A commodity market is a market that is traded in the primary economic sector rather than a manufactured product. Soft commodities are agricultural products such as wheat, coffee, chocolate, fruit and sugar. Hard commodities are mined, such as gold and oil. Access investors around 50 major commodity markets around the world with pure financial transactions exceeding the amount of physical trade in which goods are shipped. Futures contracts are the oldest way of investing in commodities. Futures are secured by physical assets. Commodity markets may include physical trading and derivative trading using spot, forward, futures and futures. Farmers have used the simplest form of derivative trade in commodity markets for centuries for price risk management.
Financial derivatives are financial instruments whose value is derived from a commodity called an underlier. Derivatives are traded on the exchange or over-the-counter (OTC). More derivatives are traded through multiple home clearing with Central Counterparty Clearing, which provides clearing and settlement services on futures exchanges, as well as off-exchange in the OTC market.
Derivatives such as futures contracts, Swaps (1970s-), Exchange-traded Commodities (ETC) (2003-), forward contracts have become the main trading instruments in commodity markets. Futures are traded on regulated commodity exchanges. Over-the-counter (OTC) contracts are "individually negotiated bilateral contracts signed between the contracting parties directly".
Exchange-traded funds (ETFs) began displaying commodities in 2003. Gold ETFs are based on "electronic gold" that does not require bullion physical ownership, with additional insurance and storage costs in the repository such as the London bullion market. According to the World Gold Council, ETF allows investors to be exposed to the gold market without risk of price volatility associated with gold as a physical commodity.
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History
Commodity-based commodity money and commodity markets in raw form are believed to originate in Sumeria between 4500 BC and 4000 BC. The Sumerians first used a ground token sealed in a clay vessel, and then the clay wrote a tablet to represent the amount - for example, the number of goats, to be delivered. These promises time and date of delivery resemble futures contracts.
The various early civilizations used pigs, rare shells, or other items as commodity money. From then on traders are looking for ways to simplify and standardize trade contracts.
The gold and silver markets evolved in classical civilization. At first precious metals are valued for their beauty and intrinsic value and are associated with royalties. In time, they are used for trading and exchanged for other goods and commodities, or for labor payments. Gold, measured, then into money. The scarcity of gold, its unique density and the way it makes it easy to melt, mold and measure make it a natural trading asset.
Beginning at the end of the 10th century, commodity markets grew as a mechanism to allocate goods, labor, land and capital across Europe. Between the late 11th and 13th centuries, English urbanization, regional specialization, expansion and improvement of infrastructure, increased use of currency and the proliferation of markets and exhibitions are evidence of commercialization. The market spread is illustrated by a reliable 1466 scale installation in Sloten and Osdorp villages so villagers no longer have to go to Haarlem or Amsterdam to weigh locally produced cheese and butter.
The Amsterdam Stock Exchange, often referred to as the first stock exchange, originated as a market for commodity exchange. Initial trading on the Amsterdam Stock Exchange often involves the use of highly sophisticated contracts, including short sales, forward contracts, and options. "The trade took place in the Amsterdam Bourse, an open space, created as a commodity exchange in 1530 and rebuilt in 1608. The commodities exchange itself is a relatively new invention, which exists only in a handful of cities."
In 1864, in the United States, wheat, corn, beef, and pork were traded widely using standard instruments at the Chicago Board of Trade (CBOT), the world's oldest futures and options option. Other food commodities were added to the Commodity Exchange Act and traded through the CBOT in the 1930s and 1940s, expanding the list of grains to include rice, plant feed, butter, eggs, Irish potatoes and soybeans. A successful commodity market requires broad consensus about product variations to make every commodity acceptable for trade, such as the purity of gold in gold bullion. Classical civilization builds a global market of gold or silver trading complexes for spices, fabrics, wood and weapons, most of which have quality standards and timeliness.
Through the 19th century "the exchange became an effective spokesperson for, and innovators, improvements in transportation, warehousing, and financing, which paved the way for expanding interstate and international commerce."
Reputation and clearing are of primary concern, and countries that can handle them effectively develop a strong financial center.
