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What Are Commodities?
Commodities
are broadly defined as natural resources, chemicals and physical products you
can touch, taste, smell, grow, mine, consume or deliver.
From their origins in the 1800s until the 1970s, futures
markets and commodities markets were one in the same; financial futures
are a modern-day invention. To confuse things slightly, today the term "commodity" is
still often used as a broad industry term describing all futures contracts,
including financials. For example, "commodity trading advisor" is
used to define an individual or firm who operates a managed
futures program, even though many of them trade exclusively in the financial futures markets such as interest rates or stock
indexes.
Physical commodities are the roots of the futures industry and
still play a valuable role in the global marketplace, even though the most
highly-traded futures today are financial contracts such as U.S. Treasury notes, Eurodollars,
and Standard & Poor's 500R.
The most popular physical commodities contracts can be broken down into several
broad categories: metals,
energy, grains, livestock, and food
and fiber. These are not paper assets, and in general, are produced
and consumed at a price based on the forces of supply and demand.
A commodity futures contract represents an
agreement to buy or sell a specific type and grade of commodity for delivery at
a specific time in the future at an agreed upon place at a market-determined
price. In reality, commodity futures rarely lead to the delivery of an actual
product, because the contract positions are typically closed out before the
delivery date.
History of Commodities Exchanges
The futures markets were
developed initially to help agricultural producers and consumers manage the
price risks they faced harvesting, marketing and processing food crops each
year. The modern futures industry still serves those markets.
The world's oldest established futures exchange, the
Chicago Board of Trade, was founded in 1848 by 82 Chicago merchants.
The first of what were then called "to arrive" contracts were flour,
timothy seed and hay, which came into use in 1849. "Forward"
contracts on corn came into use in 1851 and gained popularity among merchants
and food processors.
Meanwhile, what is now the nation's largest futures
exchange, the Chicago Mercantile Exchange, was founded as the Chicago Butter
and Egg Board in 1898. At that time, trading was offered in - you guessed it -
butter and eggs.
Other prominent U.S.
commodities exchanges were formed before or just after the turn of the century,
and also had their roots in agriculture. At one time, you could trade on the
National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk
Exchange, and the New York Hide Exchange. Small exchanges like these ultimately
merged to become the exchanges we have today.
Types of Commodity Futures
The most popular physical
commodities contracts can be broken down into several broad categories: metals, energy, grains, livestock, and food and fiber. There are some modern additions
to commodity futures that are unique, such as
chemicals and fertilizer futures, but the most popular contracts fit under the
broad categories listed here and are mainly subject to price fluctuations based
on supply and
demand factors in consuming and producing countries.
Metals
The major metals futures contracts include copper, gold, platinum, palladium and silver. Their uses include industrial purposes, in construction, and for
jewelry. Geopolitical and economic factors in the dominant producing and
consuming countries affect price action, but each also has its own unique fundamental
influences. In the copper market, building construction is the largest demand
source. Copper is also used for electrical and electronic products,
transportation and industrial machinery manufacturing. The price of copper is
therefore sensitive to statistics related to economic growth, particularly
reports such as housing starts. For that reason, participants in financial markets
often also look to price action in copper futures as a gauge of general
economic trends. In another example, gold has long been used as a hedge against
political and economic uncertainties, and many central banks back their
currency with gold reserves.
The metals listed here trade primary on the New York Mercantile Exchange.
The Chicago Board of Trade's E-cbotR electronic platform also lists mini-gold and silver contracts.
Energy
The most popular energy futures contracts are crude oil, gasoline, heating oil and natural gas. These natural resource markets
have become one of the most important gauges of world economic and political
developments, and are therefore heavily influenced by disruptions in producing
nations. The value of the U.S. dollar is significant because much of the
world's crude is priced in dollars. U.S.
energy prices are also quite sensitive to statistical reports detailing
production, imports and especially stocks. These markets are also subject to
seasonal fluctuations - mild weather may lessen the need for heating oil, while
summer tends to bring greater gasoline demand for driving season.
These products trade on the New York Mercantile Exchange.
If you'd like to learn more about the oil markets, check out "Oil Market Basics,"
a comprehensive online
course brought to you by the U.S.
Energy Information Administration. Learn about the supply and demand
factors unique to this market as well as how to track trends. There are over
400 links to EIA data and other
resources you need to make the most informed trading decisions.
Grains/Soy
Grains and soybeans are essential to food and feed
supplies, and prices are especially sensitive to weather conditions
in growing areas at key times during a crop's development and to economic conditions
that affect demand. The major futures contracts in this category are corn, soybeans, soybean oil, soybean meal and wheat. Reports from the U.S.
