So, What is a Commodity?

It is a question that has been asked many times and is never more relevant than it is now.

A. Introduction

Historically, commodities have been central to economic, political, and scientific development. British imperialism in India (and everywhere else, for that matter) and slavery in the southern states of America were all driven by the demand for agricultural commodities. Russia’s invasion of Finland at the start of World War II was as much about the need for nickel as Imperial designs for a greater Russian empire. Iraq has fought several wars (Invading Kuwait in 1990) and (the second Persian Gulf war in 2003), which some have deemed to be about control of Middle Eastern oil reserves.

The relentless need for and access to commodities has driven national interest, hastened scientific innovation, and shaped our world today. However, it has also caused many problems.

B. So, what is a commodity?

An Economist defines a commodity as an economic good, often a natural resource, with total or substantial fungibility. Fungibility means that the market treats all instances of the good as equivalent or nearly, regardless of who produced them.

Karl Marx suggested that ‘a commodity, at first sight, is a trivial thing. But upon further analysis, it is extraordinary, abounding in metaphysical subtleties and theological niceties.’ He also pointed out that it is impossible to tell who (aristocrat or peasant) produced wheat by tasting it. (Unlike a baked cake, which would not be defined as a commodity because of many recipes and a broad spectrum of baking talent.) Karl made an insightful point with the wheat but never published Das KochBuch.

When asked about commodities, most people will talk about gold, oil, copper, corn, etc. However, the actor Randolph Bellamy gives a similar but hilarious explanation as Randolph Duke in the classic 1983 movie Trading Places. Addressing Eddie Murphy’s character, he explains…

?Now, what are commodities? Commodities are agricultural products... like coffee that you had for breakfast... wheat, which is used to make bread... pork bellies, which are used to make bacon, which you might find in a bacon, lettuce and tomato sandwich.

And then there are other commodities, like frozen orange juice... and GOLD. Though, of course, gold doesn't grow on trees like oranges.“

Eddie Murphy’s facial expressions throughout Randolph’s patronising monologue are worth watching the movie for alone.

C. Major Commodities: An Epigrammatic Approach

Many books have been written about every commodity ever known. So, you most likely would have a professional interest in, say, Rhodium (a platinum group metal) or Butane (a Liquid Petroleum Gas) to work through an entire textbook dedicated to those commodities, regardless of how interesting the cover sounded.

The following section contains compendious descriptions of the most significant and common commodities you know.

Metals

Metals are elements (and alloys) with high electrical and thermal conductivity, malleability, ductility, and light reflectivity. Approximately three-quarters of all known chemical elements are metals. The most abundant varieties in the Earth’s crust are aluminium, iron, calcium, sodium, potassium, and magnesium. Most metals are found in ores, mineral-bearing substances such as bauxite (aluminium ore) and hematite (iron ore); a few metals, such as copper, gold, platinum, and silver, frequently occur in the free (or native) state because they do not readily react with other elements. Copper was first used by humanity over 10,000 years ago, and for a further 5,000 years, it was the only metal known. Gold came next, and due to its scarcity, it became a symbol of value and wealth and remains so today.

Gold is usually the first metal that comes to mind when considering the precious metals market. Stone Age people first used it to create jewellery as far back as 6000 BCE. It has been used as a store of value and for coins as currency. Until 1973, the US Dollar was based on the gold standard (discussed in later chapters).

Gold is primarily a pure, native metal. Sylvanite and calaverite are gold-bearing minerals. Gold is usually embedded in quartz veins or placer stream gravel. It is mined in South Africa, the USA (Nevada, Alaska), Russia, Australia, and Canada.

According to the World Gold Council’s website (www.gold.org), the best estimates suggest that around 205,238 tonnes of gold have been mined throughout history, of which around two-thirds have been mined since 1950. And since gold is virtually indestructible, almost all of this metal is still around in one form or another. If every ounce of this gold were placed next to each other, the resulting cube of pure gold would only measure around 22 metres on each side.

Gold is primarily used to make jewellery, but it is also an essential industrial metal that performs critical functions in computers, communications equipment, spacecraft, jet aircraft engines, and many other products.

Lastly, it continues to be a store of wealth for investors in bars, coins, and Exchange-Traded Funds (ETFs) backed by physical holdings stored at the Bank of England. The Old Lady of Threadneedle Street is the true home of the gold bar.

Silver was discovered about 6,000 years ago when early civilisations mined copper. It was used extensively for coinage throughout the Roman Empire and certain Chinese dynasties.

It is widely used in jewellery production, coinage, electronics manufacturing (it has the highest electrical conductivity of any metal), and photography.

Most of the world's silver is a byproduct of mining lead, zinc, copper, and gold. Although silver is significantly cheaper than gold, Investors like to hold physical silver or other investments backed by the precious metal, such as ETFs and closed-end funds. There is plenty of it at the Bank of England, although none is England's.

Platinum and Palladium are precious white metals that belong to a club called Platinum Group Metals (PGMs). The six platinum-group metals are ruthenium, rhodium, palladium, osmium, iridium, and platinum. They have similar physical and chemical properties and occur in the same mineral deposits.

PGMs are highly resistant to wear and tarnish, making platinum, palladium, and iridium well-suited for fine jewellery. Likewise, rhodium often coats these metals to provide protection and shine (think engagement rings). Platinum jewellery became popular in the late 19th Century when fine jewellers, such as Maison du Cartier, introduced new collections exclusively made of platinum alloys.

PGMs are also used in anticancer drugs, petrochemical industries, dentistry, electronics, and vehicle exhaust catalysts (VECs). VECs contain solid platinum (Pt), palladium (Pd), and rhodium (Rh). They are installed in vehicles' exhaust systems to reduce harmful emissions, such as carbon monoxide (CO), by helping convert them into less harmful Carbon Dioxide (CO2), which plants like.

The name platinum is derived from the Spanish word platina, meaning “little silver" (silver being Plata). Spanish settlers in Colombia in the 16th Century referred to the metal as platina because they regarded it as an unwanted impurity in the silver they were mining. They found it difficult to melt platinum.

Gold, silver, platinum, and palladium are all traded in the Over-The-Counter London Bullion market and as futures contracts on the CME and other Global Financial Exchanges.

Copper belongs to the group known as Base Metals. The most familiar base metals are copper, lead, nickel, tin, aluminium, and zinc (chemists have a more exhaustive list, but I am not sure how many people would mention tantalum when asked). These metals are more common in the Earth’s crust and can be more easily extracted than precious metals; hence, they are cheaper.

Base metals have been traded on the London Metal Exchange (or LME) for nearly one hundred fifty years, but the LME's origins date back to Elizabeth I.

Copper is found mainly in ore forms such as Chalcopyrite, Bornite, and Malachite, and occasionally as ‘native copper’, essentially chunks of pure copper otherwise found in the ground. Copper is highly unreactive, which is why native copper exists. However, native copper deposits are too sporadic to be mined because there is rarely enough in any one place (although the largest nugget of native copper ever found came from Minnesota, in the USA and weighed over 400 tons!) Copper deposits (ore bodies) are usually mined using open-pit extraction, as deposits are generally large and relatively near the surface. A freshly exposed surface of pure copper has a pink, almost orange-type glow. It is beautiful and was often used for jewellery and decoration in the early civilisations.

Chile is the world’s largest copper producer, followed by the USA. Other significant producers are Peru, Mexico, and Australia. To date, roughly 700 million metric tons of copper have been produced worldwide. This would fit into a cube measuring about 430 meters on a side (a lot larger than the gold cube from earlier). The name copper is derived from the Latin word Cuprum, which means Cyprus, the island where the Romans first mined copper.

Copper is mainly used in electrical wiring (a great conductor) and water pipes (unreactive, antimicrobial, and malleable). However, it is also used in medicine, industry, motor parts, and roofing! And let us remember coinage: Copper-nickel alloys are widely used in US, UK, and EU coinage.

