101-13 Commodities Markets

This section takes a look at commodities and precious metals, the physical goods that form the building blocks of the products we use and the food we eat.

Commodities Markets

Commodities were traditionally physical goods or raw materials such as sugar, maize, barley, pork bellies, milk, cocoa, cotton, gold, silver, or copper.  However, the commodities exchanges have expanded to encompass more modern items such as energy and even RAM chips for computers.

In the commodities market, there are different types of transactions.

Spot Trading

The participants in a commodities spot trade usually expect to receive immediate or near future delivery of the actual goods they have purchased.  This is a way for the corn farmer to find a buyer for his corn on the open market.  Spot trading because of the short delivery time will usually take place in a wholesale market and allow the buyer to inspect the goods.

Forward Contracts

A forward contract is the agreement to exchange the goods at a specified time in the future for a price that is agreed upon today.  This protects the corn farmer from falling prices and the corn oil producer from rising prices.  This minimizes the risk for both parties of doing business.

Futures Contracts

As discussed earlier in the futures section, commodities can be traded as futures contracts meaning that the buyer and seller of the contract do not necessarily expect to receive delivery of the products they have purchased; they simply accept the cash equivalent.

In the U.S., the regulating body for the commodities exchanges is called the Commodities Futures Trading Commission.

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