Chapter 2-2 Agricultural Commodities

Agricultural (Grains, Food and Fiber)

Commodity

Main Exchange

Contract Size

Trading Symbol

Corn

CBOT

5000 bu

C/ZC (Electronic)

Corn

EURONEXT

50 tons

EMA

Oats

CBOT

5000 bu

O/ZO (Electronic)

Rough Rice

CBOT

2000 cwt

RR

Soybeans

CBOT

5000 bu

S

Rapeseed

EURONEXT

50 tons

ECO

Soybean Meal

CBOT

100 short tons

SM/ZM (Electronic)

Soybean Oil

CBOT

60,000 lb

BO/ZO (Electronic)

Wheat

CBOT

5000 bu

W/ZW (Electronic)

Cocoa

ICE

10 tons

CC

Coffee C

ICE

37,500 lb

KC

Cotton No.2

ICE

50,000 lb

CT

Sugar No.11

ICE

112,000 lb

SB

Sugar No.14

ICE

112,000 lb

SE

Frozen Concentrated Orange Juice

ICE

15,000 lbs

FCOJ-A

 

Corn

According to Chicago Board of Trade history, the earliest “forward” contract for corn was recorded in 1851. This essential grain has come a long way since then in both everyday applications and futures trading. Since the first Amerindians cultivated it, corn has been an essential food product for humans and livestock alike. Modern technology has seen corn elevated to an industrial and fuel product, changing the supply and demand dynamic and causing more than one debate as prices soared to record highs. Since corn is produced in both the Northern and Southern hemispheres, there can be news all year round pertaining to crop development.

Some of the key areas have growing seasons or crop years as follows:

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Seasonality

This market’s seasonality can be divided into three time periods: late spring to mid-summer; mid-summer to harvest; and post-harvest. The most pronounced seasonal trend in corn is the decline of prices from mid-summer into the harvest period. Prices are often near their highest level in July because of factors associated with the old crop and uncertainty over new crop production. Even in years when a price decline begins before mid-July, it can continue after mid-July if the crop outlook is favorable. Harvest adds large supplies to the marketing system, which normally pressures prices to their lowest levels of the crop year. Prices usually rise following harvest. However, the “February Break” is a well-known phenomenon whereby corn prices usually show some degree of decline during the month of February.

Key Uses
Ethanol – According to information from the National Corn Growers Association, 2.3 billion bushels of corn was used to produce 6.5 billion gallons of ethanol fuel in 2007. By-products of ethanol production include livestock feed for beef and dairy cattle, swine, and poultry.
Livestock Feed – According to the Economic Research Service, it is estimated that 55 to 60 percent of the annual corn crop in the United States is used as livestock feed.
Food Products – Corn is used in everything from corn chips and corn meal to starch, syrup, whiskey, yogurts, margarine, mayonnaise, and beverages. Corn starch provides an important component for cakes and cookies while corn syrup sweetens carbonated beverages and gives chewiness to candies.
Thousands of other Uses – Ground corn cobs (relatively dust free and highly absorbent) are added to cosmetics. Resin from corncobs is used as solvents in dyes and lacquers. Starch is used in the production of spark plugs and rubber tires. Textiles can be produced from a corn fiber similar to polyester.

Oats

This cereal grain has a rich history of cultivation and has been used for both human and animal consumption for centuries. At least thirteen species make up the classification tables for oats, but the one most cultivated is the common oat – all 146 varieties of it. Early civilizations believed oats were contaminated wheat, but cultivation moved forward once it was recognized as a separate grain. Oats have a higher tolerance level for rain than other major grains, and require fewer hot summer days. These attributes likely contributed to the widespread cultivation of oats across more temperate growing regions.

Oat acreage in the United States has been on the decline since the beginning of the last century. This may coincide with the fact that oats were often used as a feed grain for horses. As the number of horses within the United States declined after the introduction of the automobile, the need for oats may have dropped as a result. Alternately, the demand for other cereal grains may have been a contributing factor. Oats are normally sown early in the spring or summer, since they are tolerant of cold, late frosts, and snow. The grain will normally go dormant in the summer heat. According to the USDA Agricultural Statistics Board the usual planting time for oats in the top five producing states is between April and May. The harvest period usually extends from July through the beginning of August.