Lead is a heavy metal that is easily extracted from its ores. One such ore, Galena, is regularly found where silver deposits are, so interest in silver production also helped initiate widespread extraction and use of lead in ancient Rome. Romans used it for coins, paints, dishes, pipes, and cosmetics. However, as many Romans in contact with the metal fell ill, some suspected that lead might be poisonous. As a result, lead production declined after the fall of Rome and reached comparable levels in the Industrial Revolution. During this time, the word “plumber” came to be derived from the Latin name for lead, viz., plumbum; it came to mean a person who installs (lead) pipes, if you can find one that is.

Lead played a crucial role in the development of the printing press, as movable type could be relatively quickly cast from lead alloys. Today, lead is still widely used for car batteries, pigments, ammunition, cable sheathing, lifting weights, diving weight belts, lead crystal glass, radiation protection, and some solders. Given its unreactive nature, it is often used to store corrosive liquids.

The toxicity of Lead became well-known in the late 19th Century. Lead harms humans because it interferes with numerous enzymes inside the cells of their organs. This results in symptoms such as muscle and joint aches, constipation, and overall fatigue. In addition, it damages our brains by interfering with how brain cells send messages and communicate.

Lead was a favoured starting point for old alchemists. Perhaps the most outstanding scientist to grace this planet, Sir Isaac Newton, spent nearly three decades in an otherwise futile attempt to turn lead into gold. He should have stuck to Physics.

Nickel is a naturally occurring metallic element with a silvery-white, shiny appearance. It occurs extensively in the Earth’s crust and core. Nickel and iron are common elements in meteorites. It is also found in plants, animals, and seawater in small quantities.

While the nickel concentration in the earth's crust is 80 parts per million, the earth's core consists mainly of a nickel-iron alloy. Nickel is the fifth most common element found on Earth and is one of only four magnetic elements (at or near room temperature – an essential fact for physicists). Incidentally, the other three metals are iron, cobalt and gadolinium.

The first use of nickel alloys has been traced back to 3500 BCE. Nickel was first isolated and classified as an element in 1751 by Axel Fredrik Cronstedt. He initially mistook the ore for a copper mineral in the cobalt mines of Los, in H?lsingland, Sweden. The name Nickel is the shortened form of the German 'kupfernickel', meaning either Devil's copper or St. Nicholas's copper (aka Old Nick)

Nickel is used in batteries, including rechargeable nickel-cadmium and nickel-metal hydride batteries used in hybrid vehicles. It has also long been used in coins. For example, the US five-cent piece (known as a nickel) is 25% nickel and 75% copper. However, it has been claimed at extreme prices that the residual metal value inherent in these coins has superseded their face value (the author still needs to validate this independently).

An isotope of a chemical element has the same number of protons (and thus the same atomic number and position in the periodic table) but a different number of neutrons. Every chemical element has one or more isotopes with nearly identical chemical behaviour. Most elements have several unstable isotopes (radioactive) and only one or two stable isotopes. However, our next base metal, Tin, has ten stable isotopes, the greatest number of all the elements (It also has 31 unstable isotopes).

Tin is the 49th most abundant element in Earth's crust, representing two ppm (parts per million) compared with 75 ppm for zinc, 50 ppm for copper, and 14 ppm for lead. However, tin is not a native element; it must be extracted from ores. One such ore, Cassiterite (SnO2), is the only commercially important source of tin. Tin is soft, malleable, ductile, and highly crystalline silvery-white. It resists corrosion from water but can be corroded by acids and bases.

Archaeological evidence shows tin was first mined and processed in Turkey around 3,500 BCE. The combination of copper (88%) and tin (12%) created a new alloy, which ushered in the Bronze Age around 3000 BCE. The Bronze Age lasted around two thousand years, during which bronze allowed early humans to make more durable tools and weapons.

Tinplate is used in food, beverage, and general line cans for chemicals, paints, and dry products. Tin use in lead-acid batteries, particularly in China, is expected to grow steadily with more start-stop and micro-hybrid vehicles and alternative energy infrastructure. China is the largest consumer of refined tin globally, consuming six times as much as the second largest consumer, viz., Japan.

Tin and tin-based alloys, including powders and coatings, are also used in brake pads, roofing, engineering, and bearings. Tin is sometimes called the ‘spice element’ because a little of it is present everywhere in ways essential to our quality of life.

Aluminium does not naturally exist in a native state. Therefore, primary aluminium production begins with bauxite, an ore of hydrated aluminium oxide (40% to 60%) mixed with silica and iron oxide. It takes approximately 4 to 5 tonnes of bauxite ore to produce 2 tonnes of alumina through a chemical process known as the Bayer process. It takes about 2 tonnes of alumina to produce 1 tonne of aluminium metal through the second energy-intensive production phase, the Hall-Heroult process. The high melting point makes primary aluminium production from alumina dependent on electricity prices.

Canada is the world's fourth-largest primary aluminium producer (5%), followed by China (56%), India, and Russia (around 5.5%). Using mostly hydroelectricity and the latest generation of technologies, Canadian aluminium producers have the lowest carbon footprint compared to other large producers. Of course, you would expect nothing less from a Canadian.

Aluminium is a silver-white colour, light, strong, flexible, non-corrosive and almost perpetually recyclable metal. Widely used in the transport, construction, foil packaging and electrical industries, it has one-third the density of steel, making it essential in the aeronautics industry. Unfortunately, it also has two spellings which causes no end of challenges for the author, a British American commodity trader for over 25 years.

The American Chemical Society (ACS) officially adopted aluminum in 1925, but in 1990, the International Union of Pure and Applied Chemistry (IUPAC) accepted it as the international standard. As a result, English speakers in North America use aluminum today, and aluminium is used everywhere else. If you want to investigate the etymology further, the Merriam-Webster dictionary has a very entertaining historical explanation.

Zinc makes up about 75 ppm (0.0075%) of Earth's crust, making it the 24th most abundant element. As a result, zinc is the fourth most common metal, trailing only iron, aluminium, and copper. Zinc is a silvery-white metal with a blue tinge, just like your grandmother's blue rinse. It tarnishes in the air and is a slightly brittle metal at room temperature.

Worldwide, 95% of new zinc is mined from sulfidic ore deposits, in which sphalerite (ZnS) is nearly always mixed with the sulfides of copper, lead and iron.? Zinc mines are scattered worldwide, but most mining occurs in China, Australia, and Peru. China produces over one-third of all global zinc output.

Today, zinc is mainly used to galvanise (coat) other metals, such as iron, to prevent rusting. Galvanised steel is used for car bodies, streetlamp posts, safety barriers and suspension bridges.

Zinc is used in large quantities to produce die-castings, which is essential in the automobile, electrical, and hardware industries. Zinc is also used in brass, nickel-silver, and aluminium solder alloys. Brass, an alloy of copper and zinc, was used in the Aegean as early as the third millennium BC. The Bronze and Brass Age should have been called the Bronze and Brass Age.

Zinc oxide is widely used in manufacturing many products, such as paints, rubber, cosmetics, pharmaceuticals, plastics, inks, soaps, sunscreen, batteries, textiles and electrical equipment. In addition, zinc sulfide is used in luminous paints, fluorescent lights and x-ray screens.

Zinc is an essential biological trace element for humans, other animals, plants, and microorganisms. It is critical for prenatal and postnatal development. Zinc is the second most abundant trace metal in humans after iron and the only metal in all enzyme classes. Sadly, Zinc deficiency (caused by malnutrition) affects about two billion people in the developing world and is associated with many diseases.

Iron ores are rocks and minerals from which metallic iron can be extracted. There are four primary iron ore deposits: massive hematite, which is the most mined; magnetite, titanomagnetite, and pisolitic ironstone. These ores vary from dark grey, bright yellow, and deep purple to rusty red. Iron is responsible for the red colour in many of our rocks and the deep red sands of the Australian deserts. Iron makes up close to 5% of the Earth's crust. Iron ore deposits are worldwide, with Australia, Brazil, the United States and Canada being the largest producing countries.

Iron ore is integral to the steel-making process and one of the most sought-after commodities in the world. Almost all iron ore (98%) is converted into pig iron for steel making, which is used in construction, transportation, energy infrastructure and household appliances. Iron is made by removing oxygen and other impurities from iron ore. When iron is combined with carbon, recycled steel and small amounts of different elements, it becomes steel. Compared to pure iron, though, steel is roughly 1,000 times stronger. Adding just a tiny amount of carbon to iron significantly increases its tensile strength, resulting in a superior level of strength compared to pure iron. 1.6 tons of iron ore is needed to produce one ton of steel.

