Commodity Market Overview Bookmark and Share

Today's commodity market has its roots in the trading of agricultural products. Since ancient times people have assigned economic values to items such as sheep, goats, and wheat. The modern commodity market is much more standardized with specific delivery dates, commodity sizes, and precise commodity descriptions. A lot of the time commodity trading is mentioned synonymously with futures trading, however there are slight differences. Commodities refer to the underlying goods such as gold, crude oil, wheat, etc..., and can be traded between two parties. Futures, however, are standardized contracts among buyers and sellers of commodities that specify the amount of a commodity, grade / quality and delivery location. Commodity futures trade on an exchange such as the Chicago Mercantile Exchange (CME) or Chicago Board of Trade (CBOT).

The Commodity Futures Trading Commission (CFTC) classifies market participants as one of three types:

  • Commercials

    • Entities involved in the production, processing, or merchandising of a commodity. Commercials include both a corn farmer and an ethanol producer who uses corn as one of his raw materials. Commercials use the commodity markets to protect or "hedge" against the price of a particular commodity making an adverse move, hurting the price they can sell their finished goods, or increasing the cost of raw materials they might need.

  • Large Speculators

    • Mostly hedge funds, banks, and commodity trading advisors (CTA) that trade in the commodity markets for speculation.

  • Small Speculators

    • Individual commodity traders who trade for their own accounts or through a commodity broker.

The universe of commodities that can be traded is essentially unlimited. Some of the more popular commodities that are traded today are as follows:

  • Grains

    • Corn, Soybeans, Wheat, Oats, Rice

  • Softs (generally commodities that are grown, rather than mined)

    • Coffee, Sugar, Cocoa, Cotton, Orange Juice

  • Energy

    • Crude Oil, Ethanol, Natural Gas, Heating Oil, Gasoline, Propane

  • Livestock & Meat

    • Lean Hogs, Pork Bellies, Cattle

  • Metals

    • Precious - Gold, Platinum, Palladium, Silver
    • Industrial - Copper, Lead, Zinc, Tin, Aluminum, Nickel

All of the commodities listed above are traded as futures that are listed on an exchange. The exchanges responsible for the majority of commodity futures trades are:


Note: Due to recent consolidation in the industry the CBOT, CME, and NYMEX are all part of the CME Group. Also, the NYBOT is now a wholly owned subsidiary of ICE.

The majority of commodities trading takes place in the form of futures contracts, however spot trading and trading of commodity forwards does take place. Spot trading of commodities is usually carried out in wholesale markets where cash is exchanged for immediate delivery of an item. This is likely to take place in the gold souks of Dubai, where gold is exchanged for cash at the current spot price. In a commodity forward contract two parties agree to exchange at a future date a given quantity of a commodity for a price defined today. The price defined today is referred to as the forward price. A commodity future is a type of forward contract that is traded on an exchange. Each contract has a defined quantity and delivery date and includes exact specifications of the type commodity to be delivered.

Commodity prices are extremely interdependent. Over the past couple years, the price of all commodities has moved sharply higher due to increased consumption from emerging economies such as China, India, and Brazil. Furthermore, demand for fuels such as gasoline and ethanol, have pushed the price of raw materials such as oil and corn higher. One can make money in the commodity markets by trading these interdependent relationships.

For more information on the commodity markets, visit About.com, which has an excellent section on commodities and commodities futures trading.

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