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Commodity price index
In 1934, the US Bureau of Labor Statistics began the calculation of the daily Commodity Price Index that became available to the public in 1940. In 1952, the Bureau of Labor Statistics issued a Spot Market Price Index that measures price movements of "22 sensitive commodities whose markets are considered to be located among the first influenced by changes in economic conditions.Thus, this serves as one of the earliest indications of changes that will occur in business activities. "
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Commodity index funds are funds whose assets are invested in financial instruments based on or related to commodity indices. Almost every index case is actually the Commodity Futures Index. The first index is the Commodity Research Bureau (CRB) Index, which began in 1958. Its construction makes it useless as an investment index. The first commodity futures index that can be invested is the Goldman Sachs Commodity Index, created in 1991, and known as "GSCI". Next up is the AIG Dow Jones Commodities Index. This differs from GSCI especially in the weight allocated to each commodity. DJ AIG has a mechanism to periodically limit the weight of one commodity and eliminate commodities whose weight is too small. After AIG's financial problems in 2008, Index rights were sold to UBS and are now known as the DJUBS index. Other commodity indices include the Reuters/CRB index (which is the old CRB Index as a re-structure in 2005) and the Rogers Index.
Commodity money
Cash or "actual" commodities refer to physical goods - for example, wheat, corn, soybeans, crude oil, gold, silver - that a person buys/sells/trades as distinguished from derivatives.
Call options
In the call option counterparties enter into the option of a financial contract in which the buyer buys the right but is not obliged to purchase a certain quantity agreed upon by the commodity or financial instrument (underlying) of the seller of the option at a certain time (expiration date) for a certain price (strike price). The seller (or "author") is obliged to sell commodities or financial instruments if the buyer decides. Buyers pay a fee (called a premium) for this right.
Electronic commodity trading
In traditional stock market exchanges such as the New York Stock Exchange (NYSE), most trading activity occurs in trading holes in face-to-face interactions between brokers and dealers in open trades. In 1992, the eXchange Financial Information (FIX) protocol was introduced, enabling the exchange of international real-time information related to market transactions. The US Securities and Exchange Commission ordered US stock markets to convert from fractional systems to decimal systems in April 2001. Metrification, conversion from imperial measurement systems to metrics, increased throughout the 20th century. Finally the FIX-compliant interface is adopted globally by commodity exchange using the FIX Protocol. In 2001, the Chicago Board of Trade and the Chicago Mercantile Exchange (later merged into the CME group, the world's largest futures exchange company) launched FIX-compatible interfaces.
In 2011, the alternative trading system (ATS) of electronic commerce featured computers that bought and sold without intermediaries selling people. High-frequency algorithmic trading (HFT), almost "dinosaur floor merchants" removed.
Global market complexity and linkage
The strong growth of emerging market economies (EMEs, such as Brazil, Russia, India and China), began in the 1990s, "pushing commodity markets into supercycles." The size and diversity of the commodity market is expanded internationally, and pension funds and state wealth funds begin to allocate more capital to commodities, in order to diversify into asset classes with less exposure to currency depreciation.
In 2012, as the emerging market economy slows, commodity prices peak and begin to decline. From 2005 to 2013, real prices of energy and metals remained well above their long-term average. In 2012, the highest real food prices since 1982.
The price of gold bullion fell drastically on April 12, 2013 and analysts frantically searched for an explanation. Rumors are spreading that the European Central Bank (ECB) will force Cyprus to sell its gold reserves in response to its financial crisis. Major banks such as Goldman Sachs began to soon become short gold bullion. Investors are scrambling to liquidate exchange-traded funds (ETF) and accelerated margin call sales. George Gero, a precious metals commodity expert at Royal Bank of Canada's Revenue Department (RBC) reported that he has not seen bullion sales as panicking like this in forty years in commodity markets.
Early commodities traded on the stock exchange (ETF), such as SPDR Gold Stock NYSEÃ, Arca: Ã, GLD and iShares Silver Trust NYSEÃ, Ã, Arca: Ã, SLV, actually have physical commodities. Similar to this is the NYSE Arca: Ã, PALL (palladium) and NYSEÃ, Arca: Ã, PPLT (platinum). However, most Exchange Traded Commodities (ETCs) implement a futures trading strategy. At that time, Russian Prime Minister Dmitry Medvedev warned that Russia could sink into recession. He argues that "We live in a dynamic, fast-growing world.This is so global and so complex that sometimes we can not keep up with change". Analysts claim that the Russian economy is too dependent on commodities.
