Grain market prices are unlike any other commodity pricing system. Prices and price movements are based on fractions of a cent. Grain commodity futures contracts are traded on margin, meaning that you only have to put up a fraction of the contract’s value. Your commodities broker lends you the rest. Grain commodity futures are highly leveraged, and a small price change can mean a big profit or loss. Understanding how grain market contracts are priced is the first step to trading agricultural commodities.
Items you will need
- Grain futures contract price quotes
Research the basics of grain commodity futures contracts. Go to an online commodities website such as the Chicago Mercantile Exchange (CME) Group to find the contract information. Corn, wheat and soybeans have the same contract specifications. All three grains are traded in bushels. One futures contract controls 5,000 bushels. Contract prices are quoted in cents per bushel. Grains are primarily traded on the CME Group. In addition, wheat is traded on two regional exchanges: the Kansas City Board of Trade (KCBT) and the Minneapolis Grain Exchange (MGEX).
Use your calculator to determine the decimal value of grain prices. Grain prices are quoted in one-eighths of one cent. Find the value of a one-eighth of a cent price move, which is $0.125, by dividing one into eight. The remaining price moves are calculated the same way. Two-eighths of a cent equals $0.250. Three-eighths of a cent equals $0.375. Four-eighths of a cent equals $0.500. Five-eighths of a cent equals $0.625. Six-eighths of a cent equals $0.750. Seven-eighths of a cent equals $0.875. Eight-eighths of a cent equals 1 cent.
Determine the market price of a grain commodity futures contract. For example, corn prices are displayed as 476^3, or 476.375 per bushel. The dollar equivalent of this is 476 and three-eighths cents, or $4.76375 per bushel. Since one futures contract controls 5,000 bushels, multiply 5,000 by $4.76375 to get the contract’s price of $23,818.75.
Calculate the value of grain futures contract price moves. The minimum price a corn, wheat or soybean contract can move is one-quarter of a cent, or $0.0025. One grain contract controls 5,000 bushels. A one-quarter cent price move equals $12.50, which is 5,000 bushels multiplied by .0025. A 1-cent price move equals $50, which is $12.50 multiplied by four. A 2-cent move is twice that, or $100. For example, if wheat moves 2 cents, the value of one futures contract changes by $100, or $50 per cent.
Determine the difference between the opening price and the closing price to calculate the profit or loss. For example, let’s say the opening price for corn is 576^2, or $5.76250, and the closing price is 584^4, or $5.84500. The difference between the two prices is $0.0825 ($5.84500 minus $5.76250) per bushel. Calculate the profit or loss by multiplying 5,000 bushels times $0.0825, which is $412.50 per contact. If you own three corn contracts, your total profit or loss is $412.50 multiplied by three, or $1,237.50.
- Commodity trading is highly leveraged and losses can add up fast. Only trade with money you can afford to lose.
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