Reading Commodity Prices
- Gold, Natural Gas, Live Cattle, Coffee, and Corn
Reading Commodity Prices - Gold, Natural Gas, Live Cattle, Coffee, and Corn
Welcome to the confusing world of commodities.
Most trades are carried out by buying and selling futures contracts, rather than trading directly in the commodity. And most futures contracts trade more or less like stocks or bonds, with the key exception that they have an expiration date. Nevertheless, some of the mechanics of trading can still be confusing to the novice. One of these is the most basic item of information: price quotes.
Because of advertising, its accessibility, and the historical allure of gold, this commodity will be one that most novice commodity traders take an early interest in. Price quotes are fairly straightforward, with just a few wrinkles.
Gold price movements have a minimum set by the exchanges. Gold futures, for example, traded on COMEX (Commodity Exchange of New York) have a 10 cent minimum 'tick' (price movement) as it's called. Since each futures contract covers a 100 troy ounces, that makes the minimum price movement for a contract $10. That's a significantly larger movement than the average stock investor may be used to, where prices typically move by ten to twenty-five cents per share.
Quotes will often be shown without the dollar sign, and sometimes the decimal point is also left out. So, a price of $580.65 per troy ounce of gold may be shown as: 58065. Normally, it will be displayed as 580.65.
Traded on NYMEX (the New York Mercantile Exchange), here the minimum price change is 1 cent. Prices are quoted in dollars per million metric British Thermal Units (mm BTU). A BTU is a measure of energy produced by burning natural gas.
The standard futures contract size is 1,000 mm BTU. So, a price movement from, say, $35.50 to $36 would represent an increase of $.50 x 1,000 = $500.
Live cattle futures are traded on the CME (Chicago Mercantile Exchange), one of the oldest and largest in the U.S. Prices are quoted in cents per hundred weight, with a standard contract covering 40,000 hundred weight.
The tick (minimum price movement) is 0.025 cents, and a movement from 71.125 to 72.125 would be calculated as follows:
71.125 is read as 71.125 cents per hundred weight. So, a common price change would look like:
$0.72125 - $0.71125 = $.0100
$0100 x 40,000 = $400.
Coffee is one of several commodities known as a 'soft', a category used to distinguish it from metals, energy, grains, etc. Traded on the appropriately named Coffee, Sugar and Cocoa Exchange (CSCE), the price is quoted in cents per pound. The standard contract size covers 37,500 pounds.
Since, the minimum change (the tick) is 0.05 cent, a contract price changes by: $0.0005 x 37,500 = $18.75. A price listed as 115.45 is equivalent to 115.45 cents per pound, or $1.1545 per pound.
Corn is one of several grains traded, and possibly the one with the longest history. Corn has been harvested for thousands of years, and formed one of the earliest 'forward' contracts.
Prices are quoted in cents per bushel, with a minimum price change of 1/4 cent. The standard contract covers 5,000 bushels. A price quoted as 290 would be equivalent to $2.90 per bushel.
Hence a contract price change from 290 to 291 would equal:
$2.91-$2.90 = $0.01
$0.01 x 5,000 = $50.
Take a moment to absorb that. A one cent movement in the price of the commodity affects a single contract owned by fifty bucks. Quite different from stocks or bonds.
Commodity prices move fast and they often move far in a single day. That makes commodity trading one of the most volatile, and hence risky, markets traders can engage in. Be ready for a real adrenaline pumping experience when you get involved.