What are commodities?
Commodities are basic goods and essential materials that can be traded on an exchange or speculated on using derivatives contracts. Examples of commodities range from agricultural products like wheat and corn to raw materials more difficult to extract like crude oil and gold.
Commodities offer traders a way to speculate on the value of an entire industry like soybean farming or copper mining instead of specific companies or countries involved in those industries. The price of commodities often moves in opposition to equities like stocks and are most affected by global levels of supply and demand.
What are the different types of commodities?
Types of commodities include agricultural products, metals, and energy sources like gas and oil. Agricultural commodities cover a wide range. Anything from livestock to lumber is considered an agricultural commodity and can be traded.
Commodities are considered fungible, meaning any commodity is interchangeable with any other commodity of the same type as long as they maintain the expected standard of quality. For example, one bale of cotton produced in India is considered to have the same value as a bale of cotton produced in the United States.
In today’s globalized marketplace, commodities are shipped all over the world. So regional changes in supply and demand can affect a commodity’s price equally regardless of the region of production. If one country’s wheat production falls because of drought or war, the global price for wheat will rise because of the smaller supply.
How are commodities traded?
Like other assets, commodities are traded on exchanges. Often they are traded via futures contracts, but commodities can also be traded indirectly through stocks and exchange traded funds (ETFs) of companies who do business in that same commodity.
The Chicago Mercantile Exchange (CME) Group is the world’s leading derivatives marketplace. The New York Mercantile Exchange (NYMEX) exists underneath CME Group and handles many commodities in the United States. In Europe, the Intercontinental Exchange (ICE) leads the market. However, the London Metals Exchange accounts for the majority of industrial metal commodities traded.
Most commodities are traded through futures contracts speculating on future price movements, but they can also be traded at spot price or through other derivatives. Commodities traded on futures contracts can be bought and sold up until the spot month. The spot month marks the earliest time at which the underlying commodity can be physically delivered.
Top ten traded commodities
Below are the top ten most-traded commodities as compiled from data published by the Futures Industry Association and Intercontinental Exchange
Cotton is the perfect example of a commodity. It’s a harvestable raw good used in a myriad of ways. Cotton’s most notable use is to make clothing and household products, but it’s also used as livestock feed and made into oil for the manufacturing of soap, rubber, margarine and plastics. Linter fibres, a by-product of cotton, are used to make bandages and paper money. The largest producers of cotton are India, China and the United States in that order.
A single cotton contract equals 50,000 pounds of the soft material. Cotton futures are available to trade up until 17 days before the end of the spot month.
Cocoa is primarily used to make chocolate in its various forms, but cocoa butter is also a popular lotion ingredient. Cocoa grows best in wet, tropical climates. The bean is primarily harvested in West Africa but also in Indonesia and Latin America.
The harvest and production of cocoa is quite laborious and often done by small, family-owned farms. Because of these production conditions, climate and political unrest in producing nations can have a large impact on the supply of cocoa. A single contract of cocoa equals 10,000 tons and is priced in US dollars.
Sugar has long been one of the world’s most important commodities, consumed heavily in just about every country. Sugar is harvested from sugarcane and sugar beet. The largest producers of sugar are Brazil, India and the European Union. Sugarcane is grown mainly in China, Thailand, Brazil and India and accounts for three quarters of all sugar production. Meanwhile, sugar beets grow mainly in Europe and are known to be more labour-intensive, making sugarcane the preferred harvest.
Because of sugar’s global popularity, many countries hold sway in determining the commodity’s price. Sugar prices are determined not just by production but the manufacturing of sugar products by different companies. The contract size for sugar futures contracts is 50 long tons.
Another commodity that holds an addictive grip on the entire globe, coffee is produced chiefly in Brazil, Vietnam, Colombia, Indonesia and Ethiopia which influences the qualities of the coffee bean. Ethiopian coffee is traded on the NYMEX and serves as the benchmark for all coffee prices.
