22) Commodities: Conclusion




Introduction From the orange juice we drink to the gas we use to power our vehicles and heat our homes, commodities play important roles in our daily lives. They can be found literally all over the world, and can be traded on the global marketplace as part of a diversified investment portfolio. In fact, billions of dollars are invested in commodities every day. While they can be traded on either spot (real-time) or futures (options) markets, most individual commodities are traded in the form of futures, where what is being traded is not the commodity itself but rather a contract to buy or sell it for a certain price by a stated date in the future. This carries the potential for wild market fluctuations, but it also offers exciting opportunities for investors willing to ride out market volatility in anticipation of rewards. Like any investment, the goal in commodities trading is to buy low and sell high. The difference with commodities is that they are highly leveraged and trade in contract sizes instead of shares. What's more, investors can buy and sell positions whenever the markets are open, so there's no chance of waking up one morning to find 10,000 bushels of corn on the front lawn. Commodities: Cocoa With a scientific name like Theobroma, which means "food of the gods," it's no wonder that the world can't seem to get enough cocoa. The origins of the cocoa plant can be traced back thousands of years. Discovered during the early exploration of the Americas, cocoa successfully spread across Europe in the 1600s as sweeteners and flavorings were added. Originally a bitter beverage for the royal court of the Mayan empire, cocoa production has become an international industry. Today, cocoa trees are predominantly grown in West Africa, primarily processed in the Netherlands and the U.S., and cocoa is consumed in one form or another by every country in the world. A sample commodity futures contract for cocoa is shown in the following table.

Cocoa Contract Specifications

Ticker Symbol Open Outcry: CC (ICE) Electronic: ECC

Contract Size 10 metric tons

Deliverable Grades The growth of any country or clime, including




new or yet unknown growths. Growths are divided into three classifications listed below Group A: Deliverable at a premium of $160/ton (includes main crops of Ghana, Lome Nigeria, Ivory Coast and Sierra Leone) Group B: Deliverable at a premium of $80/ton (includes Bahia, Arriba, Venezuela, Sanchez and others) Group C: Deliverable at par (includes Haiti, Malaysia and all others)

Contract Months H (March), K (May), N (July), U (September), Z(December)

Trading Hours Monday-Friday 2:30am-3:30pm EST

Last Trading Day One business day prior to last notice day

Last Delivery Day Last business day of the contract month.

Price Quote Dollars per metric ton

Tick Size $1 per metric ton, equivalent to $10 per contract

Daily Price Limit (Not applicable in electronic markets)

None

Understanding Cocoa Contracts Like every commodity contract, cocoa has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss. For instance, if you buy or sell a cocoa futures contract, you will see a ticker tape handle that looks like this:

CC8K @ 1363




This is just like saying "Cocoa (CC) 2008 (8) May (K) at $1,363 per metric ton (1363)." A trader buys or sells a cocoa contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the cocoa contract equals the equivalent of 10 metric tons multiplied by our hypothetical price of $1,363, as in: $1,363 x 10 metric tons = $13,630 Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. For example, to trade a cocoa contract on the Intercontinental Exchange (ICE), a trader may be required to maintain a margin of $2,660, which is approximately 19.5% of the face value. Calculating a Change in Price Because commodity contracts are customized, every price movement has its own distinct value. In a cocoa contract, a $1 move is equal to $10. To determine ICE's cocoa profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $10. For example, if prices move from $1,363 to $1,400, you multiply the difference, which is $37, by $10 to yield a contract value change of $370.

- Buy Sell Total Value

Cocoa Contract Price ($1 move = $10)

$1,363 $1,400 $37 or $370

Cocoa Exchanges The futures contract for cocoa is traded on the Intercontinental Exchange (ICE) and NYSE Euronext. Facts About Production The cocoa plant requires a very specific set of circumstances to thrive and prosper. As a small evergreen tree that can become 15-26 feet tall, it can only grow in regions that are 20 degrees north or south of the equator. Naturally, there are very few places on earth with the right climatic factors for the cocoa plant to thrive, and West Africa has




emerged as the dominant player in cocoa production, with approximately 70% of the market share in 2008. There are two distinct types of cocoa plants: Criollo and Forastero. The Criollo variety is the most sensitive of the cocoa plants, and any shifts in climate can have an adverse affect on its already low yield. In an attempt to blend the hardiness of the Forastero plant with the delicate flavors of the Criollo plant, the two were hybridized into a third plant, Trinitario, which accounted for 20% of all production in 2008, although it's steadily developing a following. Regardless of the cocoa variety, the production cycle is the same. On average, cocoa trees take five years to reach maturity and bear fruit, at which time only a total of about 20 pods might be ready for harvest. As a rule of thumb, 10 pods produce 2.2 pounds of cocoa, so the average tree can produce only a little over four pounds of cocoa. Interestingly, the Ivory Coast, Ghana and Indonesia account for more than 70% of the world's cocoa production, and most of that production comes from small farmers. Factors That Influence Cocoa's Price The price of cocoa is influenced by the following factors:

• While bees and butterflies are common pollinators, the cocoa flower is pollinated by midges, small flies or by hand. Global climatic shifts are presumed to have an effect on bee colonies around the world, and the midge fly could be affected by similar environmental pressures.

• In 1983-1984, cocoa production reached a respectable production level of 1.5 million tons. Twenty years later, in 2003-2004, cocoa production had doubled. Unfortunately, this has occurred not because of advances in agricultural efficiency, but because more land was allocated to cocoa plantings. With much of the cocoa production occurring in politically unstable areas such as the Ivory Coast, Ghana and Indonesia, political factors have a disproportionate influence in cocoa price stability.

• Temperatures for optimum growth range from just 69-90 degrees Fahrenheit, or 21-32 degrees Celsius. Temperatures lower than 59 degrees (15 degrees Celsius) can be fatal. What's more, cocoa trees need no more than 2,000 millimeters of annual rainfall. Combined, these factors leave the cocoa tree vulnerable to global warming.

• A few companies control much of the world's chocolate. Barry Callebaut, Cargill and Archer Daniels Midland Company (NYSE:ADM) are all industry giants. Other major corporations, including Mars and Cadbury (NYSE:CBY), as well as several small chocolatiers, are beholden to the financial and political decisions of the three controlling companies.




• The International Labor Organization released a report in 2005 stating that cocoa farms on the Ivory Coast are exploiting thousands of children in order to keep their industry thriving. According to the report, up to 200,000 children in 2005 were working in cocoa fields under terrible conditions, with a small percentage of them victims of human trafficking.

Conclusion Cocoa was originally blended into a drink meant solely for royalty. Today, it can be found in lotions, beverages, confections and more. The demand for cocoa criss-crosses the globe, while the supply is limited to only a few places on earth. The need to find a balance between supply and demand, along with cocoa's long gestation period, leaves considerable room for price discovery at any given time. Commodities: Coffee In 1457, Kiva Han, the predecessor to today's trendy coffee shops, opened its doors in Constantinople. It brought from obscurity a well-liked but little-known beverage, coffee, to the world. Originally cultivated in the hills of Ethiopia for thousands of years, the little brown bean developed a following in the Ottoman Empire for religious purposes. Eventually, its popularity throughout the West gained it a reputation as the preferred drink of sultans and kings. If you're a coffee drinker, you can appreciate the effect that coffee can have on your body's chemistry. It has a similar chemical molecule makeup to adenosine, the fatigue molecule that your body produces. However, instead of adenosine bonding to tired cells, the caffeine in coffee is recognized by the cells and an entirely new chemical reaction occurs. The body ignores the adenosine and in a panic reaction, the brain releases adrenaline into the blood stream, creating a feeling of alertness and excitement that makes coffee a popular choice in overcoming fatigue. A sample commodity futures contract for coffee is shown in the following table.

Coffee Contract Specifications

Ticker Symbol Open Outcry: KC (ICE) Electronic: EKC (ICE)

Contract Size 37,500 pounds

Deliverable Grades Arabica Coffee: A Notice of Certification is issued based on testing the grade of the beans and by cup testing for flavor. The exchange uses




certain coffees to establish the "basis." Coffees judged superior are at a premium; those judged inferior are discounted.

Contract Months March, May, July, Sept, Dec

Trading Hours Intercontinental Exchange (ICE): Monday-Friday 1:30am-3:15pm EST

Last Trading Day One business day prior to last notice day

Last Notice Day Seven business days prior to the last business day of the delivery month

Price Quote Cents and hundredths of a cent up to two decimal places

Tick Size .05 cent/pound = $18.75 per contract


None

Understanding Coffee Contracts Like every commodity, coffee has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss. For instance, if you buy or sell a coffee futures contract, you would see an entry that looks like this:

KC8U @ 129.50

This is just like saying "Coffee (KC) 2008 (8) September (U) at $1.295/pound." (It is standard pricing convention to see the prices of futures such as copper, coffee, sugar and orange juice quoted in cents per pound. In this case, $129.50 is equal to $1,295 per pound.) A trader buys or sells a coffee contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the coffee contract equals the equivalent of 37,500 troy ounces multiplied by our hypothetical price of $129.50, as in:




$1.295 x 37,500 pounds = $48,562.50 Commodities are traded based on margin and the margin changes based on the market volatility and the current face value of the contract. For example, a coffee contract on the Intercontinental Exchange could require a margin of $4,900, which is approximately 10% of the face value ($4,900/$48,562.50), Maintaining the minimum amount of margin required by the broker, which in this case equals $4,900, gives an investor the ability to control a sizable position despite a relatively small capital outlay. Calculating a Change in Price Because commodity contracts are customized, every price movement has its own distinct value. In a coffee contract, a .0005 cent move is equal to $18.75. When determining ICE's coffee profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $18.75. For example, if prices move from $129.50 to $140.20, you divide the difference, which is $10.70, by five to get $214, and then multiply $214 by $18.75 to yield a contract value change of $4,012.50.


Coffee Contract Price (.0005 cent move = $18.75)

$1.295 $1.4020 0.1070 cents or $4,012.50

Coffee Exchanges The futures contract for coffee is traded at the Brazilian Mercantile and Futures Exchange (BM&F), Intercontinental Exchange (ICE), Kansai Commodities Exchange (KEX), Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX), Singapore Commodity Exchange (SICOM), Tokyo Grain Exchange (TGE) and NYSE Euronext. Facts About Production While coffee production occurs around the world, primary production is dominated by countries such as Brazil, Vietnam, Indonesia and Columbia. Each of these countries has built a thriving business based on exporting coffee around the world. In 2005, Brazil




produced 2 million metric tons of coffee beans, which is over twice as much as Vietnam, its nearest competitor. The two types of coffee beans are Arabica and Robusta. Arabica beans are considered the most flavorful and in turn command a premium in the market place. Robusta beans tend to be more bitter and less palatable, but they have a 50% higher concentration of caffeine than Arabica beans. Coffee beans come from a small evergreen bush. When they reach maturity, which takes anywhere from three to five years, the bushes blossom and the coffee berry, which starts out as a small green pod, can be picked and dried. The seeds are removed and roasted. The roasting process is what gives coffee its distinctive taste and attributes. Coffee beans that are lightly roasted tend to be more acidic and bitter tasting, but they also have more caffeine. Coffee beans that are dark roasted have a smoother taste because they have less acid and more sugars resulting from the heating process. Factors That Influence Coffee's Price The price is influenced by the following factors:

• Arabica beans are primarily grown in Central and South America. These are higher quality beans that command a higher price, which has helped Brazil to become the largest coffee exporting nation in the world. At the same time, it has left Brazil exposed to competition from the cheaper coffee bean, Robusta. This Achilles heel has allowed Vietnam to develop a strong coffee industry around the cheaper Robusta bean, putting Vietnam second in the world in coffee exports.

• Four major corporations dominate the Robusta coffee world. Kraft, Nestle, Proctor & Gamble and Sara Lee account for more than 50% of all Robusta coffee bean purchases, preferring Robusta beans to Arabica beans solely because of their price. On average, Robusta beans are 70% cheaper than Arabica beans, allowing for greater mass production uses.

• Fair trade coffee is slowly gaining popularity. Fair trade guarantees coffee growers a set price prior to harvest. This has led to more privately negotiated deals with coffee co-ops around the world. In 2004, it represented 24,222 metric tons, according to the Max Havelaar Foundation, and 33,991 metric tons in 2005.

• Numerous studies have found that drinking coffee might help reduce the risk of diseases such as Alzheimer's, cirrhosis of the liver, gout and others, significantly outweighing some of coffee's known health risks. Scientists are still attempting to determine all of the applications that coffee may have, which is good news for the millions of coffee drinkers worldwide.

• Coffee is a key cash crop in various developing countries. Coffee accounts for 60% of Ethiopia's exports. The current belief is that more than 100 million people in these countries depend on coffee as their primary source of income.




Conclusion Millions upon millions of cups of coffee are consumed throughout the world each year. From its origins in the ninth century to its humble commercial beginnings at the Kiva Han to its mega-star status in today's modern arena, coffee has cemented its position as an essential traded commodity. Commodities: Copper Copper is a metal that has been known all around the world since ancient times. From West Africa to China to Europe to Central and South America, copper has been mined and worked continuously from as far back as 8,700 BC. As one of the few independently occurring metals, copper has been used in a multitude of forms, from prehistoric pendants to modern-day piping and more. As a highly versatile material, copper can conduct electricity and is a necessary trace mineral in all living things. It also possesses the ability to destroy germs on contact. Copper is mined in large open pits, and Chile and the U.S. have extensive reserves that could be exhausted within the next 50 years. The New York Mercantile Exchange (NYMEX), where copper contracts are traded, states that copper is the third most widely used metal in the world. A sample commodity futures contract for copper is shown in the following table.

Copper Contract Specifications

Ticker Symbol Open Outcry: HG (NYMEX) Electronic: EHG


Deliverable Grades Grade 1 electrolytic copper conforming to the specification B115 as to chemical and physical requirements, as adopted by the American Society for Testing and Materials, and of a brand approved and listed by the Exchange.

Contract Months All months

Trading Hours NYMEX Open Outcry: Monday-Friday 8:10am-1pm EST




CME Globex Electronic: Sunday-Friday 6pm-5:15pm EST

Last Trading Day Trading terminates at the close of business on the third to last business day of the maturing delivery month.

Last Delivery Day Last business day of the delivery month.

Price Quote U.S. cents per pound.

