What are commodities?
Commodities are the basic goods that keep much of the world economy moving. These include products like oil, gold and copper, as well as things we get from the ground like coffee, sugar and soybeans. Unlike finished products which are often differentiated by brand and features, commodities are usually traded in standard forms, which makes them easier to buy and sell across international markets.
Their prices can change quickly because the value of a product is determined by the balance between how many people want to buy it and how many people are selling it. For example, if there is a poor coffee harvest, there will be less coffee available. However, if more construction is taking place, more people will be looking to buy copper. Oil prices can fluctuate depending on events in different countries, and the value of gold can rise and fall depending on changes in interest rates or investor sentiment.
For traders, commodities represent more than just physical goods. They also represent financial markets that follow global economic trends. Rather than buying and storing barrels of oil or tonnes of copper, traders can speculate on changes in commodity prices using futures, options, exchange-traded products or CFDs.
How are commodities classified?
Commodities are usually divided into two main groups: hard and soft commodities.
Hard commodities
Hard commodities are generally natural resources that are extracted from the earth. The main examples are metals and energy products.
They include:
- Gold
- Silver
- Platinum
- Copper
- Crude oil
- Natural gas
Energy commodities are closely connected to transportation, electricity and industrial production. Metals are vital for construction, manufacturing and technology. Gold and silver are also popular as investment assets.
As many hard commodities are key to modern economies, changes in their prices can have an impact that extends far beyond the financial markets.
Soft commodities
Soft commodities are mainly agricultural products. They are grown, harvested or produced rather than mined or extracted.
Common examples include:
- Coffee
- Sugar
- Cotton
- Soybeans
- Wheat
- Corn
- Cocoa
Weather is one of the most important influences on soft commodities. Farmers cannot control droughts, excessive rainfall or unexpected temperature changes. A poor harvest can reduce global supply and cause prices to rise, while strong production can have the opposite effect.
However, weather is not the only factor. Consumer demand, transportation costs, government policies, export restrictions, currencies and global trade can also influence agricultural prices.
Top ten traded commodities
There is no single list that ranks commodities by trading activity across every market in exactly the same way. Futures exchanges, spot markets and derivative platforms can report different volumes.
Still, some commodities consistently stand out because they have large global markets, strong economic importance and active participation from businesses, investors and traders.
1. Gold
Gold has a special place in the commodity market. It is used in jewellery and electronics, but its importance goes far beyond industrial use.
For centuries, gold has been regarded as a store of value. Today, central banks hold gold reserves, while investors may use it as part of a diversified portfolio. Demand can increase when markets become uncertain, although gold does not automatically rise every time there is economic stress.
Interest rates are particularly important. When interest rates and bond yields rise, assets that generate income can become more attractive compared with gold, which does not pay interest. Expectations about future monetary policy can therefore influence the metal even before rates actually change.
The US dollar is another major factor. Gold is generally priced in dollars, so changes in the value of the currency can affect its price and international demand.
Traders can gain exposure to gold through futures, exchange-traded products and derivatives. CFDs on gold are another way to trade movements in the metal's price without purchasing physical gold.
2. White Sugar
White sugar is a major agricultural commodity used by the food and beverage industry. It is also connected to the energy market because sugarcane can be used to produce ethanol.
This connection makes sugar more interesting than it may first appear. Producers can sometimes adjust how they use their crops depending on market conditions. Changes in energy prices can therefore influence the economics of sugar production.
Weather is also important. Sugarcane requires suitable growing conditions, and poor weather can reduce yields. Production forecasts in major producing countries can consequently affect prices in international markets.
Consumer demand remains another long-term factor. Sugar is present in a wide range of products, from beverages and confectionery to processed foods.
3. Platinum
Platinum is both a precious metal and an industrial material. It is used in jewellery, chemical production and automotive applications, among other areas.
Its industrial role means that platinum can be sensitive to economic activity. If manufacturing and industrial production are expected to grow, demand for platinum may increase. Weak industrial conditions can have the opposite effect.
Supply is also important because platinum production is concentrated in a relatively small number of countries. Disruptions at major mines can therefore have a noticeable impact on the global market.
Although platinum is sometimes compared with gold, their markets are not identical. Gold is more closely linked to investment and reserve demand, whereas platinum is more closely linked to industrial activity.
4. Soybean
Soybeans are one of the world's most important agricultural commodities. They are used for human consumption, animal feed and soybean oil.
One of the key drivers of soybean demand is the livestock industry. Soybean meal is an important source of protein in animal feed, which means changes in global meat production can affect demand for soybeans.
Weather is equally important on the supply side. Planting conditions, rainfall and temperatures can change expectations for the size of a harvest.
International trade also plays a major role. Large producing and importing countries can influence global soybean flows through trade policies, tariffs and purchasing decisions.
Because of these factors, soybean prices can react quickly to changes in agricultural forecasts.
5. Copper
Copper is sometimes called a measure of economic activity because of its widespread use in industry.
It is found in electrical wiring, buildings, machinery, telecommunications equipment and many other products. Copper is also important for renewable energy systems, electric vehicles and modern power networks.
