Commodities Explained / Commodity Foundations

Read the full definition behind a quote: currency, unit, grade, location, delivery date and observation time.

A price needs a complete label

A useful quotation identifies the commodity, quality, currency, unit, location and delivery basis. It also has an observation time. A delayed exchange quote, an end of day assessment and an executable dealer offer are different things.

Gold is commonly quoted per troy ounce, while many industrial metal references use a metric tonne. Grain quotations may use bushels whose standard weight depends on the crop. Never convert an unfamiliar unit by assuming it means an everyday household measure.

Quality and location change the comparison

A refinery values crude according to characteristics that affect processing and the products it can produce. A mill needs grain that meets its quality requirements. Transport and handling add costs between the quoted location and the customer.

A lower displayed price is not automatically a cheaper usable input. A shipment may require extra freight, processing or insurance. Read the delivery conditions before comparing offers.

Worked example: the delivered cost

Suppose two hypothetical wheat offers use the same currency, quantity and grade. Offer A costs $240 per tonne plus $30 freight. Offer B costs $255 plus $10 freight. Their delivered costs are $270 and $265 respectively, before any other charges. The higher headline offer is cheaper at the destination.

If the grades or delivery dates differ, this calculation is incomplete. The arithmetic works only after the contractual terms have been made comparable.

Price movement is not contract profit

A futures quote is normally expressed per unit, while each contract covers a specified quantity. A $2 movement per barrel has a different cash effect for a contract covering 100 barrels than one covering 1,000. The quotation alone does not tell you the position size.

Write the unit beside every number in your notebook. Also record whether an amount is a price, percentage change, contract value or cash profit. Mixing these quantities is a frequent source of false conclusions.

Put it into practice

A hypothetical contract covers 100 units. Its quoted price rises from $50 to $52 per unit. What is the price change and the gross value change for one long contract?

Check your answer

The price rises $2 per unit, or 4%. The gross value change is $200 before fees and other effects. It is not a $2 total gain and not automatically a 4% return on posted margin.

Sources and further reading

Continue your learning