Commodities

A commodity is an essential raw material that comes from the primary sector, such as agriculture and mining. It can also include semi-finished products like meat and refined copper, as well as modern commodities like electricity, bandwidth, and emission credits.

The typical sub-categories of commodities are Energy, Precious Metals, Industrial Metals, Agricultural Products, and Livestock.

Factors affecting the supply and demand of commodities include the long time required to increase productive capacity, weather conditions for agricultural products, technological innovations, and storage costs.

An asset class is a group of financial instruments that exhibit similar characteristics, behave similarly in the marketplace, are subject to the same laws and regulations, have a common underlying economic driver, and are highly correlated with one another.

No, the market capitalization of commodities is difficult to quantify, although the sub-groups are relatively homogeneous.

Benefits of commodity investment include low correlation to other asset classes, acting as a good portfolio diversifier, and providing a natural hedge against inflation.

The two possible shapes of the commodity futures curve are backwardation and contango.

Backwardation occurs when futures prices are below expected spot prices.

Contango occurs when futures prices are above expected spot prices.

The return sources of commodity futures based indices are spot return, collateral return, and roll return.

Lower inventory levels lead to higher bases and higher risk premia in commodity futures markets.

The Bloomberg Commodity Index (BCOM) is designed to be a highly liquid and diversified benchmark for commodity investment, currently comprising 24 commodity futures in six sectors.

The S&P GSCI Commodity Index contains as many commodities as possible, currently comprising 24 commodities from 5 commodity sectors, and is a world-production weighted index.

The Refinitiv Core Commodity CRB Index consists of 19 commodities and uses a weighted scheme designed to reflect the liquidity of contracts, with petroleum products capped at 33%.

The most important contracts in the energy sector are WTI Crude Oil and Brent Crude Oil, with smaller weights for Heating Oil, ULS Diesel, Natural Gas, RBOB Gasoline, and Gas Oil.

The most important contracts in the precious metals sector are Gold and Silver.

The most important contracts in the industrial metals sector are Copper and Aluminium, with less importance for Zinc, Nickel, Lead, and Tin.

The most important contracts in the agricultural sector are Corn, Soybeans, Sugar, Cotton, Coffee, and Wheat.

The most important contracts in the livestock sector are Live Cattle and Lean Hogs.