Like some other grains, oats have fertilizer and other input requirements. After harvesting, oats are cleaned, sorted, de-hulled, and then finished by either flaking or milling.

Key Uses

Oat hulls may be used as feed or processed into oat fiber. Flaked oats become the familiar “rolled oats”, and milling produces oat flour and oat bran. According to the World Health Organization, oats may have the highest protein level of any cereal grain, nearly equal to meat, milk, and egg protein. Oats may also be used in beer or found in skin treatments. Oat straw may be used by livestock producers as bedding.

Rough Rice

This cereal has been a staple for human consumption for thousands of years and is now an integral part of the diet of nearly three billion people worldwide. From its humble origins in ancient Asian cultures, rice cultivation spread across the continents. Many international exports of rice are confined to the hulled and polished grains; however, the CME Group’s “rough” rice contract encompasses “paddy” rice, which has not had the husks and bran removed.

Rice can be an annual or perennial plant grown in several areas across the globe.

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Labor intensive, rice cultivation also requires plenty of water. Young seedlings are normally settled in flooded fields and once the small flowers are pollinated by wind, the grass will produce small seed grains. Each grain is covered in a layer of bran and a husk with an approximate proportion for each being 22% husk, 10% bran, and 68% rice. Rice without the husk is what is commonly known as brown rice. If the hulls and bran are removed, the resulting grains are milled or white rice.

Types of rice are often categorized by the length of the grain. Typically, long grain rice is slender and, when cooked, lower starch content yields lighter and fluffier rice. Medium grain rice is shorter and wider and more likely to cling together while short grain rice is squatter still and stickier and normally chewy when cooked. There are other

specialty rice types which may have other cooking or aromatic qualities such as Basmati rice. A seemingly endless parade of rice cultivars exists with the two most common being indicia and japonica.

The United States, rice is grown in Arkansas, California, Louisiana, Mississippi, Missouri, and Texas. Nearly 50% of the acres in production are in Arkansas – and while the United States is minor in terms of global production, it still plays a significant role in exports with much of the rice produced heading to Mexico and Central America.

Key Uses

As food, rice is not as high in protein as other cereal crops, but it remains a good source of vitamins and minerals, is low in calories, and contains only trace fats. Rice can also be enriched with added nutrients which may be lost during processing. Rice is also ideally suited to manufacturing various food products including cereal, snacks, and baby food. Rice is also used in brewing beer.

Besides the precious grain, rice bran is also an excellent source of nutrients. It is often used as livestock feed. Rice bran oil can be used for cooking and hulls can be burned as fuel or used as mulch.

Soy Beans

Among the five sacred plants of ancient China, soybeans have expanded well beyond their original land of cultivation and now reign as the second most valuable crop in the United States. As a food product, soybeans have been alternately lauded for their potential health benefits and regarded with suspicion as to potential hazards. Overall, soybeans have a fair share of interest – as well as controversy – but are an important part of farming in both hemispheres.

Soybeans have been cultivated for food and other uses for nearly five millennia. Originally native to eastern Asia, the modern farming areas for this oilseed occur on nearly every continent. In the United States they were originally considered an industrial product and after their initial introduction to North America they were grown for hay. It was only during the twentieth century that America began to use soybeans as a food product.

Since soybeans are produced in large quantities in both the northern and southern hemispheres, crop news and weather is relevant nearly all year. Cultivation is most successful in climates with hot summers and plenty of sunshine – up to and over 14 hours per day – can be important to the flowering stage of a soybean plant. The complete sowing to harvesting cycle for the modern soybean varieties can take anywhere from 80 to 120 days. Their growth cycle is roughly as illustrated:

Soybeans come in a variety of colors from black and brown to gray and yellow. Most commercial soybeans in the United States are of the yellow variety.

Seasonality

The July-August period is usually a bearish time for soybeans. Closing prices during the last week in July are usually lower than those of the previous week in July. Closing prices at the end of August are also usually lower than

those at the end of July. Also, soybean prices in late January are usually higher than those in late December. Soybeans many times also succumb to the “February Break” seasonality phenomenon. Soybean meal and oil have the same seasonal tendencies as soybeans.

