Commodity Market and Commodities Exchange

This post was updated on October 6th, 2018

What is a Commodity Market?

Commodity markets deal in soft commodities and hard commodities. Soft commodities are basically renewable and include cocoa, coffee, sugar, rice, soybeans, cotton and lumber. Hard commodities are generally fossil fuels, metals and other such products.

What is Commodity exchange?

A commodity exchange is an exchange where various commoditie derivative products, agricultural products and other raw material are traded.

A commodities exchange is an exchange where various commodities and derivatives products are traded.

Most commodity markets across the world trade in agricultural products and other raw materials and contracts based on them. These contracts can include spot prices, forwards, futures and options on futures.

Commodity exchanges deal in standard contracts.

Commodities comprise of standardized products which have been graded according to quality.

These products are valuable commodities produced in large quantities according to the demand that is created in a market.

The exchange is represented by a central authority where trading takes place.

There is a physical location for this exchange and is an incorporated entity and acts as a non-profit organization that is in place to enforce rules, regulations and procedures.

Commodities and Futures

The terms “commodities” and “futures” are often used to describe commodity trading or futures trading.

A commodity futures contract is an agreement to buy or sell a predetermined amount of a commodity at a specific price on a specific date in the future.

Buyers use such contracts to avoid the risks associated with the price fluctuations.

Sellers use futures contracts to lock in guaranteed prices for their products.

Speculators and investors also buy and sell the futures contracts in attempt to make a profit and provide liquidity to the system.

What are the types of commodity exchange?

Commodities exchanges across the world

Most commodity exchanges are located in Japan, Chicago, New York and several European locations.

Commodity markets are located all over the globe.

You can see futures contracts taking place in commodity markets where two parties agree to exchange the commodity in the future on a specific date at a pre-set price. This means that the price fluctuations in the market do not have an effect on this type of contract and the agreement will be concluded on the delivery date.
The producer of the commodity can lock in the price and be assured of that amount of return on the delivery date ensuring that his trade is stable.

Speculating in the commodity markets by third parties have gained in popularity. Investors buy and sell futures contracts in financial markets and this can be a profitable way of diversifying a portfolio. Commodity markets are not as popular as the stock market or the Forex market although some investors have started trading in commodity contracts.

Best known commodity exchanges in the United States

The Chicago Mercantile Exchange (CME) Group

The Chicago Mercantile Exchange (often called “the Chicago Merc“, or “the Merc“) is an American financial and commodity derivative exchange based in Chicago and located at 20 S. Wacker Drive. The CME was founded in 1898 as the Chicago Butter and Egg Board, an agricultural commodities exchange. Originally, the exchange was a non-profit organization.

The New York Mercantile Exchange (NYMEX)

(NYMEX) which is a part of the CME Group. CME Group is the world’s leading and most diverse derivatives marketplace, handling 3 billion contracts worth approximately $1 quadrillion annually.

Commodities exchanges across the world

Americas

Africa

Europe

Asia

By: A Dababneh