This column was originally published on RealMoney on Jan. 26 at 4:02 p.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please
The BuzzDue in part to the president's speech, corn futures this month have rallied to a 10 1/2-year high, and presently are trading above $4 a bushel. Just last summer, the nation's major row crop was trading well under $3 a bushel. That's an eye-catching rise. Corn is not the only raw commodity that has seen surprising price-gains the past couple of years. Wheat, crude oil, livestock and precious metals futures prices all have rallied strongly. A voracious worldwide appetite for major raw commodities has been the driving force behind the surge in commodities futures prices. In recent months, raw commodity price indices such as the Reuters/Jefferies-CRB Index have risen to highs not seen for more than 30 years. Speculator interest in raw commodities futures prices also has been a significant factor helping to drive these markets northward. A new report issued by the government's Commodity Futures Trading Commission just two weeks ago showed index funds and hedge funds (basically, large pools of speculator investment monies) have placed surprisingly heavy bets on the long side of many raw commodities futures markets. The annual returns of these funds have been very impressive the past couple of years, and new raw commodity-based funds and exchange-traded funds (ETFs) are still springing up.
The Nuts and BoltsCommodity-futures trading involves an agreement by the investor to purchase or sell a commodity for delivery in the future:
- at a price that is determined at initiation of the contract;
- that obligates each party to the contract to fulfill the contract at the specified price; and
- which may be satisfied by delivery or offset, which means liquidating the futures trading position before delivery.