The commodity market is a marketplace where people trade all sorts of different things, mainly raw or primary products, such as wheat, oil, and gold. While the definition we’ve given you applies to all commodity markets, do note that they’re not trading the same things.
How Commodity Markets Work
Prices in commodity markets are dependent on many factors, such as supply, costs to collect those items, and so on. Generally, it works like any other market, where people come to buy, sell, or trade.
One defining aspect of the commodity market, however, is that a buyer is given the ability to set a future price of a commodity, securing it in the present time. In other words, the buyer can secure a futures contract. For example, if an individual wants to purchase wheat at a specific price in the near future, he or she will pay that exact price no matter what when the seller delivers. It means that, whether the general cost of wheat rises or falls, the buyer is not necessarily affected by it after the agreed contract.
If you wanted to purchase a commodity like oil, you can set the price now on how much oil you want and when, and if both parties agree, you will pay the amount you specified when you receive it at a later date. Whether there is an ongoing economic event, forcing products to either shoot tremendously low or high, you’ll still pay the same amount on delivery date.
The Types of Commodity
While different commodity markets might be selling various commodities, they can all be placed either under these two categories: soft commodities and hard commodities.
Soft commodities are commodities that are usually unlimited and are not affected by factors relating to international politics that are usually influenced by geographical factors. Instead, the prices they come in are affected by the given conditions of the environment, such as weather or any other natural events. Soft commodities, then, include products relating to agriculture, such as barley, wheat, rice, and the likes. They also include livestock like chicken, pork, and beef.
On the other hand, hard commodities are limited in reserves and are affected by geopolitical factors. It means that, when there is an economic crisis or boom ongoing in the world’s general economics, the prices of these products will be affected profoundly. These products are also taken from the environment, utilising different procedures like mining, which, along with geopolitics, also affect the prices of these products. Out of these processes come the products, such as copper, rubber, gold, and oil.
Final Thoughts
Commodities are similar to other assets like bonds. The differentiating factor for commodities, then, is the fact that they’re tangible. That said, commodity markets are places where buyers and sellers can come together to buy, sell, and trade different products. At the same time, these markets give buyers and sellers the chance to set the pricing of the commodities.
If you’re looking to purchase commodities online in the UK, get in touch with us to see how we can help.