Contrast the features of the different commodity sectors
The idea
Commodity sectors differ mainly in what moves their supply and demand. Energy (crude oil, natural gas and refined products) is the largest sector by production value and responds to global growth, geopolitics and, for gas, weather-driven heating and cooling demand. Grains and softs depend on growing-season weather and government policy. Livestock depends on feed costs and disease. Industrial metals follow manufacturing and construction, with supply held back by long mine development and exposed to strikes. Precious metals, gold above all, act partly as stores of value, so real interest rates and inflation fears matter as much as industrial use. The trap is treating commodities as one asset: sectors respond to different shocks and are only loosely correlated with each other.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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- Contrast how commodity sectors move through their life cycle, from production to trading or consumption
- Explain how valuing commodities differs from valuing equities and bonds
- Set out the kinds of participant found in commodity futures markets
- Analyse how spot and futures prices relate when markets are in contango and when they are in backwardation
- Contrast theories explaining commodity futures returns
- Set out, work out and interpret each part of the total return on a fully collateralised commodity futures contract
- Contrast roll return when markets are in contango with roll return when they are in backwardation
- Explain how commodity swaps can be used to gain or adjust exposure to commodities
- Explain how the way a commodity index is built influences its returns