Tick Size 0.0005 per pound = $12.50/contract, 1 cent = $250/ contract


1. Initial price limit, based upon the preceding day's settlement price, is 20 cents per pound.

2. Two minutes after the two most active month's trade at the limit, trading in all months of futures and option will cease for a 15-minute period.

3. Trading will also cease if either of the two active months is bid at the upper limit or offered at the lower limit of two minutes without trading. Trading will not cease if the limit is reached during the final 20 minutes of a day's trading.

4. If the limit is reached during the final half hour of trading, trading will resume no later than 10 minutes before the normal closing time.

5. When trading resumes after a cessation of trading, the price limits will be expanded by increments of 100%.

Understanding Copper Contracts Like every commodity, copper has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss. For instance, if you buy or sell a copper futures contract, you would see a ticker tape handle that looks like this:




HG8H @ 371.65

This is just like saying "Copper (HG) 2008 (8) March (H) at $3.7165/per pound." (It is standard pricing convention to see the prices of futures such as copper, coffee, sugar and orange juice quoted in cents per pound. In this case, $371.65 is equal to $3.7165/pound.) A trader buys or sells a copper contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the copper contract equals the equivalent of 25,000 pounds multiplied by our hypothetical price of $371.65, as in: $1,950 x 50 troy ounces = $92,812.50 Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a copper contract on NYMEX requires a margin of $7,763, which is approximately 8% of the face value. Calculating a Change in Price Because commodity contracts are customized, every price movement has its own distinct value. In a copper contract, a .0005 cent move is equal to $12.50, and a .01 cent move equal $250. When determining copper profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $12.50. For example, if prices move from $371.65 to $340.10, you divide the difference, which is $31.55, by five and then multiply the result ($631) by $12.50 to yield a contract value change of $7,887.50.


Copper Contract Price (.0005 cent move = $12.50)

$3.7165 $3.4010 31.55 cents or $7,887.50

Copper Exchanges The futures contract for copper is traded at the New York Mercantile Exchange




(NYMEX) through its Commodity Exchange (COMEX) division and London Metal Exchange (LME). Facts About Production Copper is extracted from open pit mines, which also processes molybdenum (an element used to strengthen steel) as a byproduct. The demand for copper in India and China plays a significant role in determining when, not if, copper reserves will be depleted. Current copper calculations suggest that the earth will run out of copper in as little as 61 years. Lester Brown, an environmental analyst, believes that the number may be as low as 25 years if current copper demand continues. Factors that Influence Copper Price The price is influenced by the following factors:

• The Copper Development Association (CDA) has gained approval from the Environmental Protection Agency (EPA) to list copper alloys as antimicrobial. This is the first time that the EPA has approved a solid material in this fashion, which could lead the way for increased demand for copper in germ-sensitive areas.

• Copper is an integral part of printed circuit boards, lead free solder, microwave ovens, wave guides, integrated circuits, electromagnets, wiring and piping.

Conclusion Copper is an industrial metal essential to urban modernization. While countries such as China and India strive to develop a western lifestyle, the need for copper will likely increase at the expense of a dwindling supply. As alternatives are found to replace copper's applications, the price of copper will continue to be volatile. Commodities: Corn "Corn" is an English word used to describe any type of grain. In many parts of the world, it is known as "maize," which was the name predominately used before grain was discovered in the New World. The origins of corn have been hotly debated; some estimates of when it was domesticated range as far back as 12,000 years ago. Corn is among the most versatile and complex grains in the world, and corn production and distribution has changed the face of history. With 270 million metric tons of corn produced annually in the U.S. alone, corn could be considered the most important grain crop on the planet.




With so much acreage devoted to corn, this adaptable grain has clearly become a staple in the diets of people throughout the world. From the corn that feeds the animals we eat to the corn syrup in our processed foods and beverages to the ears of sweet corn and much, much more, this adaptable grain crop is everywhere. From Italy to Africa to Romania to South America, everyone has a specialty dish that revolves around this ubiquitous grain crop in some form or fashion. In fact, it might one day be the only source of fuel for our vehicles. A sample commodity futures contract for corn is shown in the following table.

Corn Contract Specifications

Ticker Symbol Open Outcry: C (CBOT) Electronic: ZC (eCBOT)

Contract Size 5,000 bushels

Deliverable Grades No. 2 yellow at par. No. 1 yellow at 1.5 cents per bushel over contract price. No. 3 yellow at 1.5 cents per bushel under contract price.

Contract Months March, May, July, Sept, Dec

Trading Hours CBOT Open Outcry: Monday-Friday 9:30am-1:15pm CST eCBOT Electronic: Sunday-Friday 6:31pm-6am and 9:30am-1:15pm CST

Last Trading Day The business day prior to the 15th calendar day of the contract month

Last Delivery Day Second business day following the last trading day of the delivery month

Price Quote Cents per bushel

Tick Size .25 cents/bu ($12.50/contract)


1. 20 cents per bushel ($1,000 per contract) above or below the previous day's settlement price

2. No limit in the spot month (limits are lifted beginning on first position day).




Understanding Corn Contracts Like every commodity, corn has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss. For instance, if you buy or sell a corn futures contract, you will see a ticker tape handle that looks like this:

C8X @ 601'5

This is just like saying "Corn (C) 2008 (8) November (K) at $6.0150/bushel (601'5)". A trader buys or sells a corn contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the corn contract equals the equivalent of 5,000 bushels multiplied by our hypothetical price of $6.0150, as in: $6.0150 x 5,000 bushels = $30,075 Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. For example, to trade a corn contract on the Chicago Board of Trade (CBOT), a trader may be required to maintain a margin of $1,350, which is approximately 4.5% of the face value. Calculating a Change in Price Because commodity contracts are customized, every price movement has its own distinct value. A 1 cent move in a corn contract is equal to $50. When determining the CBOT's corn profit and loss figures, you calculate the difference between the contract price and the exit price and then multiply the result by $50. For example, if prices move from 601'6-550'6, you multiply the difference, which is $33, by $50 to yield a contract value change of $1,650.





Corn Contract Price (1 cent move = $50)

601'6 550'6 51 cents or $2,550

Corn Exchanges Corn is traded in an open outcry format and electronically through the Chicago Mercantile Exchange (CME) Group (CME, e-CBOT), the Brazilian Mercantile and Futures Exchange (BM&F), Mercado a Termino de Buenos Aires (MATba), Dalian Commodity Exchange (DCE), Kansai Commodities Exchange (KANEX), National Commodity and Derivatives Exchange (NCDEX) and the Tokyo Grain Exchange (TGE). Facts About Production Approximately 525 million metric tons of corn is produced annually. The U.S. is the leading producer, with almost 260 million metric tons. China is a close second, producing more than 110 million metric tons a year. Brazil is a very far third, producing 37.5 million metric tons annually. The only other grains that come close to corn in terms of production are rice and wheat. Despite the widely diverse uses for corn, it is still primarily used as livestock feed. Throughout the U.S., cattle, chicken and hog ranchers depend on corn to maintain and fatten their livestock. A small portion of corn is diverted into corn syrup, new plastics and alcohol, and corn is also diverted to produce ethanol to create a cleaner, less expensive fuel source. Factors That Influence Corn's Price The price is influenced by the following factors:

• To fulfill biofuel needs in the U.S., a new form of corn has been introduced. Called tropical maize, this corn variety requires little nitrogen, unlike standard sweet corn, and stores 25% more sugar in the stalk because it does not produce any ears of corn. Tropical maize also has a short gestation period and can be easily rotated with standard corn or soybean crops without depleting the soil.

• Over half of the planted corn has been genetically modified to be more resistant to disease and herbicides.

• The United States Department of Agriculture (USDA) produces several important reports on corn. Every year in the second half of March, its Prospective Plantings report is released, which details how much and which crops will be planted by farmers for the upcoming season. Every month thereafter, its Monthly Crop Production report estimates the supply and demand for soybeans. The Grain Stocksreport is published four times a year and examines the supply of soybeans




and various other grains on a state-by-state basis and looks at whether the soybeans are offsite or onsite.

• The North American Free Trade Agreement (NAFTA) added corn as one of its freely traded products, wreaking havoc on the Mexican economy because of the disparity between subsidies and farming sophistication. (For more on NAFTA, see NAFTA's Winners And Losers.)

Conclusion Corn is a phenomenally versatile grain that is used to feed animals, humans and perhaps eventually feed cars. The saturation of corn in the global economy makes it extremely price-sensitive both in supply and demand. How the global marketplace will react to future shortages or miscalculations in demand will be the main factor in determining whether corn prices will double again, as in 1996. Commodities: Cotton "King Cotton" has been around for thousands of years. Independently discovered in both the Old World and New World, no other commodity has created more controversy, built more nations, enriched more lives and caused more suffering. Extensively cultivated in India for 6,000 years, cotton became the darling of the British Empire via the Dutch East India Company during the 18th century. As slavery began to take root in the U.S., cheaper and heartier cotton from the South began to supplement and later replace Indian cotton. This coincided with Britain's desire to de-industrialize India's cotton industry and expand its own during the 19th century. With the start of the U.S. Civil War, Britain, which at the time was the world's largest importer of cotton, turned its attention to Egypt. Britain encouraged huge investments in cotton production, only to abandon Egypt and refocus its attention on the U.S. when the Civil War subsided. Today, cotton remains a significant global commodity and the U.S. is a frontrunner in its production. A sample commodity futures contract for cotton is shown in the following table.

Cotton Contract Specifications

Ticker Symbol Open Outcry: CT (ICE) Electronic: ECT

Contract Size 50,000 pounds net weight




Deliverable Grades Basic Grade: Strict low middling quality and 1 2/32nd of an inch staple length.

Contract Months March, May, July, Dec

Trading Hours Monday-Friday 2:30am-3:15pm EST

Last Trading Day Third to last business day of the contract month. Trading terminates at the close of business on the third business day prior to the end of the delivery month

Last Delivery Day Last business day of the contract month

Price Quote Cents and hundredths of a cent per pound

Tick Size $0.0001 = $5


Three cents above or below previous day's settlement price. Whenever any of the two futures contract months with the highest open interest settle at 84 or higher, then all months may trade at four cents above or below the previous session's settlement price.

Understanding Cotton Contracts Like every commodity, cotton has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss. For instance, if you buy or sell a cotton futures contract, you would see a ticker tape handle that looks like this:

CT8Z @ 70.39

This is just like saying "Cotton (CT) 2008 (8) December (Z) at $.7039 per pound (70.39)." A trader buys or sells a cotton contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the cotton contract equals the equivalent of 50,000 pounds multiplied by our




hypothetical price of $70.39, as in: $0.7039 x 50,000 pounds= $35,195 Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a cotton contract on the Intercontinental Exchange (ICE) requires a margin requirement of $4,900, which is approximately 14% of the face value. Calculating a Change in Price Because commodity contracts are customized, every price movement has its own distinct value. In a cotton contract, a $.0001 cent move is equal to $5. When determining cotton profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $5. For example, if prices move from $70.93-90.02, you multiply the difference, which is $19.09, by $5 to yield a contract value change of $9,545.


Cotton Contract Price (0.0001 cent move = $5)

$0.7093 $0.9002 $0.1909 or $9,545

Cotton Exchanges The futures contract for cotton is traded at the Intercontinental Exchange, Brazilian Mercantile and Futures Exchange (BM&F), Multi Commodity Exchange (MCX), National Commodity Exchange Ltd. (NCEL) and Zhengzhou Commodity Exchange (CZCE). Facts About Production The cotton plant or shrub has the unique ability to produce a cellulose fiber, similar in texture to wool, without the livestock component. Historically called the wool plant, it is a perennial shrub in many parts of the world that can be grown throughout the year. As a perennial, the need to reseed every year is not necessary, but the plant must be tended to year after year to ensure successful harvests. Cotton requires plenty of sunshine, fertile soil and preferably no frost. Because it needs 24-48 inches of water annually, transplanting cotton from its original subtropic habitat is difficult. As cotton production has progressed around the world, adequate irrigation has become essential in growing robust plants.




Planting in the U.S. typically begins in February and ends with autumn harvesting. In this region, mechanical harvesters play a significant role in keeping production costs low; however, many top foreign exporters, such as Uzbekistan, still rely heavily on manual labor. The three top cotton producing countries are China, India and the U.S.. In fact, these three countries alone are responsible for 50% of the world's cotton use. In 2007, they produced over 79 million 480-pound bales of cotton. When it comes to cotton exports, the U.S. and Africa lead the world in exports totaling over $6 billion dollars. Much of this goes to feed China's manufacturing industry. Factors That Influence Cotton Price The price of cotton is influenced by the following factors:

• The U.S. government has provided cotton subsidies to farmers since 1930, which directly hinder trade agreements around the world. In 2005, cotton subsidies averaged $230 per acre of cotton farmland, amounting to $3.3 billion in subsidies. This is five times more than the subsidies offered to grain producers.

• Directly because of subsidies, an estimated 68% of U.S. cotton is sold internationally below production costs. This led Brazil to launch a formal complaint with the World Trade Organization (WTO) in 2004, and the following year, the WTO sided with Brazil and claimed that U.S. subsidies were illegal.

• In 2000, China was considered a net exporter of cotton. By 2008, China became the largest net importer of cotton, with no end to the demand in sight.

• Worldwide water shortages are being exacerbated by changing weather patterns and potential global warming. Cotton's intensive need for water pushed the industry to the forefront of the debate over water rationing and drought management. In 2006, droughts throughout Texas and the southern belt forced cotton farmers to ration water and yielded smaller-than-expected crops. In Uzbekistan, a leading cotton exporter, entire areas have experienced desertification in order to supply enough water to grow cotton crops.

• As with many agricultural products, genetic modification has been applied to cotton in order to help it resist various pests. As of 2003, 73% of U.S. cotton was genetically modified. As genetically modified cotton crops become more common, some pests, particularly the cotton bollworm that genetic modification was meant to fend off, have developed resistance, leading scientists to develop new strains.

• The backlash against U.S. subsidies and their impact on cotton prices worldwide has led to the development of fair trade cooperatives in Africa. In 2005,




Cameroon, Mali and Senegal combined forces to help protect their farms in the global marketplace.

