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Some people who write about commodities wax poetic. One hundred years ago, Frank Norris described the Chicago Board of Trade in his classic novel, The Pit: "Within there, a great whirlpool, a pit of roaring waters spun and thundered, sucking in the life tides of the city … then vomiting them forth again."
Others simply are trying to satisfy a nagging editor, who's suddenly decided that the price of oil or gold or beef looks high.
Commodity coverage has become a mainstream, if occasional, part of business reporting. Business journalists who do not cover commodity markets as a regular beat are being thrown into Norris' whirlpool for several reasons:
Commodity prices are much less volatile than stock prices in the long run. But news exists in the short run. When you are handed a commodity story assignment, two mental steps will make your job easier.
First, realize that you are going to write about the commodity futures market, not the commodity itself.
If the share price of eBay sank, you'd look for something happening at the company -- such as a disappointing quarterly earnings report or financial outlook by executives.
This approach doesn't work in the commodity markets. That's because the price you see quoted for gold, oil or beef is the price for a futures contract that assumes uniformity in the underlying substance. Commodities don't come with income statements, balance sheets or CEOs.
Commodity futures are contracts stating the obligation of the holder to buy a commodity at a specified price in a specified period. The contracts set the price for buyers and sellers at some point in the future.
The immediate supply and demand for the underlying commodity is an element of the price, to be sure. But the fact that the contracts are settled in the future is the key factor in covering commodities.
"There are 10,000 grain elevators in the United States, and each of them is posting a corn price. But the central price that people refer to is at the Chicago Board of Trade," says veteran commodities reporter Peter Bohan of Reuters. "The time element is key."
Because futures contracts look to the future and can be bought for little money down, their prices are influenced by the leverage of the investment and other factors that may have nothing to do with current supply and demand for the commodity. News of a cow testing positive for mad cow disease has no impact on the immediate supply of beef. But the story could devastate beef futures.
Think of commodities as a pipeline, Bohan advises. Problems that might affect any part of the pipeline at any point in the future will affect the futures price.
Reporters almost always ask commodity specialists for their price outlook. But "I would like somebody asking me that question to have an idea of the time frame they are looking for," says David Meger, director of Metals Trading at Alaron Trading Corp. "Depending on what time they are talking about, the outlook can change."
Two other rules of thumb for better perspective: Examine a multi-year price chart of the generic futures contract of the commodity you are covering, and adjust the prices for inflation.
A second mental step is to treat each explanation for futures price movements as a single hypothesis, not a definitive answer.
Hundreds of opinions, often conflicting and ill-founded, weigh on the price of short-term commodity futures contracts. Those prices are registered at futures exchanges and communicated instantly around the world.
"Everyone who is willing to put their money where their mouth is has an influence on the price, no matter where that opinion is coming from," says Russell Wasendorf, a futures commission merchant and author of books on commodities.
One oil trader's terrorism fear is another trader's Chinese growth story. Other traders rely on charts and other technical factors, such as real or imaged relationships among commodities, interest rates and even stock prices.
As a reporter, you cannot know all the factors involved or even what factors are most important at any moment. You should know, nonetheless, that factors embedded in the current futures price always represent old news.
When gold hits $400 an ounce or oil hits $50 a barrel, those prices might not tell much about tomorrow's price. If you wait until prices have spiked, your story may look foolish in 24 hours.
Inexperienced commodity reporters frequently become entranced with an explanation offered in their first phone call and seek additional sources to validate the bias conveyed in an initial interview.
Meger says reporters would do him -- and themselves -- a favor if they would reveal the premise of the article and call back in a few minutes after he's had a chance to check it out, rather than seek a quick quote to validate what may be a dubious, unstated premise.
"I'll either say that's not my interpretation of the market or I'd be happy to say something," he says. "It helps a lot to know what the crux of the article is."
Bohan recommends the following Web sites for reporters looking for background on commodities:
Copyright © 2008 Donald W. Reynolds National Center for Business Journalism
