What are commodities? Everything you need to know

If you work at any stage of the commodities chain, you’ve probably heard the following question: what are commodities anyway? The first fundamental point is to understand that they are primary goods produced on a large scale, in a standardized way and practically identical in quality.

In practice, commodities are traded internationally and provide essential raw materials for different sectors of society. They therefore have a huge economic and strategic impact across the globe. Countries like Brazil and the United States, for example, are both major commodity producers, providing food security for the world’s population.

In this article, you’ll understand all the important aspects of this subject. Read on to find out more!

What are the main types of commodities?

 Over time, the types of commodities have been classified in various ways. These include:

• Agricultural commodities: basic products grown or produced by agriculture and used mainly in the food and animal feed industry. They are subdivided into grains (soy, corn and wheat), proteins (meat, milk and their derivatives), softs (sugar, cocoa, coffee, orange juice and cotton) and biofuels.
• Mineral and energy commodities: extracted from the earth and used in construction and in the automotive, energy and technology sectors. They include minerals such as gold, copper, silver, iron, aluminum and coal, as well as energy resources such as oil and natural gas.
• Financial commodities: these are bonds issued by the government and currencies traded on various markets, such as the euro, the dollar and the real.
• Environmental commodities: related to natural resources and the preservation of the environment. They include carbon credits, renewable energy certificates, water and biodiversity. Companies often buy and sell these assets to comply with regulations and promote sustainability.
• Forest commodities: products derived from the forest, including wood and pulp. Demand for these commodities is driven by the furniture and construction industries.

 Trading commodities on the markets is quite specific. Here’s a look at the precepts that determine the logistics of how it works.

Commodity characteristics: why are they volatile?

Commodities have many buyers and sellers, located in different regions of the world. Therefore, their main characteristic is that they are not priced by producers, but by the relationship between international supply and demand.

In other words, this means that companies participating in the commodities market are subject to price volatility. This is because the production of a commodity is influenced by climatic factors, economic policies, elections, wars and much more.

In practice, to better understand how volatility works, just think of the planting and harvesting cycle. The supply of certain products is concentrated in one period of the year, at harvest time, which varies between countries. However, demand can remain inelastic throughout the year.

It is in this scenario that stocks of these products become important in order to supply consumption. However, if production is lower than expected or demand grows more than expected, there could be a shortage of products on the market. The main consequence of this situation is higher prices.

Read also:

• The law of supply and demand and price formation

• How does volatility impact the commodities market?

Where are these goods traded?

Commodities are traded on Commodity Futures Exchanges globally. The main places to buy and sell commodities include the Chicago Mercantile Exchange (CME) and the New York Stock Exchange. In Brazil, the B3 is the main reference.

In these environments, there is a wide range of futures and options contracts. With these instruments, traders can buy or sell the commodity with the delivery of a specific quantity of the product at a predetermined price on a future date. They are a popular way of trading commodities and managing risks for producers and consumers.

Commodities can be traded on a variety of tools, which gives you several options for accessing the assets.

• Discover the main exchanges for pricing commodities

How important is a commodity in the global economy?

Commodities play a central role in the global economy due to their influence on several key sectors. They serve as the basis for the production of a wide range of goods and services, including food, energy, metals, construction materials and agricultural products.

The availability and prices of these goods directly affect production costs in various industries. As a result, there is a risk of changes in the prices of end products, which also has an impact on inflation. In addition, commodities are part of the trade balance of many countries, as exports of these goods represent a significant part of the revenue of producing nations.

As a result, commodities influence the economic health and financial stability of countries. Price volatility can also have consequences for competitiveness and export performance, including impacting the value of local currencies.

Finally, commodities also attract investors and speculators, becoming assets that play a key role in global capital markets. Commodity speculation is yet another factor in price volatility, interfering with investments and financial portfolios.

hEDGEpoint: why hedge this market?

I’m sure you’ve noticed that the players in the commodities market don’t control the price of the goods being traded. In this sense, sudden price variations – whether up or down – have an effect on logistics and profitability. In other words, they affect revenues.

That’s why protecting yourself from volatility is crucial to  business. Keeping track of market trends and movements makes all the difference. In this way, you can assess the best times to buy or sell certain products.

hEDGEpoint combines sophisticated hedging products and data analysis to help you make decisions. Discover our market intelligence hub and find out how we can help!