Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Commodity Trading — Everything You Should Know
As taught in the Value Chain Analysis Course / ★★★★★ 4.9 rating
Key takeaways
- Commodity trading is the exchange of essential raw materials and goods.
- Through trading methods, commodity markets offer transparency, facilitate price discovery, and manage risks for producers, consumers, and speculators.
- Energy, metals, agriculture, and livestock commodities influence global supply and demand.
Commodities have been around for such a long time that they are a massive part of people’s daily lives and fuel the economy. Its uses and functions are ours; as a matter of fact, we use it to go on with our everyday needs and wants. On the other hand, commodity trading is as old as the commodities themselves trading goods have been around for many centuries. It plays around with the Law of Supply and Demand and is the backbone of Global Trade.
In this article, we will explore and have a detailed look at Commodity Trading. Its definition, history, how it affects economies, and how it evolved.
What are Commodities?
To better understand what Commodity Trading is, we must first know the subject of the trading: the Commodities.
Commodities are tangible products, which usually refer to raw materials that are used as inputs in producing other goods and services. Commodities are typically categorized into four categories:
1. Energy Commodities
Energy Commodities include Crude oil, natural gas, coal, heating oil, and gasoline. These resources are responsible for the generation of electricity and powers industrial processes worldwide.
2. Metals Commodities
Includes Industrial metals such as copper, zinc, nickel, and aluminum, as well as precious metals such as gold, silver, and platinum. Construction, manufacturing, and infrastructure development wise, industrial metals are vital. On the other hand, precious metal serves as a store of value, a safe-haven asset, and is often used in jewelry.
3. Agricultural Commodities
Agricultural Commodities encompass a broad range of products, such as wheat, corn, coffee, soybeans, cocoa, and cotton. These commodities play a vital role in the overall food security of the world, as they are needed to feed the ever-growing population.
4. Livestock Commodities
Livestock and meat commodities include lean hogs, pork, live cattle, and feeder cattle.
What is Commodity Trading?
Commodity Trading is the exchange of essential raw materials and goods. It follows the principles of supply and demand as it is the driving force of commodity markets. Demand is affected by changes in supply and lower supply means higher prices and vice versa.
Commodity Trading and the Global Economy
Commodities and the Global economy are closely linked as Commodities are one of the main indicators of economic health. Increases in prices mean increased production costs and higher inflation rates.
Agricultural commodity changes are a great factor in food price trends while price fluctuations in metals and minerals affect the Manufacturing Sector.
Commodity Trading is also a vital aspect of the Global Economy; Providing price discovery, risk management, and efficient resource allocation. Furthermore, it provides transparency when it comes to pricing trends as it focuses on the law of supply and demand
Different Ways Commodities can be Traded
Since commodities are essential products that are mostly raw materials, one method of trading is not going to work. Here are the different ways commodities can be traded:
1. Futures Contract
A Futures contract is a financial agreement that involves two parties agreeing to buy or sell a specific quantity of a commodity at a predetermined price at a specified time in the future. The obligation to deliver the underlying commodity is assumed by the seller, at the contract’s expiry date. The way a Futures Contract works is that the seller should sell or the buyer should purchase the underlying commodity at the agreed price, at the contract’s expiration date, regardless of its current price at the time of the expiration
2. Spot Trading
Spot trading involves the immediate and direct purchase or selling of a commodity, typically conducted within a short timeframe.
3. Commodities Stocks
This method involves buying a stock of a company that is involved with or handles a commodity. Investing in commodity stocks is less risky than investing directly in the commodities, mainly because you are not just betting on the commodity price itself. However, this method is going in the opposite direction. Investing in commodity stocks is not exactly preferable if you’re looking to track the price of commodities.
4. Exchange-Traded Funds (ETFs)
ETFs are funds that work on exchanges and generally track a specific index. The way this works here is that ETFs are investment funds that allow investors to track the performance of commodities or groups of them and acquire exposure to commodity prices.