Steel is the world’s most important engineering and construction material. It is used in every aspect of our lives: in cars and construction products, refrigerators and washing machines, cargo ships and surgical scalpels. It can be 100% recycled. Most steel products and objects aren’t made of new steel; They are made of recycled steel. Statistics show that steel has a global recycling rate of roughly 60%, meaning that over half is recycled and reused. Steel is easy to recycle because it can be smelted down. Even then, the world uses 20 times more iron (in the form of steel) than any other metal.

Although steel was first used around 1800 BCE, and India made surprisingly good steel around 400 BCE (back then, exporting was not viable), a British inventor, Henry Bessemer, is generally credited with inventing the first technique to mass-produce steel in the mid-1850s. Steel is still produced using technology based on the Bessemer Process, which involves blowing air through molten pig iron to oxidise the material and separate impurities.

There are more than 3,500 types of steel, each with many different physical, chemical, and environmental properties. So, the question must be asked: Is steel a commodity? By one definition, it is not, which explains why there has never been a flourishing Exchange-traded commodity market for steel. About eight steel contracts exist on the CME for specific types of steel in certain geographies; these specialised products do not warrant further discussion in this introductory commodity book.

A chemical reaction occurs when steel encounters water and oxygen, creating an iron oxide layer. In most modern steel applications, this problem is easily overcome by coating. Many different coating materials can be applied to steel. For example, rustproof paint coats most cars, and enamel paint is used on refrigerators and other domestic appliances. In other cases, nickel and chromium are added to make stainless steel, which can help prevent rust.

Approximately 75% of modern steels have been developed in the past 20 years. If the Eiffel Tower were to be rebuilt today, the engineers would only need one-third of the steel used initially.

The steel-making industry has been around for centuries, and while it’s experienced ups and downs, it’s safe to say the sector remains healthy. Globally, it’s estimated that over 2 million people work in the steel industry. In addition, world crude steel production reached 1,950.5 million tonnes (Mt) in 2021.

A fascinating fact about steel is that steel can be considered more elastic than rubber. Elasticity refers to a material’s ability to return to its original shape after being deformed under stress. Based on this definition, steel is more elastic than rubber because it reverts to its original form more quickly when the stress is alleviated. Physics again!

Agriculture

While Metals (and Energy) are called hard commodities, agricultural commodities are known as soft commodities or softs. These commodities are crops and livestock raised and harvested for food and, increasingly, fuel (sugar cane and corn-based ethanol). In the case of fertiliser, a critical part of the agricultural cycle, the reverse situation occurs: It is made partly from ammonia, made from natural gas, to produce nitric acid. Ammonia, like natural gas, is a hard energy-carrying commodity. However, the fertiliser that was created is known as a soft commodity due to its importance in agriculture. Biofuels (diesel and ethanol made from waste vegetable oils, animal fats and cellulose, the stringy fibre of a plant) are other examples.

The agricultural, or soft commodities sector, comprises grains (wheat, corn) and oilseeds (palm oil, cotton, and soy); livestock (feeder cattle and lean hogs); sugar; cocoa; coffee; and frozen concentrated orange juice. Of course, hundreds of other agricultural commodities have their markets, but describing them all is beyond the scope of this book. More miscellaneous agrarian produce, like Lumber, will be discussed later.

The US Department of Agriculture (USDA) Economic Research Service (ERS) is a remarkable government institution that produces incredible research and provides a staggering amount of helpful information on all aspects of agriculture online. The ERS aims to anticipate trends and emerging issues in agriculture, food, and the environment in America. It also aims to conduct objective economic research to inform and enhance public and private (industry) decision-making. For example, its research and online publications significantly contributed to the following discussion of agricultural commodities and their markets.

The Sugar Association defines refined sugar as sucrose, a disaccharide of two other sugars (glucose and fructose) bound together. Sugars are a broad category of mono and disaccharides, the most straightforward carbohydrates. Monosaccharides include glucose, galactose and fructose, and disaccharides include sucrose, lactose, maltose, and trehalose. Sugars can be naturally occurring (e.g., found in fruits, vegetables, dairy products, and nuts); they can be extracted from plants and dairy and added to foods, or they can be artificial using various plant or dairy ingredients. The sugar in the food supply is mainly harvested from sugar beets and sugar cane.

Sugar cane is grown in tropical and subtropical regions worldwide, including South Africa, Brazil, India, Mauritius, and the West Indies. It is an enormous grass that can grow as high as five meters. The sugar stored in its long stalk is a source of reserve food for the plant. However, only about ten per cent of the total weight of sugarcane crops is converted to sugar.

Sugar beet is a root crop grown in temperate regions of the world. The plant stores sugar in its roots rather than in its stalk. It is grown throughout Europe, North America, and China.

Sugar (sucrose) produced from either beet or cane is chemically and functionally identical and contains the same number of calories at four per gram; as per our definition, sugar is a commodity. The Sugar No. 11 contract, traded on the Intercontinental Exchange (ICE) in New York, is the world's benchmark for raw sugar trading (there is also a #14 contract for the US market only). Exchange contracts and commodity trading are discussed in Chapter Six.

Sugar is used in food because of its sweet taste. However, sugar has many other functions in food technology, including preservatives, texture modifiers, fermentation substrate, flavouring, colouring, and bulking agents.

Sugar crops now contribute about 60 per cent of global ethanol production; the rest comes from other grain crops. Ethanol is used to produce alcoholic drinks and as a biofuel for heating and fueling cars.

Coffee is the third most widely consumed beverage globally, behind water and tea! It is also one of the most traded commodities globally. Central and South America, Africa, the Middle East, and Southeast Asia are three primary coffee-growing regions. These regions are all located along the equatorial zone between the Tropic of Cancer and the Tropic of Capricorn, widely known as the "Bean Belt". More than 70 countries produce coffee, but most global output comes from the top five producers: Brazil, Vietnam, Colombia, Indonesia, and Ethiopia. Incredibly, Brazil accounts for about 40% of all global production.

There are two main types of coffee: Robusta and Arabica. Some in the coffee industry consider the Arabica bean of higher quality. Arabica tends to have a smoother, sweeter taste, with notes of chocolate and sugar and sometimes hints of fruits or berries. Robusta beans, on the other hand, have a more pungent and bitter taste.

The coffee futures contracts traded on the Intercontinental Exchange (ICE) are Arabica and Robusta. Arabica usually trades at a premium due to higher quality. However, Robusta coffee beans are in massive demand from large global customers, including Sara Lee, Kraft, Proctor & Gamble, and Nestlé. These companies purchase almost 50 per cent of all coffee produced worldwide and are known as the "Big Four" coffee roasters; they own many coffee-related brands and have coffee products under various names. Because of the enormous volume of coffee they purchase, changes in their demand can affect the global prices of coffee.

No one knows how or when coffee was discovered, but much evidence (and much more entertaining folklore) points towards an Ethiopian origin. The name coffee entered the English language towards the close of the sixteenth century via the Dutch name Koffie, which came from the Turkish Kahve and is handily derived from the Arabic Qahwah. Coffee drinking was first recorded along the Arabian Peninsula. It was brought to Europe by early commodity traders, where it became trendy, displacing the morning libations of wine and beer; a fundamental change in workers' productivity followed.

Coffee plants eventually reached the New World during the early 18th century. However, the drink wasn't popular in America until the Boston Tea Party of 1773, when switching from tea to coffee became a patriotic duty! And over 225 years later, according to Dunking Donuts’ 2006 marketing campaign, ‘America runs on Dunkin’. By our definition, doughnuts are not considered commodities, or indeed food, by the definitions of others.

Cocoa is the cacao tree's dried and partially fermented fatty seed from which chocolate is made. Cocoa is the dry powder derived from grinding cocoa seeds and removing the cocoa butter from the dark, bitter cocoa solids. Cocoa is the solids of the cacao seed (bean), cocoa butter is the fat component, and chocolate is the combination of the solids and the fat. Despite its delicious taste, cocoa also has notable health benefits. Cocoa contains high levels of flavonoids linked to cardiovascular health benefits.