Contract in commodity market
Spot contract is an agreement where delivery and payment are made directly, or with short breaks. Physical trafficking usually involves visual inspection and is performed in a physical market such as a farmer's market. The derivative market, on the other hand, requires an agreed standard so that trading can be done without visual inspection.
Standardization
US soybean futures, for something else, do not have a grade standard if they are "GMO or mixed GMO and Non-GMO No. 2 yellow soybeans from Indiana, Ohio and Michigan produced in the US (Unfiltered, stored in silos)". They are "classes that can be shipped" if they are "GMOs or a non-GMO No. 2 GMO and Non-GMO soybean mixture produced in the US. (Not filtered, stored in silos)". Note the differences between countries, and the need to clearly state their status as GMOs (genetically modified organisms) that make them unacceptable to most organic food buyers.
Similar specifications apply to cotton, orange juice, chocolate, sugar, wheat, corn, barley, pork belly, milk, feed, goods, fruits, vegetables, other grains, other beans, dried grass, other livestock, meat, poultry, eggs, or any other commodities traded.
Standardization has also occurred technologically, because the use of the FIX Protocol by commodity exchanges has enabled trade messages to be sent, received, and processed in the same format as stocks or equities. This process began in 2001 when the Chicago Mercantile Exchange launched the FIX compatible interface adopted by worldwide commodity exchanges.
Derivatives
Derivatives evolved from simple commodity contracts into the future into diverse groups of financial instruments applicable to each type of asset, including mortgages, insurance, and more. Futures contracts, Swap (1970s-), Exchange-traded Commodities (ETC) (2003-), forward contracts, etc. Is an example. They can be traded through official exchanges or through Over-the-Counter (OTC). Commodity market derivatives unlike default credit derivatives, for example, are secured by physical assets or commodities.
Forward contract
A forward contract is an agreement between two parties to be exchanged at a certain date in the future, a certain quantity of a commodity at a price determined when the contract is completed. The fixed price is known as the forward price. Such futures contracts begin as a way of reducing the risk of price fixing in the market of food and agricultural products, as farmers know what price they will receive for their output.
Future contracts for example, were used for rice in seventeenth century Japan.
Futures contract
Futures contracts are standard futures contracts traded through exchange. In the future contract buyers and sellers specify the product, class, quantity and location and leave the price as the only variable.
The agricultural futures contract is the oldest, used in the United States for more than 170 years. The modern futures agreement, started in Chicago in the 1840s, with the advent of the railroad tracks. Chicago, centrally located, emerged as a hub between Midwestern farmers and the center of the east coast consumer population.
Swap
Swap is a derivative in which the counterpart exchange cash flows from a one-party financial instrument to another party's financial instruments. They were introduced in the 1970s.
Exchangeable commodities (ETC)
Stock-traded commodities are terms used for commodities traded on the stock exchange (which are funds) or commodities traded on the stock of records (which are records). It tracks the performance of the underlying commodity index including a total return index based on a single commodity. They are similar to ETFs and are traded and settled exactly like share funds. ETC has market-maker support with guaranteed liquidity, enabling investors to easily invest in commodities.
They were introduced in 2003.
At first only professional institutional investors had access, but the online exchanges opened up some ETC markets to almost everyone. The ETC was introduced in part in response to the tight supply of commodities in 2000, combined with record low inventories and increasing demand from emerging markets such as China and India.
Prior to the introduction of ETCs, the ETF of the 1990s pioneered by Barclays Global Investors (BGI) revolutionized the mutual fund industry. At the end of December 2009, BGI assets reached an all-time high of $ 1 trillion.
Gold was the first commodity to be recapitalized through the Exchange Traded Fund (ETF) in the early 1990s, but was not available for trading until 2003. The idea of ​​the ETF Gold was first formally conceptualized by Benchmark Asset Management Company Private Ltd in India, when they submitted proposals with the Securities and Exchange Board of India in May 2002. Gold Bullion Securities first traded on the ASX in 2003, and the first silver exchange traded on the stock was the iShares Silver Trust launched on the NYSE in 2006. Since November 2010, the commodity ETF, SPDR Gold Shares, is the second largest ETF by market capitalization.
