How are Commodities Priced and Measured?
In the most basic sense, a futures contract is for the forthcoming delivery of a standardized amount of a specific commodity.
Some of the most common examples include:
- A corn futures contract is for 5,000 bushels of number 2 yellow corn.
- A lean hogs contract is for 40,000 lb. of hog carcasses.
Crude oil futures are for 1,000 barrels of oil.
- A copper futures contract is for 25,000 lb. of the electricity-conducting metal.
The value of a contract is the current futures price multiplied by the amount of the specific commodity in a contract. So if copper is trading at $4.41 per pound, one copper futures contract is worth $110,250.
Fortunately, you do not need $110,000 to trade copper. Futures contracts are secured by a margin deposit set by the futures exchange. When you place a trade to buy or sell a futures contract, the margin deposit amount will be restricted in your commodity futures trading account as a deposit against that trade. The required margin deposit is based on the volatility and size of the specific futures contract. One copper futures contract currently requires a margin deposit of $5,738.
Commodity traders are not as concerned about the value of a futures contract as they are about the change in value. The smallest value change for any contract is a "tick" and the tick value will be specific to the commodity. The smallest price change in copper is $0.0005 or 1/20th of a cent per pound. Corn trades in increments of 1/4 of one cent. The minimum price change times the contract size is the value of one tick. For the examples, a tick on a corn contract is $12.50 and the minimum change for copper is also worth $12.50. Generally, ticks in commodities are usually worth $10 to $15 each.
The number of ticks in one cent provides the commodity contract value change per cent of value change of the commodity. A one cent change in the price of corn is four ticks or $50. A penny change in the copper quote is 20 ticks or $250. As you can see, with some commodities, a few cents change in the price of the economy results in a significant change in the value of a futures contract.
A specific commodity future will have a range of future delivery dates which can be traded and the contract price will vary based on how far out the delivery is scheduled. The closest month contract will be the most active for trading volume and short term traders will trade this contract. When the cutoff date approaches to lock in a contract for delivery of the commodity, traders will roll their active trades out to the next contract month.
The CME Group owns most of the futures exchanges in the U.S. and details on the vast majority of commodity futures contracts can be found on the CME Group website.