What Is A Commodity? A Guide To Commodity Types & Markets

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Commodities are the raw materials that go into making all the goods that we rely on in our daily lives. For example, corn is used to manufacture breakfast cereal. And steel is used to manufacture trucks. They are the building blocks of what an economy produces.

Commodities are traded for one another or for money. Their prices are driven by the constantly changing supply and demand of each. This page covers the types of traditional raw commodities, other commodity types, and how the commodity market works.

What Is a Commodity?

A commodity is a base material, a raw good that can be traded for another. Traditional commodities are used to create other, more complex goods. They’re typically characterized by their extraction or production process — the closer a material is to the ground, the more likely it’s classed as a commodity.

Products are not commodities, but they are made of the raw materials that we call commodities.

Coal miners pushing coal trucks in a mine in Blackball, Westland
Coal mining in Blackball, Westland. Archives New Zealand, CC BY 2.0, via Wikimedia Commons

Historically, commodities were extracted by hand. With the advancement of technology, tools became the preferred method to mine and collect. Today, commodities are extracted by both manually operated and automated machinery, mostly by multinational companies.

Since the majority of global industries depend on energy, the most in-demand commodities today are energy commodities like crude oil and natural gas. Other commodities with high industrial demand include nickel, copper, and agricultural commodities like corn and wheat.

Types of Commodities

Since there are other assets with monetary value under the ‘commodity’ umbrella term, it’s important to distinguish the types of commodities. The main types are:

  1. Raw materials commodities
  2. Financial commodities.

Raw Materials Commodities

Raw commodities are base materials extracted from the ground, either through mining or farming. However, even those we call raw commodities undergo processing before entering the market. Whether it’s wood, barley, iron ore, or zinc, producers process the materials to live up to market expectations. For this reason, raw commodities do include processed materials.

Commodity Categories

The three commodity categories for raw materials are agricultural, metal, and energy. Here are some examples of what materials are included under each type:

Financial Commodities

Financial commodities are only commodities by monetary value. By the true meaning of the word, it can be confusing to consider options contracts, futures contracts, or other financial market instruments as a commodity. Additionally, traditional currencies (“fiat”) are widely considered commodities alongside cryptocurrencies.

Please Note: Availability subject to regulations. Cryptocurrency CFDs are not available to UK retail traders.

Who Trades Commodities?

Commodities are traded through institutional organizations in commercial markets, and privately in everyday retail markets.

Common types of retail buyers and sellers include:

  • Physical traders like farmers and smaller local commodity exchanges
  • Derivatives speculators via financial instruments like options, futures, or CFDs
  • Stock traders who speculate on commodity prices via mining and farming companies.

IMPORTANT: CFDs are not available in the USA due to local regulation, and regulated brokers do not accept US citizens or US residents as clients.

For example, a retail trade can involve a farmer buying 15 tonnes of organic wheat from a neighboring local farmer at $0.35 per kilo, instead of purchasing it from a commercial wheat distributor at $0.40 per kilo. A local trade like this would mean that the buying farmer gets produce from the source and pays $5,250 instead of $6,000.

Please note, this is an example trade – not a recommendation.

Examples of institutional market participants include:

  • Hedge funds and brokers that specialize in commodity markets, or raw commodity-driven financial instruments
  • Major companies like that purchase raw commodities for manufacturing purposes, like Tesla
  • Smaller commodity processing companies that manufacture parts for larger companies.

For example, a commercial commodity operation may see Tesla make a direct contract with a nickel mining company to provide the nickel needed to produce their EV batteries, instead of buying the battery parts from another company.

Commodities Traded on Futures Exchanges

A commodity futures contract is an agreement between a buyer and seller for the trade to be executed at a future date with a pre-determined price.

Contract buyers and sellers speculate on future commodity price movements in hopes of a profit, and the futures exchange is the market maker for these contracts.

Learn more about how futures work, and which exchanges commodity futures are brought and sold on.

Commodity futures contracts brought and sold on futures exchanges are typically settled in two ways. The buyer may opt-in for physical delivery of the commodity with the responsibility to store it, or the commodity may be stored in a processing warehouse, for which the new owner must pay.

