What Is a Commodity Trader?
A commodity trader is an individual or business that focuses on investing in physical substances like oil, gold, or agricultural products. The day-to-day buying and selling are often driven by expected economic trends or arbitrage opportunities in the commodities markets.
Oil and gold are two of the most commonly traded commodities, but markets also exist for cotton, wheat, corn, sugar, coffee, cattle, pork bellies, lumber, silver, and other metals.
Understanding Commodity Traders
Several different types of traders are active in the commodities market. Often these traders are dealing in raw materials used at the beginning of the production chain. Examples include copper for construction or grains for animal feed. Some operate independently, trading on major exchanges such as the New York Mercantile Exchange, and others work for international oil companies, mining companies, or other large commodity producers.
A commodity trader working for a manufacturer or producer wants to secure the best prices on purchases while simultaneously supplying competitive bids to customers. Still other commodity traders work solely as broker-dealers like Vitol or Trafigura. Professional traders working for brokerage firms help in creating a deep and liquid international commodities market.
Commodity traders sometimes act as speculators and attempt to make profits on small movements in commodity prices. These commodity traders do not really need the specific asset they are trading and rarely take delivery, but seek to gain exposure through forward and futures contracts. They go long if they believe prices are moving higher and short the commodity when they expect prices to fall.
How Commodity Traders Make Money
Commodity traders react quickly to market-moving events. Examples include natural disasters that can impact different commodity markets at the same time. A hurricane can wipe out sugar or orange crops, sending these prices up on reduced supply. At the same time, lumber prices shoot up in anticipation of new building and reconstruction costs.
Commodity traders need to be fast enough to react to such quick developments in order to trade profitably. Slow reactions can result in hefty losses if the market takes a quick turn in the wrong direction.
The Downside of Commodity Trading
A commodity trader faces certain limitations compared to traders in other markets For example, commodity traders generate a total return solely from the price movement of the commodity they are trading.
Unlike stock or bond traders, who can earn a dividend or interest payment from the asset they buy, commodity traders do not receive such periodic cash flows. This means that, in order to generate a positive return, the commodity trader must be accurate in anticipating the price direction of the commodity.