A single contract of coffee equals 37,500 pounds of Arabic beans. Like most commodities, the weather is an important factor for the supply of coffee and greatly influences its price. Because Arabica is the NYMEX benchmark, changes in consumer preference for that type of bean will most heavily affect the price of coffee as well.
Copper is a malleable, reddish-orange metal used as a conductor of electricity and to create several metal alloys including bronze and brass. Chile is the highest copper producer followed by the United States, Indonesia and Peru. Copper is a necessary resource to developing countries because of its use in electrical wires, including circuit boards and radiation machines, and industrial machinery.
Copper is traded on the NYMEX, but its price on the London Metals Exchange (LME) functions as the global benchmark. Copper has historically exhibited an unstable price. Copper has experienced increased demand in countries like China and India that continue to develop economically. The metal is heavily recycled because of its difficulty to extract and limited reserves.
Top five traded commodities
Silver is another metal with higher electrical and thermal conductivity, higher than copper even. Its scarcity prevents it from being widely used like copper though. Most silver is mined as a by-product of zinc, lead, copper or gold. Peru, Mexico and China are the top silver-producing countries.
Silver as a precious metal has long been used in silverware and jewellery production, but its more popular use now is in batteries and photography. Silver’s value is seen both in these applications and in its scarcity as a precious metal. One silver contract represents 5,000 ounces.
Gold is primarily used in monetary exchange and as an investment vehicle. Its long history as a monetary instrument and relative scarcity compared to other metals make it a leading hedge against fiat currencies whose values are more volatile. Gold is also used in high-quality electronics as a corrosion-resistant conductor.
Gold is primarily traded on the NYMEX, but its benchmark price is established on the LME. Gold’s price is more stable than most other commodities, and the global economy is its strongest price indicator. When major economies around the world experience trouble, the price of often gold rises as people transfer their wealth to the safe-haven commodity.
Central banks hold gold reserves as a backing for the value of their fiat currencies. Gold is quoted as the price value for a single troy ounce.
3. Natural Gas
Natural Gas is an energy commodity used as fuel across the world. It is often found in oil deposits and used primarily for utilities such as heating and cooking and to generate electricity. Quick changes in supply and demand can have drastic effects on the price of natural gas. Although an increase in price will often cause suppliers to increase production, and a decrease will have the opposite effect.
The contract size for natural gas is 10,000 MMBtu. The Henry Hub Natural Gas futures listed on the NYMEX is the prevailing bench price for the commodity.
2. WTI Crude Oil
WTI crude oil is one of two benchmarks for crude oil. WTI stands for West Texas Intermediary and is extracted from the United States, mainly Texas. WTI is lighter, sweeter and has a lower sulphur content than the other main oil benchmark Brent Crude. The lower a crude oil’s sulphur content, the easier and cheaper it is to refine. US oil production of WTI has increased in recent decades with the development of fracking. However, Brent Crude’s proximity to Europe, Africa and Asia make it more influential than WTI.
WTI oil contracts are sized at 1,000 barrels and traded on the NYMEX.
What is the most traded commodity?
1. Brent Crude Oil
Brent crude oil is the most traded global commodity. Brent Crude is extracted from the North Sea and accounts for two-thirds of global oil pricing. Like the other crude oil benchmark WTI, Brent Crude is mainly refined into diesel fuel and gasoline.
Brent Crude is generally slightly more expensive than WTI crude oil. The difference in price is known as the Brent/WTI spread and changes often because of their different supply factors. Global conflicts in Europe and the Middle East are more likely to affect Brent Crude oil while economic or political events in the US economy more heavily affect the price of WTI. Brent Crude contracts equal 1,000 barrels of oil and are traded primarily on the Intercontinental Exchange (ICE).
How to trade Brent Crude or other commodities
You can trade commodities like Brent Crude oil with City Index via CFDs. You can also speculate on the price of crude oil through trading stocks and ETFs. Whichever way you choose to trade commodities, you can do so with City Index in four easy steps:
- Create a live trading account or practice with a risk-free demo account
- Choose whether to trade futures, spot prices, or stocks and ETFs
- Open your first position on the commodity of your choice
- Monitor your trade using technical and fundamental analysis