Chapter 2-1 Introduction to Commodities

The most commonly traded futures contracts are commodity futures.  As a result, this is one of the most liquid markets in the world.  Commodities futures cover a vast array of assets that are grouped in a number of categories.  The first of these categories is agricultural commodities.  The most common agricultural commodities are corn, oats, rice, soybeans, wheat, sugar, coffee, and cocoa.  Agricultural commodities trade mostly on the CBOT, EURONEXT, and NYBOT exchanges.  Most of the volume on these exchanges is routed through the Chicago Mercantile Exchange (CME) which is where agricultural futures began trading back in the late 1800’s.

The second category of commodity futures is livestock.  The most common livestock futures are lean hogs, frozen pork bellies, live cattle, and feeder cattle.  Livestock commodities trade exclusively on the Chicago Mercantile Exchange.  Similar to the agricultural commodities, livestock futures have been trading on the CME for over 100 years.  Contracts in livestock are standardized at 20 tons except for feeder cattle which trades in 25 ton lots.

A third commodity category is energy futures.    The most common energy futures include crude oil, natural gas, heating oil, propane, ethanol, and gasoline.  The energy futures Energy futures are among the most heavily traded futures in the world as their prices are often far more reliant on unpredictable supply and demand factors.  This creates volatility that makes the energy market invaluable to hedgers and very attractive to speculators.  Furthermore, most energy products, particularly crude oil, are non-renewable resources protected by national interests.  This translates into a volume level significantly above many other commodities.  Liquid energy futures trade in 1,000 barrel (42,000 U.S. Gallon) lots with the exception of ethanol (29,000 Gallons).  Natural gas is traded in its gaseous state in 10,000 BTU lots.

The fourth category of commodity futures is precious metals.  Precious metals include gold, silver, platinum, and palladium.  Of these metals gold is by far the most heavily traded and the most popular as far as investments are concerned.  For years investors have been buying gold as a safe haven for their wealth and protection against the instability and volatility present in many other investment alternatives.  The most common uses for precious metals are investments, jewelry, and technology.  The precious metals all trade in standard lots weighing one troy ounce (28.35 grams) and trading occurs mainly on the New York Mercantile Exchange’s Commodity Exchange (COMEX) branch

A fifth major commodity category is industrial metals.  Not surprisingly, the industrial metals are most commonly used in the production of manufactured goods and the construction and development of both commercial and residential buildings.  The most commonly traded industrial metals are copper, lead, tin, aluminum, zinc, cobalt, and nickel.  Industrial metal futures are traded in standardized lots of 1 metric ton (2,205 lbs) and trading almost exclusively takes place on the London Metal Exchange (LME).