The Truth Behind the Storage of Commodities

Moneymagpie Team 26th Jan 2023 No Comments

Reading Time: 3 minutes

While those of you who trade commodities may understand pricing and the underlying laws that govern change in the market, you may not understand how commodities are stored and the way in which supply and demand are managed.

Remember, commodities are tangible entities are grown are part of seasonal harvests, and when certain items are in excess supply, production may be restricted in order to maintain viable price points and the market’s equilibrium.

But what exactly are commodities, and how are they traded in the global financial marketplace? Let’s find out!

What is a Commodity?
What are the World’s Most Traded Commodities?
Addressing the Price Stabilisation of Commodities

What is a Commodity?

In simple terms, a commodity is a basic good or item that’s used in commerce and interchangeable with other goods of the same type.

Commodities are frequently used as inputs in the production of other goods and services, with the vast majority of examples considered to be raw materials that are utilised in the creation of food, jewellery and a raft of other products.

The best-known commodities include key agricultural products such as wheat and precious metals like gold, while oil is another popular option when trading commodities. When they’re traded on an exchange, commodities are also required to meet specified minimum standards, with this also referred to as a basis grade.

What are the World’s Most Traded Commodities?

There are many different types of commodities, and as we’ve already touched on, some of these are more widely traded than others.

We’ve listed the top five below, based on current and historic trends and wider demand within the financial marketplace.

#1. Crude Oil and Derivatives: Crude oil is one of the most volatile but widely traded commodities in the world, although pricing has fluctuated wildly over the course of the last decade to a continued imbalance between supply and demand. As the global supply has diminished since Russia’s invasion of Ukraine, prices have also gone up as demand has remained unchanged.
#2. Coffee: Arguably the most popular hot beverage in the world, coffee is another incredibly popular (albeit less volatile) commodity in the global market. Remember, 66% of US citizens alone drink coffee every day, with this number increasing and higher than any other beverage.
#3. Agricultural Products: This is a broad category that included a number of ‘soft’ commodities, including wheat, corn, maize and rice. These are staple food products that are in demand across the globe, as the form the basis of many packaged and unpackaged products that are sold in supermarkets.
#4. Animals and Animal Products: This is another broad category, and one that includes similarly popular food items like beef, fresh and frozen pork bellies and eggs. While meat consumption may be down in the developed world, these commodities continue to benefit from high and broad demand.
#5. Metals: We’ll close with metals, which include precious metals like gold and silver and more industrial alternatives such as aluminium, copper, nickel and lead.

Addressing the Price Stabilisation of Commodities

We started by talking about the delicate relationship that exists between supply and demand in the commodities market, with this best embodied by oil’s price fluctuations since 2012 (and indeed, throughout history).

Ultimately, the supply and production of commodities like oil is controlled in line with demand, whether this is slashed or ramped up line with demand. In the oil market, the OPEC nations are responsible for stabilising price points, usually by agreeing production caps based on global demand trends.

Conversely, the current market is seeing prices soar as the supply is capped. In this case, pricing needs to be managed and agreed by all OPEC nations if stability is to be maintained over time.

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.