Commodity trading companies are some of the largest private companies in the world, with revenues in the billions of dollars. Despite their significant impact on daily life, these companies often operate in the shadows, unknown to the general public. In this video, viewers will gain insight into the five core activities of commodity trading companies, including purchasing, transporting, processing, and selling commodities, as well as the added value they provide through the supply chain.
The first part of the video provides a formal CEO perspective on the activities of commodity trading companies. The second part delves into the real reasons why these companies are so successful, including their ability to obtain cheap financing and their willingness to take on perceived market risks. By understanding the inner workings of commodity trading companies, viewers can gain a greater appreciation for the role they play in the global economy.
Key Takeaways
- Commodity trading companies are some of the largest private companies in the world, with significant impact on daily life.
- The five core activities of commodity trading companies include purchasing, transporting, processing, and selling commodities, as well as providing added value through the supply chain.
- Commodity trading companies are successful due to their ability to obtain cheap financing and their willingness to take on perceived market risks.
Overview of Largest Private Companies
The largest private companies in the world are commodity trading firms, including Traffic Era, Kofco, Car Guy, Mercury, and Meter. Despite being relatively unknown to the general population, these companies are involved in the purchase, transportation, processing, and selling of commodities that are used and consumed daily by people around the world.
Commodity trading firms add value to the supply chain by purchasing commodities, transporting them, processing them, and selling them. These activities are essential to the global economy, but they are not always straightforward. For example, purchasing commodities internationally can be complex due to delays, quality issues, and customs regulations.
Transporting commodities is also crucial, as commodities are usually low-value products that need to be transported in high volume to reach an economy of scale. Similarly, the consumption and production of commodities do not always match, which creates the need for financing and storage to bridge the gap.
Commodity firms have expanded upstream and downstream in the supply chain to become commodity processors, transforming commodities into raw materials or ingredients. They also face challenges in selling commodities, as clients often want credit for 60 to 90 days after the commodity has already arrived in their facilities.
Commodity trading firms are successful for two main reasons. First, they are skilled at getting cheap financing, which minimizes the ability of competitors to expand upstream or downstream. Second, they are able to make money when the perceived risk-reward ratio is different from the market risk-reward ratio. This means that they can close risky transactions that others cannot, leading to profits.
Overall, commodity trading firms play a critical role in the global economy, despite being relatively unknown to the general public. Their activities in purchasing, transporting, processing, and selling commodities are essential to the supply chain, and their ability to get cheap financing and close risky transactions gives them a competitive advantage.
What Commodity Trading Companies Do
Commodity trading companies are involved in various activities that add value to the supply chain. These activities include purchasing, transporting, storing, processing, and selling commodities. Although these activities may seem straightforward, they can be quite complex, especially when dealing with international transactions.
Purchasing
Purchasing commodities in large quantities internationally can be challenging. Commodity trading companies take on the risk of purchasing commodities from suppliers in different countries, ensuring that the quality of the goods is up to standard, and that all necessary documentation is in place. They also provide financing for the purchase of commodities, which is crucial for farmers who need to pay for their inputs before they can sell their crops.
Transporting
Commodities are usually low-value products that need to be transported in high volumes to reach an economy of scale. Commodity trading companies are involved in transporting commodities using various modes of transportation, including trucks, trains, barges, containers, and tankers. They ensure that commodities are delivered to their destinations on time and in good condition.
Storing
Commodity trading companies take on the risk of storing commodities for extended periods, waiting for the right time to sell them. This is especially important for commodities like wheat, which are harvested only twice a year, but are consumed all year round. Commodity trading companies provide financing for the storage of commodities, which is crucial for farmers who need to wait for the right time to sell their crops.
Processing
Commodity trading companies have expanded downstream and upstream in the supply chain to become commodity processors. They transform commodities into raw materials or ingredients that can be sold to manufacturers. For example, they buy cocoa beans and grind them to produce cocoa powder, which they sell in 25 kg bags.
Selling
Commodity trading companies sell commodities to customers who need them. They provide financing for their customers, allowing them to pay over time, even though the commodity has already arrived in their facilities. This is crucial for manufacturers who need to pay for their inputs before they can sell their finished products.
Commodity trading companies are successful because they are good at getting cheap financing, which minimizes the ability of their competitors to expand downstream or upstream. They also make money when the perceived risk-reward ratio is different from the market risk-reward ratio. This means that if a transaction is deemed too risky by the market, commodity trading companies can close it and make a good amount of money. However, if there is no perceived risk by the market, it can be difficult for them to make money, and they may have to speculate to close a deal.
