Commodities

Definition

Commodities are physical goods priced by storage, transport, and production reality — the asset class where the futures CURVE, not the spot headline, is the tradeable object. This entry anchors the theory the per-complex entries (instrument-energy-futures, instrument-metals-futures, instrument-agricultural-futures) apply: storage economics bound curve shapes, roll yield determines what a futures investor actually earns, and the asset-class evidence is a documented two-act story (strong historical case, weaker live decade).

How it works / structure

• Theory of storage (the intellectual spine): Kaldor’s convenience yield — holding physical inventory has value (availability when scarce) offset by storage and financing costs; the futures curve prices the net: ample inventory → contango (carry costs dominate), scarcity → backwardation (convenience dominates). Curve shape is therefore an INVENTORY READ, the class’s most honest fundamental.
• The return decomposition (engine-mandatory): a collateralized futures return = spot change + ROLL YIELD + collateral interest; roll yield’s sign follows the curve (ms-futures-roll, strategy-futures-carry) — long-run commodity futures returns historically owed more to roll and rebalancing structure than to spot appreciation (Gorton-Rouwenhorst’s decomposition).
• The asset-class evidence: the 2006 study’s equity-like returns with inflation correlation, and the weaker post-publication decade — both quoted (macro-commodity-linkages carries the full treatment).
• Access stack: futures directly (the honest form), broad commodity index funds (roll methodology determines everything — front-month rollers bled documented double digits in steep contangos), single-commodity ETFs (the same trap concentrated), and producer equities (equity beta plus commodity beta — a different object).

When it applies

Inflation and supply-shock expression (macro-inflation-linkages — the one documented surprise-inflation hedge); curve/inventory theses (the storage read); carry harvesting across the complex (strategy-futures-carry); allocation sleeves with the two-act evidence stated.

Risk profile & failure modes

• The spot-return illusion: “oil doubled, my oil fund didn’t” — roll drag is the class’s signature retail surprise; the return decomposition is mandatory in any commodity thesis.
• Wrapper determinism: identical spot views produce opposite outcomes across roll methodologies — the vehicle IS the position.
• Physical discontinuities: storage limits produce price behavior equities never exhibit (negative WTI — instrument-energy-futures); models trained on financial assets misprice the tails.
• Heterogeneity flattening: index-level exposure averages energy’s geopolitics, metals’ rates sensitivity, and ags’ weather into a driverless blend — per-complex theses are sharper (their entries exist for this).

Evidence & limits

Storage theory is established economics (Kaldor 1939 and successors); the return decomposition is arithmetic; Gorton-Rouwenhorst and its follow-up carry the asset-class evidence with both acts. Curve-shape inventory reads are documented mechanics; specific curve-signal trading rules are replay territory.

Falsifiable-thesis examples

Illustrations only, not signals:

• “A backwardation-weighted basket (long the most backwardated thirds across complexes) will outperform the equal-weight complex over the next year (carry thesis)” — falsified by the paired baskets.
• “This commodity fund’s 12-month return will trail its commodity’s spot change by more than 5% (roll-drag decomposition)” — falsified by the accounting.

Cross-references

• The complexes: instrument-energy-futures, instrument-metals-futures, instrument-agricultural-futures
• The mechanics: ms-futures-roll, ms-futures-margin, strategy-futures-carry, strategy-futures-calendar-spread
• The macro role: macro-commodity-linkages, macro-inflation-linkages