What are Agricultural Commodities?
Agricultural commodities are primary products traded “in natura” or with a low level of industrialization.
The term commodity, translated from English, means commodity.
In the market context , they are products with standardized characteristics and without differentiation of origin, demanded on a global scale.
Commodities, including agricultural ones, are generally used as raw materials in the production of other products – these, yes, with added value.
The price is the same, quoted on the international market (generally in dollars), according to the law of supply and demand.
A coffee producer, for example, who exports his production, has little or no ability to affect prices.
Quotes are much more influenced by factors that are impossible to control, such as climatic, macroeconomic and geopolitical events.
Types Of Agricultural Commodities
Agricultural products belong to the category of soft commodities , or light commodities.
In the hard commodities category are extracted and mined natural resources, such as gold, iron ore, oil, among others.
Primary products of agricultural origin are further subdivided into groups, such as:
- Grains: soybeans, coffee, corn, wheat
- Animal protein: meat, milk and derivatives.
Among the main characteristics of commodities, we can highlight:
- primary products
- Little or no degree of industrialization
- high volume production
- Worldwide marketing
- Prices quoted internationally
- standardized features
- Possibility of storage.
In addition to agricultural commodities, there are other types of commodities, such as financial, environmental, energy , chemical, among others.
How Does The Agricultural Commodity Market Work?
Agricultural commodities are traded in different markets , involving buyers and sellers worldwide.
Even the individual investor, who has never visited a grain silo, can invest in agricultural commodities.
Through the financial market , it is possible to buy and sell contracts for bags of soybeans, corn or coffee without actually receiving the goods .
Next, learn about the main types of commodity markets and how they work.
Physical Market
The physical market is characterized by the exchange of goods for money .
A producer who sells his agricultural commodities to a buyer is operating in the physical market.
As these are global transactions, the physical market for agricultural commodities usually takes place through commodity exchanges .
In the stock exchange environment , it is also known as the spot market.
These are negotiations that involve the immediate delivery of the goods and their respective payment in cash .
Forward Market
The forward market is an agreement between a buyer and a seller to buy or sell the commodity on a forward basis.
The details of the deal are defined in advance, such as price, contract settlement date and quantity of the commodity.
Once the forward contract is closed, changes in the price of that commodity no longer have any influence on the negotiation.
When the agreed date arrives , the seller delivers the commodity to the buyer and receives payment from him, as agreed.
The forward contract is mainly used to eliminate market risks from a trade, as it neutralizes the volatility of quotes.
Futures Market
The futures market is considered an evolution of the forward market .
In it, buyers and sellers trade futures contracts for agricultural commodities (or other assets) also with a predetermined price, quantity and date.
Futures contracts are derivatives, that is, they derive from an asset, which, in our example, are agricultural commodities.
A relevant feature is that the physical delivery of the goods does not occur at the time of closing the futures contract.
Settlement is only financial, carried out by the price difference. The adjustment even occurs daily through the stock exchange.
The main purpose of the futures market for agricultural commodities is to protect a crop from possible losses – although it is also used to speculate.
A producer can use the artifices of the derivative to eliminate the risks of the price fluctuation of its production and guarantee more cash predictability.
As commodities are priced internationally, it is difficult to predict with any degree of certainty at what level the agricultural product will be at a future date.
Options Market
Options are also derivatives and, as the name implies, give the holder the option to buy or sell an asset at a future date for a pre-established price.
Options are traded on both stock exchanges and organized over-the-counter markets.
In the bag, they have standardized characteristics. In the over-the-counter market, they can be customized according to the interest of those involved.
The buyer (holder) can acquire call or put options from the seller (writer).
Call options give the holder the right to purchase the underlying asset, at a future date, for a price stipulated in advance .
The put option gives the holder the right to sell the commodity at a future date at a pre-arranged price.
To have this right (to buy or sell something on a given date at a pre-defined price), the holder pays the writer a price for the option, called a premium.
Imagine a corn producer who, fearing a drop in prices during the harvest, decides to buy put options on the commodity.
The option stipulates the sale price of the commodity and the future date.
If, at the expiration of the option, the price of corn has actually fallen, the producer has the right to sell the asset for the agreed value, protecting himself from devaluation.
How To Invest In Agricultural Commodities
You can invest in agricultural commodities in different ways and take advantage of good opportunities , both in the short term and in the long term.
It is possible to expose yourself to the agribusiness market through investment funds, shares of companies in the sector, ETFs or futures markets.
The choice depends on the profile and objective of each investor.
