Ever wonder what’s behind that daily cup of coffee or the fuel powering your car? While often overlooked, nearly all physical goods begin with commodities—the raw materials that underpin the global economy.

Commodities are fundamental to both production and manufacturing processes. In essence, a commodity is a standardized raw material or primary agricultural product that can be bought, sold, or exchanged. These materials form the basis of countless goods and services used in daily life.

There is a wide variety of commodities, ranging from energy sources like oil and gas to agricultural products such as soybeans, coffee, and rice. They are traded on major commodity exchanges worldwide, including the Chicago Mercantile Exchange (CME), the Intercontinental Exchange (ICE), and the London Metal Exchange (LME). For investors, commodities offer a compelling way to diversify portfolios—especially during times of heightened market uncertainty.

Curious about how this unique market works? Continue reading to explore the different classes of commodities, how their prices are determined, and the mechanics behind their trade.

KEY TAKEAWAYS

Commodities are categorized as either hard (e.g., gold, oil) or soft (e.g., coffee, wheat) and are traded on global exchanges through spot trades, futures contracts, and ETFs.
Prices are highly responsive to supply-demand dynamics, macroeconomic trends, geopolitical shifts, and weather conditions, often resulting in high volatility.
Traders use strategies like hedging, trend analysis, and mean reversion not only for profit but also to protect against inflation and improve portfolio balance.
Commodity markets are generally priced in U.S. dollars and are regulated by entities such as the Commodity Futures Trading Commission (CFTC) and the Financial Conduct Authority (FCA) to ensure transparent trading.

// Types of Commodities

Commodities are essential raw inputs that serve as the building blocks of the global economy and are actively exchanged on international markets. They are typically divided into two broad categories: hard commodities and soft commodities.Hard commodities include naturally extracted resources such as crude oil, natural gas, and coal, as well as metals like gold, silver, and copper, which are crucial to industrial processes and infrastructure development.Soft commodities, in contrast, comprise agricultural and livestock products. These range from staple crops like corn and wheat to animal products such as cattle and hogs, as well as cash crops including coffee, cotton, and sugar. Each commodity market is influenced by its own unique set of factors—ranging from weather patterns and seasonal cycles to geopolitical tensions and shifts in global consumption—which collectively determine pricing and international trade flows.

// Market Structure & Instruments

Commodities are traded through a range of financial mechanisms and market platforms designed to accommodate different investment strategies. The spot market handles immediate transactions, where buyers and sellers exchange commodities for prompt delivery. In contrast, futures contracts allow traders to lock in prices for delivery at a specified future date, helping manage risk and anticipate market shifts. Options give investors the flexibility to buy or sell a commodity at an agreed-upon price within a set time period—without any obligation to execute the trade. Meanwhile, exchange-traded funds (ETFs) offer an accessible way to invest in commodities indirectly, eliminating the need to physically hold the asset. These instruments are actively traded on well-established exchanges like the Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX), and the London Metal Exchange (LME), providing a broad array of avenues for engaging in commodity markets.

// Price Influences

Commodities are traded through a range of financial mechanisms and market platforms designed to accommodate different investment strategies. The spot market handles immediate transactions, where buyers and sellers exchange commodities for prompt delivery. In contrast, futures contracts allow traders to lock in prices for delivery at a specified future date, helping manage risk and anticipate market shifts. Options give investors the flexibility to buy or sell a commodity at an agreed-upon price within a set time period—without any obligation to execute the trade. Meanwhile, exchange-traded funds (ETFs) offer an accessible way to invest in commodities indirectly, eliminating the need to physically hold the asset. These instruments are actively traded on well-established exchanges like the Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX), and the London Metal Exchange (LME), providing a broad array of avenues for engaging in commodity markets.