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Agricultural commodities trading – where to start


You may already be trading oil and gold and be thinking about other commodities markets. Agricultural commodities trading is very popular in the US, which has very sophisticated agricultural futures markets based in Chicago, but it is also possible to trade other agricultural commodities in Europe and Asia – e.g. wool in Sydney, Australia.

Getting started in agricultural commodities trading

Getting started in agricultural commodities trading is easy, although if you are brand new to commodities trading, we would suggest gold or oil and moving onto agricultural commodities later on. These are not markets for the novice trader.

There are a wide variety of futures contracts based on agricultural commodities, including wheat futures, corn futures, pork bellies, frozen orange juice, soy beans, cocoa and coffee.

Agricultural commodities often have very seasonal dynamics, as crops will depend on the quality of harvests in both hemispheres, which in turn depend on a number of other factors, but often the weather. Pests can also have a big impact.

Success in agricultural commodities trading depends on doing your homework: in my experience, the most successful traders of these markets that I have come across have been those with an informational edge. For example, one very profitable hedge fund had employees working for it in West Africa doing first hand research on the ground in cocoa plantations, and actually participated in physical cocoa trading, not just futures.

How to trade agricultural commodities

Most traders in North America will use futures to trade agricultural commodities. If you are in the UK, you may want to look at financial spread betting platforms for agricultural commodities trading: these bring with them the benefit to leverage, but also include additional risks. Elsewhere, you may want to consider CFD trading as most CFD brokers will offer CFDs based on agricultural futures prices.

Agricultural commodities trading relies on futures prices, so you will need to study how the futures markets function. Futures contracts were originally developed to facilitate the purchase of agricultural products like grains – they allowed buyers to determine a more efficient price for crops before they were harvested.

If you are trading futures you will need to be aware of how the different delivery contracts are being priced. Each commodity will have its own suite of futures which determine is price.

Which agricultural commodities to trade

Agricultural commodities markets vary in popularity: in my experience, European traders seem to prefer trading soy beans, coffee and cocoa.

With each commodity it is important to do some background reading on the dynamics of that market – find out what the main risks and drivers of the price are. Before committing any live trades, study the price performance over a period of weeks or months so that you are familiar with that market. This makes it easier to decide where to set your stop losses and manage your risk.

Some commodities traders just focus on one agricultural market – the best seem to get to know one futures market and stick with it. Others search for momentum opportunities between different agricultural commodities, depending on when specific price action cycles occur. This is a matter of personal preference.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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