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Ask the Analysts: What does a new producer or trader need to know about commodity markets?

posted on July 22, 2014


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What does a new producer or trader need to know about commodity markets?   In each Ask the Analyst segment, experienced commodity market analysts provide thoughtful insight on trading skills, price trends, and strategies to help students and producers better understand how the markets work.

What does a new producer or trader need to know about commodity markets?

Tomm Pfitzenmaier: They are in a leverage position and that it can go against you and it is really risky. I think that is important to have a good understanding of and, as I said earlier, sometimes you don't understand that until you really try it and put your money on the line. So, experience, slow, small experience is pretty important. 

John Roach: When you purchase a contract you don't put up 100 pennies on the dollar, you're putting up maybe 10, 8, 10, 12 cents on the dollar and so if the market moves 10 cents your entire investment is gone, if it goes the wrong way. If it goes the right way your entire investment is doubled. And so those kinds of swings in the value of your account start to mess with your head. 

Sue Martin: Well, they need to understand that you're not always going to make money. In fact, they need to understand that probably, like for example, in options, 90 some percent of them go worthless. But do you not use them? No, you use them because there's opportunities there. The other thing I think that a trader, new trader needs to understand is, is the fundamentals as well because that really is, it's all about psychology but the fundamentals are psychology too. 

Naomi Blohm: One is the supply and demand fundamentals. Just how much do we have available? Who in the United States is using it? Who in the world is using it? So, that is one factor of it. The other component of it is the charts and the technical aspect of it because sometimes when there's not much gossip happening over in this side of the table with the supply and demand, some of the traders look at the charts and the technical trading and then they use that as their momentum move. And so it's really important to understand both and understand how sometimes one can be more important than the other and then the next day it gets flip-flopped. 

Darin Newsom: USDA is not the end-all and be-all. The markets themselves will tell us what fundamentals are. Media, traders, analysts, get very excited when USDA reports come out because it gives them something to talk about. Many times it's in, it's different than what the market is telling us. If I had to put money and if I had money through either my livelihood or trade riding on something, I would go with what the market is trying to say rather than government numbers, every time, unquestionably. 

Elaine Kub: I think that it's important to remember that it's real stuff, that this is real tangible items, products being traded because it can be tempting I think for speculators, probably new speculators in particular, to see numbers on a screen or to see a chart and forget that these are actually cattle or this is actually corn being traded. And it's important for commodities, much more than stocks, because commodities are as equally likely to go down as to go up. With stocks you always have an anticipation that the economy should grow or that a company should grow more profitable over time. Commodities are a price of a foodstuff at your grocery store and it can have lean years and it can have very ample years. And so the downward price probability of commodities is different than stocks and I think it is because it is a tangible supply and demand item. 

Dan Hueber: When so many people come to markets today I think they want to rely very heavily on just the technical aspects of the market. And to a certain extent that is a simpler introduction. You know, you don't really have to dig in and understand the fundamental side, what it takes to produce a commodity or a crop or reach it out of the ground be it production of oil or whatever the case may be. But I think ultimately those are the factors that give you the foundation, that really help you understand what, why that commodity works, why we need to produce that commodity. Why is it important for the sustainability of life in itself? And by detaching yourself from that, from that actual cash market experience I think really, ultimately leaves people a little bit short of the lessons they need to learn to be able to apply that into really understanding what they're trading.


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