What is Commodity Trading?

Commodity Trading

What a Commodity is ?

A commodity refers to the crude state of a product and therefore its state before any transformation. It is then used in the production of finished products, energy or in food. The term "commodities" means less the product than the market where it is traded. A commodity is defined as "a product, service, or an instrument whose undercover price is based on a market subject to the strict logic of the instant adjustment of supply and demand which are subject producers and consumers ". The nature of a market of commodities makes it result its instability.

Commodities Classification

Raw materials can be classified in various ways. However, here's one we prefer:

Precious metals
Minerals and Metals
Grains and Agriculture

As you probably suspect, some markets are more active than others. The futures market the largest in the world is the CBOT Chicago dealing contracts on grains. For goods, the most active is the NYMEX (WTI crude oil contract), followed by the LME (London Metal Exchange) contracts on aluminum and TOCOM (Tokyo Commodity Exchange) contract on platinum.

This list is not exhaustive but gives an overview of various commodity. For information,  the Rexecode index which classifies commodities, is published by the Research Center for the Expansion of Economic and Business Development. Here is the composition of the index which was created to provide an overview of the overall level of prices of commodities, according to their importance:

- Grains and Agriculture (weighting in the index at 25.8%)
- Minerals and metals (weighting in the index at 23.0%)
- Precious metals (weighting in the index at 6.1%)
- Oil (weighting in the index at 45.1%)

Main Investors

Regarding commodities, there are two major categories of investors on the forward markets: professionals and speculators.

Professionals are producers, transformers, traders: they want to protect against adverse movements in prices. Their actions on the forward markets allow them to secure supplies against the risk of slippage.  Speculators take positions on the forward market on commodities without answering to a commercial or industrial logic. As in any forward market, their presence is essential and contributes to improving the efficiency and market liquidity.

Between these two types of investors are the "intermediaries" who can act on their behalf (speculative positions or hedges speculative positions) or on behalf of customers (professionals). Among these key active intermediaries on the forward markets we quote: Goldman Sachs, Merril Lynch, JP Morgan, Bear Stearns.

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