Commodities play an important role in our daily lives, and many items we use every day are produced using some type of commodity, whether it’s the cotton in the clothes we wear, the metals in our electronics or the foods on our plates. Globally, the commodities markets are massive and trade in the trillions of dollars every day.
A commodity market is a market that trades in primary economic sector rather than manufactured products. Commodities are hard assets ranging from wheat to gold to oil. Since there are so many, they are grouped in three major categories: agriculture, energy and metals.
Agricultural commodities include: Things you consume, such as sugar, coffee and orange juice. These are called the soft commodity markets.
The energy category includes crude oil, natural gas, RBOB gasoline and heating oil. Commodities trading are a big determinant in setting oil prices.
Metals include mined commodities, such as gold, copper, silver and platinum.
How do Commodities work?
The commodities market works just like any other market. It is a physical or a virtual space, where one can buy, sell or trade various commodities at current or future date.
One can also do commodity trading using futures contracts. A futures contract is an agreement between the buyer and the seller, wherein the buyer promises to pay the agreed-upon sum at the moment of the transaction when the seller delivers the commodity at a pre-decided date in the future.
Commodities contracts are priced in U.S. dollars. That means that when the dollar’s value rises, it takes fewer dollars to buy the same amount of commodities. That makes commodity prices fall.
Dealers trade commodities on an open exchange, meaning the prices change every day. This can be difficult for the consumer, who must face price variations in everyday products such as gasoline, meat and grains. It especially impacts poorer people around the world, who pay more of their limited income on food and transportation.