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Commodities
Submitted by:
Aditi Mehra Anushka Srivastava Kaustubh Salvi Srishti Dalani Varun Chaudhari
Commodities: you have probably heard the term before, but what does it really mean? Simply, commodities are goods like beef, gold or lumber. When farmers and other producers put their goods up for sale they are selling commodities.
Example : Corn selling at 3.25$/bushel , which rises later to 3.55$/bushel Trading can be done in different ways Spot Trading Forward Contracts Future Contracts ( features of forward contracts) Hedging
Commodity at a glance
Commodity Market
PRODUCT
Commodity future Factors affecting commodity prices Charges Delivery process
PARTICIPANT
Farmers/Producers Traders Importers Speculators Hedgers Arbitragers
RISK
Limit Cover
RICE
Commodity Info:1. Rough rice futures are traded on Chicago
Board of Trade under ticker symbol RR. 2. Rough rice futures are delivered every year in Jan, Mar, May, July, Sep & Nov. 3. Rice is the cereal grain one of the most consumed food stuff in world.
Why Rice?
Due to Thai flooding there could be severe crop loss, result decrease in supply. Due to Fukushima nuclear radiation leak, rice Risk Factor :produced in Japan is considered to have More demand expected and less supply radiation exposure. Which again results in less according to current Rice production conditions supply. which implies Risk is average for rice Egypt government will issue tenders to import commodity. rice if local produce keep on stocking up commodity. Result could be increase in demand. Influence of Asian Cuisine and increasing population, results increase in Demand.
Wheat
Commodity Info:Wheat futures are traded on Chicago Board of Trade under ticker symbol W. Wheat futures are delivered every year in Mar, May, July, Sep & Dec. Wheat is the most important grain in the world.
Why Wheat?
US exports for wheat with constant supply rate suggest increase in global demand.
UN's severe warning of flood in China suggest decrease in supply for wheat. Combination of widespread of hunger, increasing population and very sensitive to wheat rust results increase in Demand. Currently Wheat future prices are undervalued, which will encourage to buy wheat thus increasing the future price of wheat.
Risk Factor :-
Undervalued wheat future prices with wheat as staple food of many countries it carries large demand. But due to highly sensitive to weather conditions and to wheat rust there could be less supply. Considering these facts wheat seems to be have low risk with current price of wheat futures.
Used in both Food(Sweetening agent) and Bio-fuels(Ethanol) thus giving it a very high edge for investment and higher returns.
CORN
United States makes almost all of its ethanol from corn. Corn is also used to produce High Fructose Corn Syrup which is used as a sweetener. It has become a popular ingredient in sodas and fruit-flavored drinks
SUGAR
Brazil relies on sugar as a source of ethanol. Sugar has become a popular buy among investors, as significant volatility in spot prices creates opportunities to capture material returns over a relatively short period of time. While sugar may seem like a strange investment, it is an international commodity It trends well, however, making it a good prospect for investors with a little time to wait. It has become a popular ingredient in sweets/candy/etc.
Cont.
Sugar /Corn Price Drivers
Brazil and other South American countries have found sugar-based ethanol to be more efficient and cost effective.
Cotton is a basic crop that is a major input for the textile, agriculture, and food industries The U.S. is a major cotton producer, but its domestic textile industry is relatively small, so it exports much of the cotton it produces. Cotton #2 is traded on the New York Board of Trade under ticker symbol CT
Why Cotton?
Strong Supply and Demand Growth (10% and 15% respectively for next 1 year. Most of this growth due to China All time requirement of new clothing, yarn, thread Demand and driver of cotton prices( seasonal growing conditions, prices of competing crops)
Factors that Drive Cotton Price: Grain Price Cottonseed prices Climate: Synthetic fabrics: Substitutive Commodity
Risk Factor: Stocks/Use Ratio has increased from 39.5%(2010) to 48.1%(2011) The projection suggest the cotton price will not go down, but instead it might increase. Cotton prices are likely to come under further downside pressure with supply prospects looking robust in three of the worlds four largest producers, while the decline in prices Risk is minimal to average
Second most valuable legal exported commodity Majority Coffee Import- USA, Germany and Italy Majority Coffee Exports- Brazil, Vietnam(80% of foreign exchange earnings) Coffee is traded on major futures and commodity exchanges, most importantly in London and New York Robusta is typically sold for 70% of the price of Arabica, thus favored by (Starbucks, Kraft, P&G, Sara Lee)
Why Coffee?
Coffee is a key cash crop in various developing countries. Coffee accounts for 60% of Ethiopia's exports. The current belief is that more than 100 million people in these countries depend on coffee as their primary source of income High market growth rate: Increase in 10% over the period of last 2 years High Consumption Rate: 120-140 million bags a year Factors that drive Coffee's price: Weather Supply and Demand Fundamentals Arabica vs. Robusta
Risk Factor :Coffee future have doubled in the last year, closing at $2.46 per pound in early 2011. That's the highest price since May 1997, when coffee was trading at $3.20 per pound. Thus, risk is average
Crude Oil
Commodity Info:
Crude Oil is the oil directly from the underground and has to be refined before it can be used. It varies in physical appearance from Light to Heavy and classified according to its measured API gravity.