Western Africa is the leading cocoa-producing region. C?te d'Ivoire and Ghana are the two largest producers, accounting for over 60% of global cocoa production. Indonesia, Nigeria, and Ecuador follow them. Cocoa production begins around the tropical regions of the equator, where the hot and humid climate is ideal for growing cocoa trees.

The Mayans of Central America are believed to have been the first to discover cocoa. They learned how to harvest the beans inside the cocoa pods to make a liquid treat. According to legend, Columbus arrived in Nicaragua in 1502 and became the first European to drink chocolate.

Trading Places is a fictional comedy movie, but the commodity contract at the heart of the Duke brother's insider trading scam is real: Frozen Concentrated Orange Juice (or FCOJ-A) futures have traded in New York since 1966, first on the New York Cotton Exchange, then on the successor bourse, the New York Board of Trade and as of 2007, on the ICE. Options (the right, but not the obligation, to buy or sell a commodity at a fixed price) on FCOJ futures were introduced in 1985.

Brazil is the largest producer of oranges, followed by the US (Florida) and the EU. Orange juice is the most popular fruit juice worldwide and has long been a breakfast staple. The EU consumes the most orange juice, closely followed by the USA; the UK is the third-biggest consumer.

Although nothing is more straightforward than squeezing a few juicy oranges for delicious fresh orange juice, the global orange juice market comprises many participants in an otherwise typical commodity supply chain. Growers, fruit handlers, fruit processors, blending houses, packers, and food distribution companies play pivotal roles in the global citrus business, with concentrated orange juice at the heart.

The original orange juice process was created in the forties by three American US Department of Agriculture (USDA) researchers, Ed Moore, Cedric Atkins and Louis G MacDowell. Their method, called the Cutback process, improved the flavour of orange juice by adding some of the fresh juice to orange concentrate (first created by water evaporation) and then freezing it. This new process also restored some of the Vitamin C lost in heating, creating a more nutritious product. The process accelerated the growth of citrus production in Florida and helped make the global frozen food industry.

Like many other agricultural commodities where consumers and producers need price certainty in their operations (to profit and stay in business), the FCOJ contract was created to allow for price hedging. Commercial hedging will be discussed later, but it is the cornerstone of most commodity businesses and why many Bourses exist. The ability for a producer to agree on the prices he will sell his crops at in the future (and similarly for a consumer knowing what they will have to pay) creates cash-flow certainty. In addition, it allows for longer-term business planning and management. These contracts are called Futures and will be discussed in depth in chapter six.

According to the USDA ERS, the primary feed grains (used for feeding livestock) are Corn, Sorghum, Barley, and Oats. Corn is the primary U.S. feed grain, accounting for over 95 per cent of total feed grain production and use.

The United States is the world's largest producer, consumer, and exporter of corn. On average, U.S. farmers plant about 90 million acres of corn yearly, with most of the crop grown in the Heartland region (from the Great Plains through Ohio). Most of the crop is used domestically as the primary ingredient in livestock feed (about 45 per cent of domestic use) and ethanol production (about 45 per cent of domestic use). Corn is also processed into many food and industrial products (the remaining 10 per cent), including starch, sweeteners, corn oil, beverages and industrial alcohol. As a result, U.S. corn exports are rising and account for an average of 15 per cent of the country’s total use.

Cornflakes are one of the most well-known breakfast cereals made from toasting cornflakes. The cereal, originally made with wheat, was created by Will Kellogg in 1894 for patients at the Battle Creek Sanitarium, where he worked with his brother John Kellogg. The breakfast cereal proved popular among the patients, and Kellogg subsequently started what became the Kellogg Company to produce cornflakes for the wider public. Kellogg continued to experiment with various ingredients and different grains. Finally, in 1928, he began manufacturing Rice Krispies, another successful and famous breakfast cereal made from rice.

Wheat ranks third among U.S. field crops in planted acreage, production, and gross farm receipts—behind corn and soybeans. Unlike these two grains, they are uniquely human food crops; they are not used as feed grain for livestock (nutrition and digestion issues). Instead, wheat is a species of cereal grass that produces a dry, one-seeded fruit called a kernel.

More than 17,000 years ago, humans gathered the seeds of plants, and after rubbing off the husks, people chewed raw kernels, parched, or simmered. Wheat originated in the “cradle of civilisation” in the Tigris and Euphrates River valleys near Iraq; the Roman goddess Ceres, the grain protector, gave grains their common name today – “cereal.”

Most wheat is typically milled into flour and is then used to make a wide range of foods, including bread, muffins, noodles, pasta, biscuits, cakes, cookies, pastries, cereal bars, sweet and savoury snack foods and crackers.

Although wheat is primarily used for foodstuffs, it has several alternative uses. For example, its gluten and starch make it elastic and bind water. This makes wheat useful for products like paper, as wheat starch improves strength.

The U.S. share of the global wheat market also declined over the past two decades as the European Union, Ukraine, and Russia rose in prominence. Between 2001 and 2005, the U.S. share of global wheat exports averaged 25 per cent; for the 2020/21 marketing year, it slipped to about 13 per cent.

Wheat is one of the most traded agricultural commodities in the world. It is “unrivalled in its range of cultivation”, thanks to the diversity of its variants and the degree to which it has become central to human culture. About half of the wheat grown in the US is used domestically, and two significant contracts are traded on several US-based Exchanges. There are two types: Chicago Soft Red Wheat and Kansas City Hard Red Wheat. The Chicago contract is the most liquid global wheat contract. “Soft” refers to wheat with a low gluten content, while “hard” refers to a higher gluten content. The gluten in flour made with hard wheat gives bread dough more elasticity, which results in bread that holds its shape when baked.

Ukraine is one of the world's major grain producers known as Europe's breadbasket. The country mainly grows and exports wheat, corn, and barley. According to the European Commission, Ukraine accounts for 10% of the world wheat market, 15% of the corn market, and 13% of the barley market. With more than 50% of world trade, it is also the leading player in the sunflower oil market.

Sadly, Russia’s illegal and unjustified invasion of Ukraine in February 2022 has also disastrously affected nearly all significant commodity prices, most notably by preventing Ukraine from exporting crops safely to developing nations. This has caused food shortages and price spikes, hurting poor people globally.

The United States, Brazil, and Argentina produce about 80% of Soybeans. Recently, there has been a surge in demand for soy—the “king of beans” globally. Soy is a globally traded commodity produced in temperate and tropical regions and a critical protein and vegetable oil source.

The United States is the world's leading soybean producer and the second-leading exporter (China being their biggest customer). Soybeans comprise about 90 per cent of U.S. oilseed production, while other oilseeds—including peanuts, sunflower seed, canola, and flax—comprise the remainder.

Over 70 per cent of the soybeans grown in the United States are used for animal feed. Poultry is the number one livestock sector that consumes soybeans, followed by hogs, dairy, beef, and aquaculture. The US grows so many soybeans because per-capita chicken consumption has quadrupled since the 1950s.

A pivotal step in utilising soybeans is separating oil from protein and fibre. Soybean oil is used in various packaged foods, baked goods, snacks, dressings, and sauces and is sold as a cooking oil. It is a vegetable oil often blended with other oils, including canola, corn, safflower, and sunflower.

In the United States, corn and soybeans are grown in the same regions and by the same farmers, presenting producers in much of the country with the decision of how much to plant each in a crop year. Crop rotation is necessary to maintain soil quality and yield, but perfect annual rotation is optional. Farmers thus have a choice, year on year, of how much of which crop to plant, and the profitability of each crop is what sways farmers towards one or the other. Lower yield due to crop repetition (within limits) may produce higher profits when one crop is priced more favourably.

The economic adage “the cure for high prices is high prices” largely governs the soybean-corn relationship. For example, when soybeans are priced high relative to corn, farmers will plant more soybeans instead of corn, driving the price of beans down with the now-increased supply. The migration from corn to beans will then reduce corn supply, therefore driving the price of corn up and restoring a historical price ratio between the two crops.

