What Are Commodities?

Commodities can be defined as commercial products that appear naturally in the ground or are agriculturally cultivated. Commodities play a key role in determining the prices of other financial markets as commodities are used as input in the manufacturing process – meaning national economies in general, and publicly-listed companies in particular, are affected by their prices. Changes in the prices of commodities tend to affect the entire supply chain. A good example of this is when the price of crude oil rises due to geopolitical upheaval in the major oil-producing countries.

Main Classification of Commodities

Commodities can broadly be classified into two main types, ‘Hard Commodities‘ and ‘Soft Commodities‘. Hard commodities refer to commodities that require extraction or mining. Examples of these commodities include iron ore, crude oil, and precious metals. Soft commodities, on the other hand, are typically agricultural products like coffee, corn, cotton, wheat, and livestock such as lean hogs and live cattle.

Sub Classification of Commodities

Commodities can be further classified into several sub-categories such as agricultural commodities, (wheat, soybeans and sugar). The sub-category “Energies” refers to commodities such as crude oil, heating oil, gasoline and natural gas. Metal commodities can be grouped into precious metals such as Gold, Silver and Platinum, or base (non-precious) metals such as copper and aluminium. “Livestock commodities” refers to meat products such as feeder cattle, live cattle and lean hogs.

How Can You Trade Commodities?

For those wishing to trade commodities, there are several ways to go about it – for example, you can trade futures contracts on a Futures Exchange. A futures contract is a contract which requires the contract holder to Buy or Sell a commodity at a fixed price at a future delivery date.