Winning the Commodities Research Game

By Ojala, Marydee | Online, July-August 2008 | Go to article overview

Winning the Commodities Research Game


Ojala, Marydee, Online


Commodities have been in the news a lot lately. Some of the stories are overtly about commodities--the high price of gasoline and grocery stores' rice rationing are two that come to mind. Thoughtful opinion pieces consider whether scientific attempts to develop biofuels, in a public policy attempt to wean U.S. drivers from their "addiction to oil," is having the unexpected consequences of rising corn prices and worldwide food shortages. Other news stories are more subtle. Corporate earnings reports, for example, explain that profitability is affected by the cost of the raw materials necessary to their manufacturing processes. These raw materials are frequently commodities such as metals, petroleum, grains, and fibers. Commodities such as cocoa, coffee, orange juice, and sugar are lumped together as "softs."

Prices for some commodities are the stuff of daily conversations. It wasn't that long ago that the price of a barrel of oil was not a statistic bandied about at the local coffee shop over breakfast. Today it is. However, conversations about prices for other commodities are not exactly commonplace. Cocoa, copper, coffee, and cattle prices might not fare as well. Some commodity stories are best served with a side dish of irony. Remember when the Hunt brothers tried to corner the market on silver in the 1980s? Even without them, the price today is rising. Gold isn't doing so badly, either, finally vindicating the "goldbugs," who've been proclaiming that commodity's imminent rise in price even when it wasn't going up at all.

A definition of commodities and commodity markets is probably in order. A commodity is, according to InvestorWords (www.investorwords.com), "a physical substance, such as food, grains, and metals, which is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts." Commodity futures are contracts to buy and sell commodities at set prices in the future. Investors essentially guess what a future price will be.

Trading in commodity futures is seen by some people as more risky than buying and selling stocks. There's a myth that, if you're not careful, you'll end up with cattle grazing on your lawn, orange juice in the bathtub, and wheat dumped in your driveway. Futures, however, are derivative contracts and almost all of them are closed out, or "offset," prior to delivery.

TRADING PLACES

Trading in commodities and commodity futures is done by registered brokers through commodity exchanges, of which there are several. A major U.S. commodity exchange is the CME Group (www.cmegroup.com), formed by the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of Trade. In March 2008, the CME Group announced its intent to purchase the New York Mercantile Exchange (www.nymex.com). Two other, smaller commodities exchanges are the Minneapolis Grain Exchange (www .mgex.com) and the Kansas City Board of Trade (www.kcbt .com). More international is the IntercontinentalExchange (ICE; www.theice.com), which, in 2007, bought the New York Board of Trade (now known as ICE Futures U.S.), ChemConnect, and the Winnipeg Commodity Exchange.

Exchanges do not necessarily trade all commodities. Minneapolis specializes in grain and provides USDA Crop Reports with its own commentaries. Kansas City contains data for wheat prices and includes commentary, frequently from academicians outside the exchange. Common to the websites are statistical data on prices, volumes, indexes, and changes over time. Many show this data as charts.

Exchanges in the U.S. are regulated by the Commodity Futures Trading Commission (CFTC). At its site (www .cftc.gov) you'll find an excellent Education Center that spells out the basics of commodity trading and explains the risks involved. It also has Market Reports, with commitments of traders and cotton on-call reports issued weekly, along with other reports on the financial status of commodities futures. …

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