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Commodity grain futures contracts are traded as agreements between buyers and sellers who can if they chose to, take delivery of the underlying commodity as a specified price and date. Each contract has a standard size. The popular soybean, corn and wheat contracts are all worth 5,000 bushel. The associated CBOT mini contracts have a 1,000 bushel value.
When commodity grain futures contracts are traded, they are done so with leverage. In other words, the trader doesn’t have to put up the full monetary value of the contract derived from price times contract size. The amount of capital required to hold futures contract is called the margin. More than anything, the margin rate is based on the contract size and price of the underlying commodity, but there are a number of other factors that go into this formula.
The initial margin is more than the maintenance margin. The time frame that defines each varies between commodities, but the initial margin is the capital required to open the position and the maintenance margin is the amount needed to hold the position after the initial period. Margin requirements are also less for hedgers’ and exchange members’ positions than they are for speculative non member positions. Because futures are traded on margin, it’s possible to lose more than your initial investment. If this happens, or is in danger of happening as a result of a deteriorating capital to leverage ratio, the trader will receive a margin call. In this situation, either forced liquidation or an account refunding is necessary. Margin calls should be avoided at all costs as they are very destructive on a trader’s capital base. Sometimes, however, they cannot be avoided.
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CommodityGrain.com