Formal CEO Perspective on Activities
Commodity trading companies engage in five core activities, namely purchasing, transporting, processing, selling, and storing commodities. These activities are value-added through the supply chain. The CEO of a commodity trading company would argue that purchasing is a complex activity that involves risks and requires expertise. For instance, buying a large quantity of commodities internationally involves dealing with issues such as delayed shipments, quality control, and customs clearance.
Transporting commodities is another critical activity that commodity trading companies engage in. Since commodities are usually low-value products, they need to be transported in high volumes to achieve economies of scale. Commodity trading companies use various modes of transportation, including trucks, trains, barges, containers, and tankers, to move commodities across the globe.
Processing commodities is another value-added activity that commodity trading companies engage in. By transforming commodities into raw materials or ingredients, commodity trading companies can create new products and generate additional revenue streams. For example, companies like Olam or Cargill buy cocoa beans and grind them to produce cocoa powder, which they sell in 25 kg bags.
Selling commodities is the final core activity that commodity trading companies engage in. However, this activity is similar to purchasing, but in reverse. Clients often want credit from their suppliers, meaning they want 60 to 90 days to pay for the product, even though the commodity has already arrived at their facilities.
Commodity trading companies are able to dominate their competition and take the place of most actors in the supply chain due to two reasons. Firstly, commodity trading companies are skilled at getting cheap financing, which minimizes the ability of older players or competitors to expand downstream or upstream. Secondly, commodity trading companies make money when the perceived risk-reward ratio is different from the market risk-reward ratio. This means that if a transaction is deemed too risky by the market, traders can make a good amount of money by closing it. However, when there is no perceived risk by the market, it becomes extremely difficult to make money as a trader.
In conclusion, commodity trading companies engage in various value-added activities that are critical to the global economy. By purchasing, transporting, processing, selling, and storing commodities, these companies are able to generate revenue and create new products. Additionally, commodity trading companies are able to dominate their competition by getting cheap financing and making money when the perceived risk-reward ratio is different from the market risk-reward ratio.
In-Depth Look at Commodity Trading
Commodity trading companies are some of the largest private companies in the world, with revenues in the billions. Despite their significant impact on daily life, many people may not be familiar with these companies. In this section, we will provide an overview of what commodity trading companies do.
Commodity trading companies engage in five core activities: purchasing, transporting, storing, processing, and selling commodities. While purchasing may seem like a straightforward activity, it can be quite complex when dealing with large quantities or sums of commodities internationally. Delays, quality issues, and customs complications can all arise and impact the purchasing process.
Transporting commodities is necessary due to the mismatch between consumption and production of each commodity. Commodities are usually low-value products that need to be transported in high volume to reach an economy of scale. Trucks, trains, barges, containers, and tankers are all used to transport commodities.
Storing commodities is also necessary due to the timing mismatch between production and consumption. For example, there are only two harvests of wheat per year, but bread is consumed year-round. Commodity firms have expanded upstream and downstream in the supply chain to become commodity processors, transforming commodities into raw materials or ingredients.
Selling commodities can also be complex, as clients often want credit from their suppliers and may not pay for the product until 60 or 90 days after it has arrived at their facilities.
Commodity trading firms are able to excel in these core activities due to their ability to obtain cheap financing. As the world becomes more financialized, cheap financing has become a significant advantage in the marketplace. Commodity trading firms are able to minimize the ability of competitors to expand upstream or downstream by leveraging their ability to obtain cheap financing.
Additionally, commodity trading firms are able to make money when the perceived risk-reward ratio is different from the market risk-reward ratio. This means that if a transaction is deemed too risky by the market, a trader who closes it will likely make a good amount of money. Conversely, when there is no perceived risk by the market, it can be extremely difficult to make money as a trader.
In conclusion, commodity trading companies engage in a variety of activities to add value through the supply chain. Their ability to obtain cheap financing and take advantage of perceived market risks allows them to excel in the marketplace and take the place of many actors throughout the supply chain.
Core Activities of Commodity Trading
Purchasing Commodities
Commodity trading companies add value through the supply chain by purchasing commodities. This involves buying large quantities of commodities internationally, which can be quite complex. For instance, a factory that produces cleaning chemicals may want to buy a container of commodities worth $100,000 from China. However, there are many risks involved, such as shipment delays, poor quality, and customs issues. Commodity trading companies have the expertise to navigate these challenges and ensure that the purchasing process runs smoothly.
