Understanding the Global Agricultural Commodity Market: An Investor's Guide

The agricultural commodity market is a mystery to many investors. However, as more investors look to diversify their portfolios, the commodity market has started to become more appealing. Here are the basics of the international agricultural commodity market and what it could mean to you as an investor.

Agricultural Commodities

Agricultural commodities represent a very important part of every economic system. The strength of any country is tied directly to their agricultural commodities. Things that we use everyday, as consumers, are produced in the agricultural commodity market. Things like wheat, corn, soybeans, sugar cane and many other things are a vital part of our food supply and the food supply of the entire world.

Commodities Exchange

Exchanging these commodities is also a very important part of our society that is often overlooked. Exchanging agricultural commodities has been a way of life for many centuries and it continues to be one to this day. There are many different commodity exchanges in the world that do business every single day with agricultural producers. At these commodities exchanges, contracts of commodities can be purchased. Typically, contracts are based upon standard sizes and are priced based on the current demand of the commodity.

Pricing Considerations

The pricing of agricultural commodities can vary widely from one day to the next. It is not uncommon to see prices of a certain commodity near record highs one day and turn around and be near record lows the next. This market is subject to wild volatility from time to time. This means that as an investor, you have to be prepared for a lot of movement in the price of a particular commodity.

The supply of a particular commodity can drastically affect prices in the world market. For example, crops are subject to the weather in order to be successful. Therefore, if a certain region experiences a drought, they may not be able to meet the normal demand that has been generated for their particular crop. At that point, the price for that particular crop could go up significantly. This means that other farmers could benefit from a drought in another area. A late freeze has also been known to cause severe problems in the agricultural market. It can wipe out an entire crop of a particular commodity, which has drastic effects on the market overall.

Developing Countries

Another important factor of the international agricultural commodity market is the impact that a developing country can have. When a country is rapidly developing, they may require an unusually high amount of certain commodities. When a drastic increase in demand takes place, this also can raise the prices in the entire world for the those commodities. For example, in 2008, when China was experiencing rapid growth, the prices for nearly every commodity that you can think of went very high. This impacted everyone else that wanted the same commodities. You have to be in tune with what is happening in the rest of the world before getting involved in a commodity market.