What are commodities?
Commodities include any basic good used in trade that is easily interchangeable with like commodities. While commodity quality differs among brands, all must meet a basic grade when traded on an exchange.
Some of the different commodities include energy products, grains, livestock, meats and precious metals.
How commodity trading works
Commodity futures brokers trade in commodities on the commodity futures exchanges. Each commodity trades differently, with specifications as to the quantity traded, delivery date and minimum price fluctuations.
The futures brokers who trade on the commodity exchanges must register with the National Futures Association and follow regulations established by the Commodity Futures Trading Commission.
When trading commodities, brokers lock in the current price for future delivery of the contract. This allows commodity buyers to guard against rises in the price of the commodity traded and keep commodities from losing any value before delivery.
While the price of a commodity can go up, meaning the buyer misses out on any potential additional profit, the buyer does not have to worry about the price going down and losing him or her money since the price is locked in.
Types of commodity exchanges
Most commodity items also trade on separate exchanges. The most common exchanges include crude oil, which trades on the Intercontinental Exchange (ICE); coffee, which also trades on the ICE, and natural gas, which trades on the New York Mercantile Exchange (NYMEX).
Other popular exchanges include EURONEXT, a pan-European exchange; the CBOT, or the Chicago Board of Trade, and the London Metal Exchange.
Types of commodities
When trading in commodity futures, a variety of commodities exist. Different commodities trade at different measures, including by the bushel, by weight or by the gallon.
Energy commodities include any kind of fuel product, such as petroleum, heating oil, and coal. Energy commodities use a standard contract size with a minimum price set by the exchange. Ethanol represents an example of an energy commodity, which has a standard contract size of 29,000 U.S. gallons.
Grain commodities include a wide variety of commodities, including produce such as corn, wheat and soybeans. These commodities use standard contract sizes and have a minimum price when traded. Corn represents just one of the many examples of a grain commodity, trading in quantities of 50 tons on the commodities exchange.
Meat products, pork bellies, and live and feeder cattle trade on meat exchanges. Though less volatile than other commodities, meats depend in part on the grains commodity, with a rise or fall in grain prices affecting the price of meat.
A perfect example of a meat commodity includes lean hogs, which trade in quantities of 20 tons on the exchanges.
Metals include a variety of precious and industrial metals. Items on the metal exchanges run the gamut. They include copper, lead, gold and silver. Depending on the metal traded, quantities include troy ounces or metric tons.
Other products, such as coffee, cocoa and sugar, trade on their own exchanges. This includes the CSCE, also known as the Coffee, Sugar and Cocoa Exchange, which represents the most common commodity exchange.
Oranges trade in their frozen form since such a high percentage — 80 percent — are turned into frozen concentrate. Frozen concentrated orange juice trades in quantities of 15,000 pounds on the exchange.
Other commodity types
Other commodities also trade on the various exchanges. Some of the more popular include rubber, palm oil, and wool, all three of which trade in kilograms. Some other commodities, such as polypropylene and polyethylene, trade on the London or the Asian exchanges.