Commodity Trading – How to Read Commodities Prices Quotes

Commodities can be a confusing, but highly profitable, world.

Buying and selling futures contracts, rather than trading directly in the commodity is how most trades are conducted. Except for the fact that they have an expiration date, most futures contracts trade more or less like stocks or bonds. However, a beginner trader may find that some of the mechanics of trading can still be confusing. One of these is the most basic item of information: price quotes.

Gold
Many beginner traders will take an interest in this commodity due to advertising, its accessibility, and its historical allure. Price quotes are fairly straightforward, with just a few exceptions.

Set by the exchanges, gold has a set minimum price movement. On COMEX (Commodity Exchange of New York), for example, gold futures traded have a 10 cent minimum 'tick' (price movement), as it's called. Since each futures contract covers 100 troy ounces, that makes the minimum price movement for a contract $10. An average stock investor may see that as a substantially large movement, as stock 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 though normally, it will be displayed as 580.65.

Natural Gas
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
The CME (Chicago Mercantile Exchange), one of the oldest and largest exchanges in the U.S., trades live cattle futures contracts. 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, so 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
To distinguish it from metals, energy, grains etc, coffee is one of several commodities known as a 'soft'. Coffee is traded on the appropriately named Coffee, Sugar and Cocoa Exchange (CSCE), and the price is quoted in cents per pound. The standard contract size covers 37,500 pounds.

Coffee has a minimum change (the tick) of 0.05 cent, so 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
Possibly have the longest history, corn is one of several grains traded. Harvested for thousands of years, corn 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.

Therefore a contract price change from 290 to 291 would equal: $2.91-$2.90 = $0.01

$0.01 x 5,000 = $50.

Think about that for a moment. A fifty dollar increase is obtained from a one cent movement in the price of the commodity. Quite different from stocks or bonds.

Commodity trading is a high risk market, but the potential for profit is also extremely high. Prices are extremely volatile, and investors need to be willing to take losses as well as gains. Though not for everyone, commodities trading is an exciting experience for those willing to take the risk.

         

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