Commodity Future Margin Rates
How Much Up-Front Capital is Needed to Trade Commodities?
Oct 14, 2009
The key attraction to commodities futures trading is taking advantage of the leverage commodity brokers offer through their generous margin rates. What's margin? Margin rates are simply the 'down payment' required to buy a particular contract on gold, cattle, corn, oil, coffee, or any other traded commodity.
While commodity traders are only required to put a relatively small amount of cash into a particular trade, these traders reap the whole reward on any gains made by trading the contract. (Likewise, the trader incurs the whole dollar amount lost on a losing contract trade, which can be even greater than the initial margin deposit on the contract).
Example of Leverage on a Commodity Contract
Take an orange juice contract for example. One contract represents 15,000 pounds worth of orange juice solids. The value of the contract will vary with the per-pound price of those solids; at $2.00 per pound, the contract is worth $30,000.
The margin requirement on orange juice futures, however, is only $1,820 (a dollar amount established by that particular futures market's administering board). So, a trader could control one contract by only depositing $1,820.
If that contract increases in value from $30,000 to $35,000 (or the per-pound price of orange juice increases from $2.00 to $2.33), the profit reaped would be $5000. That would translate into a 174% gain on the initial deposit/investment, even though the actual dollar value of the contract only increased in value by 16%. This is why futures are said to offer tremendous leverage.
That said, know that had the contract lost $5000 in value rather than gained, the same trader would actually owe- through a margin call- $5000 towards the losing trade.
Commodity Futures Margin Rates
Unlike stocks, where margin rates are a flat percentage of the share value, commodity futures margin rates vary from one commodity to the next, and are generally expressed as a dollar amount rather than as a percentage. The margin requirements will also change from time to time, if the governing board of that particular market feels it's necessary change the risk/reward potential of the contracts (usually in response to price changes of the underlying commodity).
For that reason, be aware that the margin rates below may not be the same in the future (last updated on 10/14/09).
- Cocoa: $2,940/10 metric tons
- Coffee: $4,200/37,500 pounds
- Copper: $7,763/25,000 pounds
- Corn: $2025/5000 bushels
- Cotton: $2,520/50,000 pounds
- Crude oil: $12,488/1000 barrels
- Gold: $7,428/100 Troy ounces
- Heating oil: $14,175/1000 barrels
- Lean Hogs: $1,215/40,000 pounds
- Live cattle: $1,080/40,000 pounds
- Natural gas: $12,825/10,000 million British thermal units
- Orange juice: $1,820/15,000 pounds of orange juice solids
- Unleaded gas: $13,500/1000 barrels
- Silver: $8,100/5000 Troy ounces
- Soybeans: $4,725/5000 bushels
- Sugar: $1,260/50 long tons
- Wheat: $4,050/5000 bushels
Generally speaking, the margin requirements are relatively higher for the more volatile (i.e. riskier) commodities, and lower for low-volatility commodities.
Suggested Reading
Getting Started in Commodities Futures Trading
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