Palm oil is the most widely used vegetable oil in the world. Oil palm trees grow in regions around the Equator. When the oil palm trees are three to four years old, they develop palm fruit in bunches. The fruit bunches are harvested throughout the year. Each bunch contains hundreds of palm fruits. Palm fruits are about the size of large olives. The fruit has a single seed or kernel used to produce palm kernel oil. Each palm fruit contains about 30-35 per cent oil. One palm tree produces 40 kilograms of oil every year, according to the International Union for Conservation of Nature (IUCN).

Indonesia and Malaysia constitute about 85% of the world's palm oil supply, followed by Nigeria, Thailand and Colombia. Palm oil is essential for global food security and economic development, and crude palm oil and kernel oil are traded on the Kuala Lumpur Commodity Exchange.

Palm oil has been quite a controversial commodity for many health and environmental reasons. In the past decades, increasing demand has led to an unprecedented expansion of palm oil production in Malaysia, Indonesia, and Thailand. These countries have humid, tropical climates ideally suited for growing oil palm trees. However, to accommodate oil palm plantations, tropical forests and peatlands are being destroyed. These regions are home to animals and wildlife that are displaced and destroyed. The main threat to the survival of orangutan populations in the wild is the massive expansion of palm oil plantations in Borneo and Sumatra. Furthermore, destroying peatlands also releases Carbon Dioxide into the atmosphere. Wetlands are natural carbon sinks, so removing them puts the CO2 back in the atmosphere: this is very bad.

Palm oil is ubiquitous in processed foods. It is less saturated than butter and contains no trans fats, but this does not make it a healthy food. According to Harvard nutrition experts, palm oil is better than high–trans–fat shortenings and probably a better choice than butter. However, vegetable oils that are naturally liquid at room temperature, such as olive oil and canola oil, should still be your first choice.

Cotton is one of the most important textile fibres worldwide, accounting for an average of about 25 per cent of the total world fibre use.

Historians don’t know the precise origins of cotton, but cloth found in caves in Mexico proves that the crop was around more than 7,000 years ago. Since the Age of Antiquity, civilisations worldwide have spun cotton fibres into cloth garments. However, two events in history – the Industrial Revolution in England and the invention of the cotton gin in the United States – profoundly changed cotton's role in world markets. These events led to the widespread production of cotton garments and turned cotton into a multi-billion-dollar global industry.

The top two cotton producers, India and China, contribute approximately 45-50 per cent of the world's production, while the top four comprise 70-75 per cent of global cotton production. The United States is the world’s third-largest cotton producer and the leading cotton exporter, accounting for one-third of international trade in raw cotton. Despite being the second-largest cotton producer, China is also the largest importer.

Cotton is another controversial crop. Producing one kilogram requires 10,000 litres of water, so global cotton production requires over 250 billion tons annually. Let us remember Bangladesh's water pollution challenges from the dye used in developing countries to make denim.

Cotton futures have traded in New York since 1870, first on the New York Cotton Exchange, then on the New York Board of Trade, and now on ICE Futures. U.S. Options on cotton futures were introduced in 1984.

Pork It is the most consumed meat worldwide, with evidence of pig husbandry dating back to 5000 BCE.

As of April 2022, there were about 784 million pigs worldwide. China was home to more than half of the global pig population because, unsurprisingly, it is the leading pork producer worldwide, producing about 55 million metric tons of pork each year. China is also the world's largest pork consumption market. In addition, pork is deeply ingrained in the culture and diet of many (non-Muslim) Asian countries.

The environmental impact of pig farming is driven by the spread of faeces and waste to surrounding neighbourhoods, polluting air and water with toxic waste particles. In addition, waste from pig farms can carry pathogens, bacteria (often antibiotic-resistant), and heavy metals that can be toxic when ingested. There is also the question of methane emissions from burps and farts. Methane (which is natural gas) is the worst greenhouse gas.

Lean hog is a technical designation used in the futures trading of pork products, most frequently through the Chicago Mercantile Exchange (since 1966). The term refers to most edible meat harvested from a hog carcass. Pork bellies, used primarily to produce bacon, are traded and priced as separate commodities. Lean hog futures contracts are traded widely, with delivery timing linked to the agricultural production cycle.

Lean hog futures contracts are often grouped with feeder and live cattle futures contracts as livestock futures contracts. These commodities share fundamental demand and supply risks, such as long feeding periods, weather, feed prices, and consumer sentiment toward meat consumption. This makes grouping them useful for commercial discussions.

Cattle have been domesticated for the last 10,000 years. However, it wasn’t until the 1800s that beef started to take off in the northern US markets. The introduction of the refrigerated rail car in the 1860s opened the beef industry by allowing farmers to transport beef across the country (USA). Beef saw another spike in the 1950s with the introduction of the federal highway system. The U.S. accounts for 47% of worldwide beef production, making it the world's largest beef producer. However, the U.S. is also one of the largest beef importers: Americans love beef!

Feeder cattle, sometimes called store cattle, are young cattle mature enough to undergo backgrounding or be fattened in preparation for slaughter. They may be steers (castrated males) or heifers (females who have not dropped a calf). Backgrounding is the growing of steers and heifers from weaning until they enter the feedlot for finishing. It is suited to farmers who do not want to maintain a cow herd, do not want to finish cattle, but want to put added weight on calves after weaning. Backgrounding occurs at backgrounding operations, and fattening occurs at a feedlot. Feeder calves are less than one year old; feeder yearlings are between 1 and 2 years old. Both types are often produced in a cow-calf operation. After attaining a desirable weight, feeder cattle become finished cattle sold to a packer (finished cattle are also called fattened cattle, fat cattle, fed cattle, or, when contrasted with carcasses, live cattle). Packers slaughter the cattle and sell the meat in carcass-boxed form.

After feeder cattle reach a weight range of 1200 to 1500 pounds, they are considered Live Cattle. They have gained the minimum weight for processing, at which point feed lots sell the live cattle to meat packers.

Live cattle futures are standardised, exchange-traded contracts on the Chicago Mercantile Exchange (CME). These contracts represent the delivery of full-grown cattle ready to be sold to meat processors, reaching a weight of between 1,200 and 1,400 pounds. The introduction of live cattle futures in 1964 was innovative because futures were only traded on storable commodities such as grain at the time. Later, Feeder Cattle were added to the CME as a livestock product in 1971.

It is often claimed that producing one kilo of meat requires seven kilos of grain. Therefore, the price of feeder cattle varies with the costs of soy and corn as they become less or more expensive to feed and become live cattle. When grain prices rally, some cattle are slaughtered early to avoid more costly feeding for the same terminal price. Just ask Hillary Clinton, one of the most successful live cattle futures traders of the 1970s.

When we consider all aspects of farming, rearing, harvesting and production, it should come as no surprise that Agriculture, as a broad industry, can be viewed as the world's third most significant polluting industry, contributing between 13-18% GHG gases. The second is the transport sector, which accounts for around 20% of all GHG. However, transport can ultimately be considered a subsector (and this makes the numbers worse) of the most significant polluting business on planet Earth: ENERGY!

Energy commodities include crude oil and all refined products, natural gas, coal, emissions certificates, and the many different sources of power that can create electricity, such as wind, tidal, solar, and nuclear. It also covers many biofuels, such as ethanol, and other energy-derived commodities like fertiliser and ammonia. Energy commodities, like metals, are known as Hard Commodities.

Energy

The Encyclopedia Britannica describes Petroleum as a complex mixture of hydrocarbons inside the Earth in liquid, gaseous, or solid form. Petroleum mainly describes the liquid form, Crude Oil. However, it also refers to Natural Gas and the viscous or solid form known as Bitumen, found in tar sands. The liquid and gaseous phases of petroleum are the most important fossil fuels.

Petroleum is believed to have formed from animal and vegetable debris in deep sedimentary beds. With a density less than the surrounding water, oil was expelled from the source beds and migrated upward through porous rock, such as sandstone and some limestone, until it was finally blocked by nonporous rock, such as shale or dense limestone. The ensuing deposits were trapped by geologic features caused by the folding and faulting of the Earth’s crust.

Crude oil has limited uses; however, when it is sent to a refinery and separated or ‘refined’ into its constituent parts, it is not hard to see why it is the world's most important and most traded commodity.

