Of all the trading exchanges they are simply supply-and-demand driven; however, they pose medium to high risk for the investor and are extremely specialised, unless you know your pork belly, polypropylene or oat markets extremely well.
Exchanges now are predominantly based in North, South and Central America and Asia, but include the London Metals Exchange and new carbon trading markets in Europe, and commodities cover a huge range of goods.
Described as soft and hard commodities, they include coffee, oats, rice wheat, tobacco, milk powder, pork bellies, soy beans, orange juice and cotton through to industrial metals such as lead, zinc and copper up to precious metals including gold and platinum and oil.
ABN Amro Craigs broker Chris Timms described commodities exchanges as "catch all", encompassing not only the physical buying and selling of the items in units - a barrel of oil, 5000 bushels of corn or 20 tonnes of pork bellies - but also trading the contracts for supply.
Earlier this week, frozen pork belly futures contracts, deliverable on February 9 next year, were selling for $US90.95 ($NZ131.80) on the Chicago Mercantile Exchange, the main exchange for pork belly sales for North American supply.
Oil is the most commonly recognised commodity, and as New Zealand consumers have seen during the past four years, a Middle East war, terrorism threats and huge thirst from China have meant demand has outstripped supply, pushing the per-barrel prices to a record $US147 in mid July, which was reflected in record pump prices.
Since then, prices have eased to well below $US100, with China's demand for oil lessening because of a slight economic downturn, the US having more stored oil than anticipated and recession fears in predominantly the US and Europe making oil less attractive, therefore driving the price down.
However, aside from simple supply and demand, and relevant to all the commodity exchanges, is the added complexity in the strategies of commodity trading, ranging from on-the-spot (daily) markets, entering into forward and future contracts, which can span months, or taking options on the future contracts, which is where the high level of specialisation is required.
