Tradable Commodities: What They Are, How They Work

Tradable commodities are essential goods used in commerce, often interchangeable with other goods of the same type, and used to produce other goods.

Key Takeaways

• Tradable commodities are goods used in commerce and are interchangeable with other goods of the same type.
• The inputs in the creation of finished goods and services are tradable commodities.
• Tradable commodities are classified as energy, metals, livestock, and agriculture.
• Trading commodities is accomplished using futures contracts.

What Are Tradable Commodities?

Tradable commodities are usually categorized into four groups: energy, metals, livestock, and agriculture. Economists see little differentiation between a tradable commodity from one producer and the same commodity from another source.

The Commodity Futures Trading Commission (CFTC) regulates futures trading and other derivatives trading, such as options and swaps.

The trading of commodities is usually executed through futures contracts on exchanges that standardize the quantity and minimum quality of the products traded. Regulatory bodies may allow for the trade of 5,000 bushels of wheat, but laws regulate how the bushels can be sold and delivered and the minimum quality standards required for the grain.

What Affects Commodity Prices?

The futures element of trading commodities can add risk to the transaction since factors that cannot be controlled, like the weather, may affect production. Economic and societal pressures also affect commodity pricing. Food and energy prices reached record highs during the COVID-19 pandemic and the rise of the war in Ukraine, both causing supply disruptions. Experts commonly recommend diversifying a portfolio of tradable commodities with other assets due to outside factors which affect pricing.

Important

In 2023, oil, gas, gold, and silver topped the list of the most traded commodities.

Tradable vs. Non-Tradable Commodities

Many products are not considered tradable commodities, either because of the nature of the product or the demand for the product within its home country. If tomatoes are in high demand in China, and domestic production cannot keep up with the demand, they are imported in high quantities. Because of this high rate of importation, economists cannot use futures trading and pricing techniques used with tradable commodities.

What Types of Commodities Are Traded?

Common tradable commodities include crude oil, wheat, soybeans, gold, silver, livestock, coffee, sugar, cotton, corn, frozen orange juice, and natural gas. Derivative products of some commodities are also traded, such as soybean oil and soybean meal.

How Do Investors Buy Commodities?

Investors can purchase the commodity outright or invest in the stocks of companies that deal in commodities, such as oil and gas companies, or buy the futures contracts of the commodities, though speculative and must be sold before delivery. One of the easiest ways to buy commodities is to invest in exchange-traded funds (ETFs) that follow commodity indexes.

What Is the Most Traded Commodity?

The most traded commodity is crude oil. Crude oil is used in many products, from petrochemicals to petroleum to lubricants to diesel.

The Bottom Line

Tradable commodities are used to produce other goods and are classified as energy, metals, livestock, and agriculture. Tradable commodities are traded via futures and a sector of financial markets. Futures help determine the price of these commodities and are used as hedging tools by producers and speculative investments by investors.

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