Conclusion Cotton's long and varied history makes it one of the world's most intriguing and enduring commodities. In the years ahead, U.S. subsidies, China's insatiable demand and ongoing water shortages will continue to play significant roles in cotton's advancement. The goal of the individual trader is to understand these fundamental factors enough to make intelligent trading decisions. Commodities: Crude Oil Crude oil is a naturally-occurring substance found in certain rock formations in the earth. To extract the maximum value from crude, it needs to be refined into petroleum products. The best-known of these is gasoline, or petrol. Others include liquefied petroleum gas (LPG), naphtha, kerosene, gas oil and fuel oil. Oil wells are used to release the oil from within the earth. Some of the earliest developed oil wells were drilled in China using bamboo poles. These oil wells were developed in 347 A.D. for the sole purpose of providing enough fuel to create a thriving salt industry. By the 1950s, crude oil became a global energy source, which in effect killed the whaling industry by making whale oil obsolete. In the crude oil industry, there are oil names (such as Brent Light Crude Oil and Bonny Light) and there are oil types (such as light, heavy, sweet and sour). Light oil has a low density viscosity, while heavy oil is of higher density. Sweet oil has less sulfur, and sour oil has excessive sulfur. The world market prefers light, sweet crude oil, largely because it requires less refinement and production time before going to market. A sample commodity futures contract for crude oil is shown in the following table.

Crude Oil Contract Specifications

Ticker Symbol Open Outcry: CL (NYMEX)

Contract Size 1,000 U.S. barrels (42,000 gallons)

Deliverable Grades Specific domestic crudes with 0.42% sulfur by weight or less, not less than 37 degrees API gravity nor more than 42 degrees API gravity. The following domestic crude streams are deliverable: West Texas Intermediate, Low




Sweet Mix, New Mexican Sweet, North Texas Sweet, Oklahoma Sweet and South Texas Sweet. Specific foreign crudes of not less than 34 degrees API nor more than 42 degrees API. The following foreign streams are deliverable: U.K. Brent, for which the seller shall receive a 30 cent per barrel discount below the final settlement price; Norwegian Oseberg Blend is delivered at a 55 cents–per–barrel discount; Nigerian Bonny Light, Qua Iboe, and Colombian Cusiana are delivered at 15 cent premiums.


Trading Hours NYMEX Open Outcry: Monday-Friday 9am-2:30pm EST eCBOT Electronic: Sunday-Friday 6pm-5:15pm CST

Last Trading Day Trading terminates at the close of business on the third business day prior to the 25th calendar day of the month preceding the delivery month. If the 25th calendar day of the month is a non-business day, trading shall cease on the third business day prior to the business day preceding the 25th calendar day.

Last Delivery Day All deliveries are ratable over the course of the month and must be initiated on or after the first calendar day and completed by the last calendar day of the delivery month.

Price Quote Dollars and cents per barrel.

Tick Size NYMEX: 1 cent per barrel ($10.00 per contract)

Daily Price Limit

1. $10 per barrel ($10,000 per contract) for all months. If any contract is traded, bid or offered at the limit for five minutes, trading is halted for five minutes.




(Not applicable in electronic markets)

2. When trading resumes, the limit is expanded by $10 per barrel in either direction. If another halt were triggered, the market would continue to be expanded by $10 per barrel in either direction after each successive five-minute trading halt.

3. There will be no maximum price fluctuation limits during any one trading session.

Understanding Crude Oil Contracts Like every commodity, crude oil has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss. For instance, if you choose to buy or sell a crude oil futures contract, you will see a ticker tape handle that looks like this:

CL8K @ 105.52

This is just like saying "Crude Oil (CL) 2008 (8) May (K) at $105.52/barrel (105.52)." A trader buys or sells a crude oil contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the crude oil contract equals the equivalent of 1,000 barrels multiplied by our hypothetical price of $105.52, as in: $105.52 x 1,000 barrels = $105,520 Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a crude oil contract on the New York Mercantile Exchange (NYMEX) a trader may be required to maintain a margin of $8,775, which is approximately 8% of the face value. The margin amount will change in different market conditions, but the amount of leverage provided by the futures markets makes it attractive for investors looking to gain exposure to oil prices. Calculating a Change in Price




Because commodity contracts are customized, every price movement has its own distinct value. In a crude oil contract, a one-cent move is equal to $10. When determining NYMEX's crude oil profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $10. For example, if prices move from $105.52 to $110.83, you multiply the difference, which is $5.31, by $10 to yield a contract value change of $5,310.


Crude Oil Contract Price (1 cent move = $10)

$105.52 $110.83 531 cents or $5,310

Crude Oil Exchanges Futures contracts for crude oil are traded at the New York Mercantile Exchange (NYMEX), Intercontinental Exchange (ICE), Dubai Mercantile Exchange (DME), Multi Commodity Exchange (MCX), India's National Commodity and Derivatives Exchange (NCDEX) and the Tokyo Commodity Exchange (TOCOM). Facts About Production One barrel of crude oil is the equivalent of 42 U.S. gallons. After the barrel of oil is refined, it yields approximately 20 gallons of motor gasoline and seven gallons of diesel. With an additional 17 gallons of petroleum byproducts, such as propane, ammonia and plastic materials, the total refining process has a net gain of two gallons - 42 gallons go in; 44 gallons come out. As mentioned, the types of crude oil are light/ heavy and sweet/ sour. Lighter, sweeter crude is in more demand globally, but is becoming increasingly difficult to access. This has caused many investors on Wall Street to question how much oil is actually being pumped from reserves versus how much oil is being used. Emerging economies in both China and India have added to this intense debate. In 2004, annual worldwide oil consumption was 30 billion barrels. This would not have been controversial, except that new discoveries during the same time had fallen to eight billion barrels. By 2005, worldwide demand for oil had reached 31 billion barrels, leaving worldwide emergency stockpiles nearly depleted for 37 days. While Saudi Arabia, Russia, and the U.S. are the top oil producing countries in the world, they are having




more difficulty meeting demands. Currently, 62% of the world's accessible oil can be found in the Middle East, centered around five countries: Saudi Arabia, United Arab Emirates, Qatar, Iraq and Kuwait. The fact that a protracted war on terror in Iraq has halted production to a fraction of what it used to be is important to take into consideration. Also understand that Qatar shares a natural gas field with Iran, considered by the U.S. as part of the axis of evil, so two out of the five Middle East countries are not producing at full capacity. (When the price of oil goes up, don't worry about how much gas is going to cost; get even by making a play on the Canadian dollar. Find out how in Canada's Commodity Currency: Oil And The Loonie.) Factors That Influence Crude Oil's Price The price is influenced by the following factors:

• For the past 50 years, the price of crude oil has been denominated in U.S. dollars. With the fluctuation in the value of the U.S. dollar and the prominence that newer currencies such as the euro are gaining, OPEC is considering switching crude oil from a U.S. dollar quotation system to either the euro or to a basket of multiple currencies. This could have an adverse affect on oil prices in the short run.

• In 1956, geophysicist M. King Hubbert made the dire prediction that oil would reach a peak production level, flatten out, and eventually decline - following a bell curve pattern of distribution. Eventually, the world would deplete all of the available oil. The peak, as calculated by Hubbert, was alleged to have been hit in 1970. Since then, peak oil predictions have been readjusted to account for current usage versus what is being pumped from the ground. (For more on this phenomenon, see Peak Oil: What To Do When The Wells Run Dry.)

• Alternative methods of oil development are gaining prominence. Oil shale and tar sands are becoming viable oil producing sources. As the price of technology begins to decrease, these sources become more accessible to refiners. Methods for turning methane and coal into oil substitutes, first discovered in the 1930s and during WWII, are being explored again. All of these alternatives have the opportunity to upset crude oil prices.

• Global warming is considered an unintended consequence of using petroleum-based products. This has led to an aggressive move to develop green energy sources such as electric cars, fuel cells, ethanol, liquid natural gas and others, in the hope that they can potentially reduce the world's reliance on crude oil. As these technologies become more common in the marketplace, they have the ability to displace crude oil.




Conclusion Crude oil is a commodity that the 21st century inherited from the 19th century, with all of its benefits and drawbacks. Of all of the traded commodities, it has the broadest impact. How the world interacts with the crude oil industry in the years to come will have a wide-reaching impact on the environment, the global economy and our daily lives. Commodities: Feeder Cattle Feeder cattle are weaned calves that have been raised to a certain weight and then sent to feedlots to be fattened before they are slaughtered. On average, three to four months is required to fatten the cattle from a starting weight of 600-800 pounds to the desired finished weight of 1,000-1,300 pounds. Raising cattle for beef consumption occurs throughout the world. Roughly 1.3 billion heads of cattle are currently being raised worldwide, with no decrease in sight. The number of cattle brought into feedlots provides the best estimation of whether the near future will produce a glut or a shortage of live cattle. A sample commodity futures contract for feeder cattle is shown in the following table.

Feeder Cattle Contract Specifications

Ticker Symbol Open Outcry: FC (CME) Globex Electronic: GF


Non-Deliverable Effective with the January 2000 contract, the index was renamed the CMEFeeder Cattle Index and Medium No.1 and Medium and Large No.1 feeder steers weighing between 800 and 849 pounds were added to the calculation.

Contract Months Jan, March, April, May, Aug, Sept, Oct and Nov

Trading Hours CME Open Outcry: Monday-Friday 9:05am-1pm CST




Globex Electronic: Monday-Tuesday 9:05am-4pm CST

Last Trading Day Trading shall terminate on the last Thursday of the contract month.

Last Delivery Day There is no delivery of feeder cattle. They are all settled in cash seven calendar days ending on the day on which trading terminates

Price Quote Cents per feeder price at a given weight (cwt)

Tick Size 1 point = .0001 cents per pound = $5


There shall be no trading at a price more than 3 cents per pound above or below the previous day's settlement price.

Understanding Feeder Cattle Contracts Like every commodity, feeder cattle has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss. For instance, if you buy or sell a feeder cattle futures contract, you would see a ticker tape handle that looks like this:

FC8H @ 107.950

This is just like saying "Feeder Cattle (FC) 2008 (8) Mar (H) at $107.950 per hundred weight (cwt) (107.950)." A trader buys or sells a feeder cattle contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the feeder cattle contract equals the equivalent of 50,000 pounds (500 cwt) multiplied by our hypothetical price of $107.95, as in: $107.95 x 500 cwt = $53,975




Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a feeder cattle contract on the Chicago Mercantile Exchange (CME) requires a margin of $1,350, which is approximately 3% of the face value. Calculating a Change in Price Because commodity contracts are customized, every price movement has its own distinct value. In a feeder cattle contract, a $.0001 cent move is equal to $50. When determining CME's feeder cattle profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $5. For example, if prices move from $107.95 to $105.50, you multiply the difference, which is $245, by $5 to yield a contract value change of $1,225. - Buy Sell Total Value

Feeder Cattle Contract Price (0.0001 cent move = $5)

$107.95/cwt $105.50/cwt 245 cents or $1,225

Feeder Cattle Exchanges The futures contract for feeder cattle is traded at the Chicago Mercantile Exchange (CME) and Brazilian Mercantile and Futures Exchange (BM&F). Facts About Production Following a gestation period of nine months, a calf is born weighing in the range of 55-100 pounds. After weaning, it is set out to graze for approximately seven to nine months. When a calf meets the minimum weight requirement of at least 650 pounds, it is moved to a feedlot. Weighing anywhere from 650 to 850 pounds, feeder calves are then fattened for an additional three-four months before they are move to a slaughterhouse. The entire process can take just two years. There is little gender discrimination when it comes to feeder cattle. While a disproportionate number of feeder cattle are steers (castrated bulls), heifers (non-child bearing cows) and cows are also sent to feedlots. Feedlots come in a variety of sizes, with small ones able to handle 100 head of cattle and larger ones capable of handling 50,000.




In the feedlots, feeder cattle are fed a strict diet of corn, sugar beet waste and various grains. All of these foods encourage the cattle to gain weight rapidly, practically doubling their weight within three to four months. This rapid weight gain forces the bodies of the cattle to marble with fat, making them more palatable. Factors That Influence Feeder Cattle's Price The price of feeder cattle is influenced by the following factors:

• Mad cow disease, scientifically known as bovine spongiform encephalopathy (BSE), has had the largest impact on feeder cattle prices. Prior to 1997, meat and bone meal was part of the feed given to cattle during the fattening process, potentially spreading the disease deeper into the livestock food chain than expected. Although feeding bone meal to the cattle has stopped, the danger of the disease is ever-present and has led to stringent rules regarding the age of cattle that can be slaughtered. In order for the U.S. to export beef to Japan, feeder cattle has to be at least 20 months old before slaughter. At one time, the U.S. required that Canadian beef should only reach 30 months before being slaughtered. Experts believe that younger animals are unlikely to have mad cow disease.

• Grain-fed cattle is considered to be high in saturated fat and is thought to excessively distress the feeder cattle and ultimately have an adverse affect on people who eat beef. A growing trend has been to extend the grass-feeding of cattle beyond the first seven to nine months of life to as long as 20 months. The longer the grazing time, the leaner the beef. It is higher in omega-3 fatty acids and generally more nutritious. In October 2007, the United States Department of Agriculture (USDA) finally settled on a definition for grass-fed cattle, opening the way for the grass-fed cattle industry to compete with traditional feedlots.

• The USDA established the CME Feeder Cattle Index. It also releases various reports, including the Cattle on Feed report, a monthly publication that reports data on the number of cattle in U.S. feedlots, the number of animals being placed in feedlots, and the number being marketed for slaughter.

Conclusion The supply and demand of feeder cattle is essential to understanding the growth of the beef industry. The industry itself faces much internal upheaval regarding how cattle is fed and cared for. As the industry develops and grows, consumers could find more varied types and qualities of beef on their tables from all around the world. Commodities: Gold




From the time of the Egyptian Pharaohs to the voyage of Columbus to the New World and beyond, gold has been revered as a symbol of wealth and prosperity. Gold has also been used as currency and as a way to prop up the fiat money of various countries. One of the most significant moves to gold- and silver-backed currency occurred in 1792, which was the year that the U.S. put the dollar on the gold and silver standard. One-hundred and seventy-nine years later, in 1971, the U.S. was removed from the gold standard by President Richard Nixon. This fundamental economic shift had a tremendous impact on the price of gold around the globe. Approximately eight years later, on January 21, 1980, gold prices catapulted from a low of $35/ounce to a record high of $850/ounce, or $2,398.21 when adjusted for inflation. On March 19, 2008, gold hit a high of $1,022.40. (Find some golden opportunities by investing in gold commodities or futures contracts, in The Midas Touch For Gold Investors.) Currently, gold is used as an investment, in computers and in jewelry. China, South Africa, the U.S., Australia, Canada, Indonesia and Russia collectively represent the backbone of global gold production.

