The commodities market is a vast and ancient ecosystem, deeply rooted in the evolution of trade and human civilization. From the early barter systems to the sophisticated futures markets we know today, commodities like corn, rice, coffee, milk, sugar, gold, and oil have been the lifeblood of commerce. These products, some considered essentials basic needs, luxury items, shaping the global economies and drive investment decisions.

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Daily Basic Needs: Corn, Rice, Coffee, Milk, and Sugar

-              Corn: From the Fields to Global Markets

Corn has evolved from a staple crop of ancient civilizations to a key commodity in modern financial markets. Traded primarily on the Chicago Board of Trade (CBOT), corn is a vital part of the agricultural futures market. Its significance goes beyond human consumption; it’s used in animal feed, biofuels like ethanol, and various industrial products.

Trading corn futures is crucial for price discovery and risk management. Producers use the futures market to hedge against price fluctuations, securing income in the face of unpredictable weather or demand shifts. Buyers, including food producers and ethanol manufacturers, use futures to lock in costs, ensuring stability in their supply chains. Corn is a pivotal player in both agricultural and energy markets, making its trade essential for economies worldwide.

Ukraine, one of the largest corn provider countries, since the Russian Ukraine war in February 2022, corn surged as the war made a huge thread on the country corn production.

-              Rice: The Foundation of Asian Economies

Rice, a staple food for more than half the global population, is predominantly traded in Asia, with major rice futures exchanges located in Japan and Thailand. The rice futures market allows both producers and traders to manage risk, particularly in regions where the crop’s yield is highly dependent on weather patterns, such as monsoon seasons in South Asia. Rice is especially important to trade because of its impact on food security. As a dietary cornerstone, rice shortages or price spikes can lead to political unrest, as witnessed in several Asian countries during periods of supply disruption.

-              Coffee: A Global Commodity With Local Roots

Coffee, the second-most traded commodity after oil, is traded on exchanges such as the Intercontinental Exchange (ICE) and the New York Mercantile Exchange (NYMEX). Coffee futures provide a platform for producers in countries like Brazil, Vietnam, and Colombia to sell their beans at a set price before the harvest season. Trading futures allows growers to mitigate risks tied to weather conditions, global demand, and price volatility.

For commodities investors, coffee’s price movements are opportunities to profit. Coffee trading is driven by consumer demand, weather conditions affecting crop yields, and geopolitical factors in major coffee-growing regions. It’s a volatile market that attracts speculators, commodity traders, and coffee companies seeking to manage costs.

-              Milk: A Global Market Beyond Dairy

Milk and its derivatives like cheese, butter, and powdered milk are essential commodities in both domestic and international markets. Traded on exchanges like the CME Group, milk futures contracts allow dairy farmers to hedge against price fluctuations driven by supply, demand, and global trade policies. Milk trading is vital because it supports price stability for producers and ensures food security for consumers globally. In countries like New Zealand and the U.S., dairy exports play a significant role in the national economy.

-              Sugar: A Sweet Staple With Global Impacts

Sugar trading is integral to both the food and energy sectors. Major sugar-producing countries, like Brazil and India, are also significant players in the global ethanol market, where sugar is used in biofuel production. Traded on the ICE Futures U.S. and the London International Financial Futures and Options Exchange (LIFFE), sugar futures provide a tool for hedging against the volatility of the global sugar market.

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Who Trades These Products and Why?

- Producers: They use futures contracts to lock in prices for their products, reducing the risk of market volatility. This is essential for planning and investment, as prices can vary dramatically due to weather, geopolitical events, or changes in demand.

- Industrial Buyers: Large companies that rely on these commodities for production (e.g., food manufacturers, fuel producers) use futures to ensure stable prices for raw materials.

- Governments and Central Banks: In the case of critical food commodities, governments may engage in trading or stockpiling to ensure food security or to stabilize national markets.

- Hedge Funds and Investors: These financial players trade commodities to profit from price fluctuations. They do not necessarily take possession of the commodities but use derivatives to bet on future price movements.

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Traditional Commodities in the Financial Markets: Gold, Oil, and Beyond

Moving beyond agricultural products, traditional commodities like gold and oil are central to the global economy.