Risk FactorsThe chart above shows the continual front-month futures contract for Light, Sweet, Crude Futures traded on the NYMEX who Benefits from Rising Oil Prices is alternative energies like wind, solar etc, hybrid car manufacturers like Toyota and Honda. Independent oil and gas companies and oilfield services. The loses will be reflected as Rising oil prices reduce consumer demand for products that consume oil. It will make travel and shipping more expensive.
Crude oil ends up in being volatile in nature. This volatility and price movement is needed in order to gain decent profits in trading world. Money can be made form crude oil. Better chances of higher profits with less risks. The largest pension fund in the world is also known as oil fund. There is normally an increasing trend for oil future prices.
Platinum
Commodity Info:
Platinum is an exceedingly rare and precious metal found in only a few deposits worldwide. About half of all global platinum consumption is for the manufacture of automobile catalytic converters.
Why Platinum?
Its relative scarcity and wide array of uses, it is often in high demand. Platinum can be bought through funds on the exchange, foreign accounts for claims or as bullion. It just depends upon your specific investment practices and your comfort level. Platinum stocks, mutual funds, ETFs and futures are investments that can provide promising returns, in spite of this they are inadvisable for beginners because these investments are complicated and very treacherous.
Risk FactorsThe chart above shows continuous frontmonth futures prices for Platinum traded on the New York Mercantile Exchange. With gold trading at over 10% premium against platinum, the ratio between these precious metals feel to 0.88 its lowest since 1985.Gold was trading at $1720/oz on whilst platinum was at $1520 as of Tuesday.
risen so much over the past decade. Gold- effective hedge against inflation when the dollar depreciates, demand for gold increases During times of economic and political uncertainty, the demand for Gold rises due to its high intrinsic value and relative stability Demand for gold has been rising, supply has been dropping as many of the top gold producing countries have had decreasing production over the past few years
- gold price were at approx 25 dollars in 1968 -started moving up since 1973 oil crisis -again peaked in 1980 during the Iran -Iraq war -since the dot com bubble burst the gold price has moved from 400 dollars to almost 1300 dollars -which is more than 3 times of price in 2001.
How to invest in Gold? Physical -in the form of gold bullion bars, contemporary gold coins, gold jewelry(you might want to consider getting a safety deposit box) ETF- also called as paper gold Gold ETF is a kind of mutual fund which is open ended and which is also available on stock exchanges for trade. Gold miners stocksTypes of companies -juniors : produce less than 200,000 troy ounces in a year -Medium-sized producers :manufacture between 200,000 and one million ounces -large-cap company : produce over a million a year Risk and Return Portfolio can consists of the gold shares of a single large-cap company- usually offer slow but safe growth, together with a safe dividend To minimize company-specific risks- diversify the portfolios Invest in young exploration companies- investments carry risk
Natural Gas
Natural gas is a combustible mixture of hydrocarbon gases (methane, ethane, propane etc) Help power the world, be it through fueling transportation, electricity generation and residential/industrial heating Future Natural Gas contracts for North America Risk Factor:are traded on the New York Mercantile Exchange At the New York Mercantile Exchange, Most of that supply rests outside US borders the near-month (January 2012) futures (96.7% for natural gas). Until the middle of 2008, contract fell from $3.550 per MMBtu natural gas prices were skyrocketing, driven by last Wednesday to $3.421 per MMBtu high oil prices, stabilizing or declining gas reserves yesterday. near high-consuming countries
Natural gas is much cleaner - per unit of energy its combustion produces 30% less carbon dioxide than oil, and about 45% less carbon dioxide than other substitutes.
Working natural gas in storage fell by 20 billion cubic feet (Bcf) for the week ending December 2, according to EIA's Weekly Natural Gas Storage Report (WNGSR. So risk level is medium to high
Commodity
Corn/Sugar
Demand trends look positive for Sugar as Barclays forecast a 2.1% y/y rise in demand for the commodity in 2011-12/ Medium-High level
Pct.%
20% 15% 10% 10% 20% 5% 2%
Gold Platinum
Low-Medium
Rice/Wheat
In 2012 Wheat prices may decline to 610/bushel from 631, according to Barclays in a report. Macro concerns aside, the wheat market could face additional pressure from improved crop conditions and export competition. Rice seems to be a stronger commodity due to strong demand Projections predict a slump in price of natural gas and seems to get lower further. Crude oil will be in demand even though the price will increase Coffee will have High market growth rate due to high consumption rate Cotton prices are likely to come under further downside pressure with supply prospects looking robust in three of the worlds four largest producers, while the decline in prices
Rice Wheat
Coffee Cotton
Coffee-Medium Cotton-Low
Cotton
Natural Gas Coffee TOTAL
3%
10% 5% 100%
18