The Commodity Supply Chain

Introduction

I have recently become cognizant of the fact anyone dealing in commmodities needs to have a good understanding of the unique supply chain network of each commodity. This encompasses: geography, technicals, actors, etc. And commodities flow by the invisible hand. But most important of all is geography - understanding the terrain and layout, since geography dictates economics. We can view it as a series of nodes, where commodity flows from supply to demand nodes.

So TLDR - To understand commodities, understand the supply chain. To do so, understand geography, history, politics & economics.

Format

• Node Levels
  • Country, state, company, facility
• Node Types
  • Production
  • Processing
  • Storage
  • Distribution
  • Consumption
• Node Context Per Node
  • Location (where)
  • Ownership (who)
  • Quantity
  • Flows (goes where). How it evolves over time (e.g historical state, current state).
• Node Predictors
  • State & future events. Aka predict flows and as a trader capitalize on the logistics premium.

Supply & Demand Quantities/Factors

We can further split each supply or demand quantity into individual quantities in a hierarchical fashion, e.g based on geography (a natural grouping).

A possible hierarchy for quantities could look like this. A quantity would be measured by some variable: say demand/supply/imports/exports/inventory.

Region (Q) $\rightarrow$ country (Q) $\rightarrow$ companies/players (Q) $\rightarrow$ production/consumption node (Q) $\rightarrow$ factors.

Then these quantities have beta to individual factors. These are latent drivers of quantities. For example, seasonality, weather, interest rates, OPEC policy, geopolitical events, etc. The problem is, while betas to these factors are probably estimable via statistical modelling, the factors themselves are suited to discretionary modelling, and by extension so are the quantities. For example, random shocks could occur (e.g political upheaval or natural disaster) that are not forecastable.

I’d like to come up with a nice diagram for this.

Generalizing further, we can view these as supply nodes and demand sinks and a normal state of flows (arb) that bring commodities over. Whenever factors change, they drive changes in supply/demand nodes, and the flows change accordingly.