Generally, commodity ETFs are index funds that track non-security indexes. Since they do not invest in securities, commodity ETFs are not regulated as investment companies under the Investment Companies Act of 1940 in the United States, although their public offerings are subject to SEC review and they require a SEC no-action letter under the Securities Exchange Act of 1934 They may, however, be subject to the regulations by the Commodity Futures Trading Commission.
ETF's earliest commodities, such as SPDR Gold Shares NYSEÃ, Arca: Ã, GLD and iShares Silver Trust NYSEÃ, Arca: Ã, SLV, actually have physical commodities (eg, gold and silver). Similar to this is the NYSE Arca: Ã, PALL (palladium) and NYSEÃ, Arca: Ã, PPLT (platinum). However, most ETCs apply futures trading strategies, which can produce results that are very different from having commodities.
The commodity ETF trade provides exposure to an increase in commodities and commodity indices, including energy, metals, metals and agriculture. Many commodity funds, such as rolling oil are called futures contracts next month from month to month. It provides exposure to commodities, but directs investors to the risks involved in different prices along the term structure, such as the high cost of rolling.
ETCs in China and India are important because of the emergence of these countries as consumers and commodity producers. China accounts for more than 60% of commodities traded on the exchange in 2009, up from 40% a year earlier. The global volume of ETCs increased by 20% in 2010, and 50% since 2008, to around 2.5 billion contracts.
Over-the-counter commodity derivatives (OTC)
The trading of over-the-counter (OTC) commodity derivatives initially involves two parties, without exchange. Trade exchanges offer greater transparency and regulatory protection. In OTC trades, prices are generally not published. OTC commodity derivatives are at higher risk but can also lead to higher profits.
Between 2007 and 2010, global physical exports of commodities fell 2%, while the remarkable value of OTC commodity derivatives declined two-thirds as investors reduced their risk following a fivefold increase in the previous three years.
The managed money more than doubled between 2008 and 2010 to nearly $ 380 billion. Current inflows to the sector amounted to more than $ 60 billion in 2010, the second-highest year on record, down from $ 72 billion a year earlier. Most of the funds go into precious metals and energy products. The growth in prices of many commodities in 2010 contributed to an increase in the value of commodity funds managed.
Contracts for Difference (CFD)
The commodity contract for difference (CFD) is a derivative instrument that reflects the price movement of the commodity underlying the contract.
CFD commodities are transacted worldwide (separate from the US) through regulated brokers. CFD investors can speculate about higher moving commodity prices (going to be long CFDs) or lower (going short of CFDs). CFD investors do not have any commodities. Instead, they enter into contracts with brokers to capture the difference between commodity prices when they are trading CFDs and prices when they choose to leave. CFDs typically require investors to install a margin of about 3-5% of the price of underlying commodity contracts.
As an example; Imagine you're being bullish on oil. You decide to acquire CFDs to capitalize on this. You can get a long contract for $ 60.50.
To buy 20 CFD long with 3% margin, you will need $ 3,630 in your account ($ 60.50 [long price] x 20 [contract amount] x 100 [number of barrels in standard contract] x 0.03 [margin percent] ). You will then "control" $ 121,000 worth of oil for your $ 3,630.
That afternoon, you notice the price is up to $ 62.50 to $ 62.75, so you are out of trade, which now has a value of $ 125,500. Your profits will be around $ 4,500 on the deal. Of course, if the market moves against you, leverage can have the opposite impact and losses can be significant.
CFDs are complex products for experienced traders.
Commodity exchange
The exchange of commodities is the exchange in which various commodities and derivatives are traded. Most commodity markets throughout the world trade in agricultural products and other raw materials (such as wheat, barley, sugar, corn, cotton, chocolate, coffee, dairy products, pork belly, oil, metal, etc.) and contracts based on them. These contracts may include spot price, forward, futures and futures options. Other sophisticated products may include interest rates, environmental instruments, swaps, or shipping contracts.
The commodities class traded
Source: International Trade Center
Energy
Energy commodities include crude oil, especially West Texas Intermediate (WTI) crude oil and Brent crude oil, natural gas, heating oil, ethanol and pure terephthalic acid. Hedging is a common practice for this commodity.
