Contrast how commodity sectors move through their life cycle, from production to trading or consumption
The idea
Each commodity travels from production to consumption on its own clock, and that clock shapes price behaviour and the futures curve. Grains follow an annual planting and harvest cycle, so stocks peak after harvest and run down until the next one, producing seasonal price patterns. Livestock takes time to raise: hogs reach market in roughly six months, cattle in eighteen months to two years, so herd decisions made on today's feed prices change supply much later. Softs such as coffee grow on trees that need years to become productive. Energy is produced continuously but must be refined, transported and stored. Metals need years from discovery to output. The trap is assuming supply can respond quickly to a price change, when for most commodities it cannot.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →More in Introduction to Commodities and Commodity Derivatives
- Contrast the features of the different commodity sectors
- 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