Key Uses

Oil – Soybeans undergo a process to extract oil destined for a variety of processed foods and commercial products.

Livestock Feed – Soybeans are rich in proteins and the meal left over from oil production is used as livestock feed for everything from chickens and hogs to catfish.

Human Food – From infant formula to tofu, the number of products in supermarkets that contain soy have grown in recent years. Soy milk, soy yogurt, soy crisps, toasted soy nuts, and even immature pods that we refer to as edamame are a part of many modern diets.

Industrial and Commercial Products – Soybeans are a part of some surprising everyday items. From plastics to solvents, soybeans are even used to produce cloth. The idea of using agricultural products in industry is not as new – Ford was a notable early pioneer in non-food applications of soybeans. Soybean derivatives were added to plastic parts in Ford vehicles. The Ford Company was recently suggesting that soybeans can be used for producing parts for cars, namely car seats. Henry Ford is also credited with suggesting that an alternative to gas was needed.

Fuel – Biodiesel from soybean oil has been used for many years now and the recent increased fervor to produce alternative fuels may yield additional research for both new and used soybean oil.

Wheat

Wheat has taken a long journey from its origins in the Fertile Crescent to its current status as one of the world’s primary sources of dietary protein. From breakfast cereal to livestock forage, wheat is an important crop across the globe and wheat futures contracts have evolved as a means for price discovery as well as a likely tool for producers, food processors, importers, and more. In North America, wheat futures contracts trade on more than one exchange, but the contract specifications below will refer to the Chicago futures market.

This domesticated grass crop likely originated near modern-day Turkey and probably reached the shores of North America through Spanish missions to the New World. Today, the United States is among the top centers of wheat production and leads in wheat exports. There are dozens of species of domestic wheat – some with names you may recognize such as einkorn, spelt, or durum – and wheat genetics are actually quite complicated, involving different numbers of chromosome sets. Wheat can often be classified further within each species according to its growing season or gluten content resulting in terms like winter wheat, spring wheat, hard wheat, and soft wheat.

Most wheat classes are grown in specific regions:

  • Hard Red Winter Wheat – approximately 40% of overall production; grown in the Great Plains
  • Hard Red Spring Wheat – approximately 25% of production; grown in the Northern Plains
  • Soft Red Winter Wheat – from 15-20% of production; grown along the Mississippi and in Eastern States
  • White Wheat – around 10-15% of production; grown in Washington, Idaho, Michigan, Oregon, and New York
  • Durum Wheat – approximately 3-5% of overall production; grown in North Dakota and Montana

North Dakota, Kansas, Montana, and South Dakota normally dominate the overall planted and harvested acreage numbers in wheat. Overall, the table below shows harvested wheat area in the United States for available years:

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The usual planting dates for spring wheat in the United States can be any time through the months of March to May – depending on weather and the State in question – and harvest can occur from August through September.

For winter wheat, usual planting can begin in August in some states and run through February in warmer states like California. Harvest can be likewise spread through many months from May through September. This can be attributed to the period of dormancy for winter wheat during a freeze and a development timeframe which may run from 110 to 130 days from planting to harvest.

No matter where it is grown, farmers usually rely on a scale to determine growth states from tillering to stem extension, heading, flowering, and ripening. These scales can help a farmer identify key stages at which to apply fertilizer or pesticide.

The usual planting dates for spring wheat in the United States can be any time through the months of March to May, depending on weather and the State in question, and harvest can occur from August through September.

For winter wheat, usual planting can begin in August in some states and run through February in warmer states like California. Harvest can be likewise spread through many months from May through September. This can be attributed to the period of dormancy for winter wheat during a freeze and a development timeframe which may run from 110 to 130 days from planting to harvest.

No matter where it is grown, farmers usually rely on a scale to determine growth states from tillering to stem extension, heading, flowering, and ripening. These scales can help a farmer identify key stages at which to apply fertilizer or pesticide.