Significance of Commodity Trading
Commodity trading has its importance, mainly for economic reasons. Commodity trading allows people to be aware of the possible drastic changes in the commodities, thus making it crucial for several reasons.
1. Prices
Politics, economic trends, weather conditions, and many other factors can cause fluctuations in supply and demand, which are reflected in commodity prices. Commodity Trading is responsible for facilitating price discovery which in turn, helps to establish fair market prices.
2. Risk Management
Through Commodity Trading, producers and consumers can be exposed to the price volatility of commodities. It allows producers to mitigate the risk of price decline, while consumers can secure supplies and protect themselves against drastic price increases.
3. Market Efficiency
When Commodity Markets work efficiently, it helps allocate resources and guarantee that the goods reach consumers promptly.
Entities That Play a Crucial Role in Commodity Trading
Commodity trading doesn’t work on its own. Some individuals and entities play a crucial role in participating and making it work.
The entities involved are mainly the:
- Producers – Entities responsible for creating and producing the goods and services.
- Consumers – Persons or Industries that require commodities to function.
- Speculators – Individuals or Institutions that invest or trade in commodities intending to gain profit from the price movements.
Commodity Trading Tools and Software
In engaging in the field of commodity trading, you can use several tools and software that helps with market analysis, monitoring prices, and managing trades,
making it easier to make informed decisions.
Here are some tools and software available for commodity trading:
1. S&P Global Platts Commodity Insights
S&P Global Commodity Insights is a provider of energy and commodities information and a source of benchmark price assessments in the physical commodity markets. It is a subscription-based product that provides market intelligence, market analysis, and forecasts for various commodity markets.
2. Mintec
Mintec provides market intelligence, commodity prices, and price forecasts across the agri-food supply chain. Mintec’s primary offering is its Analytics Platform, which provides access to a wide database of pricing information and the latest news in the food and beverage sector.
3. CNBC (Consumer News and Business Channel)
CNBC is a recognized world leader in business news as well as a provider of real-time financial market coverage and business content. It is a global television network that provides coverage of the latest news and developments in the financial sector, economic trends, and various topics related to business and finance.
4. eToro
eToro is a social trading and multi-asset brokerage platform that offers a limited selection of stocks and ETFs. It also offers real-time market data and analysis tools and enables individuals to invest, trade, and engage with financial markets with a user-friendly interface.
5. TradingView
TradingView is an online platform primarily used for financial market analysis. It also offers charting tools, and technical indicators as well as real-time market data to help traders and investors make informed decisions.
6. Commodity XL
Created by Triple Point, Commodity XL is a commodity trading and risk management system capable of handling multiple commodities. It provides risk management solutions specifically for commodities. It is a great tool for monitoring and managing exposure to price volatility, analyzing scenarios, and implementing hedging strategies.
Conclusion
In conclusion, commodity trading is an integral part of our daily lives and global economies, driving the supply and demand dynamics of essential resources.
Commodities, spanning energy, metals, agriculture, and livestock, are vital for various sectors. Commodity trading, executed through futures contracts, spot trading, commodity stocks, and ETFs, influences economic indicators and aids in risk management.
It plays a crucial role in establishing fair prices, managing risks, and ensuring market efficiency, involving producers, consumers, and speculators as key participants in this intricate economic system.
Frequentlyasked questions
What is a Commodity?
Commodities are tangible products, which usually refer to raw materials that are used as inputs in producing other goods and services. Commodities are typically categorized into four categories: Energy, Metals, Agricultural products, and livestock.
What is Commodity Trading?
Commodity Trading is the exchange of essential raw materials and goods. It follows the principles of supply and demand as it is the driving force of commodity markets.
What is the Significance of Commodity Trading?
Commodity trading has its importance, mainly for economic reasons. Commodity trading allows people to be aware of the possible drastic changes in the commodities, thus making it crucial to know the price changes, the risk involved in handling commodities, and the way you can secure yourself against inconvenient changes.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
