Free Grain Futures Trading eGuide

Futures Markets provide the mechanism to ensure fairly consistent prices for grains, soybeans, and processed foods

Managing Uncertainty

Temperature and precipitation are largely beyond our control, yet these factors are key in determining the supply of vital commodities such as corn, soybeans, wheat, oats, and rice. Global grain and soybean supplies fluctuate continuously, and market demand for these commodities varies constantly. As a result of these many uncertainties, commodity prices can vary substantially from day to day.

So how is it that, season after season, food prices at the supermarket remain relatively predictable? To a large degree, the financial effects of futures markets are responsible for this price stability.

Ironically, futures markets are perceived as volatile. In fact, they provide the mechanism to ensure fairly consistent prices for grains, soybeans, and processed foods. Prices for cereal, for example, do not rise or fall to the degree as the prices for unprocessed oats or rice. This is possible because the Chicago Board of Trade (CBOT) futures markets help to stabilize food prices. Futures and options contracts-tools to manage risk and pursue profit potential-are essential for minimizing price swings and maintaining stability in a modern economy.

Going with the Grains

A world without grains-and the commodities markets in which they are efficiently traded- would be unthinkable.

Grains feed our livestock. In both whole and processed forms, they provide nourishing food for our families. They are also used in an everincreasing range of nonfood products.

Here are just a few of the uses:

Corn — The greatest use for corn is feed for livestock and poultry. Corn also goes into many everyday food items-corn oil for margarine; cornstarch for gravy; and corn sweeteners for soft drinks, to name just a few. Nonfood uses of corn include alcohol for ethanol, absorbing agents for disposable diapers, and adhesives for paper products.

Wheat — The primary use for wheat is flour, the key ingredient for breads, pastas, crackers, and many other food products. Wheat byproducts are used in livestock feeds. Wheat is also used in industrial products such as starches, adhesives, and coatings.

Oats — One of the primary uses for oats is for animal feed. As any trip down the cereal aisle of your supermarket will demonstrate, oats are also the main ingredient in many hearty break-fast foods. Additionally, oats are used in the manufacture of plastics, solvents, and other industrial products.

Rice — Rice is the primary food staple for 2.5 billion people. It is also an important ingredient in processed foods such as breakfast cereals and snacks. Rice byproducts are used for brewing and distilling, fuel, fertilizers, packing material, and industrial grinding.

Grains are a renewable resource, and the demand for them is great. Efficient trading of grains, combined with effective business planning, helps to ensure relatively stable food prices for consumers.

The Diversity of Soybeans

The soybean complex consists of futures and options contracts on soybeans, soybean meal, and soybean oil. These contracts allow hedgers and traders to capture the special economic relationships that exist among soybeans and the two principal soybean products throughout the production, processing, and marketing processes.

Soybeans — are a renewable resource with a seemingly limitless range of uses. For example, many publications are printed with soy ink, which is an increasingly popular alternative to petrochemical-based inks. Also, soy diesel is a new energy source that can be used by the trucking industry.

Whole soybean products are especially appreciated in Asia and among natural-food devotees in Europe and the United States. Soybeans provide the basis for low fat sources of protein such as tofu, miso, and soymilk.

Soybean Meal — Soybean meal is the dominant protein supplement used in U.S. livestock and poultry feeds. Soy products are also used to make baby food, dietfood products, beer, ale, and noodles. Technical uses include adhesives, cleansing materials, polyesters, and other textiles.

Soybean Oil — Soybean oil remains the most widely used edible oil in the United States, with consumption exceeding that of all other fats and oils combined. It is a major ingredient in cooking oil, margarine, mayonnaise, salad dressing, and shortening. Lecithin is a natural emulsifier derived from soybean oil and, without it, chocolate would separate from cocoa butter and spoil many a sweet moment.

Indispensable Financial Tools

Futures exchanges provide two vital economic functions for the marketplace: risk transfer and price discovery. Futures markets enable those who want to manage price risk (hedgers) to transfer some or all of that risk. Futures markets also provide profit opportunities for those willing to accept risk (speculators).

Efficient trading of the grain markets or the soybean complex can help to reduce seasonal volatility and maintain relatively stable prices for many products. Futures markets supply the mechanism for long-term business planning, which can improve operational profitability for farmers, processors, livestock producers, food manufacturers, and industrial users of these commodities.

Who can trade grain and soybean futures and options? Virtually everyone. Farmers, merchandisers, processors, and other hedgers in the agricultural commodity pipeline use CBOT futures and options to manage price risk. Futures and options contracts are designed to promote better business planning, more consistent product quality and service, and greater operational profitability. Speculators also trade grain and soybean futures and options in the pursuit of profitable returns on their investment. They provide liquidity to the market.

Risk Management for Processors

A soybean processing plant uses soybean, soybean oil, and soybean meal futures to hedge its gross processing margin-the difference between the cost of soybeans and the eventual revenue of the finished oil and meal. Buying soybean futures protects against rising input costs. Selling soybean oil and meal futures protects against falling prices for the later sales of meal and oil. This risk-management program helps to stabilize costs and pricing and can give the processor a competitive advantage in the marketplace.

Financial Stability for Producers

A progressive family farm operation discovered the opportunities of incorporating futures and options into its marketing plan. The family now secures more stable prices for the grain it sells and is enjoying reduced feed costs. The result is a brighter financial future for this family in the American heartland.

Cost Management for Food Companies

A large food manufacturer, which uses soybean oil in many of its bakery products, buys call options to establish a cost ceiling for eventual soybean oil procurement. In the highly competitive food business, risk-management strategies promote price stability and help build greater loyalty among customers.

Profit Opportunities for Traders

Pursuing greater return on capital, a software engineer decided to trade grain futures. Based on an analysis of trade data, this engineer anticipates corn prices will rise and, with the help of a broker, buys a corn futures contract. Two weeks later, weather conditions reduce the harvest forecast and corn prices rise. The engineer can sell the futures contract at a price greater than the initial purchase price and profit from the transaction. This participation in the futures market did not require the software engineer to have any direct link to farming or food production.

Reaping the Benefits

Futures and options are increasingly popular because they bring important benefits to individuals, companies, and our economy as a whole. These benefits include:

Price Discovery