These commodities are traded as outright futures or OTC cash and are physically settled. The Heating Oil (1978) futures market existed before the WTI Oil futures (1983). The Gasoline Futures market was created the following year, in December 1984. Brent did not start trading until 1988.

? Propane - Used as a feedstock for ethylene cracking or blended into LPG for use as fuel.

? Butane is used as a feedstock for ethylene cracking or blended into LPG for fuel.

? LPG (liquefied petroleum gas) - A blend of propane and butane used as fuel

? Light naphtha - Used as feedstock into ethylene crackers

? Gasoline - Used as a transportation fuel for passenger cars and light trucks

? Aviation gasoline - Used as an engine fuel in light aircraft

? Jet fuel - Used as a fuel for jet aircraft

? Kerosene fuel oil - Used as a residential cooking, heating, and lighting fuel

? Diesel - Used as a fuel for heavy-duty trucks, trains, and heavy equipment

? Industrial Gasoil - Used as a furnace fuel in industrial plants and commercial/residential heating (Heating Oil)

? Residual fuel oil - Used as a fuel in power generation and for large ocean-going ships (bunker fuel)

Many refineries also produce speciality or non-fuel products such as:

? Asphalt - Used to pave roads and in the manufacture of building materials (e.g., roof shingles)

? Base oils - Used to make lubricating oils for use in industrial machinery and vehicle engines

? Propylene - Can be separated for sale to the petrochemicals industry

? Aromatics - Can be separated from reformate for purchase by the petrochemicals industry

? Wax - Extracted from lubricating oil and either sold as a feedstock to speciality wax production (as slack wax) or treated at the refinery to a finished wax product.

? Grease - Used as a solid lubricating oil, mostly in industrial uses

? White oil - A colourless, odourless, tasteless oil used by the food, cosmetics, and pharmaceuticals industries

? White spirit - Naphtha range material used as an industrial or household solvent

? Sulfur - A contaminant when present in other products, but once separated, it can be sold as a feedstock to the petrochemicals industry

? Pet coke - A by-product of the coking process that can be sold as a fuel for power plants and cement plants or to manufacture electrodes and anodes

Because of refinery processing gain, a 42-gallon barrel of crude oil in the U.S. will yield about 45 gallons of petroleum products in U.S. refineries. Most new products have a lower density and thus higher volume since mass must always be conserved (according to Physics).

Every petroleum deposit will be slightly different from every other due to the unique process of making it. However, industry experts note several critical properties that affect the market price of regional crude oils: The API gravity (a measure of the density of the oil) and the sulfur content. Sulfur is naturally present as an impurity in fossil fuels, and removing organosulfur compounds from crude oil is a priority for all countries to reduce air pollution. The density of crude oil suggests the product slate that will be yielded. The lighter the crude oil, the more valuable products such as jet fuel, gasoline, and diesel, which are used for transportation, will be produced.

Major petroleum-producing countries and regions include Venezuela, Saudi Arabia, Canada, Iran, Iraq, Kuwait, Russia and the Caspian Sea region, West Africa, the United States, the North Sea, Brazil, and Mexico. In the 1960s, some countries formed a cartel to stabilise and manipulate the global oil price. They are known collectively as OPEC, and OPEC will be discussed later.

Most crude oil is traded bilaterally between producers, trading houses and consumers, with pricing set as differentials to well-established global trading benchmarks such as Brent, WTI and Dubai. Those benchmarks are traded on the major commodity trading exchanges where producers, consumers, investors, or speculators can all gain exposure to oil prices and refined products.

WTI is the primary oil benchmark for North America as it is sourced from the United States, primarily from the Permian Basin. The oil comes mainly from Texas. It then travels through pipelines, processed in Midwest and Gulf of Mexico refineries. WTI crude oil futures trade on the New York Mercantile Exchange (NYMEX) is the world's most actively traded futures contract on a physical commodity. WTI is often compared to Brent crude, an oil benchmark that prices nearly two-thirds of the world's oil contracts and is based on a blend of oil grades (usually named after their associated fields) extracted in the North Sea. Brent crude futures have traded on the ICE (since 2005) but originally started on the open outcry International Petroleum Exchange (IPE) in London in 1988.

The major Exchanges also have contracts for refined products such as gasoline, diesel, and heating oil. With the advent of all electronic trading, dozens of grades of crude oils and refined products are now listed with options and futures available for most.

The US Energy Information Administration (EIA) is the most valuable online source for all energy-related matters. It can be accessed at: https://www.eia.gov. The author has used the EIA as a comprehensive source of information for over twenty years, and much of the work here on energy is derived from its pages.

Natural Gas is the other primary petroleum energy source. Natural gas is mostly methane, a compound with one carbon atom and four hydrogen atoms (CH4). However, natural gas also contains smaller amounts of natural gas liquids or NGLs (the same family of molecules as natural gas and crude oil and composed exclusively of carbon and hydrogen. Ethane, propane, butane, isobutane, and pentane are all NGLs) and nonhydrocarbon gases, such as carbon dioxide and water vapour.

Natural gas is created in circumstances similar to crude oil. As a gas, it moves more freely than a liquid, even underground. In some places, natural gas moved into large cracks and spaces between overlying rock layers. The natural gas found in these formations is called conventional natural gas. Natural gas also occurs in the tiny pores within some formations of shale, sandstone, and other types of sedimentary rock. These natural gas deposits are known as Shale or Tight gas, sometimes called unconventional natural gas. Natural gas also occurs directly with crude oil deposits and is called associated natural gas. Natural gas deposits are found on land, offshore and in deep water under the ocean floor. Another type of natural gas found in coal deposits is called coalbed methane.

Natural gas can escape from the ground and cause long-burning fires. In ancient Greece, the gas flames at Mount Chimaera contributed to the legend of the fire-breathing creature Chimera. Although natural gas was discovered in the Americas in the early 1600s, it wasn’t until 1821 that William Hart (sometimes known as the father of natural gas) successfully dug the first natural gas well at Fredonia, New York, which led to the formation of the Fredonia Gas Light Company in 1858.

Natural gas must be transported from the wellhead to its terminal markets. In most countries, this is done through an extensive series of pipelines. However, technology and economics have made other storage and transportation methods viable.

Compressed natural gas (CNG) is mainly methane (CH4), compressed to less than 1% of the volume at standard atmospheric pressure. It is stored and distributed in rigid containers at a pressure of 20–25 megapascals (2,900–3,600 psi), usually in cylindrical or spherical-shaped containers. The stress concentration in a spherical shape is reduced as the stress resistance will be uniform over the total surface.

CNG can be used in modified traditional petrol/internal combustion engine vehicles or vehicles manufactured explicitly for CNG use either alone (dedicated), with a segregated liquid fuel system to extend range (dual fuel), or in conjunction with another fuel (bi-fuel). It can replace petrol (gasoline), diesel fuel, and liquefied petroleum gas (LPG).

CNG combustion produces fewer emissions than a traditional engine. Compared to other fuels, natural gas poses less of a threat in the event of a spill because it is lighter than air and disperses quickly when released. Biomethane, refined biogas from anaerobic digestion (pig farts!) or landfills – can be used directly; this gas type is also known as Renewable Natural Gas or RNG.

As oil prices have risen, CNG has been used in auto rickshaws, pickup trucks, transit and school buses, and trains. Unfortunately, the cost and placement of fuel storage containers are significant barriers to the broader/quicker adoption of CNG as a fuel.

Liquefied natural gas (LNG) is gas (predominantly methane, with some mixture of ethane) that has been cooled down to liquid form for ease and safety of non-pressurized storage or transport. It takes up about 1/600th the volume of natural gas in the gaseous state (at standard conditions for temperature and pressure).

LNG is odourless, colourless, non-toxic and non-corrosive; hazards include flammability after vaporisation into a gaseous state. In addition, the liquefaction process involves the removal of specific components, such as dust, acid gases, helium, water, and heavy hydrocarbons, which could cause difficulty downstream. The gas is then condensed into a liquid at close to atmospheric pressure by cooling it to approximately ?162 °C (?260 °F); maximum transport pressure is set at around 25 kPa (4 psi) (gauge pressure), which is about one-quarter of atmospheric pressure at sea level. It is an expensive proposition requiring high investment in exporting and importing infrastructure and building enormous ships designed to safely transport gas globally with minimal burn-off (loss due to vaporisation).

