A commodity is a product that is used for trade. Throughout history, people have traded one thing of value for another item because it was helpful and needed, such as tools and food.
Today, we continue to trade.
What are commodities?
The world is full of different commodities which are traded in the global market. Virtually everything that people make and use comes from a natural source or has been extracted from nature in some way at some stage.
There are several types of commodities, see home.saxo: These include gold, silver, stocks and bonds, cash crops such as cotton and coffee, oil and gas contracts (futures), gasoline/diesel fuel contracts (futures).
What are the different commodities?
We can break all commodities down into two categories: hard commodities and soft commodities.
These are raw materials mined or extracted from the earth. Ships, railroads and trucks transport them worldwide for sale. Some common examples include gold, silver, oil, coal, copper, and natural gas.
Soft commodities may not need to be physically transferred because they can be grown or raised by farmers or ranchers. Farmers sell these items to brokers who handle large volumes of business at commodity exchanges around the world. Some common examples include soybeans (which is a significant ingredient in soybean oil), pork bellies (the raw material of bacon), corn and wheat.
- Cereals (including wheat, rice and corn)
- Live animals
- Fresh fruits and vegetables
- Fish oil-rich seeds (such as soybeans)
Metals and their byproducts:
● steel alloy scrap
● precious metals such as gold and silver
● Crude Oil/petroleum crude oil
● coal made from bituminous, anthracite and lignite
● natural gas
About the commodities market
The commodities market is a trillion-dollar global industry with international commodity traders active in all markets where the real economy interacts with the financial one.
Most goods and commodities never meet face-to-face with their buyers/sellers throughout a commercial transaction because of modern logistical systems which operate globally and on a just-in-time basis.
Here are some statistics to give you an idea of the dimensions involved: we estimate that over 1 million ships transport raw materials to different corners of the globe.
The international coffee trade alone involves over 13 million small-scale farmers in 49 developing countries. There are roughly 15,000 traded contracts on agricultural commodities around the clock worldwide.
The most sought after commodities
Black gold, red blood, ambergris, coffee beans.
These are some of the most sought after commodities by the (non-fictional) countries in this world that cannot live without them.
But we trade other common goods with an astonishing frequency throughout the year: scrap metal, iron ore, crude oil, and coal fall in this category.
However, despite their apparent similarities, they differ in one critical aspect, i.e. how much it costs to extract them from nature or prepare them for usage in manufacturing processes.
The cost of these resources considers many factors, such as production volumes and labour expenses. The approximated amount of energy required to produce every unit is the determinant of the actual value of a commodity.
Based on this principle, one can assume that oil remains the most sought after resource in recent history since it only costs about $0,1 per kWh to extract from underground reservoirs around the world.
In comparison, producing a single tonne out of iron ore requires almost four times as much energy and thus is much more expensive; coal follows at a similar ratio with 1 to 3:1.
Of course, this presents no problem for industrialized nations such as China or USA: they pay whatever cost is necessary to guarantee their economy runs smoothly. All those billion-dollar companies need it, after all! But for developing countries such as Brazil, Nigeria or Venezuela, economies depend too heavily on.
Whatever commodity you decide to trade with, always run a few test runs of new strategies via a demo account without risking your own capitol.