Commodities are all around us. They’re well-known, tangible products that are often consumed on a daily basis. Popular commodity products include wheat, sugar, cotton, cocoa, crude oil, and gold. Generally speaking, commodities are highly abundant and accessible products to people in both developed and developing countries around the world.
A large number of commodities are traded in the futures market, which is a central exchange where buyers and sellers enter into contracts. A futures contract is simply an agreement to buy or sell a commodity at a particular price on a stipulated future date. Futures are highly leveraged products, requiring relatively small investments to potentially generate relatively high returns or you can risk more than the amount you invested.
It’s important to note that not all securities that trade on the futures market are commodities. Additional futures securities include stock index futures, foreign currencies, and bonds.
Types of Commodities
Commodities can be organized into three key areas: agricultural, metals, and energy. Below is a list of some individual commodity products that fall under each category:
Agricultural: Cocoa, Coffee, Corn, Cattle, Lumber, Oats, Orange Juice, Sugar, Wheat
Metals: Copper, Gold Palladium, Platinum, Silver
Energy: Brent Crude, Gasoline, Heating Oil, Light Sweet Crude, Natural Gas
Despite the fact that the above commodity products are physical in nature, there are distinct differences in each category. For example, looking at the agricultural group, you can see that each listed commodity is perishable. This is not the case with the metals group. However, metals like gold carry significantly higher storage costs due to the added security required to guard it. There are a number of characteristics that make each commodity unique, but what’s more important is understanding why price changes occur in these commodities.
Influences on Commodity Price.
Commodity prices are typically driven by supply and demand. Generally speaking, when there is an ample supply of a commodity, its price tends to be low. Prices may also be pushed to lower levels when demand is soft. The opposite is also true. When supply is tight and or demand is strong, commodity prices are often pushed higher.
There are many components that could influence both the supply and demand of a commodity. In the metals market, for example, the price of gold and silver may be driven higher by fear and uncertainty in the global economy, whereas economic certainty and growth often lead to lower prices. Conversely, price changes in agriculture commodities are heavily influenced by weather conditions. Too much or too little water may create flood or drought conditions, which can drastically affect crops. In addition, extreme weather conditions such as hurricanes and earthquakes can significantly impact commodity yields. Lastly, all categories of commodities are subject to price swings that occur from political and governmental restrictions on commodity imports and exports.
