Commodities are notoriously volatile, which means there are opportunities to make a great deal of money. Political upheaval, unexpected weather events, and economic forces continually move prices in the commodities market. It’s a market that draws investors of all kinds, although commercial investors (those involved in producing, processing, or using the commodity) are by far the largest players.
In the U.S., there are two major futures exchanges: The CME Group, which resulted from the merger between the Chicago Mercantile Exchange and the Chicago Board of Trade, and their subsequent acquisition of NYMEX and COMEX, and ICE Futures.
The CME Group trades in multiple markets, including financial products, energy, grains, precious metals, and livestock. ICE Futures also trades in the commodities markets, but as owners of the New York Stock Exchange, they also trade in equities futures.
Roughly 35 commodities trade on the U.S. exchanges. Some, like oil and wheat, have been on the exchanges forever, while other commodities come and go depending on investor interest in trading them.
Commodities can be broken into three main categories: Agriculture, metals, and energy. There are a few others that defy easy categorization, such as rubber, lumber, and amber. Below is a list of commodities currently traded on the two major U.S. exchanges.
- Soybean oil
- Soybean meal
- Rough rice
- Palm oil
- Frozen orange juice
- Live cattle
- Lean hogs
- Feeder cattle
- Non-fat dry milk
- Natural gas
- Liquid natural gas
- Crude oil
- Heating oil
- RBOB (unleaded gas)
- Iron ore
Because they’re traded on the open market, commodities futures are an accurate representation of the price of raw materials on a given day. Forecasting is another matter entirely. Although commodities analysts spend their time digging into every possible variable affecting supply and demand of their assigned commodity, emotions play a definite part in the futures market.
Speculators who believe a shortage of a particular commodity is on the horizon bid up the price in hopes of making a fat profit. Other traders see prices climbing and launch a bidding war, pushing them even higher. Through it all, the underlying dynamics of supply and demand haven’t really changed, and when the bidding war ends, prices plummet.
The oil market is a perfect example of this phenomenon. In the second quarter of 2008, global oil consumption was about 85 million barrels, while production during the same period was over 86 million barrels. Under the laws of supply and demand, oil prices should have gone down, but instead they rose from $88 to $110 per barrel during that time. The EIA blamed the increase on a massive inflow of cash into the oil futures market. In fact, the price reached a high of $145 per barrel, completely unmoored from actual global supply and demand. To say commodities futures are a risky and volatile market is an understatement.
You can trade commodities futures as an individual investor, but if you’re new to commodities, a safer way to dip your toe in the market is through commodities ETFs and commodities mutual funds. These funds tend to smooth out volatility through broad exposure to the entire market of commodities futures.