Commodity markets: why access is harder than it looks

Commodity prices appear in the news daily, and it seems buying a commodity should be as easy as buying a share. It is not.

What gets in the way

Physical commodities require storage and transport. For a private investor that option is unavailable in practically any form other than precious metals.

What is available

Futures — with every property of the derivatives market, including the cost of rolling: Contango and backwardation: why a long futures position melts.

Producers' shares — but their price depends not only on the commodity but on costs, debt, taxes and the quality of management.

Funds tracking commodity indices — inside they usually hold the same futures, so the same rolling costs apply: What is actually inside a fund.

Shares instead of the commodity

A low-cost producer gains more from a rising price than the price itself: profit grows faster than revenue. It works the same way in reverse.

That makes commodity companies' shares a leveraged bet on the commodity rather than an equivalent of it.

The role in a portfolio

For a Russian investor the question differs from a foreign one's: a large part of the local equity market is already a commodity bet — Sectors of the Russian market: what it is made of. Adding commodity instruments on top increases concentration rather than reducing it.