What is a Commodity Trader
A commodity trader is an individual or business entity that focuses on investing in physical substances like oil, gold or grains and other crops. Most often these traders are dealing in raw materials used at the beginning of the production value chain, such as copper for construction or grains for animal feed. These traders take positions based on forecasted economic trends or arbitrage opportunities in the commodity markets. Oil and gold are two of the most commonly traded commodities, but markets exist for cotton, wheat, sugar, cattle, pork bellies, lumber, silver and other precious metals.
BREAKING DOWN Commodity Trader
There are several different types of commodity traders in the market. Some operate independently, trading on major exchanges such as the New York Mercantile Exchange. Others work for large commodity producers such as the international oil companies. The job of these traders is to secure the best price for the producer while simultaneously supplying competitive bids to customers. Still other commodity traders work solely as broker-dealers. These traders tend to work for large independent companies such as Vitol or Trafigura, creating a deep and liquid international commodity market. Other commodity traders act as speculators, trying to make a profit on small movements in commodity prices. These commodity traders tend not to have a need for the specific asset they are trading, but gain exposure through forward and future contracts. Contracts are usually hedged, and actual delivery is a seldom occurrence.
Commodity traders need to be able to react quickly to market moving events. Examples include natural disasters that can impact different commodity markets at the same time. For example, a hurricane can wipe out sugar or orange crops, sending these prices up on reduced supply. At the same time, lumber prices can shoot up on 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 will not be rewarded after the price has already moved.
Limitations of a Commodity Trader
A commodity trader faces certain limitations that other types of traders do not. 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 to generate a positive return the commodity trader needs to be certain about the price direction of the commodity. A bond trader can generate a positive total return even if the price of the bond doesn't move because of the periodic cash flows that come from interest payments.