When investors expect stronger economic growth, they may anticipate higher demand for copper. This can support prices. Concerns about industrial production, construction or manufacturing can create the opposite effect.
The supply side is not simple either. Developing a new copper mine can take many years, so producers cannot always increase output quickly when demand rises.
This makes copper an important market for anyone following global economic growth and the long-term development of infrastructure.
6. Silver
Silver has two important identities. It is a precious metal, but it is also widely used in industry.
Silver is used in electronics, solar technology, jewellery and various manufacturing processes. As a result, its price can respond to both investment demand and industrial activity.
Silver often attracts investors who are also watching gold, but its behaviour can be different. Industrial demand can give silver additional price drivers that are less important for gold.
The metal's role in new technologies is another factor worth watching. Changes in industrial production and demand for electronic and energy-related products can influence the market over time.
7. Crude Oil
Crude oil is one of the most valuable commodities in the global economy. It is used to produce fuels, as well as being a key raw material in the production of many other products, including plastics and chemicals.
Oil prices can affect the cost of transportation, manufacturing, and everyday goods. Consequently, movements in the oil market can influence inflation and economic expectations.
Supply is particularly key. Expectations about available supply can be affected by production decisions made by major oil-producing countries, geopolitical events, sanctions and transportation disruptions.
Demand matters just as much. When the global economy grows, transportation and industrial activity can increase the need for energy. During economic slowdowns, demand expectations may weaken.
Two of the best-known oil benchmarks are Brent and West Texas Intermediate (WTI). Both are used as reference prices, but they represent different parts of the global oil market.
8. Natural Gas
Natural gas is another major energy commodity, but its price can behave very differently from crude oil.
Weather is one of its strongest short-term influences. Cold weather can increase demand for heating, while hot weather can raise electricity demand as households and businesses use more air conditioning.
Storage levels are closely watched because they provide information about the balance between available supply and expected demand. Production, pipeline capacity and liquefied natural gas exports can also influence prices.
Natural gas markets can be highly regional because infrastructure matters. A country may have sufficient gas reserves elsewhere in the world but still face higher local prices if it cannot easily transport or import the supply it needs.
9. Coffee
Coffee is one of the world's most widely consumed agricultural products and an important source of export income for several producing countries.
Its price is strongly influenced by growing conditions. Rainfall, temperature, plant diseases and harvest expectations can all affect supply.
Production is also concentrated in certain regions, which means weather problems in a major producing area can have an international impact.
Currency movements can add another layer. Coffee producers sell into international markets but pay many costs in local currencies. Changes in exchange rates can therefore affect their decisions and profitability.
For traders, coffee provides exposure to agricultural markets where weather and seasonal production cycles play a central role.
10. Cotton
Cotton is a key raw material for the global textile industry. Its demand is connected to clothing, home textiles and wider consumer spending.
Like other agricultural commodities, cotton is sensitive to weather. Drought, heavy rain and temperature changes can affect the size and quality of the crop.
Demand can also change with the economic cycle. When consumers spend more on clothing and other textile products, manufacturers may increase their purchases of cotton. During weaker economic periods, textile demand can slow.
Cotton therefore links financial markets to both agriculture and consumer behaviour.
How are commodities traded?
There are several ways to trade commodities, and each method works differently.
Futures contracts
Futures are one of the most established instruments in commodity markets. A futures contract represents an agreement to buy or sell a specific amount of a commodity at a defined price and date.
Futures are used by businesses that want to manage price risk as well as by traders looking to benefit from price changes. A producer, for example, may use futures to reduce the uncertainty around the price it will receive for its product.
Most financial traders do not intend to receive physical commodities. Positions can often be closed or rolled before the delivery stage.
Options
Options give the buyer the right, but not the obligation, to buy or sell an underlying commodity at a specified price within a particular period or on a particular date.
Traders can use them to protect against poor price movements or to develop more advanced trading strategies. However, options come with extra risks and characteristics, including the fact they have an expiry date and changes in implied volatility.
Exchange-traded products
Exchange-traded funds and similar products can give investors exposure to commodity markets through an exchange.
Their structure varies. Some may hold physical assets, while others use futures contracts or other instruments to follow the price of a commodity.
This difference is important because the performance of an investment product may not exactly match the spot price of the commodity.
Commodity CFDs
Contracts for difference, commonly known as CFDs, allow traders to speculate on changes in an underlying commodity's price without owning the physical asset.
Commodity CFDs may be available on markets such as gold, silver, crude oil and natural gas and other types.
CFDs are leveraged products. This means a trader can open a position with less capital than would be required to purchase the full underlying exposure. Leverage can increase the potential return, but it also increases the potential loss.
For this reason, commodity CFD trading requires careful position sizing and risk management. Traders should understand the contract size, spread, financing costs, leverage and margin requirements before opening a position.
The choice of trading instrument ultimately depends on the trader's goal. A company may use futures to manage business costs, while an investor may prefer an exchange-traded product. A short-term trader may choose CFDs because they provide a way to trade price movements without owning the underlying commodity.