​What You Should Know Before Starting to Trade Grain Futures

Ilan Levy-Mayer  |


So you’ve been trading forex perhaps, or maybe e-mini futures (MINI SP=ES, Mini NASDAQ=NQ etc.) and you just noticed recent volatility in the grains market and would like to trade grain futures?

Or perhaps you’ve never traded futures before, but recent moves in the soybean complex, wheat, corn and other grains caught your attention?

Well…. here are some pointers you should know and be aware of before you start trading grain futures, regardless of if you have traded futures before or if this is your first time.

The grain complex has a few differences from many other future markets; Knowing the facts below and being aware of the pointers I will share with you could potentially save you from frustration and hopefully help save your trading capital.

1. These are deliverable contracts. You may have heard “be careful or you may see 5,000 bushels of corn at your doorstep”, well it is not that easy, but grain contracts are deliverable contracts as opposed to mini SP 500, for example, which is cash settled.

Futures contracts are standardized contracts (which evolved from forward contracts) that involve the making and taking of delivery of an underlying asset or commodity such as corn, wheat, gold, silver, crude oil, or natural gas just to name a few.

Grains and grain futures contracts are indeed considered deliverable contracts, because they represent physical commodities that can be delivered to approved warehouses and exchanges to honor the standardized futures contracts that they represent and fulfill.

    In contrast, some futures contracts represent non-deliverable contracts. For example, several futures contracts in the financial and equity futures market segments involving sovereign debt and stock market indices may be cash delivery or settlement as opposed to physical delivery of the underlying commodity.

    2. Trading hours are bit different than most other markets:

    • • The night session runs from 7:00 p.m. – 7:45 a.m. CT the next day, Sunday- Friday.
    • • The “day session” runs from 8:30 a.m. – 1:20 p.m. CT, Monday – Friday.

    For all purposes, 7:00 p.m. the night before until 1:20p.m. the next day is considered the same trading day. The day session has quite a bit more volume than the night session, but in times of higher volatility you will see significant volume and movement in both sessions.

    3. Grain prices are quoted in one-eighths of one-cent and the value of a one-eighth-of-a-cent price move, which is $6.25, by dividing one into eight. The remaining price moves are calculated the same way and eight-eighths of a cent equals 1 cent. However, the minimum fluctuation for grain futures prices is ¼ of cent or $12.50 per contract.

      Corn, wheat and soybeans have the same contract specifications. All three grains are traded in bushels and one futures contract controls 5,000 bushels and Grains are primarily traded on the CME Group.

      4. The grain markets do have limit moves. This could be a topic for a full article by itself, but the main points are:

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      • • If you’ve ever heard the term “Limit up!” or “Limit Down!” the term most likely refers to a limit move in the grain futures markets.
      • • In the case of Soybeans, the current limit move is .70 (70 cents) per bushel as set by the CME Groups, Chicago Board of Trade(CBOT), as of July 21st, 2017.
      • • A limit up move, also known as limit bid, means the market price for a grain contract has reached its exchange-set, predetermined price limit of up 70 cents per bushel.
      • • A limit down move, also known as limit offer, means the price of the grain contract has reached its exchange set, predetermined price limit of down 70 cents per bushel.
      • • The market pressure to either buy or sell is so great that there are no competing Offers to counter the bid pressure in the case of a limit up move, or Bids in the case of a limit down move, to offset the selling pressure.
      • • A limit move represents an imbalance of market participation, i.e. there is NOT an equal number of buyers and sells bidding for the same price.
      • • These conditions that create limit moves are relatively rare occurrences but they can happen on any given day.
      • • They can happen during severe weather markets, drought, floods or disease, that may impact the year end supply stocks for a particular grain contract.
      • • Limit moves can also happen as a result of a lack of perceived or real demand or a sudden increase in demand resulting from the passing of new legislation, such as lifting trade embargos, approving a grain contract to be used as a biofuel, or even a Nuclear disaster such as Chernobyl in the main wheat growing region of what is now the Ukraine.
      • • Wheat currently has a limit of 60 cents, Corn 25 cents (July 2017)
      • • The Livestock contracts also have limits as well as many of the softs: Coffee, Cocoa, Sugar, and Orange Juice.
      • • Markets will come off limit when they have a more balanced participation, sellers to absorb all the bids on a limit up move
      • • And plenty of buyers to absorb all of the offers on a limit down move.
      • • The part of a limit price move that is watched by traders is what is referred to as “the Pools”
      • • A pool is the number of contracts either bid at limit up, or offered at limit down, traders can gauge the voracity of price move continuations the following day by the “size of the pool”

      5. Weather, Dollar value and USDA reports are key fundamentals moving these markets. Every market has its own set of fundamental factors which influence price. When all is said and done, it comes down to supply and demand, but in-between you have many “sub factors” affecting that equation. In the case of grain futures, here are the “sub factors” you need to familiarize yourself with:

      • • Seasons and weather
      • • Different crops: old crop vs. new crop
      • • US $ value and influence rise and fall that the US dollar has on the grain complex. (all else being equal, higher dollar= lower grain prices)
      • • USDA reports. Planting intentions, crop conditions, WASDE (World Agriculture Supply Demand Expectations report), and a few others. Depending on the time of the year and the cycle of the crop, these reports can be MAJOR market movers.

      Once you are aware of the key differences between the grain markets and other futures, you can decide if you would like to trade these markets, and by what method (options vs. futures, day trading versus swing trading, spreads vs. outrights etc.).

      I personally think the grain markets offer many opportunities other markets don’t, as well as risks that are greater in the grain complex than other markets.

      I find that the volume, the personality and price moves in markets like soybeans, wheat, corn, bean oil, bean meal and others should encourage traders to learn more about this complex and consider adding it to their trading.

      If you are not familiar with the risks associated with futures trading in general, specifically grain futures, I recommend you visit our broker-assist services to get help creating a trading plan and review any questions you may have.

      Disclaimer - Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.

      DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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