A Look at Commodity Markets

Currently there are over 40 different commodities that are traded on a regular basis. The most popular of these physical commodities contracts are located within several broad categories: metals, energy, grains, livestock, and food and fiber. Some unique and modern additions to the futures market are chemicals and fertilizer futures. Commodity trading prices fluctuate based on supply and demand, making a two-sided market a necessity.

Metals

The major metals futures contracts include copper, gold, platinum, palladium and silver. Their uses include industrial purposes, in construction, and for jewelry. In the copper market, building construction is the largest demand source. Copper is also used for electrical and electronic products, transportation and industrial machinery manufacturing. The price of copper is therefore sensitive to statistics related to economic growth, particularly reports such as housing starts. For that reason, participants in financial markets often also look to price action in copper futures as a gauge of general economic trends. In another example, gold has long been used as a hedge against political and economic uncertainties, and many central banks back their currency with gold reserves.

In the U.S., the metals listed here trade primarily on the New York Mercantile Exchange. CME Globex electronic platform also lists mini-gold and silver contracts.

Energy

The most popular energy futures contracts are crude oil, RBOB gasoline, heating oil and natural gas. These natural resource markets have become one of the most important gauges of world economic and political developments, and are therefore heavily influenced by disruptions in producing nations. The value of the U.S. dollar is significant because much of the world's crude oil is priced in dollars.

All energy futures markets are subject to seasonal fluctuations - mild winter weather may lessen the need for heating oil, while summer tends to bring greater gasoline demand for driving season. Hurricane season in the United States impacts the energy markets as the storms can disrupt production and refining operations.

These products trade on the New York Mercantile Exchange.

Grains/Soy

Grains and soybeans are essential to food and feed supplies, and prices are especially sensitive to weather conditions in growing areas at key times during a crop's development and to economic conditions that affect demand. Because corn is integral to the increasing popularity of ethanol fuel, the grain markets also are affected by the energy markets and outlook for fuel demand.

The major futures contracts in this category are corn, soybeans, soybean oil, soybean meal and wheat. Reports from the U.S. Department of Agriculture are closely watched, and summarize key factors influencing supply and demand including current production and carryover supply from the prior season. These products are traded in the United States at the CME Group, Kansas City Board of Trade, and Minneapolis Grain Exchange.

Livestock

Commodity futures on live cattle, feeder cattle, lean hogs and pork bellies are all traded at the CME Group. Their prices are affected by consumer demand, competing protein sources, price of feed, and factors that influence the number of animals born and sent to market, such as disease and weather.

Food and Fiber

The food and fiber category for futures trading includes cocoa, coffee, cotton, frozen concentrated orange juice (FCOJ) and sugar. In addition to global consumer demand, the usual growing factors such as disease, insects and drought affect prices for all of these commodities. FCOJ prices, however, are particularly sensitive to weather conditions. A frost or freeze in Florida or Brazil during the growing season can have a disastrous affect on both the current crop size and long-term production prospects. International exchange rates affect all of these global products, as well as factors like tariffs and geopolitical events in producing nations. These markets are traded at the New York Mercantile Exchange and ICE Futures U.S., formerly the New York Board of Trade.