Successful Commodity Futures Traders Do Their Homework

Commodity Futures: The Markets

There are essentially four different commodity futures markets, namely energy, metals, agriculture and livestock. Each one is different and is affected by various macro and micro economic factors that you need to be aware of.

Energy Futures

Energy is basically what drives the economy. Without fuel there is no production, no transport, no power, nothing. Therefore, it goes without saying that the price of oil will affect anything and everything, from your mortgage to the price of a loaf of bread.

Unlike other markets, the supply is actually what drives the energy markets. The price is set according to how much oil can produced and delivered rather than the overall demand. Another important factor about the energy market that all commodity futures traders need to be aware of is the fact that the price of oil will always rise if there is a threat to the supply chain because the world runs on oil.

Supply is limited and even though demand rises and falls it takes weeks to increase or decrease production. Even if there is plenty of crude oil in storage, it needs to be turned into a usable product which means it needs to be refined. Refineries are what slow down the entire process and limit the supply.

Commodity futures traders need to be aware of all these factors when analyzing price charts and deciding on their trades. Since energy is basically the building block of the world, many traders feel that energy futures are one of the best trading instruments available.

Metal Futures

Of the metals, probably the most popular and talked about is gold. However, it is actually industrial metals, such as copper and tin, that really drive the markets. The price of metals is closely related to the amount of economic activity. For example, the more economic activity there is, the higher the demand for metals will be. The demand can reach the point where the supply cannot cover it, which eventually leads to an increase in inflation. Rising inflation usually triggers an increase in the price of gold, which has always been considered a safe haven.

Commodity futures traders looking to trade metal futures need to have a firm grasp on the intricacies of economic activity and its effect on metal prices if they want to trade successfully.

Meat and Agriculture Futures

While livestock and agriculture futures are two different markets, they are affected by many of the same issues, such as weather, disease and even things such as diets. For example, when a low fat diet was popular, the price of red meat would go down just as it would rise when the low-carb craze was in full swing.

When it comes to livestock and meat, the market goes through a number of phases where herds are built up and then sold for slaughter. This cycle can take a few years, depending on the livestock, and will, of course, affect the price. Additionally, another factor that affects meat prices is the season. For example, around Thanksgiving, the demand for turkey goes up and implicitly the market will react by increasing prices.

Agricultural futures are no longer as popular as they once were, especially since they are some of the most challenging commodity futures to trade. This is because crops can easily be wiped out by a disease or volatile weather, and the latter is more the norm rather than the exception nowadays. Some of the most traded futures include corn, soybeans, orange juice, sugar and grains.

As you can see, there are many factors that drive the price of the various commodities which is why successful commodity futures traders master one commodity market before moving on to another. It is best that you become an expert on one market rather than know a little about all of them.

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