Trading agricultural commodities is not unlike other methods of investing. Just as you would with stocks, bonds, or crypto, there are risks and benefits associated with this type of trading. And while agricultural commodities can increase your short- and long-term profits, it’s important to have a clear understanding of how it works.

In this article, we’ll share everything you need to know about trading agricultural commodities, along with the pros and cons of doing so.

What Are Agricultural Commodities?

To put it simply, agricultural commodities are raw goods that are produced on a farm. They tend to be crops or other food or industrial farm-based products. These are essential goods that are used practically in every country on earth, making them valuable assets in our daily life and in the trading market.

The market for agricultural commodities has been around for centuries. It predates the stock and bond trading market, making it the oldest form of organized trading in human history. And while it has evolved over time, there are certain practices and goods that have remained through the years.

Common types of agricultural commodities include:

• Coffee
• Soybeans
• Cocoa
• Wheat
• Corn
• Rice
• Sugar
• Cotton
• Lumber

These items are considered “soft” commodities, which are grown instead of mined. For the sake of this article, we will be sticking to commodities that are agricultural or “soft.”

Benefits of Agricultural Trading

Agricultural trading doesn’t just benefit the farmer or producer – it can also be a lucrative option for investors and traders.

Portfolio Diversification

Investing in crops and livestock is a great way to diversify your financial portfolio. That way, you can ensure stability while growing your bank account and minimizing your losses over time. Agricultural commodities operate differently from the traditional stock market. It’s possible that your commodities may be unaffected (or even performing well) even if the stock market is down.

Inflation Hedging

Agricultural commodities can help protect your portfolio against rising prices. That’s because they generally increase in value during periods of inflation. By using futures and options (mentioned in more detail below), you can buy or sell the goods at a predetermined price (which hedges against inflation).

Global Production

As the largest player in the global food supply chain, agricultural goods play an important role in today’s society. They are in constant demand, as they’re required for food, raw materials, and processing. This makes it a stable and reliable opportunity that impacts practically every country on earth.

Liquidity

Trading with agricultural goods is relatively straightforward, even for beginners or inexperienced traders. There’s always a constant flow of buyers and sellers through the Chicago Board of Trade (CBOT) and the Intercontinental Exchange (ICE). That means you can easily enter or exit the market without significantly impacting the price of the commodities.

Risks Associated with Trading Agricultural Commodities

Bit as with any form of trading, there are certain risks to consider when dealing with agricultural commodities.

Price Volatility

The price of a commodity can fluctuate drastically depending on a variety of different factors:

• Supply and demand: This is one of the main drivers when calculating the price of a commodity. When the product supply is high compared to demand, the price will fall (and vice versa).
• Geopolitical stability: Political events around the world can disrupt the supply chain which can impact prices of certain commodities.
• Government regulations: There may be tariffs, trade agreements, or taxes that influence price or restrict trade altogether.
• Additional costs: Prices of goods may change depending on the producer’s extra costs like shipping, storage, and transportation.
• Weather: Droughts, floods, hurricanes, and other natural events play a vital role in the supply, demand, and cost of a commodity. This can drastically change the price at a moment’s notice.
• Seasonal changes: Because planting and harvest occur at different times, the availability of crops throughout the year will cause prices to fluctuate.
• Technological advances: Improvements to farming or production practices can lead to increased yields at lower rates, which will impact the price of the good.

Market Manipulation

Unfortunately, the agricultural trade industry can be susceptible to market manipulation. This is largely due to the fact that prices are dependent on a variety of different factors. Cornering the market, placing large orders (spoofing), or creating misleading high trading activity can happen. As a result, the prices may be distorted and won’t reflect the true supply and demand of the crops.

Strategies when Investing and Trading Agricultural Commodities

Futures

This is one of the most common days to deal with agricultural commodities. A futures contract obliges a buyer will purchase the commodity in the future and enables you to buy or sell at a “locked in” or predetermined price. Buyers have the obligation to buy at a specific time, whereas sellers are required to deliver before the expiration date. This protects both the farmer and the investor from sudden price changes that may occur in the future.

Options

Both futures and options are used protect the buyer and seller against price fluctuations of a specific commodity. While futures lock the price for purchase at a later date, options contracts deal with commodities bought and sold at any time before the contract’s expiration.  Options have a predetermined price (which, in this case, is called the strike price). This can turn a higher profit for the investor since it’s less impacted by price swings.

ETFs

ETFs, or exchange-traded funds, are traded like stocks. They essentially allow traders to speculate on the price without investing directly into the futures contract. This can be helpful if you want to track the price of different commodities (assuming the commodity has an ETF associated with it).

As you can see, trading agricultural commodities has a host of benefits for seasoned and beginner investors. Not only is it great for diversifying your portfolio, but it also has the potential for high returns (aka more money!). So even if you’re investing in stocks and crypto, agricultural goods are a valuable addition to enhance your financial portfolio.