How do the commodity markets work?

Could someone briefly explain how the commodity markets actually work or direct me to a site that explains? I’m a bit confused about the trading of the physical commodity in relation to the ‘paper’ commodity.

How are the physical commodities bought and sold and how do these trades and prices connect to the trades made on an exchange.

e.g. If a farmer or mining company sells it’s product to a manufacturer, is the price based on the exchange price at the time or is it a privately negotiated price?
Can the farmers or mining co’s sell their product direct on the exchange?

Can a commodity trader buy a tanker of oil from a producer and then turn and sell it on the commodity exchange at a profit?

How does this all work, how many different stages are there, who is involved and how much profit/cost is involved for each participant before it gets to the traders in the commodity exchanges?


Thanks

This book will answer all your questions:

http://eu.wiley.com/WileyCDA/WileyTi...471852104.html

They're sometimes going for under a tenner on Ebay...

Also try www.investopedia.com I'm sure it's got some decent background stuff about commodity futures and cash markets....

http://www.futures-investor.co.uk/fu...troduction.htm

Idiots guide to how trading in futures and commodities works

Hybrid Thread
Commodity & Futures markets

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Quote from db66trader:Could someone briefly explain how the commodity markets actually work or direct me to a site that explains?

See: Commodity Markets

. Leo Melamed on the origins of futures says:

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"It is no simple task to pinpoint with any degree of exactitude the precise moment when the idea of futures and options was born." __ "Indeed, the idea of establishing forward availability of product as well as its future price was conceived at the dawn of mankind, perhaps at that inspirational moment just after Eve bit into the proverbial apple and then frantically sought to make a futures contract with Adam." __ "Clearly, the first recorded application of futures is Biblical, when Joseph outlined to the Pharaoh his plan for forward buy hedges in grain to protect the land of Egypt from the coming seven years of famine."

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Quote from db66trader: I’m a bit confused about the trading of the physical commodity in relation to the ‘paper’ commodity.

Johnny has it right.

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Quote from Johnny Walker:Spot is if you want to buy (or sell) corn today. Futures are if you want to buy (or sell) corn and receive deliver in the future.

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Quote from db66trader:How are the physical commodities bought and sold and how do these trades and prices connect to the trades made on an exchange.

In all cases it initially starts with a paper contract.

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If a farmer or mining company sells it’s product to a manufacturer, is the price based on the exchange price at the time or is it a privately negotiated price?

Privately negotiated, based on the exchange price at the time. Yes!

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Can the farmers or mining co’s sell their product direct on the exchange?

They can deliver when they are short. Yes!

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Can a commodity trader buy a tanker of oil from a producer and then turn and sell it on the commodity exchange

Yes!

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at a profit?

Depends.

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How does this all work, how many different stages are there, who is involved and how much profit/cost is involved for each participant before it gets to the traders in the commodity exchanges?

Again it depends. The exchange makes the price. Everyone else does all the other stuff.

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Quote from battle river:hi. the futures exchanges have info also. just find the education section.

Exchanges web sites are a total waste of time. Forget getting anything-useful there.

Agree exchange website are not updated on a regular basis and are often month, if not years out of date in some cases - best to try broker websites and ask - simple google search for commodity broker does the trick!

www.numa.com/links/brokers.htm
or

http://www.manfutures.com -

or

www.sucden.co.uk - one of the biggest copper dealers - largest floor member of the LME apparently.......

http://www.cme.com/edu/

http://www.cbot.com/cbot/pub/page1/1,3248,1060,00.html

In regards to the Cash-Futures relationship, in the grains for instance.

btw, I grew up on a 3500 acre farm/ranch, so I know this stuff first-hand...

Dad calls the elevator and says "I have corn to sell, what are you guys bidding"

Co-op, or grain buyer "the BASIS is 10 under" which means we will pay you CASH, 10 cents under what the board (front month futures) is at. Quick 'Fun-With-Math' exercise... CU6 is trading at say 243'4 then you subtract the BASIS... you'll get 2.33 1/2 per bushel Cash.

Basis varies by location in the U.S. If you're buying corn in say Hereford, TX, expect a +40 or more basis, recently I heard higher than that. Pacific Northwest, look for +80, or thereabouts. Central Nebraska typically has a weak basis for both beans and corn.

the "10 under" is what is referred to as the BASIS... you'll find a bunch of city-boy brokers that won't be able to tell you what basis is, but they know "everything there is to know" about corn or soybeans or wheat because their grandpa has 5 acres out in western Illinois or whatever... RUN!!!


As far as deliveries go, that's a whole other lesson, but less than 1% of the open interest is actually delivered. Its just a risk management tool, and we welcome speculators to take on PRICE RISK.

Oftentimes, BASIS RISK can be as great to a producer than price risk, especially in the cattle market.

Hopefully that helps clarify the Cash/Futures relationships?

One of the best posts I have seen. More! More!