Key Uses

Wheat can be processed into many consumer goods for consumption, from flour and pasta to malt. Each species of wheat may have particular protein, carbohydrate, and fiber levels; and among the classifications used in the United States, uses may include the following:

  • Hard Red Winter Wheat – bread flour
  • Hard Red Spring Wheat – (high protein levels) bread flour and blending with lower protein wheat
  • Soft Red Winter Wheat – flour for baked goods such as cakes and cookies
  • White Wheat – flour for noodles, cereals, crackers, and white breads
  • Durum Wheat – pasta flour
  • Milled wheat byproducts like seed coats are used in the production of animal feed.

Seasonality

The seasonality of wheat prices works best when a trader is on the long side from the period of harvest lows to October/November. On the short side, from winter into summer harvest tends to work well. Wheat has two prominent seasonals: One is a strong tendency to decline during late winter and spring as the harvest approaches. The other is to rise from harvest lows into the fall or early winter. Wheat prices begin a seasonally weak period by January or February, in most years.

Cocoa

From a luxury item to a staple part of modern life, cocoa remains a decadent product whose origins are exotic – even mysterious – for most end-users. Cocoa beans come from pods from trees (cocoa or cacao) which were originally grown in South America and were eventually cultivated on the African continent at the dawn of the nineteenth century. Grown in only a handful of countries across the globe, cocoa has an interesting and dynamic set of fundamentals which affect price. Although cocoa is traded on two exchanges globally – London and New York – our contract details will focus on the New York, or Intercontinental Exchange, information.

A huge percentage of global cocoa production resides within the African continent with the crown for production numbers falling to Ivory Coast (Cote d’Ivoire) at almost double its neighbor Ghana’s production. The total production numbers for the bean have grown through the last decade not due to increasing yields but rather increased production area.

Trees begin to bear fruit when they are four or five years old and produce an average of twenty pods a year which spring from flowers pollinated by tiny flies, or midges. Once a pod ripens, it can contain anywhere from 20 to 60 beans embedded in pulp within an orange-colored rind. Pods are opened and the pulp and seeds are allowed to ferment or “sweat”, a process by which the pulp liquefies leaving the beans to be collected and then dried.

Pods can mature on the trees throughout the growing season from October to September but there is a general consensus that among producing nations there is a main crop and a mid-crop. However, since cocoa is a tropical crop, changes in the weather and the near year-round rainfall for some grower’s means that main and mid-crop harvest times can fluctuate.

Seasonality

The yearly seasonal low tends to occur in January with the Bahia (Brazil) main crop, rather than in May or June with the Temporao (Brazil) crop, because of consumer demand. Consumer demand tends to rise into late fall and early winter, which boosts prices during that timeframe. As demand peaks and then begins to decline, cocoa prices fall into January. It’s important to note that seasonal tendencies in cocoa are not very strong.

Key Uses

Cocoa is used primarily as a food product for human consumption. It is processed into chocolate and cocoa products used globally. Most cocoa activity within the last fifty years has involved “bulk” or “ordinary” cocoa – beans from the Trinitaro or Forastero trees. “Fine” or “flavor” beans generally come from Criollo trees.

There are exceptions, but most beans will fall into those two categories and will be used in producing the following:

  • Cocoa Liquor – Beans are      roasted before or after the shell is removed and the inside      “nibs” are ground into a paste. Heat generation during this      process causes the cocoa butter to melt.
  • Cocoa Butter and Cocoa Cakes –      Finely ground liquor is fed into a hydraulic press to extract cocoa      butter, leaving cakes which can contain anywhere from 6 to 24 percent of      the initial butter. Cakes are ground or broken to be used further in      chocolate manufacture. Cocoa butter can be added to soaps and cosmetics as      well as food products.
  • Dutch Cocoa – Liquor or nibs      can be treated with an alkali solution to produce a milder and darker cocoa.

Coffee

From the plantation to the cup, coffee can be an important part of a country’s agricultural output – as well as a kick-start to the consumer’s morning. Whether the beans are destined for an intimate coffee house or a bulk instant

coffee, the right mix of growing, drying, and roasting will fill the needs of caffeine lovers across the globe. The following contract specifications will refer to the Coffee “C” (Arabica) futures contract traded on the Intercontinental Exchange.

