Commodities 101: What They Are and How Their Markets Work
A commodity is a raw material that is interchangeable with other units of the same grade. One barrel of a given crude grade or one bushel of a given wheat class is treated much like any other, which is what lets these goods trade on exchanges with standard contracts.
The main sectors
- Energy: crude oil (WTI and Brent), natural gas, heating oil and gasoline.
- Precious metals: gold, silver, platinum and palladium.
- Base (industrial) metals: copper, aluminium, zinc, nickel and lead.
- Agriculture: grains such as wheat, corn and rice, oilseeds such as soybeans, and 'softs' such as sugar, coffee, cocoa and cotton.
- Livestock: live cattle, feeder cattle and lean hogs.
Who trades commodities?
Markets bring together two broad groups. Hedgers are producers and users of the physical goods, such as farmers, miners, airlines and food companies, who want to lock in prices and reduce uncertainty. Speculators, from individual traders to large funds, take on that price risk hoping to profit. Speculators add liquidity, which makes it cheaper for hedgers to trade.
Spot, futures and benchmarks
The spot price is the price for immediate delivery. A futures contract is an agreement to buy or sell a set quantity at a set price on a future date. Most futures are closed before expiry, so very few traders ever take delivery. Exchanges such as CME Group (NYMEX, COMEX, CBOT), ICE and the London Metal Exchange publish the prices that the industry uses as benchmarks.
Why commodity prices move
Every commodity has its own story, but most price moves come back to supply and demand: weather and harvests, mine and oil-field output, inventories, economic growth, currencies (most commodities are priced in US dollars) and policy decisions such as export bans or production quotas. Each commodity page on this site lists the key drivers to watch.
Key takeaway
Commodity markets are where the real economy meets financial markets. Understanding the physical story behind a price chart, not just the chart itself, is the first step to reading these markets well.
Educational content only, not financial advice. See our disclaimer.
Next guide: Futures, Spot and CFDs: How Commodity Contracts Work