DEFINITION of 'Commodity Paper'

A loan or advance for which raw materials owned by the borrower serve as collateral. Bills of lading (if the commodities are in transit) or warehouse receipts or inventory lists (if the commodities are in storage) may be used as proof of collateral. The lender does not actually take possession of the commodities unless the borrower defaults on the loan.

BREAKING DOWN 'Commodity Paper'

Commodities are raw materials (production goods) such as oil, grain, gold, copper, coffee, cocoa, lumber, cotton, wheat, corn, sugar, and natural gas. Different tools are available for investing in commodities, such as futures, options, stocks, ETFs and ETNs. Commodity paper was at the center of the Salad Oil Scandal. Allied Crude Vegetable Oil used fraud to make inventory appear many times what it was, and then borrowed against the erroneous inventory receipts.

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