gE Blog Series: What's on Top? Part 3 - Top Traded Commodities

These are the goods that run the world, where people put their fortunes, and fortunes are made.  Thinking about internationally traded goods (commodities) brings to mind vast ships, supply lines, and intense logistics, not to mention the more devious trades (a.k.a. blood diamonds).  The truth of trading is completely different.

The List:

1. Crude Oil
2. Coffee
3. Natural Gas
4. Gold
5. Brent Oil
6. Silver
7. Sugar
8. Corn
9. Wheat
10. Cotton

The most surprising thing about this list has to be coffee at number two.  It is more traded than the world’s largest food staple: wheat.  Also, it is surprising to see it is traded more than sugar, which seems to come in almost all food now.  However, unsurprisingly, crude oil is the most traded commodity in the world, along with natural gas, and Brent oil farther down on the list.  At more than 80 million barrels consumed each day, it is difficult for this to not be the most traded commodity.

Interestingly enough, when thinking about how these goods are traded, there is a very common misperception. The chain is thought to start with a miner/farmer, then to a middle man, and finally to the end consumer.  The vast majority of the trading is actually done without the products ever leaving hands.  The majority of the trading of commodities is down on futures exchanges between producers, sellers, and traders.  Miners, farmers, or anyone who is actively “producing” a commodity wants to hedge themselves against future decreases in price, usually from overproduction.  While the sellers of a commodity, the ones who sell to the end consumer want to hedge themselves against the price of the good increasing dramatically and wiping out their margin.  On top of this there are traders, who attempt to trade the product without ever having to actually hold or house the commodity.  They believe they can predict prices based on weather forecasts for farming goods, current events (the most recent being the Middle East and Japan’s effect on oil prices), and other factors.  In the end, the traders end up being the large volume of most markets, sometimes driving prices, but more often evening them out.  These commodities exchanges are worldwide and have become mostly electronic.

Without even getting into the physical trading of commodities it is a fascinating business.  So next time you buy some gasoline, eat a loaf of bread, or put on a t-shirt, just think it could have been owned by someone in London, New York, Hong Kong, Tokyo, and then Chicago before it ever came to you.