Gold Contract Specifications

Ticker Symbol Open Outcry: GC (NYMEX) Electronic: EGC (Globex)

Contract Size 100 troy ounces

Deliverable Grades In fulfillment of each contract, the seller must deliver 100 troy ounces (±5%) of refined gold, assaying not less than .995 fineness, cast either in one bar or in three one-kilogram bars, and bearing a serial number and identifying stamp of a refiner approved and listed by the exchange. A list of approved refiners and assayers is available from the exchange upon request.


Trading Hours Open outcry trading is conducted from 8:20am-1:30pm EST. Electronic trading is conducted via the CME Globex trading platform from 6pm Sundays through 5:15pm Fridays, EST, with a 45-minute




break each day between 5:15pm and 6pm.

Last Trading Day Trading terminates at the close of business on the third to last business day of the maturing delivery month.

Last Delivery Day The last business day of the contract month. Gold delivered against the futures contract must bear a serial number and identifying stamp of a refiner approved and listed by the exchange. Delivery must be made from a depository licensed by the exchange.

Price Quote U.S. dollars and cents per troy ounce

Tick Size NYMEX: 10 cents per troy ounce ($10 per contract)


No Price Limits

Understanding Gold Contracts Like every commodity, gold has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss. For instance, if you buy or sell a gold futures contract, you will see a ticker tape handle that looks like this:

GC8Z @ 920

This is just like saying "Gold (GC) 2008 (8) December (Z) at $920/ounce (920)." A trader buys or sells a gold contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the gold contract equals the equivalent of 100 troy ounces multiplied by our hypothetical price of $920, as in:




$920.00 x 100 troy ounces = $92,000 Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a gold contract on the New York Mercantile Exchange (NYMEX) requires a margin of $4,455, which is approximately 5% of the face value. Calculating a Change in Price Because commodity contracts are customized, every price movement has its own distinct value. In a gold contract, a $1 move is equal to $100. When determining NYMEX's gold profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $100. For example, if prices move from $920 to $1,000, you multiply the difference, which is $80, by $100 to yield a contract value change of $8,000.


Gold Contract Price ($1 move = $100)

$92 $1,000 $80 or $8,000

Gold Exchanges The futures contract for gold is traded at the New York Mercantile Exchange (NYMEX) through its Commodity Exchange (COMEX) division via open outcry. It is also traded electronically through the Chicago Board of Trade (eCBOT), India's National Commodity and Derivatives Exchange (NCDEX), Dubai Gold and Commodities Exchange (DGCX), Multi Commodity Exchange (MCX) and Tokyo Commodity Exchange (TOCOM). Facts About Production Gold mining is a business, and like any business, hard costs are associated with extracting gold from the earth. In 2008, mining gold costs around $238 per ounce. Because the cost is so high per ounce, the belief is that all of the gold ever mined barely totals 145,000 tons, an amount that could form a single cube measuring 66 feet per side. Historically, South Africa has been the primary gold producer - with much as 80% of the world's supply at one time. In recent years, however, the country's production has significantly dropped from a high of 1,000 metric tons per year to 272 metric tons, a




decline in production of more than two-thirds. A myriad of factors have influenced South Africa's reduction in gold production. For example, mining gold ore has become more difficult, local economic problems have evolved, and more stringent controls have emerged. In 2007, China inched ahead of South Africa, becoming the leading gold producer with a total of 276 tons. Factors That Influence Gold's Price The price is influenced by the following factors:

• Gold has developed widespread commercial use as a coating on electrical connectors. It can be found on various devices, from audio and video cables to computer and component cables and connectors.

• Worldwide gold production continues to underperform against worldwide demand. At the current level of production, an assumption is that in less than 45 years, our gold supply will not be able to meet the demand.

• The World Gold Council estimates that the total gold mined annually is approximately 2,500 metric tonnes. Currently, 3,500 metric tonnes of gold is used in the jewelry, investment and commercial industry, and it is difficult to determine where the 1,000-ton gold shortfall will come from.

• The International Monetary Fund (IMF) and the Washington Agreement on Gold (WAG) have very strict requirements in gold sales: less than 400 tons per year, and members cannot use gold to back or replace their currency.

• India is the largest worldwide consumer of gold, with an annual consumption estimated at 700 tons a year. Projections have put India's future gold demand at US$20 billion by 2010 and US$30 billion by 2015.

Conclusion Gold's historical significance and electrical conductivity ensures that it will be in demand for a long time to come. As an investment, gold has cyclically come into and out of favor, and has experienced some of the most extreme pricing of any of the commodity markets. Whether gold will continue to be considered a viable inflationary hedge remains to be seen, but the simple fact that it is a rare and beautiful metal will always keep it in the news. Commodities: Heating Oil Heating oil is a refined byproduct of crude oil. After crude oil is broken down during the refinement process, it is separated into heating oil. Similar to diesel oil, heating oil's official name is No. 2 fuel oil.




The use of heating oil gained ground with the invention of the oil burner in the 1920s. Until then, homes were heated by coal. Coal was messy, expensive, and required ample storage space and extensive manual labor on the part of the user. Conversely, heating oil freed up basement space and reduced pollution in the home - no soot or ash to contend with on furniture, clothing, and worse, in lungs. What's more, when heating oil is burned, a room thermostat can easily regulate heat to a consistent temperature. While heating oil contracts are used to hedge against price fluctuation in jet fuel and diesel, they are essentially different products and adhere to their own quality standards. A sample commodity futures contract for heating oil is shown in the following table.

Heating Oil Contract Specifications

Ticker Symbol Open Outcry: HO (NYMEX) Electronic:EHO

Contract Size 42,000 US gallons (1,000 barrels)

Deliverable Grades Generally conforms to industry standards for fungible No. 2 heating oil.


Trading Hours NYMEX Open Outcry: Monday-Friday 9am-2:30pm EST eCBOT Electronic: Sunday-Friday 6pm-5:15pm CST

Last Trading Day Trading terminates at the close of business on the last business day of the month preceding the delivery month.

Last Delivery Day Deliveries may only be initiated the day after the fifth business day and must be completed before




the last business day of the delivery.

Price Quote U.S. dollars and cents per gallon

Tick Size NYMEX: $0.0001 (0.01 cents) per gallon ($4.20 per contract).


1. 25 cents per gallon ($10,500 per contract) for all months.

2. If any contract is traded, bid, or offered at the limit for five minutes, trading is halted for five minutes. When trading resumes, the limit is expanded by 25 cents per gallon in either direction.

3. If another halt were triggered, the market would continue to be expanded by 25 cents per gallon in either direction after each successive five-minute trading halt.

4. There will be no maximum price fluctuation limits during any one trading session.

Understanding Heating Oil Contracts Like every commodity, heating oil has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss. For instance, if you buy or sell a heating oil futures contract, you would see a ticker tape handle that looks like this:

HO8X @ 3.1510

This is just like saying "Heating Oil (HO) 2008 (8) November (X) at $3.1510/gallon (3.1510)". A trader buys or sells a heating oil contract according to this type of quotation.




Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the heating oil contract equals the equivalent of 42,000 gallons multiplied by our hypothetical price of $3.1510, as in: $3.1510 x 42,000 gallons = $132,342 Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a heating oil contract on NYMEX requires a margin of $10,125, which is approximately 8% of the face value. Calculating a Change in Price Because commodity contracts are customized, every price movement has its own distinct value. In a heating oil contract, one thousandth of a one-cent move is equal to $4.20. When determining NYMEX's heating oil profit and loss figures, you calculate the difference between the contract price and the exit price, and multiply the result by $4.20. For example, if prices move from $3.1510 to $2.9070, you multiply the difference, which is $.2440, by $4.20 to yield a contract value change of $10,248.


Heating Oil Contract Price (1 cent move = $50)

$3.1510 $2.9070 0.244 cents or $10,248

Heating Oil Exchanges The futures contract for heating oil is traded at the New York Mercantile Exchange (NYMEX), the Intercontinental Exchange (ICE) and Multi Commodity Exchange (MCX) in India. Facts About Production Heating oil is an important alternative energy source for homes that lack access to natural gas. While the majority of homes in the U.S. have adequate access to the necessary infrastructure that distributes natural gas, a small concentration of homes in the New England and Central Atlantic regions do not. A push has been made to convert




older homes from heating oil to natural gas. Unfortunately, the expense and the uncertainty of the natural gas market pricing has left 8.1 million single family homes dependent on heating oil as their sole primary source of heat during the coldest months of the year - December through March. This limited window of necessity has caused heating oil to become one of the most seasonally affected traded commodities available. As a byproduct of oil, heating oil takes lower priority than gasoline needs; therefore, refinement levels can fluctuate every winter from year to year, solely dependent on the amount of crude oil that was used to fuel cars during the prior summer. Factors that Influence Heating Oil's Price The price is influenced by the following factors:

• The severity of any given winter can have a significant impact on the price of heating oil. Because the concentration of homes affected by heating oil supply/demand fluctuations are concentrated in the Northeast area of the U.S., any major storms there can have a disproportionate effect on the actual movement in heating oil prices. If the area experiences unusually warm weather because of climatic shifts due to global warming, then heating oil prices could drop, solely because of a perceived glut in inventory.

• The refinery capacity in the U.S. is very restricted. No new refineries have been built in approximately the last 25 years, and in turn, refineries are delaying heating oil production in order to address the intense demand for gasoline. If refineries continue to run at capacity for extended stretches of time past the summer months to produce gasoline, the duration of time allotted to refining heating oil becomes truncated and consequently has a significant impact on its availability.

• Currency fluctuations can have an important effect on heating oil prices if low supplies or excessive demands require that heating oil must be imported from the Organization of Petroleum Exporting Countries (OPEC) or various other trading partners.

• About 47% of the refining capabilities in the U.S. are concentrated in the Gulf Coast region. The devastation caused by Hurricane Katrina alerted the world to how vulnerable this region is and how easy a single storm could bring the oil industry to a grinding halt.

• As the price of crude oil increases, so too does the price of heating oil. Consumers have welcomed multiple alternatives to heating oil into their homes. Wood furnaces, corn pellets and biodiesel from vegetable oil are all being sought after as alternative fuel sources.




Conclusion The price of heating oil is dependent on three factors: weather; the distribution of natural gas; and refinery capacity. Traders who are overly dependent on technical analysis can end up missing some of the subtle signals that any of these three factors may bestow on heating oil price fluctuations. Commodities: Live Cattle Cattle have roamed the earth for thousands of years, and "modern" cattle raising can be traced back at least 8,500 years ago in Europe and the Middle East. Found all over the world, cattle are used for milk, leather, meat and labor, and have been revered throughout history in art, the zodiac and in various religions. In the U.S., cattle were brought over by European settlers. Originally imported into the U.S. in 1623, cattle breeds have been introduced continuously in order to improve the cattle industry. With the ultimate goal of finding cattle that matured faster, produced more milk and provided a better quality of leather, the majority of cattle in the U.S. are the result of various cross breeding experiments. In 1964, the Chicago Mercantile Exchange (CME) introduced the first futures contract on a live animal, thereby allowing meat buyers and suppliers to diminish their exposure to the seasonal risk that live cattle trading creates. A sample commodity futures contract for live cattle is shown in the following table.

Live Cattle Contract Specifications

Ticker Symbol Open Outcry: LC (CME) Electronic: LE (Globex)


Deliverable Grades Each futures contract shall be for 55% choice, 45% select, yield grade 3 live steers, as defined by the United States Department of Agriculture (USDA) "Official United States Standards for Grades of Slaughter Cattle," or producing 55%




choice, 45% select, yield grade 3 steer carcasses, as defined by "official United States Standards for Grades of Carcass Beef."

Contract Months Feb, April, June, Aug, Oct, Dec

Trading Hours CME Open Outcry: Monday-Friday 9:05am-1pm CST eCBOT Electronic: Sunday-Friday 6:16am-4pm CST

Last Trading Day Last business day of the contract month

Last Delivery Day Up to seven business days of the month following the end of the contract month.

Price Quote Dollars and cents per pound

Tick Size 1 point = 1 cent per hundred pounds = $4


There shall be no trading at a price more than 3 cents per pound above or below the previous day's settlement price.

Understanding Live Cattle Contracts Like every commodity, live cattle has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss. For instance, if you buy or sell a live cattle futures contract, you will see a ticker tape handle that looks like this:

LC8Q @ 91.80




This is just like saying "Live Cattle (LC) 2008 (8) August (Q) at $91.80 per hundred pounds (91.80)." A trader buys or sells a live cattle contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the live cattle contract equals the equivalent of 40,000 pounds or 400 hundred pounds multiplied by our hypothetical price of $91.80, as in: $91.80 x 400 hundred pounds = $36,720 Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a live cattle contract on NYMEX requires a margin of $1,080, which is approximately 3% of the face value. Calculating a Change in Price Because commodity contracts are customized, every price movement has its own distinct value. In a live cattle contract, a 1-cent move is equal to $4. When determining CME's live cattle profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $4. For example, if prices move from $91.80 to $92, you multiply the difference, which is 20 cents, by $4 to yield a contract value change of $80.


Live Cattle Contract Price (0.01 cent move = $4)

$91.80 $92.00 0.20 cents or $80

Live Cattle Exchanges The futures contract for live cattle is traded on the Chicago Mercantile Exchange (CME) and Brazilian Mercantile and Futures Exchange (BMF). Facts About Production Calves require a nine-month gestation period, and typically weigh between 55 and 100




pounds at birth. They can grow to as much as 1,900 pounds, with a natural lifespan of approximately 15 years. The world has about 1.3 billion head of cattle. India has 400 million head of cattle, Brazil and China share a combined 300 million head of cattle, Africa has about 200 million head of cattle and the U.S. has 100 million head. Of these five nations, the U.S. produces 25% of the world's beef, which is a tremendous feat considering that the country only represents 10% of the world's cattle. Factors That Influence Live Cattle Prices The price of live cattle is influenced by the following factors:

• Rearing cattle is harmful to the environment. According to the United Nations, cattle farming contributes at least 18% of greenhouse gas emissions. The primary pollutant is methane, which is largely produced by the digestive systems of cattle and considered to be worse than carbon dioxide because its warming effect is at least 23 times greater.

• Bovine spongiform encephalopathy (BSE), also known as mad cow disease, periodically impacts the live cattle industry. Outbreaks have led countries to ban imports and exports from various countries around the world, and have resulted in the mass destruction of thousands of livestock in order to reduce potential disease spreading. A 2004 discovery of BSE in cattle from Texas directly led Japan, the largest importer of U.S. beef, to shut its doors. Eventually Japan eased the ban, but placed heavy restrictions on imports.

