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Ask the Analysts: What are risks and benefits to commodity trading?

posted on July 22, 2014

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What are risks and benefits to commodity trading?  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 are risks and benefits to commodity trading? 

Sue Martin: First off, the risks are you can lose a lot of money. Anything that can give you a high return, I don't care what it is, has a high risk associated with it. So, that would be one thing. But, the potential to be able to make a lot of money as a speculative trader is good. Every farmer should be using futures markets as far as I'm concerned. And I'm not saying that because I'm a broker, I'm saying it because too many of these guys just say, well I sell off the combine. Well, hello! Selling off the combine you're usually selling it when there's a glut of the commodity coming onto the marketplace and you see your cheapest prices most years. 

Darin Newsom: Risks to commodity trading, losing everything you own is probably the biggest risk. Very volatile markets and they're much bigger than when I got started in this 25 years ago, these markets are huge now compared to then. You used to be able to trade one or two lots, or one or two contracts at a time. You just get swallowed up now. These are enormous markets played by folks with a lot of money and so you have to be very careful, you have to know, you have to be very comfortable with what you're doing and know when to get out, know when to say that you're wrong. You will not be able to say, well, it's going to come back, because usually it doesn't. 

Tomm Pfitzenmaier: Well, the speculator is obviously doing it because he thinks he has figured out the market and he's going to make some money on whatever position he takes. Obviously the risk is that he's wrong and you can lose your shirt. I mean, you're dealing with a situation that is highly leveraged where you're putting up a couple thousand bucks for a corn contract that is worth a lot of money and that can swing you pretty hard if you're right and if you're wrong. So, I think the leverage part of that is something that is really, it's something that catches people off guard sometimes and zaps them pretty good. Now, the benefits to producers is it gives them an opportunity to price their product. That's why these markets were invented in the first place. That was the purpose is to give producers a chance to make sales and not be limited to their local market. And I think that's still true particularly in the grains with all the bins that have been built you can go out and you can shop different -- you can sell on the futures, you're not obligated to one in particular buyer. 

Virgil Robinson: From personal experience, having had a customer list for a long, long time, I was always told from the get-go, make sure you know your customer, make sure you know your customer. Well, over the course of time I gathered a better understanding of what that meant. You need to understand what that person is trying to do. If he or she is trying to outsmart the market, fine, have the capital and the risk capital available to be involved. And the secondly, you have to have the discipline, a great deal of discipline, you have to be able to take a loss because not every trade is going to be right and those are extremely difficult skills to acquire. 

Naomi Blohm: The risk is that if you don't know what you're doing, like any tool in your shop at home, you can get hurt pretty bad. You can lose money. You can have a lot of family strife. And it can become a very serious situation. The benefit, though, is that, like tools in your shed, when used properly, tremendous benefit, tremendous, tremendous benefit. And the other thing to keep in mind is that not one futures or option tool or cash marketing tool is the right one year in and year out. And there might be two or three years that go by where you don't use a particular option type or a trading tool and then all of a sudden for the next two years that is the one that is the best one to know. 

Don Roose: Well, the benefit in commodity trading is the fact that there's a huge potential, from a trader's standpoint, if you're not using it as a hedge. There's a huge amount of potential from that standpoit with a lot of leverage. From a hedger's standpoint, there's an awful lot of opportunity eacuse you can lock in profits and you can control a much bigger quantity. For example, you can farm bigger, you can raise more cattle because you can just lock in your profit and take advantage of that. So, I would say those are the two advantages from both sides. The risk always is that if you're not astute at what you're doing from a trader's standpoint there's no guarantees, that if you're a poor trader you probably don't make money. 


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