The grain market is a commodity market where farmers sell what they grow, says Rowan Relton – commodity trader. This market depends on the demand and supply of commodities, which can change based on customer needs, temperature, precipitation and diseases. Due to these changes, the price for commodities are being affected and this brings about price fluctuation to be regulated.
Grain market trading or marketing occurs widely through futures contracts. Here, Rowan Relton provides everything you need to know about grain markets and what you stand to gain when you invest in it.
Grain Future Contracts
A grain futures contract is a legal document that sets the amount at which grain will be delivered in future at an agreed time and place.
So, according to Rowan Relton, anyone that wants to invest in grain futures contracts needs to know the risk involved. In this investment, one has to use risk capital to avoid losing all your investment.
Speculators and hedgers are the two main participants in the future market. Speculators are not interested in the actual commodity and they accept risk with the hope of making profits. Though they don’t deal with physical grain, they buy and sell futures contracts.
Hedgers use futures contracts to manage risk in the market and are also able to cope with some risks which are related to the availability and price of a commodity.
Benefits of Futures Contracts
“There are many reasons why a future contract is a good investment vehicle,” Rowan Relton says. This include:
1. High Liquidity:
Most of the futures contracts offer high liquidity in most commonly traded commodities. This gives room for a trader to buy and sell when they want to. Which means they can exit and enter the market at any time.
2. Protection from Price Fluctuation:
Many industries with a high level of price fluctuations including farmers use future contracts as protection against the risk of a drop in the price of crops. For example, when a farmer is not sure of the price of a crop at harvest time, he or she can sell the crop at a fixed price before harvesting. The harvest can be agreed to be delivered at a future date.
3. Opens Market to Investors:
Future contracts gives investors a chance to participate in the market they want, especially the risk-tolerance investors.
4. Easy Pricing:
Future contracts pricing is very easy to understand.
Buying Future Contracts
When you buy a futures contract, it means you agreed to buy a set of a commodity on a particular date at a fixed price, holding the contract till expiration. You have exposure to a commodity market when you buy a futures contract. So when the market goes high, you gain and when it goes low you lose.
Selling Future Contracts
It means you agreed to sell a set of a commodity on a set date and price. You need to set a future position if you want to deliver a physical crop to the market.
Benefits of Grain Contracts
Grain is a real commodity, therefore the grain market has several unique qualities. Grain has a lower margin when compared to other complexes such as the energies, which makes the participation of speculators easy. Grains fundamentals are straightforward, just like most tangible commodities, the price is determined by demand and supply and weather factors as well.
Rowan Relton – commodity trader, believes having a full understanding of how the grain market works should be the major priority of anyone who wants to go into the grain market.
Grain markets go with demand and supply and weather creates an important impact on the market. So all these factors should be put into consideration if you want to be profitable.