• Although the U.S. represents 25% of the world's beef production, it is still considered a net importer of beef. The imported beef is primarily used as ground beef. This leaves the import industry sensitive to any changes in dietary habits that involve reducing or eliminating products that contain ground beef.

Conclusion The cattle industry has yet to be fully tapped. The fact that the U.S. represents one-quarter of the world's beef production with only 10% of its inventory leaves the field wide open for competitors. China has yet to tap its resources. Brazil, along with its neighboring countries, was able to expand its beef industry when Japan banned U.S. cattle. Needless to say, the cattle industry has not yet reached its full potential. Commodities: Lumber The standardization of lumber in the U.S. can be directly traced back to the first and second World Wars. While logging had endured for centuries, it was not until World War I that standard lumber sizes were instituted. The significant amount of lumber that was




required during World War II solidified the acceptance of standardized sizes because it provided an efficient way for mills and lumber purchasers to meet each other's needs while being separated by thousands of miles. Although lumber has many versatile uses, it is constantly subjected to changing consumer interests, shifts in manufacturing facilities and housing downturns. This leaves the industry in a constant state of panic because it is forced to be reactionary to various factors outside of its control. To protect the lumber industry from the volatile price swings that this uncertainty brings, the Chicago Mercantile Exchange (CME) developed the first lumber commodities contract in 1969. A sample commodity futures contract for lumber is shown in the following table.

Lumber Contract Specifications

Ticker Symbol

Open Outcry: LB (CME)

Contract Size 110,000 bd. ft. of random lengths 2x4s (8' to 20')

Deliverable Grades

Each delivery unit shall consist of nominal 2x4s of random lengths from eight feet to 20 feet. Each delivery unit shall consist of and be grade stamped No.1 or No.2 AND BETTER.

Contract Months

Jan, March, May, July, Sept, Nov

Trading Hours

Open Outcry: Monday-Friday 9am-1:05pm CST

Last Trading Day

On the business day immediately preceding the 16th calendar day of the contract month.




Last Delivery Day

Last business day of the contract month.

Price Quote Cents per board foot

Tick Size 1 point = 10 cents per 1,000 bd. ft. = $11 per contract


$10 per thousand board feet above or below the previous day's settlement price.

Understanding Lumber Contracts Like every commodity lumber has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss. For instance, if you buy or sell a lumber futures contract, you will see a ticker tape handle that looks like this:

LB8X @ 262.50

This is just like saying "Lumber (LB) 2008 (8) November (X) at $262.50/1000 bd. ft. (262.50)." A trader buys or sells a lumber contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the lumber contract equals the equivalent of 110 (1,000 bd. ft) multiplied by our hypothetical price of $262.50, as in: $262.50 x 110 (1,000 bd. ft.) = $28,875




Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a lumber contract on CME requires a margin of $1,650, which is approximately 6% of the face value. Calculating a Change in Price Because commodity contracts are customized, every price movement has its own distinct value. In a lumber contract, a .10 cent move is equal to $11. When determining CME's lumber profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $11. For example, if prices move from $262.50 to $290.10, you multiply the difference, which is $27.60, by $11 to yield a contract value change of $3,036.


Lumber Contract Price (.10 cent move = $11)

$262.50 $290.10 27.60 cents or $3,036

Lumber Exchanges The futures contract for lumber is traded at the Chicago Mercantile Exchange (CME). Facts About Production Wood takes the form of either softwood or hardwood. Softwood trees include spruce, pine, fir, cypress, redwood and various conifer trees. Softwood is an essential component for buildings, furniture and paper. Hardwood is wood from broad-leaved (mostly deciduous) or angiosperm trees (plants that produce seeds with some sort of covering). Hardwoods are used in a range of applications such as construction, furniture, flooring and utensils. The U.S. set the standard for lumber sizes, and these sizes have become essential parts of all wood-related construction. This country also leads the world in softwood lumber production. In 2006, it produced 66.5 million cubic meters of lumber and imported 60 million cubic meters, almost the same amount. China was a distant second in lumber production and imports, coming in at 9.25 million cubic meters and 2.06 million cubic meters respectively. Lumber is considered to be one of Canada's largest




exports to the U.S. In 2005, it exported 21.5 billion board feet of lumber across the border. Factors That Influence Lumber's Price The price of lumber is influenced by the following factors:

• The number of new homes under construction at any time impacts the need for lumber. In 1999, hardwood production was 12.6 billion board feet; by 2005, it had dropped to 10.7 billion board feet.

• Traditionally, lumber has been treated with pesticides to repel insects and fungus. Unfortunately, these pesticides are considered harmful to humans and the environment, yet switching to alternatives or eliminating the pesticides altogether could potentially increase costs, either by way of lost lumber or via more expensive alternatives.

• The U.S. is faced with a growing number of manufacturing plants overseas that are in need of raw logs, as opposed to finished lumber. Unfinished wood is less valuable than finished wood and commands a cheaper price in the marketplace. This leads to a loss of jobs in the finished lumber sector and a shrinking of the logging-to-lumber industry.

• Logging has always played an active role in environmental debate. Cutting down large swathes of forests has irreversibly altered various species, ecosystems and plants. The long-term consequences of this cannot be foreseen, particularly in a world that is increasingly affected by global warming. It has been estimated that deforestation is responsible for 17% of annual global carbon, a level higher than that of emissions from transportation.

• U.S. loggers have experienced difficulty competing directly with Canadian wood. Both countries have fought for decades to find equal footing regarding lumber pricing and subsidies. Because various Canadian governments own timber land, a prevailing assumption is that an unfair advantage exists in sale prices compared to the privately owned timber lands in the U.S. Both parties have made multiple agreements to resolve this issue, but it may take some time before a sufficient arrangement can be found.

Conclusion Lumber is an essential part of our modern world, and of any industrial economy. Nevertheless, many factors are increasing pressure on the logging industry to adapt, such as global warming, foreign exports, domestic needs and others. How these issues will ultimately impact the industry once they are resolved is still open to debate, yet the fact remains that definite change will come at some point. Commodities: Natural Gas




Natural gas is used extensively throughout the U.S. to heat homes, and also has important applications in commercial and industrial settings. It is similar to what is referred to as biogas, which is methane produced from the breakdown of organic matter. Because it is a fossil fuel, it contains many secondary products that must be filtered out of the methane to render it commercially viable. Ethane, propane, butane, helium and hydrogen sulfide are removed and are considered a secondary income source for refiners. Once considered an ineffective byproduct of oil production, natural gas is steadily finding a foothold in today's world. Economical, environmentally friendly and efficient, natural gas is the cleanest-burning fossil fuel, and technologies are improving the way it is captured, transported and distributed. According to statistics published in 2009 by the Federal Energy Regulatory Commission, 96% of the world's natural gas reserves reside outside of the U.S., yet 25% of the country's energy comes from natural gas. A sample commodity futures contract for natural gas is shown in the following table.

Natural Gas Contract Specifications

Ticker Symbol Open Outcry: NG (NYMEX) Electronic: ENG (eCBOT)

Contract Size 10,000 million British thermal units

Deliverable Grades

Pipeline specifications in effect at time of delivery

Contract Months

All months

Trading Hours NYMEX Open Outcry: Monday-Friday 9am-2:30pm EST eCBOT Electronic: Sunday-Friday




6pm-5:15pm CST

Last Trading Day

Trading terminates three business days prior to the first calendar day of the delivery month.

Last Delivery Day

Last business day of the contract month

Price Quote Cents per million Btu (mmBtu)

Tick Size NYMEX: .1 cents per mmBtu ($10/per contract)


1. $3 per mmBtu ($30,000 per contract) for all months. 2. If any contract is traded, bid, or offered at the limit for five minutes, trading is halted for five minutes. When trading resumes, the limit is expanded by $3 per mmBtu in either direction. 3) If another halt were triggered, the market would continue to be expanded by $3 per mmBtu in either direction after each successive five-minute trading halt. 4) There will be no maximum price fluctuation limits during any one trading session.

Understanding Natural Gas Contracts Like every commodity, natural gas has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key




components and understand how to use them to calculate your potential profits and loss. For instance, if you buy or sell a natural gas futures contract, you will see a ticker tape handle that looks like this:

NG8K @ 10.946

This is just like saying "Natural Gas (NG) 2008 (8) May (K) at $10.946 /mmBtu (10.946)." A trader buys or sells a natural gas contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the natural gas contract equals the equivalent of 10,000 mmBtu ounces multiplied by our hypothetical price of 10.946, as in: $10.946 x 10,000 mmBtu = $109,460 Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a natural gas contract on NYMEX requires a margin of $8,438, which is approximately 8% of the face value. Calculating a Change in Price Because commodity contracts are customized, every price movement has its own distinct value. In a natural gas contract, one hundredth of a one-cent move is equal to $10. When determining NYMEX's natural gas profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $10. For example, if prices move from $10.946 to $10.846, multiply the difference, which is .100 or 10 cents, by $10 to yield a contract value change of $1,000.


Natural Gas Contract Price (.001

$10.946 $10.846 .10 cents or $1,000




cent move = $10)

Natural Gas Exchanges The futures contract for natural gas is traded at the New York Mercantile Exchange (NYMEX, U.S. Futures Exchange (USFE), Intercontinental Exchange (ICE) and Multi Commodity Exchange (MCX). Facts About Production Natural gas is a convenient energy source that is piped directly from oil fields into our homes. Produced domestically, it is distributed to more than 60 million homes, and is considered to be a key source in generating electricity and providing energy for new homes. In 2005, the U.S. produced 18.2 trillion cubic feet of natural gas and simultaneously consumed 21.9 trillion cubic feet of natural gas, creating a net deficit of 3.7 trillion cubic feet. Because natural gas is difficult to store unless converted to liquid natural gas, more sources of it need to be found to match demand. According to the Minerals Management Service and U.S. Geologic Survey, the U.S. has significant amounts of untapped natural gas reserves, which from an investing standpoint offers an interesting opportunity. Factors That Influence Natural Gas Prices The price of natural is influenced by the following factors:

• While natural gas cannot be shipped around the world in pipes (and because of the impracticality of building pipes across the ocean), liquid natural gas is gaining a foothold in the marketplace. The Gas Technology Institute (GTI) released a report showing that the cost of producing liquid natural gas has dropped by as much as 50%, virtually debunking the belief that it is too expensive to be a viable alternative. This makes the option of importing and exporting natural gas more common in a world that needs new forms of energy besides crude oil.

• Qatar is considered to be sitting on the world's largest natural gas fields, the North Field. It is estimated to be 6,000 square kilometers and is partially shared by Iran. With the potential to develop 1,180 trillion cubic feet, Qatar is emerging as the leader in natural gas, holding almost 20% of the world's natural gas within its borders.




• Continued unrest in the Middle East and the strained relationship between the U.S. and Iran jeopardizes the ability for foreign natural gas to be safely transported around the world.

• Currently, 96% of the world's natural gas reserves reside outside the U.S., with 15 nations representing 84% of the total natural gas production.

Conclusion Natural gas was once considered a throw-away byproduct of oil exploration. However, it has increased in relevance and importance as the world's crude oil reserves are slowly being depleted. As more efficient and inexpensive ways of liquefying natural gas are developed, it is steadily inching its way closer to becoming a viable fuel alternative for the future. Commodities: Oats Although oats are one of the earliest domesticated grains, they have not always enjoyed a good reception. In Greece, for example, oats were considered a deformed type of wheat, and in England they were considered barely palatable even for livestock. Interestingly, Scotland is the only region in which oats have been historically revered, and consequently they play a traditional role in Scottish cuisine. In fact, Scottish oats rank among the best worldwide, and command a premium in the market. Most people know oats as oatmeal (89% of oat is eaten this way), or as rolled oat products. Oats are also a popular food choice for horses, cattle and chicken, and can be found in some brands of dog food. A sample commodity futures contract for oats is shown in the following table:

Oats Contract Specifications

Ticker Symbol Open Outcry: O (CBOT) Electronic: ZO (eCBOT)


Deliverable Grades

• No.2 Heavy and No.1 at par. • No.1 Extra Heavy at 7 cents

per bushel over contract price.




• No.2 Extra Heavy at 4 cents per bushel over contract price, and No.1 Heavy at 3 cents per bushel over contract price.

• No.2 (36 pound total minimum test weight) at 3 cents per bushel under contract price and No.2 (34 pound total minimum test weight) at 6 cents per bushel under contract price.

Contract Months

March, May, July, Sept, Dec


Last Trading Day

The business day prior to the 15th calendar day of the contract month

Last Delivery Day

Seventh business day following the last trading day of the delivery month


Tick Size .25 cent/bu ($12.50/contract)

Daily Price Limit (Not applicable in

1. 20 cents per bushel ($1,000/contract) above or below the previous day's settlement price. 2. No limit in the spot month (limits




electronic markets)

are lifted beginning on First Position Day).

Understanding Oats Contracts Like every commodity, oats has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profit and loss. For instance, if you buy or sell an oats futures contract, you will see a ticker tape handle that looks like this:

O8H @ 385'0

This is just like saying "Oats (O) 2008 (8) March (H) at $3.85/bushel (385'0)." A trader buys or sells an oats contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the oats contract equals the equivalent of 5,000 bushels multiplied by our hypothetical price of 385'0, as in: $3.85 x 5,000 bushels = $19,250 Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade an oats contract on the CBOT requires a margin of $1,350, which is approximately 7% of the face value. Calculating a Change in Price Because commodity contracts are customized, every price movement has its own distinct value. A 1-cent move in an oats contract is equal to $50. When determining the CBOT's oats profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $50. For example, if prices move from $385 to 425'6, you multiply the difference, which is $33, by $50 to yield a contract value change of $1,650.





