What the f**k are commodities? After dozens of episodes this is our first on the topic so for all of us who don’t know, today we are going to find out. Carley Garner, author of Higher Probability Commodity Trading, joins us today to teach us all about commodites. What are they and why are they important. What the F**k Are Commodities? Commodities are an asset class like stocks, bonds, or real estate. The reason many of us aren’t familiar with them is that unlike those other classes, commodities are not geared towards individual investors. The entities buying commodities are more often companies who need commodities to operate; airlines buying oil commodities to hedge against high prices is an example. Commodities are not manufactured things like cars but things from the natural world like grains, minerals, or oranges. There are soft and hard commodities. Soft commodities are things that are grown like cocoa, corn or cotton. Hard commodities are things that are mined from the earth like oil or copper. Buying and Selling Commodities Buying and selling commodities is speculative and the transactions are leveraged which is an easy way to get into trouble. If you think the price of corn is going to go up, you enter into a contract to buy it at the current price in the hope that the price will go up in the future and you will sell it for a profit. Here’s an example of how commodities work. There is a drought predicted for the Mid West which means corn prices are going to go up. You own a corn chip factory. You buy corn futures now while the prices are low so you can still set your budget and know how much you are going to pay for the corn you need. You locked the price in. You paid $3.50 a bushel. The price was $3.25 a bushel. You lost money. But for the chip factory owner, commodities aren’t necessarily an investment designed to make money. They are things that they need to operate and when they buy futures, they can keep their books balanced whether or not they were on the right side or the wrong side of speculating. If you are just an individual investor in the corn/drought scenario, it is about making money. If you bought corn at $3.50 a bushel and it sold for $3.75, you made money. But who keeps both parties honest? What if the chip company refuses to pay the agreed upon price or the farmer holds the corn ransom until they get a better price? Commodities are traded on an exchange. Most commodities are traded on the Chicago Board of Trade or the New York Mercantile Exchange. These exchanges are what guarantee the trades. If you want to get into commodities trading you can buy a seat on an exchange which costs hundreds of thousands of dollars or you can hire a broker as a middle man. You can make trades on the broker’s platform which is not so different from buying and selling stocks with TD Ameritrade. You’ll pay about $7 per trade. Opening an account with a broker is like applying for a loan. Being a broker is risky because most of the purchases are heavily leveraged. You can trade $50,000 worth of commodtities as long as you have $3,000 in your account. If you lose $50,000 from an account with just $3,000, the exchange is still going to get their money but they come after the broker. And the broker is left to get their money back from you. Risky indeed. That’s why there is vetting involved and you have to meet the broker’s criteria to open an account. Where Does it Go? You want to trade commodities but you don’t have an corn chip factory. What are you going to do with 5,000 bushels of corn? If you get a delivery notice, you don’t have to clear out the garage. You can sell your delivery notice. Doing so is known as a retender. The buyer of the futures contract doesn’t want to take delivery of the commodity. When you retender the delivery, the exch