Crude oil and natural gas
Over the years, West Texas Intermediate (WTI) crude oil, light, sweet crude, is the world's most heavily traded commodity. WTI is the value used as a benchmark in oil prices. This is the commodity underlying the Chicago Mercantile Exchange oil futures contract. WTI is often referenced in news reports about oil prices, in addition to Brent Crude. WTI is lighter and sweeter than Brent and much lighter and sweeter than Dubai or Oman.
From April to October 2012, Brent futures contracts surpassed for WTI, the longest streak since at least 1995.
Crude oil can be light or heavy. Oil is the first widely traded energy form. Some commodity market speculation is directly related to the stability of certain countries, for example, Iraq, Bahrain, Iran, Venezuela and many others. Most commodity markets are not so tied to the politics of turbulent areas.
Oil and gasoline are traded in 1,000 barrels (42,000 US gallons). WTI crude is traded through NYMEX under the CL trading symbol and through the Intercontinental Exchange (ICE) under the WTI trading symbol. Brent crude is traded through Intercontinental Exchange under the trading symbol B. Gulf Coast Gasoline is traded through NYMEX with LR trading symbol. Gasoline (reformulated gasoline blendstock for oxygen mixing or RBOB) is traded through NYMEX via RB trading symbols. Propane is traded through NYMEX, a subsidiary of the Intercontinental Exchange since early 2013, through a trade symbol of the PN.
Natural gas is traded through the NYMEX in units of 10,000 mmBTU with NG trading symbols. Heating oil is traded through NYMEX with the HO trading symbol.
More
Purified terephthalic acid (PTA) is traded through ZCE in 5 tons with TA trading symbols. Ethanol is traded on CBOT in a 29,000 US gal unit under the trade symbols of AC (Open Auction) and ZE (Electronics).
Metal
Precious Metals
Precious metals currently traded in commodity markets include gold, platinum, palladium and silver sold by troy ounce. One of the major exchanges for this precious metal is COMEX.
According to the World Gold Council, gold investment is the main driver of industrial growth. The price of gold is very volatile, driven by a large flow of speculative money.
Industrial metal
Industrial metals are sold by metric tons through the London Metal Exchange and the New York Mercantile Exchange. The London Metal Exchange trade includes copper, aluminum, tin, lead, aluminum alloy, nickel, cobalt and molybdenum. In 2007, steel began trading on the London Metal Exchange.
Iron ore has become the latest addition to industrial metal derivatives. Deutsche Bank first began offering iron ore exchange in 2008, other banks soon followed. Since then the market size has more than doubled every year between 2008 and 2012.
Agriculture
Agricultural commodities include grains, food and fiber and livestock and meat, various regulatory bodies define agricultural products.
On July 21, 2010, the United States Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act with a change to the definition of agricultural commodities. The operational definitions used by Dodd-Frank include "[a] ll other commodities that, or have ever been, or originated from, living organisms, including plants, animals and aquatic life, which are generally interchangeable, in their respective classes, and used principally for human food, shelter, animal feed, or natural fiber. "The other three categories are described and listed.
In February 2013, Cornell Law School included wood, soybeans, vegetable oil, livestock (live cattle and pigs), dairy products. Agricultural commodities may include wood (wood and forest), grains excluding stored grains (wheat, oats, barley, rye, wheat sorghum, cotton, hemp, fodder, tame seaweed, native grass), vegetables (potatoes, tomatoes, sweet corn, dried peas, dried peas, freezing and peas), fruits (oranges such as oranges, apples, grapes) corn, tobacco, rice, peanuts, beet sugar, cane, sunflower, raisins , nursery plants, beans, complex soybeans, fish farming of agricultural species such as finfish, molluscs, crustaceans, water invertebrates, amphibians, reptiles, or plant life cultivated in aquatic plants.
In 1900, the area of ​​maize was twice that of wheat in the United States. But from the 1930s to the 1970s, the area of ​​soybeans exceeded corn. In the early 1970s, the price of wheat and soybeans, which were relatively stable, "surged to an unimaginable level at the time." There are a number of factors affecting prices including "the spike in crude oil prices caused by the Arab Oil Embargo in October 1973 (US inflation reached 11% in 1975)."
