What Are Commodities?

Should You Invest in Commodities?

cow
Justin Sullivan/Getty Images

Definition: Commodities are hard assets ranging from wheat to gold to oil. Since there are so many, they are grouped in three major categories: agriculture, energy, and metals.

Agricultural commodities include:

  • Things you drink, such as sugar, cocoa, coffee and orange juice. These are called the softs markets.
  • Grains, such as wheat, soybeans, soybean oil, rice, oats and corn.
  • Animals that become food, such as live cattle and pork (called lean hogs).
  • Things you wouldn't eat, such as cotton and lumber.

The energy category includes crude oil, natural gas, RBOB gasoline, and heating oil. Metals includes mined commodities, such as gold, copper, silver and platinum. Find out How Are Oil Prices Determined?

Commodities are officially defined by the U.S. federal government by the 1936 Commodity Exchange Act. The Act covers trading in agricultural and natural resource commodities. Although the Act treats financial products like commodities, it doesn't consider them to be commodities. The Act also bans trade in onions as a commodity, as per the 1958 Public Law 85-839 (7 USC 13-1).

Dealers on an open exchange trade commodities. That means the prices change every day. This can be difficult for the consumer, who must face price variations in everyday products such as gasoline, meat and grains. It especially impacts poorer people around the world, who pay more of their limited income on food and transportation.

The highest volume of trading occurs in oil, gold and agricultural products. Since no one wants to transport those heavy materials, they trade futures contracts instead. These are agreements to buy or sell at an agreed upon price on a specific date. Find out more about commodities futures.

Commodities contracts are priced in U.S. dollars.

That means that when the dollar's value rises, it takes fewer dollars to buy the same amount of commodities. That makes commodity prices fall. 

Financials are also traded in the futures markets. These include currencies, such as the 3-month eurodollar and the euro-FX. It also includes interest rates, such as the 10-year Treasury note. There are also futures on stock indices such as the S&P 500. But the the Commodity Exchange Act doesn’t define these as commodities.

The U.S. commodities markets are in Chicago, New York and Atlanta. The CME Group owns all but one. The Chicago Mercantile Exchange focuses on agricultural commodities, while the Chicago Board of Trade specializes in grains. The New York Mercantile Exchange focuses on energy and metals, while the Commodity Exchange are located in New York, although the Chicago-based CME Group owns them. The New York Board of Trade is now owned by Atlanta-based Intercontinental Exchange. It trades mostly in the softs markets. For more, see How Does Commodities Trading Affect the Economy?

The Commodity Futures Trading Commission regulates the commodities. In 1975, this replaced the Commodity Exchange Authority and the Commodity Exchange Commission .

In 1936 the Commodity Exchange Act established these bodies to administer the Act and to set Federal speculative position limits. (Source: “Commodities Glossary, U.S. Commodities Futures Trading Commission.)

Commodities as a Business Term

In business, commodities can be defined as any good or service that is bought and sold purely on price. These include the traded commodities. They can also include products that are not very differentiated from others based on brand, benefits or other distinguishing features.

For example, Coca-Cola is a branded product that receives great loyalty, and a higher price, because of its perceived differentiation from other cola drinks. A low-cost store brand is more of a commodity, because it isn't much different from other store brands and is bought primarily because of its low price, not its taste.