Agricultural Derivatives

Types of Agricultural Derivatives

Agricultural commodity derivatives can be broadly classified into the following.
  1. Main Staples
  2. Oil Seeds
  3. Spices
  4. Sugarcane
  5. Cotton
Each of the above broad categories can be subdivided into the following sub-categories as follows.

Main Staples Oil Seeds Spices

Where are they traded?

The agricultural derivatives are traded on both exchanges and OTC markets. The following are some of the important exchange markets in the world.

  1. South African Futures Exchanges
  2. Egyptian Commodities Exchange
Latin America
  1. Brazilian Mercantile and Futures Exchange
  2. Mercado a Termino de Buenos Aires
North America
  1. Chicaco Mercantile Exchange (CME)
  2. Kansas City Board of Trade
  3. Intercontinental Exchange
  4. Memphis Cotton Exchange
  5. Minneapolis Grain Exchange
  6. Winipeg Commodity Exchange, Canada
  1. MCX, India
  2. NCDEX, India
  3. Central Japan Commodity Exchange, Japan
  4. Dalian Commodity Exchange, China
  5. Jakarta Futures Exchange, Indonesia
  6. Kansai Commodity Exchange, Japan
  7. Singapore Commodity Exchange
  1. ICE Futures Europe (NYSE Liffe)
  2. London Commodity Exchange

Typical Contract Specifications

The contract specifications depend on the product, exchange, country, quality and market participants. The following provides an overview of the contract specifications in general.

How to trade?

Let's take the example of Corn Futures traded on CME. On 30th Sep 2020, the following contracts are available for trading.

Sl No Contract Previous Closing Price
1 Dec 2020 362.60
2 Mar 2021 372.20
3 May 2021 378.00
4 Jul 2021 382.00
5 Sep 2021 376.60
6 Dec 2021 381.60
7 Mar 2022 389.40
8 May 2022 -
9 Jul 2022 396.40
10 Sep 2022 -
11 Dec 2022 -
12 Jul 2023 -
13 Dec 2023 -

The contract size for Corn on CME is 5,000 bushels, the quote is U.S. cents per bushel, and the contract can be settled either in cash or through delivery.

If we think that the prices one year from now will increase then we can take a long position in one of the contracts. Let's suppose that we take a long position in 10 contracts in Sep 2021 contract through a LIMIT order @ 375. (Note: 375 is cents. In dollar terms it is 3.75 per bushel).

Our contract size is: 10 contracts x 5,000 bushels per contract x $3.75 per bushel = $187,500

We can close this contract anytime before Sep 2021 by taking an opposite position (i.e. taking a short position). Alternatively, if we hold the position till expiry then the exchange will close our position automatically. However, it is possible that we might have to take delivery of the product. Therefore, if we don't intend to take delivery then it is better to close the position before expiry of the contract. Let's suppose that we closed our position by taking a short position in 10 contracts @ 385. The profit in this trade would be:

Profit = 10 x 5,000 x (3.85 - 3.75) = 10 x 5,000 x 0.1 = $5,000


Updation History
First updated on 5th October 2020