Commodity Paper Law and Legal Definition

Commodity paper is an instrument representing a loan secured by documents such as bills of lading, verified inventory lists, and warehouse receipts.

Commodity papers are a special type of loan or advance. In such a loan, a commodity in the possession of the borrower is used as collateral for the transaction. In general, the lender does not take possession of the physical commodities as part of the loan agreement.

In such a transaction, the nature of commodities is different from many other investments. Here, the commodity is a physical substance that has to be produced before it can be sold on an exchange. For example, food products and grains are raised by farmers and then stored, and they hope to sell it at a good price in the future. The commodity paper is one of the ways that the owner of produced commodities can benefit from the stored goods prior to the point of sale.