Commodities are natural products that are generally consumed by people, animals or industry such as oil, sugar and wheat. Commodities have been traded for thousands of years and have always had an important economic impact on people and nations throughout history.
Commodity trading is just as important today, with commodities playing a crucial role in global economics. Commodity markets can be easier to understand than other financial markets because prices are influenced by more obvious contributing factors. They reflect the fortunes of industries like the oil business or farming. Prices are informed by supply and demand issues that are easy to grasp.
Types of commodity
Commodities are often placed into two groups:
Soft commodities
These are agricultural commodities, farmed rather than mined or extracted. Softs tend to be very volatile in the short term, as they’re susceptible to seasonal growing cycles, weather and spoilage which can suddenly and dramatically affect prices.
Hard commodities
These are generally mined from the ground, or taken from other natural resources. Hard commodities are typically easier to handle and transport than softs, and are more easily integrated into the industrial process.
You may also see commodities classified according to their ecological sector:
Energy (oil and gas)
Metal (gold, silver, copper, lead, etc)
Agriculture (wheat, coffee, livestock, etc)
What drives commodity markets?
Commodity markets exist to provide more efficient prices and security for consumers of those commodities. Airlines, for example, want to be able to protect themselves from sudden and unpredictable changes in the oil price, while farmers will be looking for the best price for their products. A food manufacturer will want to ensure that the price it pays for wheat will be steadily consistent.
The growth of interest in commodity trading represents the growth in interest in global trade and delivering an internationally-recognised price for a product.
Commodity markets can be influenced by a range of factors, including:
Interruptions of supply, such as bad harvests, miners’ strikes or stock piling .Seasonal demand, for example from consumers of heating oil and natural gas in the winter, or people buying gold during periods of political uncertainty. General economic slowdowns, which can impact demand. Oil, for example, is sensitive to this. It is worth doing more research on a market you are interested in, as each has its own characteristics.
Trading Tips
There are certain trading factors and relationships with other currencies and indices that you should know when your buying or selling a commodity. For example gold as mentioned is seen as a save haven, if there is a recession or an economic crises. Even something as drastic as a terrorist attack people turn to gold as a save investment causing the price to rise.
Likewise commodities such as oil, wheat and gas are all effected by supply and demand. News comes out on a weekly basis that you can keep an eye on which we cover later on in the course which influences the prices of these commodities.