The commodity market is a market where products of common economic sectors are bought and sold. The market classifies its commodities into soft and hard commodities.
Soft commodities include agricultural products like coffee sugar, cassava, wheat and cocoa. Hard commodities on the other hand are minable. Typical examples are gold, silver and oil. Investors access up to 50 major commodities worldwide, with financial transactions that are constantly rising to soon outnumber physical trades.
Types of commodities
All tradable commodities are classified into the following four categories.
Metals: commodities that fall under this category include gold, silver, platinum and copper.
Energy: commodities that fall under thus category include crude oil, heating oil, natural gas and gasoline.
Livestock and meat: Thus category includes all tradable livestock, such as live cattle, pork bellies, chicken, feeder cattle etc.
Agriculture: falling into this category are all tradable agricultural produce, including cocoa, cassava, rice, wheat, cocoa, coffee, sugar etc.
In the stock market, investors typically scramble to transfer their money to precious metals such as gold, which has a history of been viewed as a reliable metal that can convey value.
Futures, also known as forward contracts are a popular practice in commodity trading. Farmer’s corporative associations use this mechanism always too. It works in a simple way. Farmers enter into a sales agreement with a large MNC who agree to buy their commodity at a certain fixed price. Fixing the price means that a farmer has hedged his bets against the monsoon fury and as such has secured an income from agriculture.
Large organizations ledge bets in many situations. A typical example of a large that must secure large amount of fuel at a price that we stable to help stabilize its planning process is the airline sector. Airline companies engage in hedging by buying large amount of fuel at a fixed price so that they can avoid the burning effect that comes with the volatility of crude and gasoline market.
Like every other financial market instruments, there are some risks that a person may expect when trading commodity.
Here are some of the most popular risks in commodity trading.
1. Demand and supply
The functions of demand and supply play fully into action in the commodity market. The market can swing widely as a result of demand excess in supply.
Weather can highly affect soft commodities like wheat, cocoa and coffee. Prices of these commodities can shoot up if poor weather causes a drop in quantity of supply for a particular period of time.
3. Political policies.
Policies made by political bodies can cause huge fluctuations in the prices of commodities. For example if a large oil producing nation is in political problem, it can cause a slowdown in oil supply, causing an increase in price.
4. Exchange rate
Because most commodities are traded in USD, countries exchange rate fluctuates against the dollar will cause massive fluctuations in the commodity markets too.