The coffee bush or tree is grown in the tropics and does best far from the touch of winter frost. Higher elevations suit coffee bushes and the best yields come with good amounts of water and fertilizer. “Beans” are actually the seeds or pits found inside the fruit of the coffee plant – the cherry. Normally red, these fruits are produced by plants which are around three to five years old, with the possibility of being up to one hundred years old. It can take seven to nine months for the berry to mature for Arabica and ten to eleven months for the Robusta. The unroasted – or green – “beans” are removed from the cherry during processing in either a wet or dry method. In the dry method, cherries are dried in the sun, a process which can take up to four weeks. They are later hulled.

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The coffee plant is native to subtropical areas of Africa and Asia but is now cultivated in countries within that zone across the globe. There are many species of coffee plant with the two most recognizable being Coffee Arabica and Coffea canephora – Arabica and Robusta, respectively. Arabica is considered to have the best quality.

Brazil and Vietnam are leaders in coffee production with the South American grower producing mostly Arabica beans and the Southeast Asian nation growing more of the Robusta beans. Brazilian harvest will typically begin in May and last through September. The arrival of coffee may then begin one to two months after harvest ends. This can, of course, vary.

Seasonality

The frost season in Brazil occurs during the May-August period. In anticipation of this frost, prices tend to rise from January into June. This seasonal tendency is not real strong, however, because coffee can come from other producing countries, such as Mexico. Still, the potential for a Brazilian frost should be monitored. The other seasonal influence is during the winter, when U.S. coffee consumption tends to rise.

Key Uses

Drip, espresso, instant, decaf – coffee is consumed as a beverage hot or iced. Beans are roasted and usually ground to deliver a caffeinated treat while the fruit is discarded or used as fertilizer.

Cotton

This soft staple fiber from the bolls of the cotton plant has been cultivated since about 3000 BC in the Indus Valley – part of modern India and Pakistan – and as early as 5000 years ago in the Americas. Ancient cultures spun cotton to make fine garments and textiles. Wild, uncultivated cotton has been found in Australia, Africa, Arizona, Central America, California, Brazil, and Mexico – and through breeding and selection, wild cotton plants were developed into the processing-friendly varieties grown today.

Commercially grown cotton is normally one of five varieties; Egyptian, Sea Island, American Pima, Asiatic, or Upland. In the United States, the “cotton belt” growing region includes Alabama, Arizona, Arkansas, California, Georgia, Louisiana, Mississippi, Missouri, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia. A cotton crop needs a long frost-free period, a lot of sunshine, and moderate rainfall – it normally takes around 150 days from planting to harvest. Most dry tropic and sub-tropic areas across the globe can produce cotton.

Cotton bolls are processed usually by use of a cotton gin (short for engine) which separates the lint from the seeds. Cotton is normally classified according to the fiber length or “staple”. The fiber is compressed into bales which the cotton industry has dictated standards for. Each bale is 55 inches tall, 28 inches wide and 21 inches thick.

The following graph shows the overall production of cotton in the US since 1960, the earliest year for which the USDA has available data:

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Seasonality

Cotton is a market where the “trade” has very heavy participation and seasonals tend to be a function of heavy deliveries issued against the expiring futures contracts–December, March, May, July, and to a lesser degree, October. In November, the market tends to recover from harvest lows, and then in January the market tends to back off to lower levels.

Key Uses

Cotton is a valuable source of fiber, and the obvious end-use for the crop is as a textile. However, cottonseed oil is also an important and valuable product. After the seeds are de-hulled, the meat of the seed is pressed to extract the valuable oil. Leftover meats and hulls are sold as livestock feed and the refined oil is used in foods, cosmetics, rubber, soaps, and even explosives.

Sugar

This sweet commodity has been the underlying product for a futures contract in New York for nearly a century. Part of the “softs” sector of futures contracts (which traded on the Coffee, Sugar and Cocoa Exchange), the Sugar #11 futures contract to which our specifications will refer now finds its home on ICE Futures U.S. Sucrose, lactose, and fructose are a trio of substances from which we taste the flavor “sweet”. Sugar itself is a crystalline substance derived primarily from sugar cane and sugar beets. Most of us are likely more familiar with sugar cane and its history as it shaped the Caribbean through plantations which ran on slave labor to produce their bounty of molasses and rum.

