What Are Commodities?

The commodities market is one of the oldest financial markets, with the Amsterdam Stock Exchange, founded in 1530, often considered the first stock exchange in history. While it began as a commodities market, it has since evolved. So, what exactly are commodities, and how have they developed over time? In this article, we explore the origins of the commodities market, its significance, and how traders can participate in this dynamic sector.

What Impact Do Commodities Have?

Commodities are natural resources or agricultural products that are either mined or grown. These goods are essential in the manufacturing process, influencing the prices of many other goods and services. As such, changes in commodity prices can have a far-reaching impact on national economies and publicly traded companies.

For example, a spike in crude oil prices due to geopolitical tensions in key oil-producing countries can affect global inflation. One notable event was the 1970s energy crisis, when an oil embargo by the Organization of Arab Petroleum Exporting Countries (OAPEC) caused oil prices to surge. This led to significant inflation worldwide. Similarly, a sharp increase in natural gas prices occurred in 2022, following Russia’s invasion of Ukraine, marking the highest levels seen in over 13 years.

A Brief History of Commodity Exchanges

The Chicago Board of Trade (CBOT), founded in 1848, holds the title of the world’s oldest futures and options exchange. It primarily deals with commodities like corn, wheat, gold, silver, and soybeans. In 2007, the CBOT merged with the Chicago Mercantile Exchange (CME) to form the CME Group. Established in 1898, the CME originally focused on agricultural commodities, but has since grown into the largest futures and options exchange globally, offering contracts on a wide range of assets, including currencies and interest rates.

Another important exchange, the New York Board of Trade (NYBOT), was established in 1870 as the New York Cotton Exchange. In 2004, it merged with the Coffee, Sugar, and Cocoa Exchange (CSCE) to become NYBOT, which now focuses on commodities such as cocoa, coffee, and cotton, as well as currency and interest rate trading.

The New York Mercantile Exchange (NYMEX), initially created in 1872 to trade dairy products, later merged with the Commodity Exchange (COMEX) in 1994, becoming the largest physical commodity exchange at the time. In the wake of the 2008 financial crisis, it was absorbed into the CME Group. Outside the U.S., major exchanges for commodity trading include the London International Financial Futures Exchange (LIFFE), the London Metal Exchange, and the Tokyo Commodity Exchange.

Classifying Commodities

Commodities are generally divided into two main categories: “Hard Commodities” and “Soft Commodities.”

Hard Commodities refer to resources that must be mined or extracted from the earth, such as crude oil, gold, iron ore, and other precious metals.

Soft Commodities are primarily agricultural products, including coffee, corn, cotton, wheat, and livestock such as cattle and hogs. These are sometimes referred to as “softs,” “tropical commodities,” or “food and fiber commodities” due to their agricultural nature.

Subcategories of Commodities

Within these broad categories, commodities can be further classified into specific subgroups:

Agricultural Commodities: Includes products like wheat, soybeans, and sugar. Energies: Includes crude oil, natural gas, heating oil, and gasoline. Metals: Divided into precious metals (such as gold, silver, and platinum) and base metals (like copper and aluminum). Livestock: Includes live cattle, feeder cattle, and lean hogs.

How Can You Trade Commodities?

If you’re interested in trading commodities, there are several ways to get started. One common method is through futures contracts, which obligate the buyer or seller to exchange a commodity at a fixed price on a future date.

Another popular option is trading CFDs (Contracts for Difference), which allows traders to speculate on the price movements of commodities without actually owning the underlying asset. PFD Markets offers CFDs on a variety of commodities, many of which are linked to futures contracts from prominent exchanges like the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange (CME), the New York Board of Trade (NYBOT), the New York Mercantile Exchange (NYMEX), and the Intercontinental Exchange (ICE).

Additionally, traders can gain exposure to the commodities market by trading CFDs on commodity-related stocks. For example, you could trade CFDs on companies like Exxon Mobil, Newmont Corporation, Rio Tinto, and Southern Copper Corporation, which are closely tied to the performance of various commodities.