Department of Agriculture are closely watched, and summarize key
factors influencing supply and demand including current production and
carryover supply from the prior season. Each product has its own unique
fundamental factors, depending on their use for human or animal consumption, or
for industrial needs.
These products are traded in the U.S. at
the Chicago Board of Trade,
Kansas City Board of Trade, and Minneapolis Grain Exchange.
Livestock
Futures on live
cattle, feeder cattle, lean hogs and pork bellies are all
traded at the Chicago Mercantile Exchange.
Their prices are affected by consumer demand, competing protein sources, price
of feed, and factors that influence the number of animals born and sent to
market, such as disease and weather.
Food and Fiber
The food and fiber category includes cocoa, coffee, cotton, frozen concentrated
orange juice (FCOJ) and sugar. In addition to global
consumer demand, the usual growing factors such as disease, insects and drought
affect prices for all of these commodities. FCOJ prices, however, are
particularly sensitive to weather conditions.
A frost or freeze in Florida or Brazil during the growing season can have a disastrous affect on both the
current crop size and long-term production prospects. International exchange
rates affect all of these global products, as well as factors like tariffs and
geopolitical events in producing nations. These markets are traded at the New York Mercantile Exchange
and New York Board of Trade.
Who Participates in Commodities Markets?
There are two basic types of
participants in the commodities markets - hedgers and speculators.
The hedgers are those seeking to minimize and manage price risk, while
speculators are those willing to take on risk in the hope of making a profit.
As an example of a hedger, you might be a large corn farmer
wanting to sell your product at the highest possible price. However, unpredictable
weather may create
risk, as well as excess supply that could drive prices down. You could take a
short position in corn futures, and if prices fall, you could then buy back the
futures at a lower price than you previously had sold them. This would help you
offset the loss from your cash crop and help minimize your risk. Of course, if
prices rose, you'd lose money on the futures transaction, but the idea is to use futures as a
hedge.
The speculator could take the opposite side of this futures transaction. That participant would bear the risk that
prices are going to rise in hopes of generating a profit on the long futures
position. Most likely, this type of speculator has no actual stake in the
business, other than buying and selling in the futures market. A
commercial food producer in need of the raw product (a breakfast cereal
processor, for example) may also take the other side of the short hedger's
trade to offset the risk of paying higher prices for the commodity. If the
price of corn rises, the commercial food producer could still capture a profit
from the futures position, even though he'd be paying more for the actual corn.
An individual trader who commits his or her
own capital to act as speculator on a particular exchange is known as a local.
Typically, these individuals provide market liquidity by constantly buying and
selling throughout the trading session and are viewed as important participants
in the market by shouldering risk. While the term local has been used to
designate those trading in the open-outcry markets, this era of electronic trading is making the phrase a little obsolete.
However, their function as liquidity providers is equally important in
electronic markets. The Commodity Futures Trading
Commission defines this new breed of electronic traders
"E-locals," but they are often more simply known as independent traders.
What Commodities Can I Trade?
There are a wide variety of
physical commodities markets available to trade around the world, and new
contracts are continually being introduced while others retired.
A list of North American exchanges that offer trading in
physical commodities and their corresponding contract listings are listed here,
although not exhaustive.
Some of these markets have limited liquidity and therefore
can be more challenging to trade. Therefore, it is recommended you contact your
broker and learn more before decide to trade these markets. Click on each
exchange's link below for more details on contract specifications.
Contract-specific links to exchanges:
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Chemicals
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Benzene
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CME/GLOBEX
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Mixed Xylenes
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CME/GLOBEX
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Energy
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Coal
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NYMEX
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Crude Oil, Brent
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NYMEX
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Crude Oil, Light Sweet
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NYMEX
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Crude Oil, miNY
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NYMEX
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Ethanol
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NYBOT
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Gasoline, Unleaded
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NYMEX
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Heating Oil
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NYMEX
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Natural Gas, Henry Hub
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NYMEX
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Natural Gas, miNY
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NYMEX
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PJM Electricity
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NYMEX
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Propane
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NYMEX
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Fertilizer
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Diammonium Phosphate (DAP)
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CME/GLOBEX
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Urea Ammonium Nitrate (UAN)
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CME/GLOBEX
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Urea
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CME
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Food & Fiber
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Butter
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CME
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Cocoa
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NYBOT
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Coffee "C"
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NYBOT
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Coffee "C" Mini
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NYBOT
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Cotton #2
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NYBOT
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FCOJ
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NYBOT
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Milk - Class III
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CME
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Milk - Class IV
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CME
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Milk - Nonfat Dry
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CME
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Sugar, #11 World
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NYBOT
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Sugar, #14 Domestic
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NYBOT
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Grains & Oilseeds
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Barley, Western
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WCE
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Canola
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WCE
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Corn
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CBOT
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Corn, Mini
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CBOT
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Corn Index, National (NCI)
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MGEX
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Flaxseed
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MGEX
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Oats
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CBOT
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Rough Rice
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CBOT
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Soybeans
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CBOT
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Soybeans, mini
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CBOT
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Soybean Meal
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CBOT
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Soybean Oil
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CBOT
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Soybean Index, National (NSI)
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MGEX
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Wheat
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CBOT
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Wheat, Hard Red Winter
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KCBOT
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Wheat, mini
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CBOT
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Wheat, Feed
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WCE
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Wheat Index, National (HWI)
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MGEX
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Wheat, Spring (Hard Red)
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MGEX
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Indexes
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Goldman Sachs Commodity Index (GSCI)
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CME
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Reuters CRB Index
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NYBOT
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Livestock/Meat
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Feeder Cattle
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CME
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Live Cattle
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CME
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Lean Hogs
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CME
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Pork Bellies, Frozen
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CME
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Metals
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Aluminum
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NYMEX
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Copper
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NYMEX
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Gold
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NYMEX
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Gold, Mini
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CBOT/e-CBOT
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Gold, 100 oz.
