Technical University Munich Commodities as an Asset Class - risklab

2.2 Characteristics of Commodity Markets
Supply and demand limits are not purely price dependent
Timing uncertainly in production and supply
Direct exposure to a variety of exogenous functions, e.g.
environment or technological change
weather, political
Some commodities can be substituted by others
Physical accessability introduces transportation and location issues
There are additional costs like storage, insurance and wastage costs
Difference between storable, e.g. metals, and non storable commodities, e.g. electricity
Complex processing chains, some commodities are downstream commodities of
others, e.g. soybeans are needed to get soybean meal 37 what on its side is needed
for live cattle breeding
Commodities market enable global trade. Nevertheless, local constraints have to be
kept in mind including the often high transportation costs, costs and risks between
markets (e.g. piracy, ship in distress), industry regulations and currency factors.
Figure 2.15 gives an example of a typical processing chain in commodity markets. 38
It covers the major interaction of commodity market members:
Figure 2.15: Commodity Markets Process Chain
37 See Appendix B.11.
38 Inspired by [Structured Products 2006]
29