What are agricultural commodities?

Agricultural commodities are raw materials or primary agricultural products, such as crops or livestock. These commodities are traded globally on various exchanges, such as the:

• Intercontinental Exchange (ICE) in New York, which references sugar, coffee, cotton, and cocoa markets,
• Chicago Board of Trade (CBOT), which is a benchmark for the grain market.

One of the key characteristics of agricultural commodities is fungibility. This means they’re interchangeable with other goods of the same type, as long as they meet established quality standards. For example, a bushel of wheat is essentially the same whether it’s produced in China or India. This fungibility allows for standardized pricing and trading on commodity exchanges.

Agricultural commodities can be bought and sold through spot markets and futures markets:

• Spot markets: This involves buying and selling agricultural commodities for immediate delivery, with prices based on current supply and demand dynamics.
• Futures markets: This involves buying and selling contracts to deliver an agricultural commodity on a future date. Futures contracts are traded on exchanges like the ICE and CBOT, and are used by producers and companies to hedge against price fluctuations and mitigate risks.

Types of agricultural commodities

Agricultural commodities can be classified into six categories:

Oil seeds

Oil seed crops are cultivated for their oil-rich content. Once the oil is extracted, the remaining seeds are repurposed as animal feed or other byproducts. Oil seeds include canola, cotton, soybeans, sunflower seeds, and palm oil.

Cereal grains

Cereal grains are staples in human and animal diets. They can also be used to create biofuels, such as ethanol derived from corn. Cereal grains include wheat, corn, oats, barley, and rough rice.

Livestock

Livestock includes cattle, hogs, and poultry, which are traded as both live animals and processed products (e.g. meat, hide, organs, or bones).

Dairy

Dairy commodities include milk, butter, cheese, eggs, and whey. These commodities are often used in food manufacturing industries.

Soft commodities

Soft commodities include any product that is cultivated rather than mined. They include crops like sugar, coffee, cocoa, and frozen concentrated orange juice (FCOJ). Softs are unique because they’re grown and harvested each year.

Miscellaneous agricommodities

Miscellaneous agricultural commodities include those that don’t fit into other classifications, such as wood, rubber, and lumber. These are used in industries such as manufacturing, construction, and textiles.

What are the top agricultural commodities in global markets?

Some of the most popular agricultural commodities include corn, coffee, soybeans, cotton, sugar, cocoa, wheat, cattle, and rice.

The role of fertilizers in agricultural commodity markets

Fertilizers play an important role in agricultural commodity markets as they're essential to many modern agricultural practices. Fertilizers are classed as agricultural inputs and can be categorized into three main types:

• Nitrogen-based fertilizers
• Phosphate fertilizers
• Potash fertilizers.

Fertilizers are widely used to produce key agricultural commodities like grains, oilseeds, and cash crops, and can directly impact crop production levels. Because they are so essential for farming, they can influence the pricing of agricultural commodities. For example, increased fertilizer costs can reduce crop yields, which leads to lower supply and higher prices.

The impact of the monthly World Agricultural Supply and Demand Estimates (WASDE) report on markets

The WASDE is a monthly report published by the World Agricultural Outlook Board (WAOB). The report forecasts global crop production, trade, supply and demand for major agricultural commodities, including global and U.S. crops and U.S. livestock.

It impacts the agricultural markets by promoting:

• Transparency: The WASDE report reduces information asymmetry by providing access to timely and accurate data.
• Price discovery: Market participants use the data provided in the WASDE report to analyze agricultural trends and inform buying, selling, and hedging decisions.
• Risk management: Market participants use the insights provided in the WASDE to mitigate risks associated with price volatility and potential supply disruptions.
• Policy development: Policymakers and government agencies refer to WASDE forecasts when evaluating the effects of agricultural policies on prices and markets.

In addition to this report, many producers and companies also use agriculture market intelligence to inform decision-making.

What are other sources of agricultural market intelligence?

While the WASDE report provides valuable information, other market intelligence sources can offer unique perspectives to help businesses navigate the complexities of agricultural markets.

At StoneX, we provide in-depth analysis, real-time market data, and agricultural market reports with expert insights not available in other sources. Our agricultural market intelligence includes breaking news, global coverage, historical and emerging trends, and global supply & demand information across agricultural commodities. We also offer reports with unique insights tailored to fats & oils, grains & oilseeds, base metals, dairy, energy, meats & livestock, fertilizer, precious metals, and more.

