Commodities:

Commodities?🌾💰

Have you ever wondered what’s behind the coffee you drink or the oil that powers your car? 🚗☕ Commodities are the foundations of the global economy, those basic products that make everything work. From the gold that shines in the markets to the wheat that becomes bread, these raw materials are the starting point for almost everything we use on a daily basis.

Do you want to know how they work, why they are so important and what history they have behind them? Keep reading and you will find out! 📚✨

What are Commodities? 🤔

Commodities are essential raw materials that fuel the global economy and serve as the basis for the production of goods and services. They are tangible and fungible assets, meaning that one unit of a commodity is interchangeable for another of the same type and quality. Simply put, they are the “building blocks” of virtually everything we use and consume.

Main Categories

Commodities are divided into two broad groups:

Hard Commodities: These are natural resources that are mined or extracted. Examples include oil, natural gas, precious metals (gold, silver, platinum), and industrial metals (copper, aluminum, nickel).
Soft Commodities: These are agricultural or livestock goods that are grown or raised. Examples include wheat, corn, coffee, sugar, cotton, and livestock.

Key Features

1. Fungibility: A commodity is identical regardless of its origin. A barrel ofSaudi oil is worth the same as one extracted in the United States, as long as it meets standards.
2. Intrinsic value: Unlike assets like stocks or bonds, commodities have direct utility. Gold for jewelry, oil for fuel, wheat for bread.
3. Volatility: Their prices fluctuate considerably due to factors such as weather, geopolitical tensions, industrial demand or changes in supply.

Commodity markets

Commodity trading occurs in organized global markets, such as:

London Metal Exchange (LME): For industrial metals.
Chicago Board of Trade (CBOT): Mainly for grains and agricultural products.
New York Mercantile Exchange (NYMEX): Focused on energy and metals.

These markets use standard contracts to guarantee quality, quantity and delivery. A barrel of West Texas Intermediate (WTI) oil, for example, meets precise specifications, ensuring its acceptance in global trade.

Factors that affect prices

The price of a commodity is driven by supply and demand. For example:

Supply: A drought can reduce the corn harvest, increasing its price.
Demand: A boom in electric car manufacturing can increase the price of lithium, essential for batteries.
Geopolitics: Conflicts in producing regions can disrupt oil supplies, raising its price.
Business cycles: In times of economic growth, demand for materials such as copper and aluminum increases.

Commodities are fundamental to both the global economy and investors. Understanding what they are and how they behave is essential for those looking to diversify their portfolio or simply better understand how the gears of the global economy work. 🔎🌍

Why are Commodities Important? 🔍

Commodities are fundamental to the global economy and our everyday lives. They are the essential resources that power industries, trade, and ultimately our daily activities. From the fuel in our vehicles to the ingredients in our food, virtually everything we use has its roots in these basic goods. Their importance is reflected in both their practical use and their impact on financial markets and global economies.

Foundation of the Global Economy 🌎

Commodities are the engine of global supply chains. Without oil, modern energy would collapse; without grains, the food industry would suffer; without metals, construction and technology would grind to a halt. In essence, they are the starting point for transforming raw materials into finished products we use daily.

Example:

Copper is essential for electricity, from cables to electronic components. Without it, energy infrastructure would not exist as we know it.
Wheat, meanwhile, is the basis of the world’s diet, being transformed into foods such as bread, pasta and cereals.

Key investment in financial markets 💰

Commodities are not only essential resources; they are also important financial assets. Investors use them to diversify their portfolios and protect themselves against specific risks.

1. Diversification: Commodities have little correlation with other assets such as stocks or bonds. This means that when stock markets fall, the prices of some commodities can rise, helping to balance out losses.

2. Inflation protection: When prices rise due to inflation, the value of commodities such as gold or oil tends to increase, acting as a «safe haven« for investors.

Practical example:

During times of economic uncertainty, gold becomes a safe haven asset because it retains its value even in crises.

Global Price Stabilization ⚖️

The price of commodities directly influences inflation and, therefore, global economic stability.

Impact on inflation: When prices of essential goods such as oil rise, transportation and energy costs increase, which impacts all products. This affects consumers, businesses, and governments.
Stabilizing role: Commodity markets allow prices to efficiently adjust to supply and demand, helping to avoid extreme fluctuations in the long term.

Interesting fact: In 2008, the financial crisis included a drastic increase in food and oil prices, which exacerbated the global recession and led to unrest in various parts of the world.

Strategic advantage for resource-rich countries 🌟

Commodities can make the difference between economic growth and stagnation for a country. Nations that have access to abundant natural resources often have a strategic advantage in global trade.

1. Exporting countries:

- Saudi Arabia dominates the oil market, allowing it to influence global prices and generate large revenues.
- Brazil is a leader in coffee and soybeans, positioning itself as an agricultural giant.

2. Dependence on importers:

Countries without access to certain resources must import them, making them vulnerable to price fluctuations and geopolitical tensions.