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CBOT/e-CBOT
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Palladium
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NYMEX
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Platinum
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NYMEX
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Silver
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NYMEX
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Silver, Mini
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CBOT/e-CBOT
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Silver, 5,000 oz.
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CBOT/e-CBOT
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Wood
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Random Length Lumber
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CME
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What Are Commodities?
Commodities
are broadly defined as natural resources, chemicals and physical products you
can touch, taste, smell, grow, mine, consume or deliver.
From their origins in the 1800s until the 1970s, futures
markets and commodities markets were one in the same; financial futures
are a modern-day invention. To confuse things slightly, today the term "commodity" is
still often used as a broad industry term describing all futures contracts,
including financials. For example, "commodity trading advisor" is
used to define an individual or firm who operates a managed
futures program, even though many of them trade exclusively in the financial futures markets such as interest rates or stock
indexes.
Physical commodities are the roots of the futures industry and
still play a valuable role in the global marketplace, even though the most
highly-traded futures today are financial contracts such as U.S. Treasury notes, Eurodollars,
and Standard & Poor's 500R.
The most popular physical commodities contracts can be broken down into several
broad categories: metals,
energy, grains, livestock, and food
and fiber. These are not paper assets, and in general, are produced
and consumed at a price based on the forces of supply and demand.
A commodity futures contract represents an
agreement to buy or sell a specific type and grade of commodity for delivery at
a specific time in the future at an agreed upon place at a market-determined
price. In reality, commodity futures rarely lead to the delivery of an actual
product, because the contract positions are typically closed out before the
delivery date.
History of Commodities Exchanges
The futures markets were
developed initially to help agricultural producers and consumers manage the
price risks they faced harvesting, marketing and processing food crops each
year. The modern futures industry still serves those markets.
The world's oldest established futures exchange, the
Chicago Board of Trade, was founded in 1848 by 82 Chicago merchants.
The first of what were then called "to arrive" contracts were flour,
timothy seed and hay, which came into use in 1849. "Forward"
contracts on corn came into use in 1851 and gained popularity among merchants
and food processors.
Meanwhile, what is now the nation's largest futures
exchange, the Chicago Mercantile Exchange, was founded as the Chicago Butter
and Egg Board in 1898. At that time, trading was offered in - you guessed it -
butter and eggs.
Other prominent U.S.
commodities exchanges were formed before or just after the turn of the century,
and also had their roots in agriculture. At one time, you could trade on the
National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk
Exchange, and the New York Hide Exchange. Small exchanges like these ultimately
merged to become the exchanges we have today.
Types of Commodity Futures
The most popular physical
commodities contracts can be broken down into several broad categories: metals, energy, grains, livestock, and food and fiber. There are some modern additions
to commodity futures that are unique, such as
chemicals and fertilizer futures, but the most popular contracts fit under the
broad categories listed here and are mainly subject to price fluctuations based
on supply and
demand factors in consuming and producing countries.
Metals
The major metals futures contracts include copper, gold, platinum, palladium and silver. Their uses include industrial purposes, in construction, and for
jewelry. Geopolitical and economic factors in the dominant producing and
consuming countries affect price action, but each also has its own unique fundamental
influences. In the copper market, building construction is the largest demand
source. Copper is also used for electrical and electronic products,
transportation and industrial machinery manufacturing. The price of copper is
therefore sensitive to statistics related to economic growth, particularly
reports such as housing starts. For that reason, participants in financial markets
often also look to price action in copper futures as a gauge of general
economic trends. In another example, gold has long been used as a hedge against
political and economic uncertainties, and many central banks back their
currency with gold reserves.
The metals listed here trade primary on the New York Mercantile Exchange.