Here’s are four of the biggest commodity exchanges with examples of live commodity markets, some of them including derivatives like futures:

ExchangeCommodities*
Chicago Mercantile Exchange (CME)
Australian Securities Exchange (ASX)
Intercontinental Exchange (ICE)
London Metal Exchange (LME)

*To see the full list of available commodities on each exchange, visit our exchange guide.

What Is a Commodity Code?

Commodities have unique identifier codes on exchanges. There are also month codes to identify when the futures contract expires. For example, ‘ZCK1‘ is a corn futures contract on the CME, expiring in May.

Commodity month codes indicate the month in which the futures contract expires.

See the commodity month codes.

Month Code
JanuaryF
FebruaryG
MarchH
AprilJ
MayK
JuneM
JulyN
AugustQ
SeptemberU
OctoberV
NovemberX
DecemberZ

Other Commodity Markets

The main ways to buy and sell commodities are physically or via derivatives contracts, like futures.

Futures mostly involve physical settlement and owning a commodity, though there are other ways to speculate on commodity prices through derivatives where you don’t own the commodity, like contracts-for-difference (CFDs) and options.

IMPORTANT: CFDs are not available in the USA due to local regulation, and regulated brokers do not accept US citizens or US residents as clients.

Some people also prefer to buy and sell mining or agricultural company stocks as a way to gain exposure to commodity markets.

Are Commodity Prices Volatile?

Important: This is not investment advice. We present a number of common arguments for and against investing in this commodity. Please seek professional advice before making investment decisions.

As with any market, commodities too are driven by supply and demand. If there were man-made laws, we could all search and extract what we need from the ground, but that’s not how the market works.

To understand supply and demand, we need to explore the basics of how the commodity market and its surrounding global economy operate. The main factors are:

  • Raw Material Availability: If regulatory bodies deem a commodity to be plentiful, there are fewer restrictions likely to be placed on its extraction due to environmental protection. If there is an oversupply of a commodity, there may also be restrictions to control the market.
  • Geopolitics: International relations between nations and market makers also determine what companies can and can’t do, although some companies have enough funds to incentivize regulators to open up new extraction, processing, and trading opportunities.
  • Corporate Deals: Large multi-national companies account for both the highest supply and demand volumes, so corporate politics is also a huge factor in what enters and leaves the open market.
  • Consumption: Products created by companies that buy raw commodities are sold to everyday consumers. Consumption is the fundamental driver of commodity supply and demand dynamics — if there were no one to buy, there would be no reason to make it.
  • Retail: Perhaps the least impactful factor on commodity supply and demand, though still worth mentioning. In comparison to commercial market volumes, retail buyers and sellers contribute a minuscule fraction to the global commodity market.

FAQs

What is a commodity trader?

A commodity trader is a person who buys and/or sells a raw material or a financial instrument tied to the price movements of either. Commodity traders may also speculate on financial markets, like fiat currencies and cryptocurrencies. A commodity trader may be a private individual, known as a retail trader, or a member of an institutional organization.

IMPORTANT: CFDs are not available in the USA due to local regulation, and regulated brokers do not accept US citizens or US residents as clients.

What is a commodity broker?

A commodity broker is a market maker who allows people to buy and sell commodities or financial contracts bound to the possible ownership of commodities. Brokers act as third-party middlemen who create a market to connect buyers and sellers, for which they charge a set of fees as compensation.

What is a commodity chain?

A commodity chain describes the set of interconnected actions that result in a market-ready commodity. The commodity chain includes all processes from planning the production/extraction to processing the raw goods as required by the market. The biggest difference between commodity chains is determined by whether a product is mined or farmed. Other major differences include the complexity of the commodity to be sold or brought, as it determines the efforts required to process it.

Further Reading

If you want to learn more about commodity trading and ways you can trade, head over to this Commodity Trading Guide.

You can also see the types of online brokers in the Broker Guide where we review brokers who offer CFDs, options, stocks, forex, bullion, and cryptocurrencies.

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