The Trafigura piece on the economics of the commodity trading firm by Craig Pirrong is now available to the general public and it is a good piece on the key roles that commodity trading firms provide for the market. So what do commodity trading firms do? They are actually very diverse but they all engage in the economics of transformation with respect to commodities. There are three major types of transformation, time, form, and space. The economics of time is through their willingness to provide storage facilities. They are paid to buy to today and sell later. This is critical with harvested commodities. They engage in the economics of space or logistics through facilitating the movement of commodities from one location to another. They also engage in the economics of form when they help the processing of a commodity into another form. This could corn into ethanol, soybeans into meal and oil, oil into refined products. Along with these services comes a myriad of other activities including hedging, insurance, and financing. They are not usually engaged in flat price speculative behavior but more focused on spreads and arbitrage through time, place, and form.
While it was written for Trafigura, Pirrong provides a unique piece on the economics of industrial organization of commodity firms that did not previously exist. If you want to understand and study commodity markets, this should be a critical piece of reading.
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