What does Commodity Paper mean?
An instrument representing a loan secured by commodities. Commodity paper is a special type of loan or advance where commodities serve as a collateral. The documents, such as bills of lading, or warehouse receipts, showing ownership over commodities are deposited with the lender.
Futures Knowledge Explains Commodity Paper
The lender has a lien over the commodity, but physical possession of the commodities remain with the borrower. For example, banks provide working capital loan on a commodity paper to a farmer who has 50,000 bushels of wheat in his inventory. The farmer can get a loan against the food grains to continue farm operations, or in some instances use the loan as speculation to wait for a better price (sell the wheat at a higher price, payoff the loan, and keep the net proceeds).