While commodities such as wheat, soyabeans, corn, palm oil and pork bellies don’t make massive headlines, most can easily be traded via major spread betting companies and you can also buy Exchange Traded Funds (ETFs).
The price of milk, eggs, chicken, corn and butter have all risen sharply over recent years, with corn up over 100 per cent causing riots in the streets of Mexico as the price of tortillas, a basic food, sky rocket. I have been a bull on commodities since 2003 and still see higher prices especially in grains, meats and soft commodities.
You may think that profiting from higher food prices is a little unethical and it’s a case of the evil capitalist profiting from the poor. However, you’re not going to stop the trend and if you feel guilty then why not give a percentage of your profits back to charity?
So what’s the story?
Driving all this are population increases and the rise of the middle classes in China and India. It is a fact that the calorie intake goes up as a population develops and there is an increase of processed foods. Furthermore, climate change is making global farming more difficult. Farming costs are increasing due to higher oil prices and the higher price of grains affects cattle prices as feed costs move up, affecting the price of milk and dairy products.
The final major factor is the USA desire to cut reliance on importing oil and to use food as fuel. It takes 450 pounds of corn to make enough Ethanol to fill a 25-gallon petrol tank. While it may sound a good green idea, burning food to feed big 4X4 cars is not the solution. The solution is to cut down on consumption and use less fuel, not try and find a quick fix. Of course, getting the US Government to see sense is not going to happen and those voting farmers are cashing in on the higher grain prices, so it’s a vote winner as well.
Higher food prices hit the poorest as they spend the highest proportion of their income on food. For the last few years, thanks to Government subsidies, competition from major supermarkets and increased efficiencies in retailing and farming, food prices have been kept fairly stable and we may have even become accustomed to lower prices. However, those days are well gone. Price increases will have to be passed on.
Now to trading – I have already featured palm oil and soyabean oil in the past and I still remain bullish on both. I also like soyabeans (see chart). You can spread bet soyabeans or you can look at buying an ETF. See www.etfsecurities.com.
You could look at buying the DJ-AIGCI Agriculture Index (AIGA) currently trading at US$6.50 (£3.20). This would give you exposure to soyabeans (25 per cent), cotton, sugar, coffee, soyabean oil, and wheat all in one trade. Remember you can buy ETFs via any stockbroker just like a share, and you can buy them in pounds.
Spread Betting Commodities
This month I would like to take a look at Spread Betting commodities. Even with the recent massive bull run in commodity prices the majority of spread betting customers still stick to trading the Dow Jones, FTSE100 and a few shares.
The main reason that many traders are scared to venture into commodities has been lack of clear pricing and worries of unlimited losses.
You can now spread bet most commodities; the main groups are Metals, such as gold, silver high grade copper and platinum, Energies such as Unleaded Gas (petrol), Heating oil, Crude Oil and Natural Gas. Grains such as Oats, Wheat, Soybeans. Softs which cover Sugar, Coffee, Cocoa, Lumber and Meats such as Pork Bellies, Live Hogs and Live Cattle.
The major bookmakers will allow you to trade most of these markets, IG Index has a good commodities service and you can trade online or via phone.
A few things you need to know:
1. Know yourself and your spread trading strategies.
The way I trade commodities is technically, rather than following fundamental news, so it’s the price and chart that I am led by. I do also look at seasonality and then I may just glance at the news on the commodity. You can find lots of good free information on line. A good site to have a look at is www.tradingcharts.com
2. Know the size of the bet you are taking.
It’s important that you know what a point means, for example if the FTSE moves from 6002 to 6003 that’s 1 point but in commodities a point or a tick may not be a 1 point, also many markets trade to the next decimal point i.e. 165.10 to 165.11 is a point. You can find details of contract sizes in your financial bookmaker’s handbook. Never place a bet until you know this.
3. Know the trading hours.
Most commodities that I trade are US based so they trade later in the day. You can find trading times in bookmaker’ handbooks. It’s better to trade when the actual market is open, some bookmakers will make out of hour prices, however, the spreads tend to be wider.
4. Know the expiration dates.
Just because you are trading April Orange Juice it does not mean that it will expire (close) in April, in many cases an April contract will close the last week of March. When you open a trade most bookmakers will state the last trading day. If you wish to trade the commodity after this date then you would roll over the contract. Also if you are familiar with spread betting indices you will know the normal contract dates are March, June, September and December. Many commodities have a different cycle.
5. Know the Average True Range or NTR.
Some commodities are extremely volatile whilst others only trade smaller moves. Whilst there is nothing wrong with volatility and a volatile market can lead to big gains, be aware of the swings and if you are starting with a small trading bank you need to stay away from high ATR/NTR markets. Lumber is a good example of a volatile market, if you were to trade this market you would keep your bet size down to a minimum.
6. Stick to the price charts rather than react on the news.
In most cases when trading commodities you will be ahead of the news as the price will react before the facts. For example, if it’s freezing cold in the USA it does not necessarily mean Heating Oil will go up, in many cases Heating Oil may have its biggest rises in the summer as trader’s stock pile ahead of the winter.
7. Buying Signals.
A good buying signal is a breakout above a previous 15 day high. So if the price closes at its highest for the last 15 trading days (breakout) that can be a good entry point. The chart below of Orange Juice is a good example of a break out:
An exit signal would be if the price falls below the lowest low for the last 10 trading days. So, on the chart of orange juice your exit would be around 132.00.
8. Use Guaranteed Stops.
Make sure you have a guaranteed stop, this way you know what your worse case scenario is. Also move stops to lock in profit as your trade goes your way.
