Streetwise Professor

April 24, 2014

What You’ve All Been Waiting For: The Commodity Trading White Paper

Filed under: Commodities,Derivatives,Economics,Energy,Politics,Regulation — The Professor @ 3:13 pm

I have been working since last year on a whitepaper (sponsored by Trafigura) on The Economics of Commodity Trading Firms. After about a month of limited theatrical release, the paper is now publicly available at the link.

Even if I do say so myself, the paper provides a pretty thorough overview of commodity trading firms, ranging from their economic function as “agents of transformation” (of commodities in space, time, and form), to risks and risk management, to corporate structure (private vs. public), to capital structure, to asset ownership, to the systemic risks (or lack thereof) of commodity trading.

One of the main takeaways for me was the diversity of commodity trading firms. Making generalizations is difficult. Another takeaway (related, in a way) is that some of the conventional wisdom about these firms (e.g., there is a general trend to asset ownership and vertical integration) is not correct.

But rather than discuss the report extensively here, I leave it to you all to read it. Comments welcome.


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  1. SWP- Excellent synopsis of commodity trading- the framework of space-time logistics is very lucid for the media and policy-makers busybodies. Thank you and Trafigura in the battle of ideas.

    A few critical comments:

    A Ricardian-discussion on the concept of “trading” would be a nice addition- and the critical value that commodity firm provide to our modern world. A few references to Stalin or Mao’s famine would also knock home the idea; that folks did starve and freeze without the services of these companies. Brilliant and/or benevolent politicians cannot supply you with food or warmth.

    The diversity of trading firms could (should) be emphasized as the necessity of local and specific knowledge for proper price discovery and logistics. Commodities are not fungible like cash or credit, and diversity of firms must be significantly higher than financial firms. Included in that necessary local Hayekian knowledge are also geophysical and agricultural engineers, not just financial wizards. I would have liked you to portray a more romantic history of commodity trading.

    Your relative comparison of Commodities to Banking in terms of financial leverage was too narrow. Bankers are the kicking boys on the pecking order, and you could have made comparisons to Banking from many perspectives, such as innovation/liquidity in futures markets, the lack of “commodity crisis” compared to “financial crisis” and global reach of commodity firms versus iBanks.

    While your paper is no match for FrankenDodd and EMIR, I hope the next generation will discover your paper and gives Futures and derivatives a chance in next go-around. Kudos to you and Trafigura.

    Comment by scott — April 28, 2014 @ 10:14 am

  2. @Scott-Thanks. In reply to your critical comments. My references to Adam Smith, especially in the afterward, was intended precisely to make it clear that rather than causing starvation and misery, commodity traders prevent famine and dearth and starvation.

    I didn’t frame things in explicit Hayekian terms, but my discussion on p. 8 about the nature of commodity markets (search vs. centralized markets) definitely has a Hayekian flavor to it. I certainly always think in Hayekian terms.

    Not totally tracking your paragraph re banks. Care to put it a different way?

    Re me vs. Frankendodd & Emir. Dammit Scott, I’m just a doctor, not a miracle worker. Seriously, though, I am fighting them the only way I know how. Hopefully like you say this can be a grain of sand around which the pearl can form.

    Thanks again.

    The ProfessorComment by The Professor — April 29, 2014 @ 10:01 pm

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