Agricultural Derivatives
Types of Agricultural Derivatives
Agricultural commodity derivatives can be broadly classified into the following.
- Main Staples
- Oil Seeds
- Spices
- Sugarcane
- Cotton
Each of the above broad categories can be subdivided into the following sub-categories as follows.
Main Staples
- Rice
- Wheat
- Maize (Corn)
- Chickpeas
- Tur Dal
- Lentils (Masoor Dal)
Oil Seeds
- Groundnut oil
- Mustard oil
- Soya bean oil
- Cotton seed oil
- Coconut oil
- Sunflower oil
- Sesame oil
- Safflower oil
- Niger seed
- Palm oil
Spices
- Black pepper
- Cardamom
- Ginger
- Garlic
- Turmeric
- Chilly
- Cummin Seeds
Where are they traded?
The agricultural derivatives are traded on both exchanges and OTC markets. The following are some of the important exchange markets in the world.
Africa
- South African Futures Exchanges
- Egyptian Commodities Exchange
Latin America
- Brazilian Mercantile and Futures Exchange
- Mercado a Termino de Buenos Aires
North America
- Chicaco Mercantile Exchange (CME)
- Kansas City Board of Trade
- Intercontinental Exchange
- Memphis Cotton Exchange
- Minneapolis Grain Exchange
- Winipeg Commodity Exchange, Canada
Asia
- MCX, India
- NCDEX, India
- Central Japan Commodity Exchange, Japan
- Dalian Commodity Exchange, China
- Jakarta Futures Exchange, Indonesia
- Kansai Commodity Exchange, Japan
- Singapore Commodity Exchange
Europe
- ICE Futures Europe (NYSE Liffe)
- London Commodity Exchange
Typical Contract Specifications
The contract specifications depend on the product, exchange, country, quality and market participants. The following provides an overview of the contract specifications in general.
- Contract month: All months
- Price quotation: Depends on the product and its standard quantity
- Trading hours: Usually during the day hours from 9am to 4pm. Some exchange trade for longer durations
- Contract size: Depends from exchange to exchange
- Minimum tick: Depends from exchange to exchange
- Delivery: Mostly cash settlement but physical settlement available in select products
How to trade?
Let's take the example of Corn Futures traded on CME. On 30th Sep 2020, the following contracts are available for trading.
| Sl No |
Contract |
Previous Closing Price |
| 1 |
Dec 2020 |
362.60 |
| 2 |
Mar 2021 |
372.20 |
| 3 |
May 2021 |
378.00 |
| 4 |
Jul 2021 |
382.00 |
| 5 |
Sep 2021 |
376.60 |
| 6 |
Dec 2021 |
381.60 |
| 7 |
Mar 2022 |
389.40 |
| 8 |
May 2022 |
- |
| 9 |
Jul 2022 |
396.40 |
| 10 |
Sep 2022 |
- |
| 11 |
Dec 2022 |
- |
| 12 |
Jul 2023 |
- |
| 13 |
Dec 2023 |
- |
The contract size for Corn on CME is 5,000 bushels, the quote is U.S. cents per bushel, and the contract can be settled either in cash or through delivery.
If we think that the prices one year from now will increase then we can take a long position in one of the contracts. Let's suppose that we take a long position in 10 contracts in Sep 2021 contract through a LIMIT order @ 375.
(Note: 375 is cents. In dollar terms it is 3.75 per bushel).
Our contract size is: 10 contracts x 5,000 bushels per contract x $3.75 per bushel = $187,500
We can close this contract anytime before Sep 2021 by taking an opposite position (i.e. taking a short position). Alternatively, if we hold the position till expiry then the exchange will close our position automatically. However, it is possible that we might have to take delivery of the product. Therefore, if we don't intend to take delivery then it is better to close the position before expiry of the contract. Let's suppose that we closed our position by taking a short position in 10 contracts @ 385. The profit in this trade would be:
Profit = 10 x 5,000 x (3.85 - 3.75) = 10 x 5,000 x 0.1 = $5,000
END OF MY NOTES