The Chicago Board of Trade's E-cbotR electronic platform also lists mini-gold and silver contracts.
Energy
The most popular energy futures contracts are crude oil, gasoline, heating oil and natural gas. These natural resource markets
have become one of the most important gauges of world economic and political
developments, and are therefore heavily influenced by disruptions in producing
nations. The value of the U.S. dollar is significant because much of the
world's crude is priced in dollars. U.S.
energy prices are also quite sensitive to statistical reports detailing
production, imports and especially stocks. These markets are also subject to
seasonal fluctuations - mild weather may lessen the need for heating oil, while
summer tends to bring greater gasoline demand for driving season.
These products trade on the New York Mercantile Exchange.
If you'd like to learn more about the oil markets, check out "Oil Market Basics,"
a comprehensive online
course brought to you by the U.S.
Energy Information Administration. Learn about the supply and demand
factors unique to this market as well as how to track trends. There are over
400 links to EIA data and other
resources you need to make the most informed trading decisions.
Grains/Soy
Grains and soybeans are essential to food and feed
supplies, and prices are especially sensitive to weather conditions
in growing areas at key times during a crop's development and to economic conditions
that affect demand. The major futures contracts in this category are corn, soybeans, soybean oil, soybean meal and wheat. Reports from the U.S.
Department of Agriculture are closely watched, and summarize key
factors influencing supply and demand including current production and
carryover supply from the prior season. Each product has its own unique
fundamental factors, depending on their use for human or animal consumption, or
for industrial needs.
These products are traded in the U.S. at
the Chicago Board of Trade,
Kansas City Board of Trade, and Minneapolis Grain Exchange.
Livestock
Futures on live
cattle, feeder cattle, lean hogs and pork bellies are all
traded at the Chicago Mercantile Exchange.
Their prices are affected by consumer demand, competing protein sources, price
of feed, and factors that influence the number of animals born and sent to
market, such as disease and weather.
Food and Fiber
The food and fiber category includes cocoa, coffee, cotton, frozen concentrated
orange juice (FCOJ) and sugar. In addition to global
consumer demand, the usual growing factors such as disease, insects and drought
affect prices for all of these commodities. FCOJ prices, however, are
particularly sensitive to weather conditions.
A frost or freeze in Florida or Brazil during the growing season can have a disastrous affect on both the
current crop size and long-term production prospects. International exchange
rates affect all of these global products, as well as factors like tariffs and
geopolitical events in producing nations. These markets are traded at the New York Mercantile Exchange
and New York Board of Trade.
Who Participates in Commodities Markets?
There are two basic types of
participants in the commodities markets - hedgers and speculators.
The hedgers are those seeking to minimize and manage price risk, while
speculators are those willing to take on risk in the hope of making a profit.
As an example of a hedger, you might be a large corn farmer
wanting to sell your product at the highest possible price. However, unpredictable
weather may create
risk, as well as excess supply that could drive prices down. You could take a
short position in corn futures, and if prices fall, you could then buy back the
futures at a lower price than you previously had sold them. This would help you
offset the loss from your cash crop and help minimize your risk. Of course, if
prices rose, you'd lose money on the futures transaction, but the idea is to use futures as a
hedge.
The speculator could take the opposite side of this futures transaction. That participant would bear the risk that
prices are going to rise in hopes of generating a profit on the long futures
position. Most likely, this type of speculator has no actual stake in the
business, other than buying and selling in the futures market. A
commercial food producer in need of the raw product (a breakfast cereal
processor, for example) may also take the other side of the short hedger's
trade to offset the risk of paying higher prices for the commodity. If the
price of corn rises, the commercial food producer could still capture a profit
from the futures position, even though he'd be paying more for the actual corn.
An individual trader who commits his or her
own capital to act as speculator on a particular exchange is known as a local.
Typically, these individuals provide market liquidity by constantly buying and
selling throughout the trading session and are viewed as important participants
in the market by shouldering risk. While the term local has been used to
designate those trading in the open-outcry markets, this era of electronic trading is making the phrase a little obsolete.
However, their function as liquidity providers is equally important in
electronic markets. The Commodity Futures Trading
Commission defines this new breed of electronic traders
"E-locals," but they are often more simply known as independent traders.
What Commodities Can I Trade?
There are a wide variety of
physical commodities markets available to trade around the world, and new
contracts are continually being introduced while others retired.
A list of North American exchanges that offer trading in
physical commodities and their corresponding contract listings are listed here,
although not exhaustive.
Some of these markets have limited liquidity and therefore
can be more challenging to trade. Therefore, it is recommended you contact your
broker and learn more before decide to trade these markets. Click on each
exchange's link below for more details on contract specifications.
Contract-specific links to exchanges:
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