The rough rice futures price
is different than the rough rice price in the cash (physical) market. Generally, the price of a commodity for future delivery
is higher than the cash price due to carrying costs (insurance, interest, and warehousing fees). This is called contango.
The opposite of contango is backwardation. Backwardation is when the price of a commodity for future delivery is lower than
the cash price Backwardation is normal in a “seller’s market.”
When you trade rough rice futures, your futures price depends on where you get into the market. After
you post your initial margin, your profit or loss depends on where you enter and exit the market (minus transaction costs).
For example:
The contract size for rough rice is 2,000 hundred weight. So each $.01 move equals $20. As the market
moves your account value adjusts. If your account value drops below the maintenance margin a margin call is due. A margin
call can be met by offsetting positions or adding money to your account.
Trading futures is like driving a car without insurance. You save the insurance premium, but if you crash
you will wish that you were insured. If you have very deep pockets or deal with the physical rough rice product then futures
may be for you. If you are a speculator with a limited amount of risk capital then rough rice options are a better way for
you to invest in the rough rice market.
