Futures trading

The influence of climate change

Futures trading is about commodities such as grains, cereals, wheat and seeds
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Futures trading mainly speculates on the price of commodities such as maize, soy, oil, wheat, seeds and rice, to either go up or down in the future. Futures markets make the overall economy operate more efficiently through price discovery and risk transfer.

Speculators and hedgers don’t have to buy or sell the actual physical commodity, just the paper-contract that holds that commodity, and can exit contracts before the stipulated delivery date.

A hedger is the producer of the commodity (farmer or oil company) who trades a futures contract to protect himself from future price changes in his product. For example, if a farmer thinks the price of wheat is going to fall by harvest time, he can sell a futures contract in wheat then exit the trade later by buying it. That way, if the cash price of wheat does fall by harvest time, he will make a profit on the short-sale of the futures contract.

Speculators are independent floor traders and private investors. They make a profit buying a futures contract which they expect to rise in price, or sell a futures contract they expect to fall in price.

Futures prices are determined through a continuous worldwide flow of information that influences the supply and demand expectations of traders. Long-term price discoveries are affected by emerging market economies, crop conditions, consumer preferences, government policy, trade agreements and technology. Whereas breaking news, extreme weather conditions, disasters, the exchange rate and emotions influence the market on a daily basis.

Weather has always been a major factor in grain trading since it affects everything from planting, to crop condition, to harvest, to yield. Traders need to know what’s produced in each region of the world and need to be acutely aware of weather patterns and soil moisture levels to fully grasp how the supply picture changes.

Global climate change and extreme weather conditions in any part of the world can have a dramatic effect on grain prices as seen in the recent Hurricane Sandy that hit the US east coast. The disaster caused futures prices to slump with a drop in investor confidence and floor trading in New York had been closed for days.

Because grain markets are global, difficulties in one area will spur price changes in another area. For instance, wheat futures fall due to export demand for the US grain not picking up, even though export competition from the Black Sea dried up, and production slowed in regions such as Ukraine and Russia after droughts curtailed production.

The FAO Cereal Supply and Demand Brief released in early October this year forecasted, at the current level, a decline of 2.6% in world cereal production by the close of seasons in 2013, caused mainly by severe droughts in the US, Europe and central Asia.

Demand for agricultural commodities, a decline in world grain stocks, recent price spikes, and ever-increasing population numbers have raised concerns that climate change could increase food insecurity. Agriculturists say climate change induced by increasing greenhouse gases is likely to affect crops differently from country to country. Crops need warmth, water, and carbon dioxide to produce the best yields.

Warmth is abundant during global warming, and in many areas which are now too cold to grow crops, higher temperatures will greatly increase new land availability for use. However, in the traditional crop-growing areas, temperatures will also rise, and if there’s a lack of water or soil moisture, it would retard crop growth and development.

Plants need carbon dioxide to survive, and the more they have, the faster they’ll grow. Growers of greenhouse plants often inject carbon dioxide into their greenhouses, up to three times the normal atmospheric concentration to aid in growth and development with unequivocally positive results.

In South Africa, fluctuating weather and grain market conditions have led to a decrease in total grain production levels, a higher volume of food imports and higher food prices. Limited access to farming technology will undoubtedly affect farmers’ ability to adapt to the negative impacts of climate change.

Although Gauteng agriculture MEC Nandi Mayathula-Khoza said in September this year 78.8% people have access to food, a good indication that South Africa is food secure, there’s still 6.5% lacking access to food. She said it’s a priority to strengthen the ability of rural and urban households to play an active role in sustaining their livelihoods through agriculture, and aggregate them into larger co-operative units.

Farmers will need support in the form of finance, market access, capacity development, modifying crop rotations, altering planting dates, developing new crop varieties and investing in new technologies, for example the expansion of irrigation infrastructure.

At first glance, expanding irrigation seems the obvious means of increasing productivity, but all of South Africa’s irrigable land is already cultivated with irrigation. Of particular concern is that irrigation is by far the biggest water use in South Africa.

South Africa is one of the most water-scarce countries and characterised by variable rainfalls. Climate change predictions for SA are that rainfall will be more infrequent but more intense which will further shrink the country’s arable land and increase agricultural unpredictability.

Farmers will find it increasingly difficult to increase productivity to meet the growing demand for food. This highlights the need for sound cropping and rangeland production practices to retain soil integrity, despite these predicted intense rainfall events.

There are still many uncertainties to uncover in regards to climate change impacts on agriculture and food security. Particularly because of the lack of information on many specific farming regions, the effects of clean technology on productivity, global food demands, and the numerous possibilities of adaptation.

For speculators hoping to make a profit on short-term movements in grain futures contract prices, trading remains positive if they know the market and industry well. For hedgers it remains a secure, affordable and flexible instrument to manage agricultural price risk, protecting themselves against adverse price movements in markets.


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