Natural gas is an abundant global resource. If our consumption remains at present levels, the International Energy Agency (IEA), another great institution creating excellent research material and statistics, estimates there are enough recoverable resources to last over 200 years. A gas-fired power station takes much less time to start and stop than a coal-fired plant. This flexibility makes it an excellent partner to renewable sources of energy such as solar and wind, which are only available intermittently when the sun shines and the wind blows. It also fuels many industrial processes that produce materials and goods ranging from glass to clothing, and it is an essential ingredient in products such as paints and plastics.

Gas is the cleanest-burning hydrocarbon, producing around half the carbon dioxide (CO2) and just one-tenth of the air pollutants of coal when burned to generate electricity. Using gas instead of coal has enormous potential to reduce near-term CO2 emissions and air pollution. Liquefied natural gas (LNG) is a lower-emission fuel for ships, trucks, buses, and trains and should eventually be part of an interim solution to achieve net zero emissions by 2050.

Gas has become more available through the development of LNG, which can help countries deal with short-term supply disruptions. For example, after the 2011 Fukushima nuclear power plant disaster, Japan shut down its nuclear reactors and relied on LNG to make up much of its lost electricity supply.

In some cases, producing electricity through natural gas rather than coal is cheaper. According to the IEA, the most efficient combined cycle gas-fired plant has investment costs of $1,100 per kilowatt, compared with $3,700 for the most efficient coal-fired plant. Gas-fired power becomes more competitive when long-term costs associated with climate change and the impact of air pollution, both on people and the environment, are included: The prices of NOx and SOx as well as Carbon emissions (EUAs, in the EU)

The CME states that the Henry Hub natural gas future is the world’s third-largest physical commodity futures contract by volume. It is widely used as a national benchmark price for natural gas, which continues to grow as a global and U.S. energy source. Natural gas is also a highly volatile, independent, stand-alone commodity. Speculators and investors in the natural gas market often refer to it as ‘Gas Vegas’. This has led to spectacular financial gains and losses for many market participants.

Because of the costs associated with building export and receiving terminals and chartering ships, most LNG supply is agreed upon between two or more parties even before work begins setting up the system. As a result, surplus production or unneeded contractually agreed amounts (cargoes) are often sold in the open market. In addition, the ships can be redirected to the markets where a shortfall has occurred (due to higher-than-expected demand or failure of another LNG supplier to perform). As a result, there are three major pricing systems in the current LNG contracts:

? Oil-indexed contracts are used primarily in Japan, Korea, Taiwan and China.

? Oil, oil products, and other energy carriers indexed contracts, used primarily in Continental Europe

? and market-indexed agreements, are used in the US and the UK.

Unlike the Henry Hub futures contracts, a physical-settled contract requiring gas delivery at the Henry Hub, Louisiana, these indexed contracts are all linked to the price of oil and oil products.

The National Geographic resource library is another superb source of information on natural resources. For example, their article on Coal contributed heavily to the following.

Coal is a black or brownish-black sedimentary rock. It is chiefly composed of carbon and hydrocarbons, which contain energy that can be released through combustion (burning). Coal is the largest energy source for generating electricity globally and the most abundant fossil fuel in the United States.

Coal creation began about 300 million years ago, during the Carboniferous period. Over time, the plants and algae were buried and compressed under the weight of overlying mud and vegetation. As debris was forced deeper under the Earth’s surface, it encountered increased temperatures and pressure. As a result, the plant matter decomposed slowly, retaining most of its carbon. Areas of buried plant matter are called peat bogs. Peat can be burned for fuel, a significant source of heat energy in countries such as Scotland, Ireland, and Russia. Under the right conditions, peat transforms into coal through carbonisation, which occurs under incredible heat and pressure: About 3 meters (10 feet) of layered vegetation eventually compresses into a third of a meter (1 foot) of coal!

Coal exists in underground formations called “coal seams” or “coal beds.” A coal seam can be as thick as 30 meters (90 feet) and stretch up to 1,500 kilometres (920 miles). Coal seams exist on all continents, with the largest coal reserves in the United States, Russia, China, Australia, and India. In the United States, coal is mined in three major regions. Wyoming is the top producer in the Western Coal Region, and about 40% of the coal mined in the country is extracted in the state. Over one-third of the nation’s coal comes from the Appalachian Coal Region, including West Virginia, Virginia, Tennessee, and Kentucky. Coal extracted from Texas in the Interior Coal Region supplies primarily local markets.

Coal goes through different phases of carbonisation over millions of years and can be found at all stages of development in other parts of the world. Coal is ranked according to how much it has changed over time. Hilt's Law states that the deeper the coal seam, the higher its rank. This is because the material encounters greater temperatures and pressure at deeper depths, and more plant debris is transformed into carbon.

Lignite coal is the lowest rank of coal. It has carbonised past the point of being peat but contains low amounts of energy—its carbon content is about 25-35%. It comes from relatively young coal deposits, about 250 million years old.

Lignite, a crumbly brown rock known as brown coal or rosebud coal, retains more moisture than other types of coal. This makes it expensive and dangerous to mine, store, and transport. It is also susceptible to accidental combustion and produces very high carbon emissions when burned. Most lignite coal is used in power stations near where it was mined.

Sub-bituminous coal is about 100 million years old. It contains more carbon than lignite, about 35-45%. Sub-bituminous coal is considered “brown coal,” along with lignite. Like lignite, sub-bituminous coal is mainly used as fuel to generate electricity. Most sub-bituminous coal in the U.S. is mined in Wyoming and makes up about 47% of all the coal produced in the United States. Outside the U.S., China is a leading producer of sub-bituminous coal.

Bituminous coal is formed under more heat and pressure and is 100 million to 300 million years old. It is named after the sticky, tar-like substance Bitumen, also found in petroleum. It contains about 45-86% carbon. As a sedimentary rock, bituminous coal has “bands,” or strips, of different consistencys that mark the compressed plant material layers. Bituminous coal is divided into three types: smithing coal, cannel coal, and coking coal. Smithing coal has very low ash content and is ideal for forges, where metals are heated and shaped. Cannel coal was extensively used as a source of coal oil in the 19th century. Coal oil is made by heating cannel coal with controlled oxygen, which is called pyrolysis. Coal oil was used primarily as fuel for streetlights and other illumination. The widespread use of kerosene (a refined oil product akin to jet fuel) reduced the use of coal oil in the 20th century.

Coking coal is used in large-scale industrial processes. It is created by heating coal in an oxygen-free environment, reducing its moisture content and increasing its stability. The steel industry relies on coking coal.

Anthracite is premium coal with the most carbon, up to 97%, and therefore the most energy. It is harder, denser, and more lustrous than the other types of coal. Almost all the water and carbon dioxide have been expelled, and it does not contain the soft or fibrous sections found in bituminous coal or lignite. It burns cleanly, with very little soot and is more expensive than other coals; it is rarely used in power plants. Instead, anthracite is used primarily in stoves and furnaces.

Anthracite is also used in water filtration systems. It has tinier pores than sand, so more harmful particles are trapped. This makes water safer for drinking, sanitation, and industry.

Anthracite is typically found in geographical areas that have undergone stressful geologic activity. For example, the coal reserves on the Allegheny Plateau in Kentucky and West Virginia stretch to the base of the Appalachian Mountains. Here, orogeny, or mountain formation, contributed to temperatures and pressures high enough to create anthracite. China dominates anthracite mining, accounting for almost three-quarters of anthracite coal production. Other anthracite-mining countries include Russia, Ukraine, and Vietnam.

Graphite is an allotrope of carbon. It has a different crystalline structure from the other allotropes, graphene, diamond, and buckminsterfullerene. Graphite is the final stage of the carbonisation process, which we reviewed throughout the hydrocarbon discussion.

Graphite conducts electricity and is commonly used in Lithium-ion batteries. It has a high melting point and can resist temperatures up to 3,000 °Celsius (5,400 °Fahrenheit). Graphite can also be used in fire-resistant doors and missile parts like nose cones. However, the most familiar use for graphite is probably as pencil “leads.” (Pencils have never been made with lead.) China, India, and Brazil are the world’s leading graphite producers.