Diamonds
In 2012, diamonds are not traded as commodities. Institutional investors are rejected by campaigns against "blood diamonds", the diamond market monopoly structure and a lack of uniform standards for diamond pricing. In 2012, the SEC reviews proposals to create "first-exchange-traded exchange-traded funds" that will trade on-line in one-carat diamond units with storage storage and delivery points in Antwerp, the headquarters of Antwerp Diamond Bourse. The exchange fund is supported by a New York City-based company called IndexIQ. IndexIQ has introduced 14 funds traded on the stock since 2008.
According to Citigroup analysts, the annual production of polished diamonds is about $ 18 billion. Like gold, diamonds are easy to authenticate and last longer. Diamond prices are more stable than metals, because De Beers's global diamond monopoly holds almost 90% (in 2013 reduced by 40%) of new diamond markets.
Other commodity markets
Rubber trading on the Singapore Commodity Exchange in 1st, kg at prices in US cents. Palm oil is traded in Malaysian Ringgit (RM), Bursa Malaysia in 1st, kg with prices in US cents. Wool is traded on AUD in 1 kg. Polypropylene and Linear Low Density Polyethylene (LL) are trading on the London Metal Exchange in 1,000 kg price in USD but dropped in 2011.
Agency and regulatory policies
United States
In the United States, the main regulator of commodity and futures markets is the Commodity Futures Trading Commission (CFTC). The National Futures Association (NFA) was formed in 1976 and is a self-regulatory organization of the futures industry. The first NFA regulatory operations began in 1982 and fell under the Commodity Exchange Act of the Commodity Futures Trading Commission.
Dodd-Frank was enacted in response to the 2008 financial crisis. He called for "strong measures to limit speculation in agricultural commodities" calling on the CFTC to further limit its position and to regulate over-the-counter trading.
European Union
Markets in Financial Instrument Instruments (MiFIDs) are the cornerstone of the European Commission's Financial Services Action Plan that governs the operation of the EU financial services market. It is reviewed in 2012 by the European Parliament (EP) and Council on Economic and Financial Affairs (ECOFIN). The European Parliament adopted a revised version of Mifid II on October 26, 2012 which included "provisions for position restrictions on commodity derivatives", aimed at "preventing market misuse" and supporting "regular pricing and settlement conditions".
The European Securities and Markets Authority (ESMA), based in Paris and established in 2011, is the "EU-wide financial markets watchdog". Esma sets the position limits on commodity derivatives as described in Mifid II.
The EP voted in favor of strong regulation of commodity derivatives markets in September 2012 to "end rough speculation in commodity markets" that "pushed up global food prices and price volatility". In July 2012, "global food prices jumped 10 percent" (World Bank 2012). Senior MEP UK Arlene McCarthy called for "brake-mounting on excessive food speculation and speculating giants taking advantage of hunger" ending an immoral practice that "serves only the interests of profiteers". In March 2012, Member EP Markus Ferber suggested amendments to the European Commission proposal, which is intended to strengthen the restrictions on high-frequency trading and commodity price manipulation.
Trading system
The software for managing trading systems has been available for decades in various configurations. This includes software as a service. Called Energy Trade Risk Management (ETRM) includes software such as Triple Point Technology, Sol Arc, Open Link, and Gibbon. One of the more popular soft commodity solutions called Just Commodity, based in Singapore this app serves a large number of businesses of palm oil, edible oil, sugar and wheat trade.
See also
- List of commodity booms
Note
References
Further reading
- Understanding Derivatives: Markets and Infrastructure Federal Reserve Bank of Chicago, Financial Markets Group
- "Opportunities and Risks: Education Guidelines for Futures Trading and Options on Futures" (PDF) . Chicago, Illinois: National Futures Association. 2006. p.Ã, 48.
- Markham, Jerry W. (1987). History of Commodity Futures Trading and its Regulations . Praeger. p.Ã, 305.
- Longstreth, Andrew (May 26, 2011). Alden Bentley, editor, ed. "CFTC faces high hurdles in the case of oil manipulation". Reuters. CS1 maint: Additional text: editor list (link)
External links
- Open Historical Commodity Price Data
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