Futures Market
If you are looking for short-term results , speculating in the futures market can be a good option, as long as you are aware and understand the risks of operations.
It is possible to easily buy or sell agricultural commodity contracts on the stock exchange, such as live cattle, corn, soybeans, coffee, among others.
The contracts are standardized , that is, they have specific quantities of each commodity and predetermined expiration dates.
A live cattle futures contract on B3, for example, is 330 arrobas.
Although the amount is substantial, the investor does not need to have an account balance to cover the full value of the contract.
A margin of guarantee is enough, since the operation in the futures market is leveraged.
When buying a live cattle contract, the investor has no interest in actually receiving the 330 arrobas.
Its objective is to gain from the fluctuation of commodity prices.
As there will be no physical delivery of the commodity, the exchange allows the speculator to buy the contract even without having all the resources.
In practice, he pays or receives only the variation of the contract, an adjustment that is made daily.
Stocks And Investment Funds
For the investor looking for long-term returns , there are other simpler alternatives that allow exposure to the agricultural commodities market.
One of them is through direct investment in shares of agribusiness companies.
Generally, company shares have a positive correlation with the performance of commodities in the international market .
If the price of the agricultural product rises, the tendency is for the shares of the producing company to appreciate.
If the product drops in price, stocks also tend to follow.
Those who invest in stocks can earn in different ways .
The main ones are: capital gain with asset appreciation and receipt of dividends.
It is also possible to invest in commodities through active management investment funds or ETFs, passive funds that replicate the performance of some index.
Another option is the Real Estate Investment Funds (FIIs), which have also started to explore the agro segment.
What Are The Advantages Of Investing In Agricultural Commodities?
Due to its global economic importance , the agricultural commodity market undoubtedly offers very attractive investment options .
As we have seen, it is possible to expose yourself to the market in different ways, according to the profile and objective of each investor.
Among the main advantages are:
Diversification
In any scenario, a well-diversified investment portfolio is always a good strategy.
A properly balanced portfolio provides good profitability in optimistic scenarios, while ensuring resilience in times of crisis.
In this context, investing in agricultural commodities makes perfect sense.
Use Of Cycles
Although essential to human survival, agricultural commodities are priced according to the law of supply and demand .
Prices therefore fluctuate, up and down.
Furthermore, there are the harvest and off-season periods that have a direct impact on prices.
To take advantage of the best opportunities, investors need to be aware of internal and external events related to the market to surf the cycles.
Liquidity
Liquidity is also a major advantage of the agricultural commodities market, especially in the futures market.
For those who make short operations in search of short-term profits , liquidity allows entering and exiting any operation without difficulties.
What Are The Risks Of Investing In Agricultural Commodities?
Agricultural commodity risks can be higher or lower, depending on the assets chosen and the strategies adopted.
In the futures market, for example, it is possible to profit both high and low.
But as the operation is leveraged, there is the possibility of turbocharged gains, but also exponential losses.
It takes knowledge and experience to do well in the derivatives market.
If the investor’s option is for shares of companies in the sector or investment funds, the analysis needs to consider other aspects, in addition to the commodity itself.
A listed company can produce a very profitable and profitable raw material, but be poorly managed and go bankrupt.
There are also external factors , such as weather conditions, geopolitical conflicts and exchange rate fluctuations, which will always have an impact on the price of commodities.
Is It Worth Investing In Agricultural Commodities?
Agricultural commodities are (and will likely continue to be) essential to human survival.
As we have seen, there are different ways of investing in the sector.
If you want to diversify your portfolio , have an adequate profile for risk levels and know how the market works, investing in agricultural commodities will certainly be worth it.
3 Tips For Investing In Agricultural Commodities
Interested in investing in agricultural commodities?
So, check out tips to make the right choice.
1. Define Your Goals
The first step is defining the objectives. Do you want to speculate on short-term gains or invest thinking ahead?
The purpose of a capital gainer is different from someone interested in, for example, income (such as dividends).
2. Evaluate The Alternatives
There are several investment alternatives in the market: futures contracts, shares, funds and even BDRs.
Some options allow the investor direct exposure to a specific commodity. Others represent indirect investments.
You can be more active in your allocations and choose, for example, the futures market, or be more passive (funds, ETFs).
3. Invest In Knowledge
Whichever you choose, the success of your investment will depend on how much you know about the market.
Always study, master analysis techniques and seek information from reliable sources .
This will increase your chances of success, both in agricultural commodities and in other types of assets.
