Commodities and Commodity Futures
What is a Commodity? What is a Future? What Commodities Are Traded?
This article explains futures-traded commodities: what they are, items that are traded, the exchanges where futures are bought and sold, and what a futures contract is.
Many people are baffled by images of hundreds of intense commodity traders in a ring-like arena, swaying, jumping, waving wild hand signals and yelling at one another. What are they shouting and gesturing about?
Pandemonium though it may appear, there’s method to their madness, clarity in the chaos. The trading pits of the world’s commodity exchanges, where thousands of trillions of dollars of futures contracts are frenetically bought and sold annually, are engines of commerce vital to global financial order and stability. Odd though it may appear, the many men (and few women, for the denizens of the futures pits are mostly male) who scream at each other are in fact experts in their craft. They both help run the world’s most transparent, orderly and largest auction exchange markets, and frequently risk their own capital.
What is a Commodity?
A futures-traded commodity is an item
- the identity of one is indistinguishable from and interchangeable with another.
- publicly traded on an auction-style futures exchange
- of global economic interest and inherent worth
Futures-traded items are said to be fungible, which means interchangeable, mixable or substitutable. A bushel of futures-traded corn from Iowa is identical to a similar bushel from Argentina, an ounce of South African gold is interchangeable with an ounce from Russia, and all Japanese Yen are alike and substitutable. Although diamonds and heirloom rugs are valuable, they’re not fungible commodities, because they are like snowflakes—all unique and distinguishable. Standard office staples and paper clips are fungible, but they’re not futures-traded commodities because their economic value is trivial.
What Commodities Are Traded on Futures Markets?
There are dozens of futures-traded commodities, usually grouped in categories. Examples:
- Grains: corn, soybeans, oats, wheat, rice, cotton
- Meats: cattle, hogs, pork bellies
- Energy: crude oil, gasoline, natural gas, heating oil, propane, ethanol
- Metals: gold, silver, copper, platinum
- Softs: sugar, orange juice, cocoa, coffee
- Currencies: Euro, British Pound, Swiss Franc, Yen, Canadian Dollar
- Financial: Dow Jones Industrial Average, S&P 500, NASDAQ, Treasury bonds and notes
What’s a Future?
A future is a standardized contract—an agreement—traded on an organized exchange wherein a buyer today promises to purchase and accept a specific quantity of a commodity, and a seller promises to provide it, on a set time and place in the future, for an agreed upon price. For example, a seller of a June soybean futures contract is obligated to deliver, and a buyer is obligated to accept delivery of, 5,000 lbs. of the commodity in June of the specified year, at a specific price and location. In the parlance of the markets, both buyer and seller are hedgers or speculators, and are said to have taken a position in the commodity.
A futures-traded commodity contract is technically classified as a financial derivative, that is a risk management-transference device whose value is linked to another underlying asset.
Where Are Commodity Futures Traded?
Futures buyers and sellers are usually complete strangers, brought together for the transaction via arm-waving traders at open outcry public exchange markets like the Chicago Board of Trade (CBOT), Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX), or on electronic trading exchanges.
