Commodities market overview

Commodity markets (overview)

INTRODUCTION

Commodity markets cover physical assets such as precious metals, base metals, energy (oil, electricity), food (wheat, cotton, pork bellies), and weather. Most of the trading is done using futures (total trading volume around 200 billion dollars for the year 2002). However, over the last few years, an OTC market has also been growing (total size estimated to several tens of billion dollars for the year 2002), as an increasing number of market participants are trading in exotic options.

DESCRIPTION OF THE VARIOUS MARKETS Commodity markets cover the following assets: Energy: mainly oil and gas like crude oil, jet fuel, gasoline, fuel oil, heating oil, natural gas and propane. electricity as well as renewable forms of energies like solar and wind energy weather: weather is obviously not a tradable asset but we include them here because, over the last years, many derivative products whose underlying is weather (temperature, wind, precipitation) have been forth and traded. Agricultural: Livestock: live hogs, cattle and pork bellies.

Grain: corn, wheat, soybeans, soyoil, sunflower seed and oil. Forest products group: lumber and plywood. Textiles: cotton. Foodstuffs: cocoa, coffee, orange juice, rice, cheddar, and sugar. Metals Base metals: aluminium, copper, zinc, nickel, and lead, tin, iron. Precious metals: gold, silver, platinum, rare metals (palladium, titanium).

SPOT MARKETS Spot markets are organized exchanges where commodity products can daily be traded (by large amounts, even). Typical examples are the CME (Chicago Mercantile Exchange), the MCE (Mid America Commodity Exchange).

FUTURES MARKETS At their very early stage, commodity markets futures trading exchanges, served the purpose of hedging against price fluctuations in agricultural commodities. Sellers (farmers) and buyers would commit themselves to future exchanges of grain for a certain amount of cash. Nowadays, the rationale for trading futures is