Commodities mean goods basically. Here in Brazil, commodities are traded in mercantile stock exchanges, managed by Bolsa de Mercadorias e Futuros – BM&F&Bovespa.
Commodities are goods and products usually extracted, mined or planted by a serie of companies, agents and producers. Such products can be stocked for some time without losing their main characteristics. In general, there are standards for those goods and their quantity, which can include things like sacks, tonnes, specs and others.
The main groups of commodities are:
Agricultural Commodities: soy beans, corn, cotton, sugar, coffee, rubber, pulp, cattle, orange juice, etc.
Mineral Commodities: gold, silver, nickel, lead, iron ore, aluminium, crude oil, tin, etc.
Financial Commodities: foreign currencies, indexes, bonds, interest tax rates, etc.
Environmental Commodities: carbon, forests, etc.
Most commodities traders are agricultural producers, who trade with futures related to their goods, looking for getting better prices in the next rounds and aligning market prices with their selling prices and costs. Also, large companies which need commodities as raw materials and input for their production – for instance, cattle for meat processors and oranges for a beverage company.
Commodities prices are freely and widely traded in BM&F, where their prices see changes due to a serie of factors: crop, supply and demand, natural disasters, weather conditions, speculation, rumors, market perspectives and much more. Changes on commodities prices affect dramatically the global trading flux, and eventually harm producers, buyers or even countries. Brazil stands as a great raw materials exporter (oil, iron ore, pulp, coffee, etc) and then it becomes dependent of those commodities pricing for benefit from exports. However, if those prices are dropping, profits from Brazilian companies and their respective shares use to be obviously affected.
Commodities, just like other futures, have some characteristics in common:
Standard contracts: commodities share a common and regulated structure, which gives all product’s specs, expiry dates, type of liquidation, standards for the product, quotations, etc. That allows commodities to find liquidity in the market – as contracts follow the same pattern, conditions are always the same, no matter who is buying or selling the papers.
Daily settlements: The daily change is nothing more than a mechanism used by BMF&Bovespa to balance the investor accounts. As futures change in a daily basis, generating credits or debts, investors are daily updated on their positions, earning or losing as prices change – in other words, they either get their profits or pay for their losses daily. The mechanism is a protection against any noncompliance among investors.
Guaranty margin: It is a value deposited in cash or notes which will covering any noncompliance of an investor in daily adjustments. Usually to operate options, the investor is forced to deposit a guarantee to mitigate risks. The margin is defined by the stock exchange, according to the analysis of the futures market. The assets accept as guarantee include cash, gold, government or private bonds, letters of pledge and quotes at funds.
Check out the main commodities traded on the BM&F: