Financial Markets for Commodities

Introduction

Physical commodity markets are markets where products that have material reality are bought, sold and delivered. Financial commodity markets are markets where financial contracts are negotiated. The value of these contracts is derived from the value of the commodities. Prices form on each market; the central objective of this book is to describe and analyze the dynamics of physical prices and financial prices, with the trickiest point being understanding the joint dynamics of these two groups of prices.

Commodities – agricultural, sources of energy or minerals – are mainly used in the initial phases of a production cycle. For example, corn serves as fodder for animals but is also used to produce fuel; oil makes it possible to provide fuel and other by-products in chemistry; and iron is a basic product in the steel industry. The concept of what a commodity is can vary from one activity to another. To take just one example: corn is undoubtedly considered as a commodity. However, for certain industries, the commodity is the starch – which makes up about of 72–73% of corn. It appears difficult in practice, and quite futile, to try and define commodities based exclusively on their physical characteristics. And thus, we offer the following definition: “[…] in practice, the first form through which the product obtained from a natural resource can travel through the next phase of its transformation is called a commodity” [GIR 15]. Commodity trading is a highly technical ...