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Commodity.com explains what commodities are, how they are traded, and what drives their prices.
Once you have that under your belt, you can check out How to Trade Commodities. There we teach you about trading in these global markets.
What are Commodities?
A commodity is a basic good or raw material in commerce that people buy and sell. Commodities are usually the building blocks for more complex goods and services.
Commodities are different from other types of goods in that they are standardized and interchangeable with goods of the same type.
Generally, commodities are extracted, grown, produced, and traded in large enough quantities to support liquid and efficient markets.
These markets provide a transparent way for commodity producers, consumers, traders and speculators to transact business.
What Are the Main Commodities?
Commodities can be divided into several categories: agricultural, energy, metals, and environmental. Some people also consider cryptocurrencies to be commodities, including US regulators. Here are some well-known examples per category:
These main categories contain many more commodities. The following commodities play significant roles in the global market.
Corn is a commodity with two important applications in the global economy. It is a food source for humans and livestock like feeder cattle, lean hogs, and live cattle. And it is used in the production of ethanol fuel.
The high cost of sugar in the United States has made corn a key ingredient in sweetening products such as ketchup, soft drinks, and candies.
Growing food and fuel demand should drive continued interest in corn as a commodity.
The global coffee industry is enormous. As a commodity, it is intriguing for at least two reasons.
At the same time, demand for coffee continues to grow as emerging market economies develop a taste for it.
Sugar is known mostly as a sweetener. But it plays an important role in the production of ethanol fuel as well.
Historically, governments across the world have intervened heavily in the sugar market.
Subsidies and tariffs on imports often distort prices and make sugar challenging to trade. Although sugarcane is grown all over the world, three-quarters of all production comes from just ten countries, including India, Thailand, China, the US, Pakistan, and Russia.
Soybeans play a critical role in global food production. Soybean oil is used in bread, crackers, cakes, cookies, and salad dressings. It also serves as a feedstock in the production of biofuels.
The meal from crushed soybeans serves as the main source of food for livestock. The growing need for food and fuel in emerging market economies could drive demand for soybeans.
Wheat grows on six continents and for centuries has been one of the most important food crops in the world.
Traders compare wheat prices to other grains such as corn, oats, and barley. Differences in grain prices are easy indicators for changes in grain supply-demand dynamics.
Demand for cheap and nutritious food sources in developing nations should continue to drive interest in the wheat market.
Live Agricultural Commodity Prices
Here are a handful of live prices for agricultural commodities:
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This commodity has the largest impact on the global economy.
Crude oil is used in transportation, as well as the production of plastics, synthetic textiles (acrylic, nylon, spandex, and polyester), fertilizers, computers, and cosmetics.
If you take transportation costs into account, crude oil plays a role in the production of every other non-digital commodity.
Crude oil has different price markers as two oil markets: West Texas Intermediate (WTI) and Brent Crude.
Natural gas is used in various industrial, residential, and commercial applications including electricity generation.
The United States and Russia are the leading producers of it.
The main use of this refined crude oil product (also known as reformulated gasoline blendstock for oxygen or RBOB gasoline) is as a source of fuel for cars, light-duty trucks, and motorcycles.
Gasoline prices have a large effect on the economy since demand for it is generally inelastic.
Inelasticity means that people’s use of it doesn’t change much regardless of its price.
Live Energy Commodity Prices
You can see live prices for a few oils and natural gas here:
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Many market participants see gold as an alternative to paper money, so its price tends to go up when people are concerned with inflation.
Gold is also used to make jewelry and electronics.
Silver is used in a variety of industries and applications including jewelry.
Silver prices can be analyzed with various technical analysis methods that allow traders to obtain and compare specific data sets like transaction volumes.
Copper is a metal with one of the broadest use cases on earth.
It is a suitable commodity due to its conductive properties and is primarily used for electrical wiring, roofing, plumbing, and as key parts of industrial machinery.
Copper is mined all over the world, most notably in Chile, Peru, and China. Its prices are easily impacted by global housing market trends and technology.
Live Metal Commodity Prices
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Cryptocurrencies typically serve two main purposes. They act as:
- A digital stores of value
- A medium of exchange
Some also serve as commodities in an economy around a technological hub (called a blockchain) with specific features, like platform integrations.