Access StoneX agricultural market intelligence to stay ahead in a rapidly changing market.

What factors drive the demand for agricultural commodities?

The demand for agricultural commodities is driven by several factors, such as population or economic growth. For example, growing populations means an increased demand for food and agricultural products. During periods of economic growth, rising incomes can lead to higher demand for meat and dairy – which, in turn, increases demand for feed grains like corn and soybeans.

Consumer preferences also play a role in demand. For example, as more people shift towards non-dairy milks, there is increased demand for agricultural commodities used in alternative milks, such as soybeans or rice.

How do agricultural commodities play a role in futures trading strategies?

Futures contracts are an agreement to buy or sell a commodity at a predetermined price on a future date. These contracts allow buyers and sellers to lock in prices for agricultural commodities ahead of time, providing a way to protect against market volatility. When a futures contract expires, the buyer is obligated to purchase the underlying commodity while the seller is obligated to deliver the commodity as agreed.

Companies that depend on agricultural commodities often use futures contracts to mitigate risks associated with price fluctuations. They play an important role in maintaining stable pricing for ag operations such as agribusinesses, farming cooperatives, or food manufacturers. Taking positions in futures contracts provides a way for these companies to mitigate the risk of financial losses due to volatile markets.

For example, a wheat farmer may face price volatility due to unpredictable factors like weather, global supply, or changing demand. To hedge against these risks, the farmer can sell wheat futures contracts ahead of the harvest. By locking in a price now, they ensure a guaranteed price for their crop when it’s harvested, regardless of future market fluctuations. This provides financial security and helps them plan their future budgets more effectively.

In another example, consider a food manufacturer that produces corn-based snacks. Like other agricultural commodities, corn’s price can fluctuate depending on weather, supply, and other factors. To protect against price increases, the food manufacturer uses futures contracts to lock in a price for corn several months before it needs to make a purchase.

If the market price of corn rises due to a bad growing season or supply chain disruptions, the company is shielded from these increases as it has already secured a price through the futures contract. If corn prices fall, the manufacturer could potentially overpay for corn – but the trade-off is the benefit provided by stable budgeting and pricing.

How are prices for agricultural commodities determined?

Agricultural commodity prices are influenced by various factors, including:

Weather and climate

Weather is one of the major factors in determining agricultural commodity prices. Droughts, floods, hurricanes, and other extreme weather events can greatly impact crop yields and livestock production, resulting in supply shortages and price increases. For example, the 2012 U.S. drought severely affected corn and soybean crops, leading prices to skyrocket.

Supply and demand

Like other commodities, supply and demand plays a significant role in agricommodity prices. When a commodity’s global production exceeds its demand, prices tend to decline, while shortages can lead to price increases.

Geopolitical events

Political instability, trade policies, and conflicts can all disrupt the production and distribution of agricultural commodities. Export bans or sanctions on major producing regions can also disrupt global supply chains, limiting access to specific commodities and causing price increases.

How do businesses manage volatility in agricultural commodities markets?

The below example outlines how futures contracts can be used to manage volatility in agricultural commodities markets.

John, a corn farmer, plants his crop in the spring and expects to harvest in the fall. After the harvest, John would usually take his corn to the local grain store to sell at the current market price. However, corn prices can fluctuate widely due to factors like weather, global demand, and competition from other countries. If prices drop significantly before harvest, John could face financial losses that make it difficult to cover his production costs.

This year, John learns that there’s likely to be a bumper corn crop across the U.S., which could drive prices down. To protect himself, John decides to use a futures contract to lock in a favorable price for his corn before it’s even harvested. He joins an agriculture trading platform and sells a corn futures contract on the Chicago Board of Trade (CBOT), one of the major commodity exchanges in the U.S.

The futures contract specifies details like the amount of corn John plans to sell, the quality standards it must meet, and the delivery date. By doing this, John secures a set price for his crop – ensuring he can cover his costs even if the market price drops at harvest time.

When the harvest is complete, John delivers his corn as agreed, knowing he’s protected from the risk of low prices. This hedging strategy provides him with financial stability and peace of mind.

This material is for informational purposes only and should not be considered as an investment recommendation or a personal recommendation.