-              Gold: The Timeless Safe Haven

Gold has been traded for thousands of years, and it remains a store of value, especially during economic crises. Traded on exchanges like the COMEX in New York, gold is seen as a hedge against inflation, currency devaluation, and geopolitical uncertainty. During the COVID-19 pandemic, gold surged as investors sought safe-haven assets amid market chaos. The price reached new highs in 2024, peaking at over $2,500 per ounce as central banks unleashed unprecedented monetary stimulus.

Emerging market central banks have increasingly turned to gold as a hedge against geopolitical tensions and economic uncertainties. As global instability rises, gold offers a safe-haven asset that protects reserves from currency depreciation and market volatility. Central banks in regions facing inflationary pressures or political risks are diversifying their portfolios, reducing reliance on foreign currencies like the U.S. dollar, and bolstering their holdings in gold. This trend reflects a strategic move to strengthen financial stability and safeguard national wealth in an unpredictable global environment.

Even during the subsequent rate hikes by the Federal Reserve, gold remained resilient. While higher interest rates typically depress gold prices (as investors seek yield in bonds and cash), persistent inflation concerns and geopolitical risks have kept gold attractive for risk-averse investors.

-              Oil: The Lifeblood of Industrial Economies

Oil is one of the most traded commodities in the world, also called “Black Gold”. It’s traded on exchanges like NYMEX and ICE, where contracts for Brent and WTI crude are bought and sold. The price of oil is a key indicator of global economic health, as it powers transportation, industry, and production globally.

Unlike gold, oil experienced significant volatility during the pandemic. Demand plummeted as lockdowns brought the global economy to a halt, leading to a temporary crash in oil prices. As economies began to recover, oil prices surged again, driven by supply chain disruptions, production cuts by OPEC, and rising demand. To wrap up, oil price is not just affect by the macro-economic factors, but also the OPEC’s production decision, global physical oil demands, as well as political factors (WTI and Brent oil prices slumped after Harris led Trump in the presidential poll following the debate, noting that Trump is an advocate of fossil fuels.).

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Correlation with General Markets and Hedging

Commodity markets do not always move in tandem with broader equity markets. They often serve as a hedge, providing protection during economic downturns.

-              Commodities as a Hedge Against Inflation

Commodities, particularly precious metals like gold and silver, serve as effective hedges against inflation. As currency values erode and purchasing power declines, the price of physical commodities generally rises. Investors flock to gold, renowned for its ability to preserve wealth in times of inflationary pressure.

-              Low Correlation with Stocks

Commodities typically exhibit low correlation with traditional assets such as stocks and bonds. During periods of market distress, assets like gold and oil often excel, providing a counterbalance to losses in other areas. For example, during the COVID-19 crisis, while equity markets plummeted, gold surged as a safe haven. Likewise, oil prices, which initially collapsed due to shrinking demand, rebounded as economic activity resumed.

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Current Market

In terms of the current market, we are walking into an end of the interest rate hike and gradually stepping into the start of interest rate cut. Historically, during an interest rate cut, gold typically sees an increase in demand and prices, as lower interest rates reduce the opportunity cost of holding non-yielding assets like gold. When central banks lower rates, it often signals an attempt to stimulate economic activity, which can weaken currencies and drive consumer price higher. Gold, historically seen as a hedge instrument against inflation and currency depreciation, becomes more attractive to investors in this environment.

Furthermore, interest rate cuts often accompany periods of economic uncertainty or financial market instability. Gold's historical role as a safe-haven asset becomes even more pronounced during these times, as investors seek protection from volatility in traditional asset classes such as equities and bonds. The combination of declining yields, inflationary pressures, and increased market risk amplifies the demand for gold, positioning it as a strategic asset during the monetary easing period.

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Conclusion: The Strategic Role of Commodities

From corn and coffee to gold and oil, commodities play a critical role in global markets, affecting everything from food prices to energy costs. They offer unique opportunities for international exporter, farmers, and investors alike. Understanding the dynamics of supply, demand, and macroeconomic factors is essential for navigating these volatile in such rewarding market. Whether used as a hedge against inflation or a bet on economic growth, commodities remain a fundamental pillar of global finance, offering protection, profit, and a window into the state of the global economy. In the next chapter, we will discuss more about commodities strategies on Gold.

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