As food prices have risen over the last few years we have seen an influx of players into the grain markets. Many have decided that now is the time to invest in food, as the prices for life perpetuating consumables have almost doubled since the commodities crash in 2008. The public view seems to be only the biggest of players can participate in these markets. This could not be further from the truth. Due to the availability of smaller grain contracts developed by the Chicago Board of Trade, the smaller investor has been able to take part using these mini-contracts.
Prior to 2001, the CBOT only offered the 5000-bushel grain contract. Even though the size seemed large it was not too big for a trader with under $10,000. At the turn of the century the price of corn for example, was around $1.80. At 5,000 bushels the corn contract had a total value of $9,000. A trader with less than $10,000 had the ability to play corn without any leverage at all. The ability to “lever up” was much easier because the margins and daily swings were less. Today that is not the case. The 5,000-bushel corn contract at $7.50 cents is worth $37,500 and routinely sees swings of over 20 cents intraday. In 2000, that would have represented daily movements of nearly 20 percent! Today a trader with $10,000 has to apply an account leverage ratio of over 3.5 to 1 just to participate, which is considered high in the current environment, especially for investors who don’t like seeing big percentage swings in liquidity on a daily basis. (For more information on trading in volatile times check out the recent blog article, “Trading in Volatile Markets”.)
Thankfully, for the lower equity/risk averse traders who either don’t want to play with the leverage of the big contract or don’t like the lack of direct exposure from an ETF, the CBOT developed these mini contracts for the grains, which allow smaller traders to get direct market exposure to the actual product. These are 1/5th the size of their large counterparts representing only 1,000 bushels and requiring only 1/5th of the margin. At that size the value of a corn contract at this moment is $7,500 with initial margin under $500, which is much more manageable for a smaller account. The minis trade on the electronic exchanges just like the big contract and even offer expanded hours, as the mini contracts on grains trade for 30 minutes longer than the big contracts during the day session.
As one determines the strategy and instrument for their investing, it would be appropriate for many to take a look at the advantages the minis offer. As many participants in this grains bull market can attest, the mini contracts can offer not-so-mini returns.
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