Transporting Commodities
Transportation is a crucial activity in commodity trading. As commodities are usually low value products, they need to be transported in high volume to reach economies of scale. This involves using various modes of transportation, such as trucks, trains, barges, containers, and tankers, to supply commodities to different parts of the world.
Storing Commodities
The consumption and production of each commodity do not always match. For example, people eat bread all year round, but there are only two harvests of wheat a year. This creates a need for storage facilities to hold commodities between harvests. Commodity trading companies have expanded both upstream and downstream in the supply chain to become commodity processors. This means that they can transform commodities into raw materials or ingredients, such as grinding cocoa beans to produce cocoa powder.
Processing Commodities
Commodity trading companies have expanded both upstream and downstream in the supply chain to become commodity processors. This means that they can transform commodities into raw materials or ingredients, such as grinding cocoa beans to produce cocoa powder.
Selling Commodities
Selling commodities is similar to purchasing, but in reverse. Clients often want credit from their suppliers, meaning they want 60 or even 90 days to pay for the product, even though the commodity has already arrived at their facilities. Commodity trading companies have the expertise to manage these credit risks and ensure that the selling process runs smoothly.
Commodity trading companies are able to dominate the market due to two key factors. Firstly, they have the ability to get cheap financing, which minimizes the ability of their competitors to expand upstream or downstream. Secondly, they are able to make money when the perceived risk-reward ratio is different from the market risk-reward ratio. This means that they are able to take on risky transactions that others are not willing to, and make a profit from them.
Understanding Value-Added by Trading Companies
Trading companies, such as Kofco, Car Guy, Mercury, and Meter, are some of the largest private companies in the world, with revenues in the billions. These companies are involved in commodity trading, which encompasses five core activities: purchasing, transporting, storing, processing, and selling commodities.
Some people may question how purchasing commodities can be considered a value-added activity. However, buying large quantities of commodities internationally is a complex process. For example, if a factory in New Zealand needs to purchase cleaning chemicals from a Chinese company, it is not as simple as sending a wire transfer. The shipment may be delayed, the quality may not be right, or the producer may not supply an important document. Additionally, international transactions can be challenging due to compliance issues, especially for European companies.
Transporting commodities is another essential activity for trading companies. As commodities are usually low-value products, they need to be transported in high volumes to reach an economy of scale. This involves using trucks, trains, barges, containers, and tankers to supply commodities to different parts of the world.
Commodity trading companies also play a crucial role in managing the risk associated with the production and consumption of commodities. For instance, there are only two wheat harvests in a year, but people consume bread all year round. This means that someone needs to take the risk of financing and storing the wheat in between harvests. Trading companies have expanded upstream and downstream in the supply chain to become commodity processors, transforming commodities into raw materials or ingredients. For example, Olam or Cargill buys cocoa beans and also grinds them to produce cocoa powder.
Selling commodities is the final core activity of trading companies. However, clients always want credit from their suppliers, meaning they want 60 or even 90 days to pay for the product, even though the commodity has already arrived in their facilities.
Two reasons why commodity trading firms are successful and are taking the place of most actors in the supply chain are cheap financing and the ability to manage risk. The world is getting more financialized, and trading firms are the best at getting cheap money, minimizing the ability of competitors to expand upstream or downstream. Additionally, trading firms can make money when the perceived risk-reward ratio is different from the market risk-reward ratio. For instance, prepaying a local mine in South Sudan or giving credit to a group of armed rebels for fuel needs are risky transactions that can result in a good amount of profit for traders.
In conclusion, trading companies add value to the supply chain through their core activities of purchasing, transporting, storing, processing, and selling commodities. They also manage the risk associated with commodity production and consumption, making them successful in the market.
Financing in Commodity Trading
Commodity trading companies engage in various activities to add value to the supply chain, such as purchasing, transporting, processing, and selling commodities. These activities require significant financing, and commodity trading firms have become experts at obtaining cheap financing, which gives them a competitive advantage over other players in the market.
One of the key activities of commodity trading firms is purchasing commodities. While buying commodities may seem straightforward, it can be quite complex, especially when dealing with international transactions. For instance, delays in shipment, quality issues, and customs-related problems can create significant challenges for commodity buyers. Commodity trading firms have the expertise and resources to manage these challenges effectively.