What are the Main Drivers of Commodity Prices?
Alongside general economic issues, there are several factors that affect commodity prices:
- Emerging Markets: The past couple of decades have seen enormous rises in the standards of living in developing economies. So changes in these conditions can have large effects on commodity prices. For example, China is one of the biggest drivers of crude oil, copper, and iron ore prices.
- US Dollar: The value of the US dollar is also a big issue because it is the world’s reserve currency. If the dollar increases in value, people buying in other currencies may not be able to purchase as much of a commodity.
- Substitution: As a commodity’s price increases, so does the viability of alternatives, and the elasticity of demand will vary between commodities & use cases.
- Weather: A significant factor, especially with agricultural products.
Supply shocks usually cause prices to increase. For example, corn, wheat, and soybean prices increased due to widespread flooding in 2019. Demand shocks can push prices either way.
On another note, petroleum prices decreased in the spring of 2020 due to reduced demand caused by the COVID-19 pandemic.
Ways To Trade Commodities
When commodities are traded, the trader doesn’t necessarily own them. This depends on the type of instrument being traded. Common ways to trade commodities are:
- Physical delivery: After purchase, commodities can be delivered to their owners. But there are other cases, such as gold, where a buyer may hold the physical product (bullion) — often for an extended period — without taking delivery of it.
- Shares: This is an indirect way of trading commodities by owning shares in companies that mine or produce the assets.
- CFDs: Contracts for difference (CFDs) allow traders to speculate on price movements between the time the trade is entered and exited.
- Commodity Futures: Contracts that promise to purchase a set amount of a commodity at a time in the future. These are usually traded on the futures market before the purchase date.
- Options on Futures: These allow you to speculate on futures using less money but they require even more accuracy in your trading.
- ETFs: Many ETFs (Exchange-Traded Funds) grant exposure to commodities prices via commodity futures, options on such futures, or shares in companies that mine or produce commodities. Some also purchase physical bullion. (ETFs trade as funds on exchanges.)
Where Can You Trade Commodities?
One of the simpler ways to start trading commodities is via CFDs.
When you’re ready, we can also provide guidance in finding the right broker.
Here’s a summary of which brokers are available in …
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 71.00%-89.00% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Further Reading On Commodities
- 2020 Must-Read Introduction To Energy Commodities: Trading And Trends Explained
- Trading Precious Metals In 2020: How The China Influence Is Driving Demand
- Cryptocurrency Guide 2020: Everything You Need To Know About Trading Cryptocurrencies
- A Guide to Agricultural Commodities And Their Importance On The Global Market
Below are the answers to some of the most frequently asked questions about commodities.
What is a commodity?
A commodity is a raw material. It is used as an input for the production of other things. For example, steel is used in the construction industry. Another important aspect of a commodity is that it should be interchangeable. Roughly speaking, the source of a commodity doesn’t matter. So steel made in the US should be the same as steel made in India.
What are examples of commodities?
Examples of commodities include steel, oil, and rice. Steel is a metal commodity used in a wide variety of industries including in the construction of highways and buildings. A typical energy commodity is crude oil, which is primarily used to create RBOB gasoline but also has applications far outside energy production. Rice is used in many ways like the manufacture of breakfast cereals. Like most agricultural commodities, rice is also consumed directly.
Are cryptocurrencies commodities?
The U.S Government classifies cryptocurrencies as commodities. There has been some debate about whether cryptocurrencies are actual commodities, or even currencies, although such government classifications give a clear answer. With increasing discussions and regulations in the cryptocurrency sphere, cryptos are gradually thought of as a commodity by traders alike.
What are the commodity prices today?
Commodity prices are constantly changing — throughout the day of trading and over the course of decades. Day traders tend to be more concerned with immediate prices due to their frequent trades. Prices change because of changes in the supply and demand of a commodity. Brokers like Plus500 provide live price updates when traders browse tradeable assets.
Some commodity prices like the yearly price cycle of many agricultural commodities can be predictable, unlike metal used in industries with more fluctuating demand.
Brokers provide access to real-time commodity prices so that you can make buying and selling decisions based on up-to-date information.
Credits: Original article written by Lawrence Pines with contributions from Commodity.com team. Major updates and additions in Oct 2020 by Frank Moraes and Marko Csokasi.