Fun fact: The commodities boom in the 2000s boosted the growth of emerging economies such as China, which became the largest consumer of metals and energy.

Key point for global competitiveness 🌐

In international trade, commodities determine the terms of trade between countries. A nation that can offer high-demand basic goods at competitive prices positions itself as a major player in global markets.

Example:

Australia, thanks to its vast production of iron and coal, supplies rapidly expanding Asian economies such as China and India. This not only boosts its economy, but strengthens its position as a strategic trading partner.

Commodities are much more than resources; they are the axis on which the financial, commercial and productive world revolves. From influencing our daily lives to being at the core of global strategic decisions, their impact is undeniable.

Understanding their importance not only connects us to the functioning of the economy, but also opens the doors to investment and trade opportunities.

How do commodity markets work? 📈

Commodity markets are where buyers and sellers meet to trade basic goods such as oil, gold, or wheat. These transactions, which seem abstract, actually directly impact our daily lives, from the price of gasoline to the cost of bread.

To understand how they work, it is key to know the tools, the factors that influence prices, and the dynamics behind these operations.

Trading on specialized exchanges 💼

Commodities are mainly traded on specialized exchanges that facilitate the purchase and sale of these goods.

Some of the most important ones include:

Chicago Commodity Exchange (CME): Famous for futures contracts on grains such as corn, wheat, and soybeans.
London Metal Exchange (LME): Specialized in metals such as copper, aluminum, and nickel.
New York Mercantile Exchange (NYMEX): Leader in trading oil and natural gas.

Futures Contracts: The Key to Trading 🔑

In these markets, commodities are not typically bought or sold physically (although they can be). Instead, participants trade futures contracts.

What is a futures contract?

It is a legal agreement to buy or sell a specific amount of a commodity at a certain price on a future date.

Example: A farmer secures the price of his wheat crop with a contract to be delivered in six months. In this way, he avoids the risk of prices falling before the harvest.

Why are they used?

To protect against price fluctuations (hedging).
As a speculative tool, where investors seek to profit from price changes.

Fun fact: Less than 2% of futures contracts end with physical delivery of the commodity; most are financially settled before the expiration date.

And if you want to continue learning with WAFFT, visit the Futures Contracts Section. Remember, it’s not just a memecoin, we create future investors:

Factors that affect commodity prices 📊

The price of commodities is not fixed and is influenced by multiple factors. Here are the most important ones:

1. Supply and demand: 🛒

Fluctuations in these factors reflect global dynamics, such as the growth of emerging economies or changes in consumer behavior.
Example: If there is a drought that reduces coffee production in Brazil, the price of coffee will rise due to lower supply. On the other hand, an increase in demand for oil in winter can trigger its price.

2. Geopolitics: 🌍

Conflicts in key production regions, such as the Middle East in the case of oil, can generate instability and significant increases in prices.
Economic sanctions also play a role: if an exporting country faces restrictions, as happened with Russia in 2022, markets adjust, and prices tend to skyrocket.

3. Monetary policy and global economy: 💵

Inflation and interest rates directly impact commodity prices.
Example: When the dollar is strong, dollar–denominated commodities, such as gold, tend to fall in price as they become more expensive for buyers with other currencies.

4. Climatic and natural factors: 🌦️

Extreme weather events, such as hurricanes or frosts, directly affect the production and distribution of agricultural and energy goods.
Example: Frosts in Brazil, one of the largest coffee producers, can destroy entire crops and cause prices to skyrocket.

Participants in commodity markets 🕴️

These markets involve different types of actors, each with specific interests:

Producers: Such as farmers or oil companies, who seek to secure a fair price for their products.
Consumers: Companies that need commodities as raw materials (food factories or airlines).
Investors and speculators: Individuals or institutions that do not physically handle goods, but invest to profit from price movements.

Commodity markets are an essential cog in the global economic system. They offer a platform for managing risks and maintaining the balance between supply and demand of essential goods. Whether you want to protect yourself against inflation or diversify your investments, understanding how these markets work is key to getting the most out of them.

And remember that behind every transaction there is a story that connects producers, consumers and investors! 🌟

Advantages and risks of investing in commodities ✅⚠️

Investing in commodities can be exciting, lucrative, and sometimes a little risky. Like any type of investment, it has its pros and cons, and understanding them is key to deciding if it’s what you’re looking for.

Let’s break it down:

Advantages of investing in commodities✅

On the one hand, commodities are an excellent diversification tool. Unlike stocks or bonds, which tend to move in step with traditional markets, commodities often take different paths. For example, during a recession, while the shares of large companies may fall, gold, known as a safe haven, can rise in value. This makes them an ally to protect a portfolio against economic volatility.

Another great advantage is their ability to act as a shield against inflation. As prices rise, basic goods such as oil, wheat or copper tend to increase in value. This means that even when your money loses purchasing power, your investment in commodities could keep you afloat.