Sugar cane has been produced for centuries and is now mostly grown in warm climates around the world.

The following chart shows a selection of top producers:

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Of course, many countries with cooler climates still produce sugar beets which, in the Northern Hemisphere, have a season that culminates in a harvest normally beginning in September. Sugar beets may be stored after harvest, but like cane they can lose some of their sugar content in this manner.

Sugar cane is crushed for collecting and filtering juice. Following treatment to remove impurities and boiling, dredging, and skimming, sugar liquid begins to produce crystals which are removed from syrup using a centrifuge. Raw sugar crystals may be refined further or shipped to another location for additional processing. Beet sugars are washed

and sliced and sugar is extracted with hot water. Treatment, filtration, and evaporation lead to a centrifuge as well. The rough share of commercial world sugar production is 70% cane sugar to 30% beet sugar.

Price supports and trade subsidies and restrictions and any changes that may be implemented could have an effect on sugar prices. There appears to be no end to issues with imports and exports of sugar including many countries that subsidize domestic production and maintain high import tariffs. Trading blocs and other groups of sugar producing nations will often argue these issues and more in venues such as the World Trade Organization and any statements or news from these organizations and countries is worth watching. Especially noteworthy for many traders is whether or not the US will maintain or adjust its tariff on sugar ethanol.

Seasonality

Prices tend to peak in November because of a combination of supply and demand. Production at this time is not complete, as the European crop is not yet on the market. Demand in the Northern Hemisphere, however, is usually at its peak in the fall.

Key Uses

Food – Sugar was once a luxury food product, but it is now a part of cuisines across the globe. From candies to desserts or for preserving food, sugar can be found in a wide variety of food products. Byproducts of beet sugar processing may also be used in feedstock.

Fuel – Sugar can also be converted into ethanol, making it a critical link to fuel or energy resources. By fermenting sugar from cane crops into ethyl alcohol, sugar went from being mainly a food commodity to a choice for alternative fuels. Brazil is widely noted as a leader in sugar ethanol production

Orange Juice

Relatively modern when compared to other agricultural products, orange juice futures are a versatile and often volatile market with unique fundamental and technical considerations. Fresh squeezed or mixed from concentrate, orange juice is a popular beverage across the world. The first juice production occurred early in the 20th century, and trading began later on the New York Board of Trade. The frozen concentrated orange juice market has developed into a favorite focus for many traders and currently finds its home on the Intercontinental Exchange list of products.

Orange juice is often sought out as a source of vitamin C and potassium. Folic acid and flavonoids are also purported to be healthful and inspire the juice drinking faithful. In North America, the image of oranges usually conjures up ideas of Florida, the principal growing area for citrus in the United States. Early Spanish explorers brought and planted the first citrus trees in the peninsula state, likely in the 16th century. Over the next few centuries, cultivation and groves spread across Florida and the state remains as the source for the majority of orange juice consumed in the United States. Oranges for retail are also grown in Texas, California, and Arizona and include different varieties such as

Valencia, Navel, and Ambersweet. Navel oranges are actually the result of a mutation from an orange grove in a Brazilian monastery. The season for fresh oranges usually runs from October through to June.

On a global level, Brazil usually far surpasses the United States in production and exports. This orange producing giant provides orange juice for most world markets while US production is normally consumed domestically. In the following chart on production, only one year in the last two decades has seen US production rival Brazilian. In exports, the margin is far wider. Most citrus in Brazil is grown in the state of Sao Paulo.

Seasonality

Seasonal price movement of FCOJ (Frozen Concentrated Orange Juice) does not usually reflect the December-February freeze period in the southern U.S. Seasonal tendencies are caused by harvest, production (also called “pack”) and demand (“movement”). The most significant seasonal move in O.J. is that prices generally fall from November to January. Freezes cannot be completely ignored, however.

Key Uses

While orange juice has an obvious end use, the by-products of orange groves and the production of orange juice are worth noting. Orange oil from pressed orange peels is used in household chemicals, food flavorings, and other fragrance products. Orange blossoms can be used for food and tea flavorings. Orange peels are employed by some gardeners as a slug repellent. The remains from squeezing out the juice can also be used as dehydrated livestock feed.

Questions