Oats Contract Price (1 cent move = $50)

$385 425'6 .40 3/4 cents or $2,037.50

Oats Exchanges The futures contract for oats is traded in an open outcry format and electronically through the Chicago Mercantile Exchange (CME) group (CME, electronic Chicago Board of Trade (eCBOT). Facts About Production Oats are typically planted in the spring and early summer. However, owing to their tolerance to cold temperatures, oats are still capable of yielding a good harvest even in cooler weather. In the U.S., oat production has seen a steady decline, largely due to the automobile. As vehicles replaced horses as the primary mode of transportation, the need for oats for horse feed diminished. As of 2008, the most recent year that oats reported a record crop was in 1945, with 42 million acres yielding 1.5 billion bushels of oats. Sixty years later, less than five million acres were allocated for oats, barely 10% of the size of 1945's banner crop. About 50% of harvested oats are used for hay, and the other half is used for grains. U.S. oat production is centralized in the Midwest, with the Dakotas, Wisconsin, Minnesota and Iowa featuring as key players. Each acre of land yields about 100 bushels of oats. Factors That Influence Oat Prices The price of oats is influenced by the following factors:

• Oats are hearty and can be found in various climates around the world. There are successful crops in Iceland as well as Northwest Europe. Oats are considered capable of tolerating cool, wet summers and have a tendency to lie dormant under extreme heat.

• The Food and Drug Administration (FDA) has developed standards for oat quantities in products. A certain minimum amount must be in a product before that product can be declared capable of reducing the risk of heart disease. The




product is required to have a minimum of .75 grams of soluble fiber in each serving. These guidelines spurred a health-conscious fad in the late 1990s that mirrored a similar oat fad in the 1980s.

• Oats have untapped commercial potential. They are the only cereal with a protein profile similar to soybeans. With a protein range of 12-24%, oats have been deemed by the World Health Organization (WHO) to be equal in quality to meat, milk and egg proteins.

Conclusion Oats are a unique type of grain that offer significant health benefits. However, with the rising popularity of soybeans and corn, particularly in ethanol production, oats are having a tough time finding their place in the market. Commodities: Orange Juice For 4,000 years, oranges have grown in Southeast Asia and China. The orange made its way to Europe during the Moorish occupation of Spain, eventually arriving in the New World. From these humble beginnings, a thriving orange industry has developed in both the U.S. and Brazil. Prior to 1947, the traditional form of consumption for orange juice was fresh-squeezed; therefore, the commercial orange juice industry was constantly contending with the highly perishable nature of freshly squeezed oranges. Often, supply shocks were both quick and severe. The invention of frozen concentrated orange juice (FCOJ) in 1947 brought a new standard to the orange juice industry, opening the gates to an international marketplace that was not readily available before. Until 1962, Florida dominated the orange juice export market. However, because of severe freezes and hurricanes throughout the years, it has been overtaken by Brazil, the world's leading FCOJ exporter in 2009. In the last 30 years, Brazil's dominance in the international market has become so complete that it represents 80% of all global exports. Brazil even supplies the U.S. with 30-50% of its orange juice. FCOJ's dependence on only two geographical regions has resulted in an extreme sensitivity to weather. When hurricane Katrina hit Florida in 2005, it ruined orange groves and drove the price of frozen concentrated orange juice from 90 cents per pound to $1.98 per pound. This occurred on the heels of orange juice reaching an all-time low of 60 cents per pound.




A sample commodity futures contract for orange juice is shown in the following table.

Frozen Concentrated Orange Juice Contract Specifications

Ticker Symbol Open Outcry: OJ


Deliverable Grades

U.S. Grade A at 62.5 degrees Brix

Contract Months

Jan, March, May, July, Sept, Nov

Trading Hours Open Outcry: Monday-Friday 10am-1:30pm EST

Last Trading Day

14th business day prior to the last business day of the contract month.

First Notice Day

First business day of the contract month.

Price Quote Cents per pound

Tick Size .05 cents per pound ($7.50 per contract)

Daily Price Limit

1. Movable 10 cents above or below previous day's settlement for first and second listed month. 2. Once the contract with the highest open interest hits this limit, a suspension is triggered.




3. New limit is 10 cents above or below the price at which the suspension was triggered.

Understanding FCOJ Contracts Like every commodity, FCOJ has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss. Oranges are juiced and shipped around the world in frozen form. The Brix system of measurement ensures uniformity in the quality of FCOJ that is traded between suppliers and buyers. Brix is defined as a measurement that quantifies the mass ratio of dissolved sugar to water in a liquid. In the case of FCOJ, the Brix content or sugar content is required to be 62.5% of the actual product and the water content must be no greater than 37.5% of the product. The FCOJ contract size is measured as 15,000 pounds. The tick movement is based on a per pound basis. Each single tick move in FCOJ is based on five ten-thousandths of a cent ($0.0005). Every $0.0005 movement is the equivalent of $7.50 per contract. For instance, if you buy or sell a FCOJ futures contract, you will see a ticker tape handle that looks like this:

OJ8K @ 115.15

This is just like saying "Frozen Concentrated Orange Juice (OJ) 2008 (8) May (K) at $1.1515/pound." (It is standard pricing convention to see the prices of futures such as copper, coffee, sugar and orange juice quoted in cents per pound. In this case, $115.15 is equal to $1.1515/pound.) A trader buys or sells a FCOJ contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the FCOJ contract equals the equivalent of 15,000 pounds multiplied by our




hypothetical price of $1.1515, as in: $1.1515 x 15,000 pounds = $17,272.50 Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. For example, to trade an FCOJ contract on the Intercontinental Exchange (ICE) your broker may require a margin of $1,890, which is approximately 11% of the face value of the FCOJ. Calculating a Change in Price Because commodity contracts are customized, every price movement has its own distinct value. In FCOJ, a $0.0005 move is equal to $7.50. When determining ICE's FCOJ profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $7.50 For example, if prices move from $115.15 to $115.20, you take the difference, which is 5 cents and find it is the equivalent of $0.0005. This is one tick and is equal to $7.50.


FCOJ Contract Price ( .05 move = $7.50) 115.15 115.20 .05 cents or $7.50

FCOJ Exchanges The Intercontinental Exchange (ICE) acquired the New York Board of Trade (NYBOT) in 2007 and now offers contracts in "Frozen Concentrated Orange Juice" and "Not From Concentrate Orange Juice." Facts About Production The price of FCOJ is driven by weather. Brazil's drought season occurs from July through November, while Florida experiences its freeze from December through March. Harvest is therefore a year-round affair, so crop and weather reports must be monitored often, especially at the beginning of each country's inclement season. The industry has ridden a roller coaster in supply and demand numbers over the past 30 years. Drastic freezes in the 1980s lowered production numbers, yielding a mere 652 million gallons produced for the 1989-90 season. The 1990s saw a steady increase in




production, more than doubling to 1.55 billion gallons. In the 1997-98 season, domestic consumption was pegged at 5.73 gallons per capita, with futures prices reaching a modest $1.28. The most recent decline can be partly attributed to competition with juices not from concentrate and other fruits. An important item to consider is that much of Brazil's FCOJ production has been hit with citrus variegated chlorosis (CVC), a type of blight that could potentially affect the 250 million orange trees on which Brazil's third largest agriculture market depends. Factors That Influence FCOJ's Price The price of orange juice influenced by the following factors:

• The navel orange is the product of a single mutation that occurred in 1820. A monastery in Brazil discovered this seedless variety of orange and began to export cuttings to the U.S.

• Navel orange trees are a product of grafting and are therefore vulnerable to a number of diseases because the crops are so genetically homogeneous.

• The Valencia orange is used for juicing when navel oranges are out of season. • Low-carbohydrate diets and alternative juices succeeded in driving down the

demand for frozen concentrated orange juice in the early 21st century. • Over 1 million hectares of citrus fruit resides in Brazil, with the concentration in

Sao Paulo. • In the 1950s, the introduction of a bacteria called Xanthomonas axonopodis pv.

citri, the agent of citrus canker, became a problem. It took thirty years to eradicate and is still a very real threat.

• In the mid-1980s, ready-to-drink (RTD) began its ascent to prominence, capturing 75% of the market share from frozen concentrated orange juice.

Conclusion Frozen concentrated orange juice has a long and rich history in the Americas and around the world. Considering the significant health benefits that orange juice provides, this tasty drink will continue to play a significant role in the commodities landscape regardless of the form it takes. However, bearing in mind the level of sensitivity to weather and the homogeneous nature of orange trees, an epidemic could potentially devastate the industry. Commodities: Platinum Platinum was a part of Native American culture before Columbus arrived in the New World. In 1557, Julius Caesar Scaliger writes about the metal, referencing the platinum




mines of Panama and Mexico and the difficulty of melting the metal based on the technology of the times. Europeans realized early on that platinum was more precious than gold. King Louis XV of France acknowledged platinum's rarity and declared it the only metal fit for a king. During the 19th century, platinum was very difficult to metalsmith. It was often mixed with iridium in order to mold it into jewelry. Around the turn of the 20th century, Russia made several significant platinum deposit discoveries and began to produce 90% of the world's platinum. At the same time, advances in metalsmithing made the use of pure platinum more common. Platinum's metallic properties make it highly attractive in a variety of commercial and industrial applications. It has a high resistance to temperature and does not oxidize in air, although it is corroded by halogens, cyanides, sulfur and caustic alkalis. What's more, it is also non-reactive to chemical attack and has excellent electrical properties. A sample commodity futures contract for platinum is shown in the following table.

Platinum Contract Specifications

Ticker Symbol Open Outcry: PL (NYMEX) CME Globex Electronic: EPL (NYMEX)

Contract Size 50 troy ounces

Deliverable Grades

In fulfillment of each contract, the seller must deliver 50 troy ounces (±7%) of platinum not less than .9995 fineness, with no single piece weighing less than 10 ounces. Each contract unit may consist of ingots or plates, each incised with the lot or bar number, weight, grade, name, or logo of the assayer, and symbol identifying the metal.




Contract Months

All months

Trading Hours NYMEX Open Outcry: Monday-Friday 8:20am-1:05pm EST CME Globex Electronic: Sunday-Friday 6pm-5:15pm EST

Last Trading Day

Third to last business day of the contract month. Trading terminates at the close of business on the third business day prior to the end of the delivery month.

Last Delivery Day


Price Quote U.S. dollars and cents per troy ounce

Tick Size NYMEX: 10 cents per troy ounce ($5 per contract)


1. Futures: $25 per troy ounce ($1,250 per contract) 2. There is no maximum daily commodity trading limit during the current delivery month and the three business days preceding it. 3. If the settlement price reaches the maximum daily limit for two consecutive days in any of the outer months, the expanded daily limit schedule will go into effect.




4. The maximum expanded daily limit is $50 per troy ounce ($2,500 per contract)

Understanding Platinum Contracts Like every commodity, platinum has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss. For instance, if you choose to buy or sell a platinum futures contract, you will see a ticker tape handle that looks like this:

PL8J @ 1950

This is just like saying "Platinum (PL) 2008 (8) April (J) at $1950.00/ounce (1950.0)." A trader buys or sells a platinum contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the platinum contract equals the equivalent of 50 troy ounces multiplied by our hypothetical price of $1,950, as in: $1950 x 50 troy ounces = $97,500 Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a platinum contract on NYMEX requires a margin of $9,450, which is approximately 9% of the face value. Calculating a Change in Price Because commodity contracts are customized, every price movement has its own distinct value. In a platinum contract, a 10-cent move is equal to $5. When determining platinum profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $5. For example, if prices move from $1,950 to $2,000.10, you multiply the difference, which is $50.10, by $5 to yield a




contract value change of $2,505.


Platinum Contract Price (10 cent move = $5)

$1,950 $2,000.10 $50.10/501 cents or $2,505

Platinum Exchanges The futures contract for platinum is traded at the New York Mercantile Exchange (NYMEX) through its Commodity Exchange (COMEX) division via open-outcry. It is also traded electronically through the Chicago Board of Trade (eCBOT) and Tokyo Commodity Exchange (TOCOM). Facts About Production Platinum is one of the most precious metals in the world. Large deposits of platinum can be found on the moon and in meteorites, but finding it on earth is more difficult. Of all of the platinum that has been found on earth, 80% has been located in South Africa, 11% in Russia and 6% in North America. Thirty times more rare than gold, platinum has an annual production of approximately five million troy ounces a year compared to gold's 82 million troy ounces per year and silver's 547 million troy ounces per year. Platinum's special properties put it in large demand in diverse industries. From jewelry to cars to health sciences and more, this versatile metal plays a vital role in our everyday lives. For example, cars (which still operate with catalytic converters), represent 29% of platinum's usage. The balance of platinum is used in jewelry, chemical refinement and in high-tech electronics. Factors That Influence Platinum's Price The price of plantinum is influenced by the following factors:

• About 51% of platinum finds it way into jewelry. This disproportionate demand leaves platinum exposed to changing tastes and consumer demands. Any changes in buying habits, whether good or bad, could potentially lead to quick drops or jumps in platinum prices.

• Platinum is an essential component in catalytic converters and is used as a catalyst in fuel cells. Fuel-cell scientists are working to reduce the amount of




platinum required to operate fuel cell devices. With major industrial countries such as the U.S. advocating for reduced reliance on oil and increased green energy consumption, the impact on platinum usage has yet to be truly felt.

• Platinum has found a place in the fight against cancer. Platinum-dependent compounds are used in various forms of chemotherapy. Despite current adverse side-effects on kidneys and hearing, platinum-based chemotherapy shows a promising future as a form of treatment.

• Platinum is gaining ground in the use of archival photography, thermometers, electrodes, crucibles for high temperature melting, and various small electronic devices.

Conclusion Platinum is one of the rarest metals on earth, yet it can be found in a myriad of general consumer goods. This has led to wild fluctuations in supply and demand, which in turn has caused platinum's price to be quite volatile. Of course, this volatility only excites traders even more, and creates huge opportunities for profit (and loss). Commodities: Pork Bellies Any discussion on pork belly futures invariably involves the history and ultimate domestication of pigs in the U.S. Whether you call them pigs, hogs or razorbacks, wild boar are considered to be the first domesticated livestock, and their domestication can be traced as far back as 9,000 years. Originally, they were thought to have been initially domesticated in Eastern Turkey; however, new research shows that pig domestication may have occurred independently in several regions around the world. America's pig farming can be traced back directly to Queen Isabella of Spain. At her prompting, Christopher Columbus brought pigs on his journey to the New World, setting a precedent for other explorers to follow suit. One of them, Hernando de Soto, became well-known for growing his livestock from a mere 13 pigs to more than 700 pigs in just three years. From this humble beginning, the pig industry began. Cured pork belly (also known as bacon) evolved as a way to preserve the meat after slaughter. Pork belly is the result of harvesting both bellies from a pig, salting or smoking them, and refrigerating them. The pork industry's growth was fueled by the demand for pork bellies as the rail system in the U.S. improved. At the same time, the country's population and economy shifted from rural to urban, bringing a taste for pork belly to the cities. Considered a longer lasting and easier way to transport pork with little




to no perishing, pork bellies became a staple in the American diet. With the increased production and distribution of pork bellies, the first pork belly commodities contract was created in 1961 by the Chicago Mercantile Exchange (CME). A sample commodity futures contract for pork belly is shown in the following table.