Electricity is the flow of electric charges through a conductor; an electric current is the measurement of the rate of charge flow past a given point in time. When a conducting material is moved through a magnetic field, an electric current will flow through the material. Electromagnetic induction is the phenomenon at the heart of electricity generation at power plants.

Most of the world’s electricity is generated from power plants that use turbines to drive electricity generators (Solar energy is a different process (photovoltaic) but has the same output). Electricity generated by any method is a flow of charges, thus fungible. Hence, by our definition at the start of this chapter, electricity is a tangible commodity.

Electricity can be generated from renewable and non-renewable sources. What interests us most is from which source. Electricity generation and associated risks will be discussed in a later chapter.

Electricity markets and Exchange-based contracts are traded in many parts of the world and mostly require physical delivery of electricity (serving load). However, due to the many idiosyncrasies of contract specification and overall market design (think about electricity grids, substations, power stations and pylons!), a detailed description of any electricity contract is beyond the scope of this book.

Other Commodities: A Compendious Discussion

In the study of logistics and transportation, Freight refers to:

1. any goods, items or commodities (oil, LNG, iron ore, grains, et al.) transported in bulk via air, surface, or sea/ocean transport.

2. the amount paid for transporting goods via any means or the combination of transport systems.

From (2) freight, whether wet (oil and chemicals transportation) or dry (grains, coal and iron ore) or even those 40-foot shipping containers themselves, can be considered a commodity (the same ships can move grains or oil between any two points, seafaring containers are typically the same size etc.) and, as such, have markets that support the price of moving things from A to B globally (for a given ship/cargo/route type). The definitive source of all things freight is the Baltic Exchange (www.balticexchange.com).

According to their website, the Baltic Exchange (BE) is the world's only independent source of maritime market information for the trading and settlement of physical and derivative contracts.

The BE comprises over 3000 members representing the world's maritime interests, including the dry bulk, tanker, gas, and container shipping markets. Members include shipowners, shipbrokers and charterers, maritime lawyers, arbitrators, P&I Clubs, and other shipping associations. Each member commits to a code of business conduct—the Baltic Code—summed up by their motto, “Our word, our bond.” Members of the Baltic Exchange negotiate and handle a significant proportion of the world’s ship chartering and sale and purchase business.

The BE is also the world's leading independent maritime market data source. Their data is used by shipbrokers, owners & operators, traders, financiers and charterers as a reliable and independent view of the dry bulk, tanker, gas, container and air freight markets. In addition, indices and assessments are used as a settlement tool for freight derivative trades, benchmarking physical contracts, and as a general indicator of the freight markets’ performance. Their comprehensive information services cover voyage and time-charter rates for Capesize, Panamax, supramax and handysize bulk carriers; Worldscale and time charter equivalent rates for VLCC, Suezmax, Aframax and MR tankers; time-charter rates for LPG and LNG vessels; container freight rates; air cargo rates; as well as forward assessments, sale and purchase values, OPEX assessments and even ship recycling prices; market reports and fixtures.

Baltic Exchange dry bulk assessments are made on a dollar-per-day time-charter or dollar-per-tonne voyage basis.

Baltic Exchange clean (refined products like gasoline and diesel) and dirty (crude oil) tanker assessments are published on both Worldscale and Time Charter Equivalent basis.

Baltic Exchange gas assessments are made on a time charter basis for LNG and a dollar-per-tonne voyage basis for LPG.

The Freightos Baltic Indices (FBX) reflect weekly spot rates for 40-foot containers. The data also includes a headline index, the FBX Global Container Index, a weighted average of the 12 underlying trade lanes.

The Baltic Air freight Indices (BAI) reflect the weekly transactional rates for general cargo. The data includes a headline index - the BAI Index – a weighted average of the 17 underlying destination basket routes and six outbound indices – a weighted average of the destination baskets from each of the six origin airports.

Rice is the seed of the grass species Oryza sativa (Asian rice) or, less commonly, Oryza glaberrima (African rice). As a cereal grain, domesticated rice is the most widely consumed staple food for over half of the world's human population, especially in Asia and Africa. Moreover, it is the agricultural commodity with the third-highest worldwide production, after sugarcane and maise. Since sizable portions of sugarcane and maise crops are used for purposes other than human consumption, rice is an important food crop concerning human nutrition and caloric intake, providing more than one-fifth of human calories consumed worldwide. There are many rice varieties, and culinary preferences tend to vary regionally. The CME currently offers a future contract for ‘Rough Rice’.

Timber and lumber are terms for ‘Wood,’ which are often used interchangeably but refer to different stages of harvesting and processing wood through a sawmill. Lumber is a collective term for harvested wood and is classified as hardwood or softwood; it refers specifically to the products derived from logs in a sawmill. Timber is unprocessed wood fibre, such as cut logs or standing trees, that have yet to be cut down and sent to a mill.

Lumber is mainly used for construction framing and finishing (floors, wall panels, window frames). However, it is also used for furniture, as a heating and light source, and as the principal feedstock in the paper and pulp industry.

Hardwood lumber, including oak and maple, is used in commercial industries, mainly for wood pallets, furniture, and flooring. Softwood lumber, such as pine and fir, is structural lumber used primarily for building.

Despite the many types and grades of wood and the many sizes (width, length and depth) that lumber can be delivered as, since 1969, the CME has offered a Lumber future that producers and consumers (as well as speculators) can gain price exposure through. CME lumber futures are called ‘Random Length Lumber Futures’. Although the contract size stipulates they’re as close to 2”x4” as possible.

Speculators often participate in this market, as the price of lumber can be a way to track economic health due to the imbalances in supply and demand caused by the construction industry's health. Lumber futures primarily trade in the Western Spruce, Pine, and Fir species of trees.

Wood Pulp, Recycled Paper, Recovered Fiber, and Kraftliner are all paper supply chain-based commodities traded for several decades on the CME, other minor or specialised Exchanges and bilaterally through industry participants in the OTC markets.

Uranium is the fuel most widely used by nuclear plants for nuclear fission. Although no carbon emissions occur in atomic power, Uranium is a nonrenewable energy source. Nuclear power plants use a certain kind of uranium, U-235, for fuel because its atoms are easily split apart and liberate the energy that generates the heat required to run the steam-driven turbine systems most power plants employ. Although uranium is about 100 times more common than silver, U-235 is relatively rare.

Most U.S. uranium ore is mined in the western United States. Once uranium is mined, the U-235 must be extracted and processed before it can be used as fuel. Uranium, by our definition, is a commodity; however, it cannot be traded for physical delivery in an open market (one accessible to speculators) because it is radioactive and could be used for more nefarious purposes other than fueling power plants. So, instead, the CME offers a non-deliverable futures contract based on the weekly published settlement prices for Uranium Oxide, U3O8 (also known as Yellowcake). We will discuss different settlement methods for futures contracts in chapter six.

Rubber can be divided into two categories based on its origin. Natural rubber is created from the milk of a rubber tree, whereas synthetic rubber is made using petroleum. Natural rubber comes from the Havea Brasiliensis Tree, which grows in tropical regions. The tree becomes economically viable after seven years and will last for about 10 to 25 years, depending on the skill of the tapper and bark preservation.

Synthetic rubber can be made into several different grades depending on the chemicals used in the production process. Adding specific chemicals makes rubber as soft as a sponge, as hard as a bowling ball, or as resilient as a rubber band. This unique characteristic has led to rubber being used in numerous applications and virtually every aspect of daily life.

Asia's leading Rubber derivative markets are the Tokyo Commodity Exchange, the Osaka Mercantile Exchange and the Singapore Commodity Exchange. Physical rubber trading mainly occurs at the New York (NYMEX), London, and Kuala Lumpur exchanges.

Unlike gold or copper, Diamonds (an allotrope of Carbon with four bonds) vary significantly from one stone to the next. With variations in carats, cuts, colour, and clarities, it would be challenging to standardise a product to be traded on an Exchange or OTC. We stated earlier that over 3500 recognised types of steel made it hard to have a standardised steel contract. The problem with a diamond contract would be manifestly worse!

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