In addition, commodity markets are highly liquid and accessible. Thanks to technology and financial instruments such as futures contracts or commodity ETFs, anyone can participate without needing to physically handle tons of oil or gold bullion. Businesses also benefit from these markets. A farmer can lock in the price of his crop months in advance, and an airline can protect itself against unexpected increases in fuel prices.

Risks of investing in commodities ⚠️

However, it’s not all upside. One of the biggest risks when investing in commodities is their extreme volatility. Prices can change dramatically due to factors such as weather, geopolitical conflicts, or changes in monetary policy. For example, an unexpected drought can send corn prices soaring, but also sink them if harvests exceed expectations.

Leverage is another double-edged sword. In futures markets, you can control large amounts of a commodity with a small initial investment. This amplifies both profits and losses. A small movement in price can result in a loss greater than your initial investment if you’re not careful.

There are also hidden costs. Although it may not seem like it, investing in commodities can involve additional expenses, such as storage fees if you decide to physically take delivery of the good or high spreads in less liquid markets. These small leaks can erode your profits if you don’t take them into account.

Finally, the commodities market requires specialized knowledge. Investing in oil is not the same as investing in coffee. Each has its own dynamics, influenced by very different factors. Going in without understanding these details can be a recipe for disaster.

A balance between opportunity and caution ⚖️

Commodities are undoubtedly one of the most exciting investments. Their direct connection to the real economy and their ability to offer diversification and protection against inflation make them attractive. But it is crucial to understand that they are not for everyone. If you decide to invest, make sure you have the necessary knowledge, are aware of the risks and build a solid strategy.

In the world of commodities, information is power. Be prepared, do your research and always remember to only invest what you are willing to lose. At the end of the day, opportunities are there, but they depend on how well you know how to take advantage of them. 🌾📈

History of Commodities: From Origins to the Global Market 🕰️

Commodity trading has roots that go back to the earliest history of mankind. Long before the invention of money as we know it, basic goods such as salt, wheat, spices, and even livestock were used as means of exchange. These products were not only essential for survival, but also had a universal value recognized across cultures, becoming the first «currencies« in history.

Japan and Rice Contracts: The First Futures🧧

Although basic commodity trading had always existed, the concept of structured agreements and organized markets began in Japan during the 17th century. Rice traders, faced with the volatility of crops and prices, developed the first futures contracts. These agreements allowed them to set the price of rice in advance, reducing risk for both producers and buyers. This innovation marked the beginning of a model that would evolve into modern commodity markets.

The Chicago Trading Revolution 🌾

Commodity trading took a huge leap forward in 1848 with the creation of the Chicago Board of Trade (CBOT). At the time, farmers and traders in the United States faced a recurring problem: the lack of stable prices and organized markets for their products. The CBOT was born to solve this chaos, providing a space where agricultural futures could be traded more efficiently.

In the first decades, these markets focused on goods such as wheat, corn, and soybeans. Futures contracts offered farmers the ability to protect themselves against price changes before harvest, while buyers could secure a constant supply at predictable prices.

Expansion into new horizons🌏

With the growth of industrialization and global trade in the 20th century, commodity markets soon came to include natural resources such as oil, natural gas, and metals. Oil, known as “black gold,” became one of the most traded commodities due to its fundamental role in the global economy. Exchanges such as the New York Stock Exchange (NYMEX) and the London Metal Exchange (LME) became epicenters of trading in energy and mineral resources.

The 20th century also saw the diversification of markets into soft commodities, such as coffee, sugar, and cocoa. Producing countries, such as Brazil and Colombia, found in these international platforms a way to connect their products with buyers around the world.

The digital age and global markets 💻

The advent of technology in recent decades has radically transformed commodity trading. Digital platforms now allow goods to be traded in real time from anywhere in the world. There’s no need to physically be on an exchange like the one in Chicago or London anymore; investors and traders can buy and sell contracts from an app on their phone.

In addition, modern analytics tools and real-time data have made markets more accessible to small investors. Today, a farmer in Kansas and a trader in Singapore both have access to the same globalized market.

Why does this story matter?📖

The evolution of commodity trading not only reflects the development of the global economy, but also shows how innovation has allowed people to adapt to market challenges. From rice contracts in Japan to today’s trading algorithms, commodity markets have been a bridge between producers, consumers, and investors.

Ultimately, understanding the history of these markets is not just an academic exercise; it’s a way to appreciate how the economic dynamics of the past continue to shape the modern world.

A fun fact for the next financial conversation! 😉

Conclusion: Why you should understand commodities? 🤔

Commodities are much more than raw materials; they are the engine of the global economy.Whether you are interested in investing or simply understanding how oil or food prices work, knowing about commodities helps you understand the world around you.

However, remember that although they offer great opportunities, they are also highly volatile and require solid knowledge before taking the plunge.

So, the next time you fill up your gas tank or grab a coffee, think about the fact that behind those products there is a gigantic market at work! 🌍💹