Pork Belly Contract Specifications

Ticker Symbol Open Outcry: PB (CME) Electronic: GPB (Globex)


Deliverable Grades

Green Square-Cut Clear Seedless bellies from a federally inspected packing plant. Each belly must bear a United States Department of Agriculture (USDA) Food Safety and Inspection Service Inspection legend, except if the belly has been exempted by the USDA from this requirement.

Contract Months

Feb, March, May, July, Aug

Trading Hours CME Open Outcry: Monday-Friday 9:05am-1pm CST CME Globex electronic: Monday-Thursday 5pm-4pm CST

Last Trading Day

Third to last business day of the contract month

Last Delivery Day

Last business day of the contract month.




Price Quote Cents per pound

Tick Size 1 point = $.0001 per pound = $4


2, 3 or 4.5 cents, expandable price limits

Understanding Pork Belly Contracts Like every commodity, pork belly has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss. For instance, if you buy or sell a pork belly futures contract, you will see a ticker tape handle that looks like this:

PB8Q @ 70.575

This is just like saying "Pork Belly (PB) 2008 (8) August (Q) at $.70575/pound (70.575)." A trader buys or sells a pork belly contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the pork belly contract equals the equivalent of 40,000 pounds multiplied by our hypothetical price of $70.575, as in: $.70575 x 40,000 pounds= $28,230 Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a pork belly contract on the CME requires a margin of $1,620, which is approximately 6% of the face value. Calculating a Change in Price




Because commodity contracts are customized, every price movement has its own distinct value. In a pork belly contract, a .00025 cent move is equal to $10 and a .0001 move is equal to $4. When determining CME's pork belly profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $4. For example, if prices move from $70.575 to $73.650, you multiply the difference, which is $3.075, by $4 to yield a contract value change of $1,230.


Price belly Contract Price (.0001 cent move = $4)

$.70575 $.73650 307.5 cents or $1,230

Pork belly Exchanges The futures contract for pork belly is traded on the Chicago Mercantile Exchange (CME) and the Dalian Commodity Exchange (DCE). Facts About Production Pigs are slaughtered at about six to seven months, weighing an average of 255 U.S pounds. The pork belly is derived from the pig's two bellies, which represents 12% of the pig's total weight. Each frozen pork belly weighs approximately 13 pounds.To gain those 13 pounds of belly, a pig eats about 12 bushels of corn plus 130 pounds of soybean meal. While pigs produce more than just pork bellies, the interrelationship between pork belly prices and grains prices is undeniable. Pork production is highly dependent on feed; based on some calculations, feed represents 65% or more of total production costs. In 2004, over 1 billion bushels of corn were used to fatten pigs for slaughter. This has often led to grain prices preceding a higher price move in pork belly futures. The pork industry has seen tremendous growth worldwide - more exports are heading to China and Japan than ever before. Pork has long been considered the leading consumed meat in the world, and the pork industry saw 105 million pigs go to slaughter in 2006, plus a doubling in export demand in 2007. With much of the pork heading overseas to fulfill growing demand, the industry's continued growth appears healthy.




Factors That Influence Pork Belly's Price The price of pork belly is influenced by the following factors:

• Without question, pork is the premier meat consumed in the world. Demand is projected to increase, with the U.S. at the forefront.

• China's Dalian Commodities Exchange has developed a pork belly futures contract to account for the tremendous pork production occurring in China.

• China's pork industry production is barely running at a net positive, which has led to an increase in demand for imports to satisfy any potential future shortfall. In 2007, pork production reached 55.8 million tons while pork consumption reached 55.3 million tons. This barely left 500,000 tons for storage carryover into 2008.

Conclusion Pork bellies are easy to transport, can be preserved nearly indefinitely with proper refrigeration, and are a byproduct of the most popular meat in the world. Needless to say, pork bellies are commodities that will always have a supply and demand chain. China's continued urbanization presents an opportunity for explosive growth in pork product demand, much like the migration from rural to urban life in the U.S. spurred the domestic popularity of pork bellies. Commodities: Rough Rice The term rough rice is used to describe rice as it comes from the field after harvest. Whether birthed from Indian soil by Vishnu, carried to the Chinese on the tail of a dog or incarnated as the Emperor of Japan, rice is recognized as an integral part of the most populous countries in the world. Rice was first sown, harvested and distributed across Southeast Asia and Central Asia in the second millennium B.C., migrating to Europe in the eighth century A.D. and then to the Americas during the 16th and 17th centuries. Today, rice constitutes one of the top three staple foods of the world. Consumption in both China and India translates directly into weak exports. Only a small percentage of the total global production of rice is truly available for international trade, which leaves small rice-producing countries such as Thailand, Vietnam and the U.S. in the forefront as net rice exporters. With its invaluable status as a staple food source in two of the most populous nations on earth and the domination of its export share by relatively small producers, rough rice futures are becoming an attractive commodity for both hedgers and speculators, especially in light of geo-political and climatologic developments.




A sample commodity futures contract for rough rice is shown in the following table.

Rice Contract Specifications

Ticker Symbol

Open Outcry: RR Electronic : ZR

Contract Size

2,000 cwt (hundred weight)

Deliverable Grades

U.S. long grain rough rice 1. No. 2 or better 2. 65%< total milling yield including 48%< head rice 3. 500-gram sample with no heat-damaged or stained kernels, and a max of 75 lightly discolored kernels per sample

Contract Months

Sept, Nov, Jan, March, May, July

Trading Hours

Open Outcry: Monday-Friday 9:30am-1:15pm CST Electronic: Sunday-Friday 6:33pm-6am, 9:30am-1:15pm CST

Last Trading Day

Business day prior to the 15th calendar day of the delivery month

Last Delivery

Seventh business day following the LTD of the delivery month




Day

Price Quote Cents per cwt

Tick Size .5 cents per cwt ($10 per contract)

Daily Price Limit

50 cents per cwt ($1,000 per contract) above or below previous day's settlement price.

Understanding Rough Rice Contracts Like every commodity, rough rice has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss. Each single tick move in rough rice is the equivalent of half of a penny. Every half penny is the equivalent of $10. A rough rice contract is measured in hundred weights (cwt). One rough rice contract is 2,000 hundred weights (cwt) (the equivalent of 91 metric tons) with the trading price reflecting the value of one (1) hundred weight. For instance, if you buy or sell a rough rice futures contract, you will see a ticker tape handle that looks like this:

RR8K @ 2482.5

This is just like saying "Rough Rice (RR) 2008 (8) May (K) at $24.825/hundred weight (2482.0)." A trader buys or sells a rough rice contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the rough rice contract equals the equivalent of 2,000 cwt (hundred weights) multiplied by our hypothetical price of $2,482.5, as in: $24.825 x 2,000 cwt = $49,650




Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a rough rice contract at the CME Group requires a margin of $2,025, which is approximately 4% of the face value of the rough rice. Calculating a Change in Price Because commodity contracts are customized, every price movement has its own distinct value. In a rough rice contract, one-half of one cent is equal to $10. When determining CME Group's rough rice profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $20 (one full cent). In other words, every $1 move in rough rice is the equivalent of $2,000. For example, if prices move from $2,194.0 to $2,482.0, you multiply the difference, which is $288.0, by $20 to yield a contract value change of $5,760.


Rough Rice Contract Price (1 cent move = $20)

$21.94 $24.82 $2.88 cents or $5,760

Rough Rice Exchanges Rice is traded at the Chicago Board of Trade (CBOT). The Dalian Commodities Exchange (DCE) in China is currently preparing to launch the rough rice futures to diversify its product offering. Facts About Production Just over 620 million metric tons of rice were produced worldwide in 2005, with figures approaching 630 million metric tons for the 2007-2008 season. Although yields have nearly doubled in the past 40 years, from 2.2 million tons per hectare to 4.1 million per hectare, they have remained virtually unchanged for the past decade due to the prevalence of higher yielding varieties that produce more grain and require less water. Nearly all of the rice harvested is consumed as food, although a small portion of it is used for distilling to make sake in Japan or soju in Korea. The in 2008, U.S. produced 2% of the global harvest, but made up approximately 13% of total world exports, trailing Thailand, Vietnam and India. Several nations import




enormous amounts of rice to support domestic consumption. Most notably, consumption in India and China shows no signs of abating. While this could bode well for the U.S. export market, it is important to understand that rice prices are subject to international supply and demand numbers more than they are to domestic U.S. numbers. China and India alone account for half of the world's rice production. A sudden surplus of rice due to lower consumption or an import ban could cause prices to collapse, just as famine could cause a drastic inflation in the price. Another important factor to consider in price analysis is the cost of other grains and seeds. Corn, wheat and oats have recently enjoyed a bull run in prices due to energy policies in the U.S., and rice has ridden on their coattails. Less acreage planted with rice, in favor of high-priced grains and seeds, has helped reduce rice plantings, which in turn has contributed to recent lower worldwide stocks, and therefore higher prices. Factors That Influence Rough Rice's Price The price of rough rice is influenced by the following factors:

• Rice is a global commodity whose importance rests on its status as a staple food source for some of the most populous nations on earth.

• Growing demand in premium production nations such as China and India has an important impact on prices.

• Climatologic changes in South Asia and the U.S. will impact prices profoundly, especially given the intense water requirements for growing rice.

• Rice prices from 2004-2008 were affected by rising fuel and fertilizer expenses, leading to a doubling of price in just four years.

• In 2007-2008, global rice stocks were calculated at 72 million tons. This was the lowest in global rice stocks since 1983-84 and approximately half of the peak in 2000-01.

• Since the 1980s, rice has seen a 40% increase in demand worldwide. • As of 2008, Thailand is the world's largest rice supplier, exporting 7.3 million

metric tons in 2006 and 8.5 million metric tons in 2007. • The Philippines import about 15% of its rice. In the 1970s, it was a net exporter

before real estate development.

Conclusion Although rice is a staple in the diets of over 2 billion people worldwide, commodity exchanges around the world have taken a long time to develop contracts for it. As more commodity exchanges do incorporate rice as an offering, the hope is that prices will stabilize and a more realistic picture of supply and demand will emerge.




Commodities: Silver Silver is the whitest, most malleable and most conductive metal available. It has enjoyed a variety of uses throughout history, most notably as a form of money and jewelry. The first evidence of its use as currency dates back to around 700 B.C.E., in what is now Turkey. Silver has adorned tombs from Chaldea to China, and was one of the prime movers of European history after the discovery of the New World. While silver is less rare than gold, it has played a significant role in affecting currencies and has consistently moved in tandem with gold prices. The British pound derives its name directly from the fact that a British pound was once considered to be worth one pound of sterling silver. Over 14 languages use synonymous terms for silver and money. In fact, the U.S. dollar prior to the Civil War was also backed by silver. In 1971, the U.S. moved away from the gold standard, effectively becoming a fiat currency. This led to an increase in the value of gold and also a significant run up in the value of silver. For the first time, the status of silver and gold as precious metals was established around the world, as was the interrelationship of their price movement. In 1973, the Hunt brothers used their enormous fortune, along with bank leverage, to try to corner the silver market. Through their actions and the speculative nature of the metals market at the time, silver peaked at over $50 per ounce by 1980, with a majority of that increase ($41) occurring over the last six months of 1979. A sample commodity futures contract for silver is shown in the following table.

Silver Contract Specifications

Ticker Symbol Open Outcry: SI (NYMEX) Electronic: ZI (eCBOT)

Contract Size 5,000 troy ounces

Deliverable Grades Refined silver 1. Assayed at 0.999 fineness




2. As cast bars of 1,000 or 1,100 troy ounces 3. Stamped and serialized by an exchanged listed and approved refiner

Contract Months Jan, March, May, July, Sept, Dec

Trading Hours NYMEX Open Outcry: Monday-Friday 10am-1:30pm EST eCBOT Electronic: Sunday-Friday 6:16am-4pm CST

Last Trading Day Third to last business day of the contract month

Last Delivery Day Last business day of the contract month

Price Quote Cents per troy ounce

Tick Size NYMEX: .5 cents per troy ounce ($25 per contract) eCBOT: .1 cents per troy ounce ($5 per contract)


1. Movable 10 cents above or below previous day's settlement for first and second listed month 2. Once the contract with the highest open interest hits this limit, a suspension is triggered 3. New limit is 10 cents above or below the price at which the suspension was triggered

Understanding Silver Contracts Like every commodity, silver has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and




loss. For instance, if you buy or sell a silver futures contract, you will see a ticker tape handle that looks like this:

SI8K @ 1794.0

This is just like saying "Silver (SI) 2008 (8) May (K) at $17.94/ounce (1794.0)." A trader will buy or sell a silver contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the silver contract equals the equivalent of 5,000 troy ounces multiplied by our hypothetical price of $1,794, as in: $17.94 x 5,000 troy ounces = $89,700 Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a silver contract on NYMEX requires a margin of $7,763, which is approximately 9% of the face value. To trade a silver contract on the eCBOT requires a margin of $10,125, which is approximately 11% of the face value. Calculating a Change in Price Because commodity contracts are customized, every price movement has its own distinct value. In a silver contract, a one-cent move is equal to $50. When determining NYMEX's silver profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $50. For example, if prices move from $1,794.0 to $1,750.0, you multiply the difference, which is $44, by $50 to yield a contract value change of $2,200.


Silver Contract Price (1 cent move = $50)

$17.94 $17.50 .44 cents or $2,200




Silver Exchanges The futures contract for silver is traded at the New York Mercantile Exchange (NYMEX) through its Commodity Exchange (COMEX) division via open-outcry. It is also traded electronically through the Chicago Board of Trade (eCBOT), the Indian National Commodity and Derivatives Exchange (NCDEX), Dubai Gold and Commodities Exchange (DGCX), Multi Commodity Exchange (MCX) and Tokyo Commodity Exchange (TOCOM). Facts About Production As a rare and precious metal, silver derives its price from its availability on the open market, so world production numbers are an important statistic to consider. About 7.6 billion ounces of silver were mined during the 4,400 years leading up to the discovery of the New World. In the approximately 440 years since then, production has increased to 15 billion ounces. As of 2006, half of the world's cumulative production of nearly 45 billion ounces was mined over the last 60 or so years. Silver production, especially by the largest mining companies, seems to have flattened (if not declined), which could determine the direction of prices in the coming years. An important point to keep in mind is that older production techniques, where the silver is mined from veins already in operation, will shut down as production slows, which could also impact price direction as uncertain newer production sources are sought. Factors That Influence Silver's Price The price of silver is influenced by the following factors:

• Silver is typically extracted from ore, usually of copper, gold and zinc. • Copper, which alone accounts for 26% of all of the silver mined, is a commodity

that is heavily dependent on demand from the housing market. Because copper is used in new home construction, any change in the housing market can affect its demand, which can signal an indirect turn for the supply of silver, and therefore its prices.

