COINS

How is the Chicago SRW futures contract structured?

• traded on the Chicago Board of Trade

• each contract is 5000 bushels of wheat

• prices in us cents per bushel

• contract months are march, may, july, september, and december

• contracts are physically deliverable as opposed to cash

What’s the difference between the spot price and the futures price of a commodity?

The spot price is what the commodity is currently worth. If I were to buy a commodity today, the spot price is what I’d pay. A futures price, however, is the agreed upon price to be delivered at a specific date. These prices show the difference between how the market is acting right now and what it is expected to do later.

What are the main factors that move commodity prices?

• supply and demand: when supply of a commodity rises and exceeds demand, prices fall and vice versa; consumer demand

• for wheat specifically, weather and climate

• geopolitical factors: wars, conflicts, etc.

• economic factors: sanctions, tariffs, etc. 

How do commodities behave differently from equities or bonds?

Commodities respond to supply and demand as well as geopolitical events and factors, but equities and bonds respond more to inflation, future earnings, and overall economic growth. 

Give and example of a geopolitical event that would move Chicago SRW prices.

Ukraine-Russia War:

• both ukraine and russia account for 25-30% of global wheat exports

• when there is conflict, which slows down production, other countries turn to the us for their wheat instead

• raises the prices of wheat because of the increased demand

What is the difference between trading a commodity ETF and trading commodity futures?

• ETFs: like trading stock. buy and sell through a brokerage account

• futures: have a contract in which you buy and sell a commodity at a future date that can have a physical delivery

Why do some commodities often have strong seasonal price patterns?

• Ag: harvest times

• energy: weather patterns

What is the federal-funds rate, and why do markets care about it?

It is a range set by the federal reserve that is an interest rate for bank to bank overnight lending. 

• influences other interest rates like mortgage rates, auto loans, and credit card rates 

• raising the federal funds rate cools inflation, but it makes borrowing more expensive

• recent lowering by fed: mainly caused by the slowing job market

Why might a strong US dollar put pressure on commodity prices?

• commodities become more expensive for foreign buyers, they’re spending more in their local currency to buy the commodity

• high local currency costs reduce global demand

• strong dollar —> commodities cheaper in USD terms —> pressure on prices

• downward pressure commodity prices, potentially hurting demand

What is the Federal Reserve’s dual mandate?

• comes from congress and directs the Fed to pursue maximum employment and stable prices

• employment: keeping unemployment low and stable, but not zero

• stable prices: controlling inflation, target inflation is 2%

What is the yield curve?

• representation of what treasuries do

• rates on y-axis, time on the x-axis

• a normal yield curve is upward sloping, showing that long-term bonds have higher yields than short-term bonds

If demand from a major consumer country rises, what happens to global prices?

Global prices will rise because demand increases and consumers will be willing to pay more at every price level. 

If farmers harvest a record crop, what happens to prices?

Prices fall because supply exceeds demand. Ex: egg shortage saw an opposite effect where prices rose because there weren’t enough eggs

If the economy enters a recession and consumers cut back on spending, what happens to demand for commodities and their prices?

Demand decreases because people are less willing to spend money on things. When consumers don’t want a product, demand decreases and prices fall.

If oil production is cut, what typically happens to oil prices?

Oil prices rise because supply decreases and demand stays the same. When everyone still want oil, but there isn’t enough to go around, it will cost more to purchase.