Trading Commodities, A 101 Overview


Commodities markets, both historically and now, have tremendous economic impact on nations and people. It is thought that rice futures may have been traded in China 6,000 yrs ago.

Shortages on Key commodities have brought on wars throughout history such as in World War II, when Japan ventured into foreign lands to secure Crude Oil and rubber, while oversupply can have a devastating impact on a region by devaluing the prices of core commodities.

Energy commodities such as Crude Oil are closely watched by countries, corporations and consumers.

The average Western consumer can become significantly impacted by high Crude Oil prices. And Crude Oil producing countries that are largely dependent on petro-dollars as their source of income can become adversely affected by low Crude Oil prices.

Unusual disruptions caused by weather or natural disasters can not only be an impetus for price volatility, but can also cause regional food shortages.

Various commodities play an important the global economy and savvy commodities investors can turn economic events into opportunities.

The 4 categories of trading commodities include:

1. Energy: crude oil, heating oil, natural gas and gasoline

2. Metals: gold, silver, and , , tin, , , and others.

3. Livestock and Meats: lean hogs, live cattle and feeder cattle

4. Agricultural: corn, soybeans, wheat, rice, cocoa, coffee, cotton and sugar

Commodity trading is an essential business.

The might of empires can be seen as somewhat proportionate to their ability to create and manage complex trading systems and facilitate commodity trades, as these serve as the wheels of commerce, economic development and taxation for treasuries. Reputation and reliability are critical underpinnings to secure the trust of  investors, traders and suppliers throughout history,

Commodity trading over and in the world’s exchanges require agreed-upon standards so that trades can be executed without visual inspection.

Trading and investing in commodities can be very different from investing in securities such as and bonds.

Global economic development, technological advances and market demands for commodities influence the prices of staples such as crude oil, aluminum, copper, sugar and corn.

Example: the emergence of China and India as significant economic players has contributed to the declining availability of industrial metals, such as steel, nickel, copper, zinc, tin and lead, for the rest of the world.

Basic economic principles follow the commodities markets: lower supply equals higher prices.

For instance, participants can follow livestock patterns and statistics. Major disruptions in supply, such as widespread health scares and diseases, can lead to investing plays, given that the long-term demand for livestock is generally stable and predictable.

Investing directly in specific commodities can be a risky proposition, if not just speculative without the required, knowledge, experience, diligence and rationale involved.

Some plays are more popular and sensible in nature.

Volatile or Bearish markets typically find scared investors scrambling to transfer money to precious metals such asgold, which has historically been viewed as a reliable, dependable metal with conveyable value.

Investors losing money in the can create nice returns by trading precious metals. Precious metals can also be used as a hedge against high inflation or periods of currency devaluation.

Energy (Crude Oil, Nat Gas) plays are also common for commodities.

Global economic developments and reduced Crude Oil outputs from reservoirs around the world can lead to upward moves in prices, as investors weigh and assess limited supplies with ever-increasing energy demands.

And, optimistic outlooks regarding the price of Crude Oil should be tempered with certain considerations. Economic downturns, production changes by the Organization of the Petroleum Exporting Countries (OPEC) and emerging technological advances such as wind, solar and bio-fuel that aim to supplant, or complement Crude Oil as an energy source should also be considered.

Commodities can become risky investment propositions because they can be affected by eventualities that are hard to call. These include unusual weather patterns, natural disasters, epidemics and man-made disasters.

For example, agriculture grains have a very active trading market and can be volatile during Summer months or periods of weather transitions.

With commodities playing a Key role in the global economic markets and affecting the lives of most people on Earth, there are multitudes of commodity and futures exchanges around the world.

Each exchange carries a few commodities or specializes in a just 1 commodity.

The most popular exchanges include the CME Group (NASDAQ:CME), which resulted after the Chicago Merc, and Chicago Board of Trade (CBOT) merged in Y 2006, Intercontinental Exchange (NYSE:ICE), Kansas City Board of Trade and the London Metal Exchange(LME).

Futures, forward contracts and hedging are a prevalent practice with commodities.

The airline sector is an example of a large industry that must secure massive amounts of fuel at stable prices for planning purposes.

Because of this need, airline companies engage in hedging and purchase fuel at fixed rates for a frame to avoid the market volatility of Crude Oil and Jet Fuel which would make their financial statements more volatile and riskier for investors.

Farming cooperatives also utilize this mechanism.

Without futures and hedging, volatility in commodities could cause bankruptcies for businesses that require predictability in managing their expenses. Thus, commodity exchanges are used by manufacturers and service providers as part of their budgeting process, and the ability to normalize expenses through the use of forward contracts reduces a lot of cash flow-related issues.

Investing in commodities can quickly degenerate into pure speculation when a trader makes uninformed decisions.

However, by using commodity futures or hedging, investors and business planners can secure insurance against volatile prices. Population growth, combined with limited agriculture commodities supply, can provide opportunities to ride agriculture price increases.

Demands for industrial or base metals can also lead to opportunities to make money by betting on future price increases. When markets are unusually volatile or Bearish, commodities can also increase in price and become a place to park cash.

Stay tuned…