• Film photography, despite the advent of digital imaging, still represents an important application for silver and thereby renders it a critical player as a low-cost, high-quality standard.

• Silver's conductivity makes it integral to the electronics industry, where it is used for circuits and switches.




• Solar panels use silver paste to conduct electricity from the silicon photovoltaic cells and are becoming more common as a cost-effective energy source.

• Silver tends to track the price of gold. Although the correlation between the two metals is not hard and fast, price charts certainly show that as gold rises and falls, so does silver.

• Silver represents another method that investors use for hedging currency risk through precious metals as the dollar weakens.

Conclusion Silver is one of the most versatile metals available. Used as both an industrial metal and a hard asset, it plays double duty in the commodities market. Trading it and predicting its price is a careful balancing act between what consumers need and what the currency market demands. Commodities: Soybeans First introduced in Europe in the 1700s, the soybean has become one of the most important beans in the world, securing a place for itself by providing oil and protein around the world. With applications as diversified as vegetable oil, animal feed and foodstuffs, it is no wonder that soybeans have become staples in countries far from its original roots in Eastern Asia. Fifty-five percent of the world's soybean production occurs in the Americas. The U.S. exports 37% of the world's soybeans. Originally considered merely an industrial product before the 1920s, soybeans rose to popularity for human consumption during World War II and have had a significant impact on U.S. farming. In 2007, soybeans brought in a total of $26.8 billion. A sample commodity futures contract for soybeans is shown in the following table.

Soybean Contract Specifications

Ticker Symbol Open Outcry: S (CBOT) Electronic: ZIS (eCBOT)


Deliverable No. 2 Yellow at par, No.1 yellow at




Grades 6 cents per bushel over contract price and No.3 yellow at 6 cents per bushel under contract price.*

Contract Months

March, May, July, Aug, Sept, Nov


Last Trading Day

The business day prior to the 15th calendar day of the contract month.

Last Delivery Day

Second business day following the last trading day of the delivery month.


Tick Size .25 cent/bu ($12.50/contract)


1. 50 cents/bu ($2,500/contract) above or below the previous day's settlement price. 2. No limit in the spot month (limits are lifted beginning on First Position Day).

Understanding Soybean Contracts Like every commodity, soybeans have their own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and




loss. For instance, if you buy or sell a soybean futures contract, you will see a ticker tape handle that looks like this:

S8X @ 1383'6

This is just like saying "Soybean (S) 2008 (8) November (K) at $13.8375 per bushel (1383'6)." A trader buys or sells a soybean contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the soybean contract is the equivalent of 5,000 bushels multiplied by our hypothetical price of 1383'6, as in: $13.8375 x 5,000 bushels = $69,187.5 Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a soybean contract on CBOT requires a margin of $4,725, which is approximately 7% of the face value. Calculating a Change in Price Because commodity contracts are customized, every price movement has its own distinct value. A one-cent move in a soybean contract is equal to $50. When determining the CBOT's soybean profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the difference by $50. For example, if prices move from 1383'6 to 1350'6, you multiply the difference, which is 33, by $50 to yield a contract value change of $1,650.


Soybean Contract Price (1 cent move = $50)

1383'6 1350'6 33 cents or $1,650




Soybean Exchanges Soybeans are traded in an open outcry format and electronically through the CME Group (Chicago Mercantile Exchange (CME), e-CBOT), the Brazilian Mercantile and Futures Exchange (BM&F), Mercado a Termino de Buenos Aires (MATba), Dalian Commodity Exchange (DCE), Kansai Commodities Exchange (KANEX), National Commodity and Derivatives Exchange (NCDEX) and the Tokyo Grain Exchange (TGE). Facts About Production The majority of the soybean crop is allocated for vegetable oil and as animal feed. While tofu, soy milk and other soy products have been developed for human consumption, a small portion of the crop is actually allocated for foodstuffs. In 2008, U.S. farmers set aside 74.8 million acres for soybean plantings. In 2007, only 63.6 million acres (25.7 million hectares) were set aside for soybeans. The yield from that crop produced 2.585 billion bushels (70.36 million metric tons) of soybeans, and almost half of it, or 1.0 billion bushels (27.9 million metric tons) was exported. Ironically, China is the largest importer of U.S. soybeans, with Mexico coming in at a distant second. Considering soybean byproducts, which are soybean meal and soybean oil, Mexico purchased $439 million worth of soybean meal and China purchased $160 million worth of soybean oil. Factors That Influence the Soybean's Price The price of soybeans is influenced by the following factors:

• The soybean has two byproducts: soybean meal and soybean oil. Each byproduct market enjoys its own supply and demand chain and a relationship with one another. Soybean trading uses a strategy called the crush spread, in which a trader purchases one contract of soybeans (S) and sells one contract of soybean oil (BO) and one contract of soybean meal (SM). This is a way to diminish exposure to market forces and to create a hedge against supply and demand factors.

• One of the most controversial influences in the soybean market is the concept of genetic modification or genetically modified organisms (GMO). Soybeans were modified to be resistant to herbicides by introducing genes taken from bacteria. Within a 10-year range from 1997-2007, the population of GMO soybeans increased from about 8% to 89%. While still a polarizing issue among consumers, GMO soybean crops have been tentatively accepted.




• The United States Department of Agriculture (USDA) releases several important reports on soybeans. Each year in March, the Prospective Plantings is released, detailing how many and which crops will be planted by farmers for the upcoming season. Every month thereafter, the USDA releases a monthly Crop Production report, which estimates the supply and demand for soybeans. The final important report is the Grain Stocksreport, which is released four times a year and examines the supply of soybeans and various other grains on a state-by-state basis and whether the soybeans are offsite or onsite.

• Brazil is the second largest producer of soybeans behind the U.S. In 2005, Brazil produced 52.7 million metric tons, and is attempting to expand soybean cultivation further. However, the country faces opposition from various environment groups that dispute the soybean industry’s encroachment on the Amazon rain forest and the overall deforestation of Brazil for profit.

Conclusion The soybean's price increases have a negative impact on other grains. Farmers only have so much arable land to plant crops. As a substitute good, it pushes corn and wheat aside, adversely affecting their supply and demand chains, which in turn significantly affects our global grain system. Global supplies are interdependent among countries, making all grains negatively interdependent because of the fight for limited resources. All of this leads to extreme fluctuations in the price and volatility of soybeans - the perfect environment in which to trade. Commodities: Sugar Commercial sugar's origins date as far back as fourth-century India. While the Indians discovered a way to crystallize sugar, the Moors discovered a way to perfect it. With the development of sugar mills and refineries, sugar became a successful commodity in the Muslim world. In the 14th century, the Moors brought sugar growth and production to the Iberian Peninsula, and plantations were set up throughout what is now known as Spain and Portugal. These regions inherited the legacy of sugar manufacturing once the Moorish empire was successfully driven out of the Iberian Peninsula by King Ferdinand and Queen Isabella of Spain. Eventually, Portugal successfully brought sugar to the New World, and by the 16th century there were more than 3,000 sugar mills throughout South America. The refined table sugar we consider a staple was once so rare and expensive that it was referred to as "white gold." Sugar cane, which was the first source of sugar, is a perennial grass that is grown in tropical and subtropical areas (before the arrival of




sugar cane, honey and fruit were the only common sweeteners). Later, the development of an alternative source of sugar was discovered: beets. The sugar derived from these two sources is 99.8% pure sucrose, which is a complex sugar composed of glucose and fructose. Today, sugar can be found throughout the world, with over 120 countries successfully producing it for domestic and international use. A sample commodity futures contract for sugar is shown in the following table.

Sugar Contract Specifications

Ticker Symbol Open Outcry: SB (ICE)

Contract Size 112,000 pounds (50 long tons)

Deliverable Grades

Raw centrifugal cane sugar based on 96 degrees average polarization

Contract Months

Jan, March, May, July, Oct

Trading Hours Monday-Friday: 2:30am-3:15pm EST

Last Trading Day

For March, May, July, and October: the last business day of the month preceding the delivery month. For January: the second business day before the 24th day of the prior calendar month.

Last Delivery Day


Price Quote .0001 cents per pound = $11.20

Tick Size 0.01

Daily Price None




Limit (Not applicable in electronic markets)

Understanding Sugar Contracts Like every commodity, sugar has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss. For instance, if you buy or sell a sugar futures contract, you will see a ticker tap handle that looks like this:

SB8F @ 11.85

This is just like saying "Sugar (SB) 2008 (8) January (F) at $.1185 per pound." (It is standard pricing convention to see the prices of futures such as copper, coffee, sugar and orange juice quoted in cents per pound. In this case, $11.85 is equal to $.1185 per pound.) A trader buys or sells a sugar contract according to this type of quotation. Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the sugar contract equals the equivalent of 112,000 pounds multiplied by our hypothetical price of $11.85, as in: $.1185 x 112,000 pounds = $13,272 Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a sugar contract on the Intercontinental Exchange (ICE) requires a margin of $1,540, which is approximately 12% of the face value. Calculating a Change in Price




Because commodity contracts are customized, every price movement has its own distinct value. In a sugar contract, a .0001 cent move is equal to $11.20. When determining sugar profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $11.20. For example, if prices move from $11.85 to $13.10, you multiply the difference, which is $1.25, by $11.20 to yield a contract value change of $1,400.


Sugar Contract Price (.0001 cent move = $11.20)

$0.1185 $.1310 $.0125 or $1,400

Sugar Exchanges The futures contract for sugar is traded at the Intercontinental Exchange (ICE), Brazilian Mercantile and Futures Exchange (BF&M), Kansai Commodities Exchange (KEX), Multi Commodity Exchange (MCX), National Commodity Exchange Limited (NCEL), National Commodities and Derivatives Exchange (NCDEX) and Zhengzou Commodity (CZCE) Exchange. Facts About Production The process by which sugar is produced has changed little since the 14th century. The natural sugar that is stored in the cane stalk or beet root is separated from the rest of the plant material. For sugar cane, processing involves extracting the juice, creating and crystallizing a thick syrup, spinning the crystals to produce raw sugar, and sending the raw sugar to a refinery for final processing and packaging. Beet sugar processing normally is accomplished in one continuous process without the raw sugar stage. Sugar appears in various forms, such as sugar cane, sugar beet, honey, maple syrup and more. Its unique property as a simple carbohydrate gives it the distinct ability to make taste buds interpret it as sweet. White sugar is a refined sugar that is derived from sugar cane and sugar beets, and is sold in many granule sizes ranging from coarse to superfine. Sugar cane dominates as the world's primary source of sugar, covering 78% of the market, with sugar beets following in second place. Worldwide sugar production in 2006 and 2007 reached a record 161 million tons, with Brazil leading the way with 33 million




tons, India a close second with 27 million tons and the European Union (EU) running a distant third with 16 million tons of sugar production. The sugar industry is unique among various commodities because as much as 70-80% of all sugar produced is actually consumed in its country of origin. This has led to an international sugar marketplace rife with subsidies and unfair market pricing. Factors That Influence Sugar Price The price of sugar is influenced by the following factors:

• The key health concerns of sugar consumption are diabetes, obesity and tooth decay. Industrialized nations have made it a priority to solve these health problems, and may require the continued substitution of sugar or its elimination altogether.

• The European Union is the second largest sugar exporter in the world. Sugar is subsidized in many regions, including the EU, through production and high tariffs on imports. Any shift in policy could topple this disparate plan.

• Weather plays a key factor for both sugar cane and sugar beets. Sugar cane thrives in warmer tropical climates, while sugar beets prefer cooler climates such as Japan. Although sugar beets are consistently used as an alternative source for sugar production, frost damage and the lack of processing capacity can play a significant role in determining their availability.

• Like all sugar producing countries, the U.S. has a protectionist policy in place for sugar prices. While producers enjoy higher sugar prices, it forces consumers to look to alternatives, a situation that has led to a significant number of companies switching to corn syrup. A growing movement among sugar cane and sugar beet producers is demanding a free market for sugar production.

Conclusion Sugar production is subsidized and tariffed all over the world. The real price of sugar is actually unknown. In a truly competitive trading environment, sugar prices might be significantly less. Subtle clues surrounding its export and consumption must be watched in order to determine the market's direction. Commodities: Conclusion We hope this tutorial has opened your eyes to the exciting and fast-paced world of commodities trading. Let's recap a few important points.

• Commodities offer exciting opportunities for investors to diversify their investment portfolios beyond stocks, bonds and mutual funds.




• Like any other investment, commodities carry some risk. However, what makes them particularly attractive is leverage. You can trade them on very low margin.

• There are more than a dozen major commodity exchanges around the world, reflecting the globalization of the markets.

• Grains include wheat, oats, corn, rice, soybeans and other agricultural products. • Softs include coffee, cocoa, sugar, oats, cotton and similar products. Frozen

concentrated orange juice (FCOJ) has been actively traded since the creation and widespread use of inexpensive refrigeration (post World War II).

• Energies cover a range of products used to provide energy to heat and power homes and businesses. The most common are petroleum and its byproducts: crude oil, heating oil, natural gas and others.

• Meats like live cattle, pork bellies and feeder cattle are traded on various exchanges. Pork belly prices can be dependent on the price of grain, since the pigs are fed mostly corn.

• Each commodity has its own tick and standard contract size, which is the amount covered by a standard futures contract. Some prices, like soybean meal, are listed in dollars per ton, where the standard contract size is 100 tons. By contrast, the amount for wheat is 5,000 bushels. In the case of crude oil, the amount is 1,000 barrels.

Commodities trading has become an increasingly popular way for active investors to profit from global demand.

Documents

Commodities Word Doci.investopedia.com/inv/pdf/tutorials/commodities.pdf · not the commodity itself but rather a contract to buy or sell it for a certain price by a stated date in