Transporting commodities is another critical activity in commodity trading. As commodities are usually low-value products, they need to be transported in high volumes to reach economies of scale. Commodity trading firms use various modes of transportation, such as trucks, trains, barges, containers, and tankers, to ensure that commodities reach their destination efficiently.
Commodity production and consumption do not always match, which creates the need for financing and storing commodities. For instance, there are only two wheat harvests per year, but bread is consumed throughout the year. Commodity trading firms have expanded downstream and upstream in the supply chain to become commodity processors. They can transform commodities into raw materials or ingredients that can be sold to customers.
Selling commodities is similar to purchasing commodities, but in reverse. Customers often want credit from their suppliers, meaning they want 60 or 90 days to pay for the product, even though the commodity has already arrived at their facilities. Commodity trading firms have the expertise and resources to manage these credit risks effectively.
Commodity trading firms are experts at obtaining cheap financing, which gives them a competitive advantage in the market. As the world becomes more financialized, commodity trading firms have become adept at getting cheap money, minimizing the ability of older players or competitors to expand downstream or upstream. For instance, if a small mine sells copper cathode to customers, it needs to finance the transport for 60 days or so, which can be expensive. However, if it sells directly to commodity trading firms, it can get paid as soon as the commodity leaves its mine, and the trading firm can finance the transport to the customer.
Commodity trading firms also make money when the perceived risk-reward ratio is different from the market risk-reward ratio. For instance, if a transaction is deemed too risky by the market, a commodity trading firm can make a good amount of money by closing it. However, if there is no perceived risk by the market, it can be challenging to find an arbitrage and make money as a trader.
In conclusion, commodity trading firms engage in various activities to add value to the supply chain, such as purchasing, transporting, processing, and selling commodities. These activities require significant financing, and commodity trading firms have become experts at obtaining cheap financing, which gives them a competitive advantage over other players in the market.
Risk-Reward Ratio in Trading
Commodity trading companies engage in various activities such as purchasing, transporting, processing, and selling commodities. These activities add value to the supply chain, making commodity trading a lucrative business. However, there are risks associated with trading commodities, and traders must manage their risks effectively to maximize their profits.
One way traders manage their risks is by assessing the risk-reward ratio of each transaction. The risk-reward ratio is the ratio of the potential profit to the potential loss of a trade. Traders aim to find trades with a high potential profit and a low potential loss, which results in a favorable risk-reward ratio.
Commodity traders are skilled at identifying trades with a favorable risk-reward ratio. They take advantage of market inefficiencies and perceived risks to make profitable trades. For example, traders may prepay a local mine in South Sudan or give credit to a group of armed rebels for fuel needs. These transactions are considered risky by the market, but if the trader manages to close the deal, they can make a significant profit.
On the other hand, when there is no perceived risk by the market, it can be challenging to find profitable trades. In such cases, traders may have to speculate to close a deal. Speculation involves taking a position in the market based on the trader’s belief about future price movements.
In conclusion, managing risks is crucial in commodity trading, and traders must assess the risk-reward ratio of each transaction to maximize their profits. Traders must be skilled at identifying trades with a favorable risk-reward ratio and take advantage of market inefficiencies and perceived risks to make profitable trades.
Conclusion and Further Resources
In conclusion, commodity trading companies play a crucial role in the global economy by adding value through the supply chain. They purchase, transport, process, and sell commodities, which are essential for our daily lives.
While some may question the value-added aspect of purchasing, it is actually a complex process, especially when dealing with international transactions. Commodity trading firms have the expertise and resources to navigate the complexities of international transactions, ensuring that commodities are delivered on time and meet the required quality standards.
Transportation is another critical aspect of commodity trading. As commodities are usually low-value products, they need to be transported in high volumes to reach economies of scale. Commodity trading firms have extensive transportation networks that enable them to transport commodities efficiently and cost-effectively.
Commodity trading firms also take on significant risks by financing and storing commodities between harvests. They have expanded downstream and upstream in the supply chain to become commodity processors, transforming commodities into raw materials or ingredients for various industries.
The two main reasons why commodity trading firms dominate their competition are their ability to get cheap financing and their expertise in managing risk. As the world becomes more financialized, commodity trading firms have a distinct advantage in securing cheap financing, which minimizes the ability of competitors to expand downstream or upstream. Additionally, commodity trading firms are skilled at managing risk, enabling them to profit from perceived risky transactions that others may avoid.
If you want to learn more about commodity trading, the first link in the description of the video provides further resources.