What are commodities?

Markets are almost as old as man. Aristotle mentioned its existence and it is known that in the Middle Ages there were forward contracts between farmers and merchants. However, the derivatives markets as we know them today date back to 1848 , when the Chicago Board of Trade began trading agricultural products. A lot of time has passed since then. The economy and finance have continued to evolve and new forms of investment have appeared, but commodities have remained.

What are commodities in Finance?

A commodity is a tangible material that can be traded, bought, or sold . Being unprocessed, it does not have any added or differential value beyond its origin, which is why it is usually used as a raw material to manufacture more refined products .

Commodities are a basic productive element, which makes them a very interesting asset for trading. In fact, there are currently two types of markets where commodities are bought and sold. In the spot market , the raw material is sold in real time, so that the payment is made immediately and the product is delivered at that very moment.

On the other hand, in the futures market or commodity exchanges, raw materials are traded through futures contracts in which the quantity and price are fixed in advance for later sale. Such trading is similar to stock trading, in that there are futures brokers that purchase contracts that can be resold or repurchased.

Types of commodities

In the market we can find different types of commodities that are classified according to the raw materials to facilitate their commercialization:

  • Grain. It is the oldest category of commodities that is traded in today’s financial markets and includes cereals such as soybeans, wheat, corn, rice or oats, among others. The oscillations in its price depend largely on the climate and the consumption of the different countries. You might be interested in more articles on our site.
  • Cattle raising. In this category of commodities are all products of animal origin intended for general consumption, such as pork or beef, as well as those derived from these, whether milk, butter or leather.
  • Energetic. This classification refers to products with great demand worldwide, such as oil, ethanol, coal and natural gas, which is why it is a market that is particularly exposed to changes in the political and economic situation of the countries, as well as variations in energy demand according to the season of the year.
  • Metals. Gold, silver, copper, nickel, platinum, zinc and aluminum are some of the most well-known commodities that are traded in this category and are destined for different industrial processes. The variation in its price depends largely on the industrial growth of the main consuming countries.
  • Softs. Within the “soft” commodities are mainly those agricultural products that are not cereals, such as sugar, coffee, cotton, cocoa and orange juice. Its price depends largely on the weather and fluctuations in global demand.

In the world there are different futures exchanges where commodities are traded . For example, the DCE of China and the CBOT of the United States are the main exchanges for trading agricultural products. Instead, the LME in London, the NYMEX in New York, the SHFE in Shanghai and the MCX in India are the main exchanges where metals are traded. The commodities of the energy sector have their epicenter in the NYMEX of New York, the ICE of the United Kingdom, the TOCOM of Tokyo and the DCE of China.