A penny represents both the cost of commodities, and a commodity itself: copper. During 2009, a penny made before 1982 had a value of about 1.6 cents.
Commodities affect everyone, and their price movements can be confusing. For example, the price of crude oil annoys many people because it seems to be beyond anyone's control, and on some days, it seems to control everything. This article will attempt to summarize how a few major commodities markets operate, as well as how commodity markets operate generally and what to expect when dealing with a commodities market.
Derivatives
Commodities can either be traded directly, or indirectly through derivatives, which work by affecting the risk of the transaction and take the place of actual physical trade. Derivative traders agree to exchange assets or cash at a certain time in the future. Derivatives come in forward, option or swap varieties and are often named for the underlying assets. A forward refers to a contract in which an agent promises to buy/sell an asset in the future at a certain price, and an option gives a buyer the right, but not the obligation to buy/sell an asset in the future at a certain price. Swaps are derivatives in which two parties swap one stream of cash flows for another stream with a differing risk. Financial contracts can be complex, however, incorporating several of these standard contracts into larger instruments. Derivatives can either be exchange-traded or traded individually between parties (over-the-counter). Commodity exchanges include the New York Mercantile Exchange, the Tokyo Commodity Exchange, the NYSE Euronext, Dalian Commodity Exchange in China, and India's Multi Commodity Exchange.
Trade
Derivatives specific to the commodities market might be phrased as "the right to buy (sell) the underlying commodity for a predetermined price in the future." These derivatives are then valued according to complex formulas. To trade commodities in the simplest way possible, trade futures. This can be done by opening a trading account with a broker, or directly from a futures merchant. In other situations, written power of attorney is needed to make trades from a managed account. Commodities trading advisers can be hired for a fee. Some of the most popular techniques for trading commodities include investing in commodities-indexed mutual funds, or to get involved in community clubs.
Recent Trends
In 2008 there was a rise in commodity prices worldwide. However, the asset bubble that was created popped just before 2009, lowering prices. The price of crude is tracked on the New York Mercantile Exchange and affects many companies. Oil prices during the summer of 2008 were at a record high, prompting a high price at the pump, but prices retreated in the fall and winter of 2008 somewhat. Corn is also an important commodity, and not one without controversy, as the mandate for ethanol has pushed corn prices higher in the United States and around the world. Gold, though seemingly erratic in price recently, can be counted on to increase in price when the dollar fumbles, as investors look for safety. Wheat prices rose to a record high in the fall of 2007, but have since fallen, though not completely to pre-spike levels. Rice prices also spiked in late 2007. Finally, aluminum prices rose 100 percent from 2002 to 2005, then 100 percent more by 2007 before crashing back to 2002 levels in 2008.
