# How commodities trade Commodities change hands under contracts ranging from a single spot cargo to standardised futures backed by a clearing house. You will see how margins, delivery and storage tie exchange prices to physical goods, how hedgers swap price risk for basis risk, and how squeezes exploit the delivery promise. You will also see how trading houses earn money by transforming commodities in space, time and form, and why their financing and power make them controversial. Source page: https://www.materialinsights.org/learn/commodities/how-commodities-trade/ [Understanding Commodities](https://www.materialinsights.org/learn/commodities/) / Module 6 ## How commodities trade Commodities change hands under contracts ranging from a single spot cargo to standardised futures backed by a clearing house. You will see how margins, delivery and storage tie exchange prices to physical goods, how hedgers swap price risk for basis risk, and how squeezes exploit the delivery promise. You will also see how trading houses earn money by transforming commodities in space, time and form, and why their financing and power make them controversial. 5 parts · 19 sections · about 50 minutes · 0 of 5 parts read ### By the end you will be able to - Explain how spot, forward, long-term and futures contracts differ in risk, flexibility and pricing. - Describe how clearing houses, margins, delivery rules and warehouses make futures prices track physical prices. - Work through a short hedge, a long hedge and the basis risk that each leaves behind. - Analyse how squeezes and corners work, using cases from soybeans and aluminium to the 2022 nickel crisis. - Identify who sets benchmark prices, on which exchanges and through which price reporting agencies. - Assess how physical trading houses create value, finance producers and wield market power. ### Contents 1. [Part 1 Contracts: from a handshake to a clearing house](https://www.materialinsights.org/learn/commodities/how-commodities-trade/p1/) Every commodity changes hands under some contract. The contract fixes what is delivered, where, when and at what price, and it decides who carries the risk if the price moves or the other side walks away. This part follows the contract from its simplest form to the standardised futures contract, and shows how delivery and storage tie paper prices to physical goods. - Spot, forward and long-term contracts each solve a different problem - A futures contract is a standardised forward with a clearing house behind it - Delivery, warehouses and storage tie paper prices to physical goods 2. [Part 2 Venues and benchmarks: where the world's prices are made](https://www.materialinsights.org/learn/commodities/how-commodities-trade/p2/) A handful of exchanges and price publishers set the reference prices for most physical trade. Some are a century and a half old; the busiest are now in Asia. Where no futures market works, a price reporting agency surveys deals and publishes an assessment. This part explains why some commodities get exchanges and others do not, and who makes the numbers that contracts point to. - Futures markets succeed only under certain conditions, then tend to win outright - London, Chicago and New York built the benchmarks - Asia now trades more contracts than anywhere else - Price reporting agencies assess prices where no exchange quote exists 3. [Part 3 Hedging in practice: trading price risk for basis risk](https://www.materialinsights.org/learn/commodities/how-commodities-trade/p3/) Futures markets were set up for hedgers: farmers who wanted to know their harvest price, merchants holding stocks, manufacturers with fixed-price orders. A hedge is a futures position opposite to a physical exposure. It removes most of the risk of the price level but leaves the risk that local prices and futures drift apart. Worked examples show both halves. - A farmer and a miller hedge opposite sides of the same price - A copper fabricator hedges a fixed-price order - Basis is the gap a hedge cannot close - Options buy insurance rather than a lock 4. [Part 4 Speculators, squeezes and corners](https://www.materialinsights.org/learn/commodities/how-commodities-trade/p4/) Speculators take on the risk that hedgers shed. Most of the time they deepen markets and may even steady prices. But a futures contract is a promise to deliver a finite stock in a particular place, and whoever controls that stock can make the promise very expensive to keep. The cases here, from Chicago soybeans to London nickel, show how squeezes work and why they keep recurring. - Speculators provide liquidity, and the evidence that they drive prices is weak - A corner turns the delivery promise into a trap - Hunt silver and Sumitomo copper show the two faces of manipulation - The 2022 LME nickel crisis: a squeeze in a market with a surplus 5. [Part 5 The physical traders: transformation, finance and power](https://www.materialinsights.org/learn/commodities/how-commodities-trade/p5/) Behind the exchanges sit the firms that actually move the goods: Cargill and the grain houses, Vitol, Glencore, Trafigura and their peers. They make money on price differences rather than price levels, finance producers and buyers, and increasingly own ports, tanks and mines. Their size and secrecy have made them indispensable and controversial at once. - Traders transform commodities in space, time and form - Two dynasties: the grain merchants and the Philipp Brothers line - Traders finance trade, producers and sometimes whole countries - Market power and controversy follow the traders 6. [Wrap-up Key terms, try it in the table, final quiz, sources](https://www.materialinsights.org/learn/commodities/how-commodities-trade/review/) [Start: Part 1, Contracts: from a handshake to a clearing house →](https://www.materialinsights.org/learn/commodities/how-commodities-trade/p1/) ## Other sections - [Contracts: from a handshake to a clearing house](https://www.materialinsights.org/learn/commodities/how-commodities-trade/p1/index.md) - [Venues and benchmarks: where the world's prices are made](https://www.materialinsights.org/learn/commodities/how-commodities-trade/p2/index.md) - [Hedging in practice: trading price risk for basis risk](https://www.materialinsights.org/learn/commodities/how-commodities-trade/p3/index.md) - [Speculators, squeezes and corners](https://www.materialinsights.org/learn/commodities/how-commodities-trade/p4/index.md) - [The physical traders: transformation, finance and power](https://www.materialinsights.org/learn/commodities/how-commodities-trade/p5/index.md) - [Key terms, quiz and sources](https://www.materialinsights.org/learn/commodities/how-commodities-trade/review/index.md)