Commodities are primary agricultural products and raw materials. In other words, things that mining companies, oil and gas companies, and farmers produce or extract. Iron ore, for example, is a commodity, and so are sugar and grains.
Some mass-produced unspecialized goods or services are also commodities, such as computer memory or chemicals.
Commodities – prices
A commodity is typically a good or service that we trade solely on its price, rather than its features or quality.
For example, everybody, when buying electricity, looks purely at its price – not its quality. All electricity is basically the same quality.
What is the commodity market?
If you want to buy or sell a commodity, you go to a commodity market.
It is similar to the equity market. However, in the equity markets, traders buy and sell shares (stocks).
There are more than 50 commodity markets in the world. They facilitate investment trade in nearly one hundred primary commodities.
The commodity market has a major bearing on everybody’s day-to-day life. It determines, for example, the price of electricity. Electricity prices affect all of us.
Futures contracts are the oldest way of investing in commodities. Investors secure futures contracts with physical assets.
The derivatives market allows investors to engage in speculation or hedging by trading in commodity options and futures without the need for physical delivery.
Modern financial instruments such as exchange-traded funds (ETFs) have expanded access to commodity investments, allowing even individual investors to gain exposure to commodity price movements.
Types
There are two main types of commodities:
Agricultural Goods: such as wheat, corn, sugar, and cocoa. An agricultural good is a soft commodity.
Raw Materials: such as oil, silver, and gold. A raw material is a hard commodity.
Commodity traders have four narrow categories:
Agricultural Foodstuffs: including soybeans, wheat, corn, cocoa, coffee, and cotton. Sugar is also in this category.
Livestock and Meat: examples include lean hogs, pork bellies, eggs, poultry, live cattle, and feeder cattle.
Metals: including copper, zinc, nickel, platinum, silver, and gold.
Energy: such as crude oil, gasoline (UK: petrol), and heating oil. Natural gas is also in the ‘energy’ category.