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What is a Commodity Market?

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  • Written By: M. McGee
  • Edited By: Lauren Fritsky
  • Last Modified Date: 05 December 2016
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The commodity market is the global supply and demand for undifferentiated materials. A commodity is any item that is the same regardless of its origin. Things like raw metals, fabric or electricity are the same all over the world, no matter who mined, manufactured or generated them. Since these items are all essentially the same, they can be exchanged independent of origin. A commodity market is also the primary location where these commodities are exchanged.

Nearly any non-branded material can be a commodity. Raw materials, such as oil, and agricultural products, like soybeans and sugar, make up a largest portion of the commodity market. Livestock, like cattle and pigs, makes up a smallest part, as does electricity, cotton cloth and ethanol. Certain common materials, like milk, are not trading commodities, as the price and source of the milk varies significantly from area to area.

In economics, the commodity market is the global need for individual commodities. As the requirements in one area of the world go up, this brings up demand across the entire global market. This, in turn, causes increases in price. When demand goes down, this also lowers the price worldwide.

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The individual items sold on the commodities market are common in many manufactured goods. As the price changes, this will increase or decrease the cost of manufactured material accordingly. This market also indirectly affects goods in the case of commodities like ethanol. As the price of ethanol rises, more food material goes into its production; this lowers the supply of raw food goods and raises finished food prices.

The buying and selling of commodities primarily takes place in a global commodity market. These markets are similar to a stock exchange, except instead of pieces of a business, the brokers sell pieces of a commodity. Brokers sell off amounts of a commodity from the general pool; the actual source of the commodity is quite unimportant to the process. Each of these markets is connected, so a spike in one market will have a global response almost instantly.

These sales are generally in something called ‘futures.’ A future is a guarantee that the buyer owns a specific amount of the individual commodity, an amount to be delivered at a future time. The idea is to purchase a future with the hope that demand will cause the price to increase, and then it will sell for a greater amount. If the supply outstrips the demand or if the supply can’t meet the quantity of futures sold, the investor may end up losing a great deal of money.

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bear78
Post 3

Technically, the only valuable commodity is gold. Even money is believed to have no value. In fact, federal reserve banks of all countries maintain "money" in the form of gold bars.

Practically any commodity can lose all of its value in the commodity market. The one commodity that will always remain valuable is gold. That's not to say that the value of gold (its equivalency to cash) doesn't vary based on the market. It's just that it will never be valueless.

ysmina
Post 2

@ddljohn-- The commodity is there, it's just not delivered at that time. People who invest in futures are sort of the middle people. They buy the commodity and then sell it. And they hope to make money in the process. So they try to make predictions about future prices of commodities in the market. Then they purchase commodities which are likely to become more expensive later. If this turns out to be right, they will buy the commodity for less and make a profit when they sell the commodity after the price has gone up.

If the opposite happens, if the price goes down rather than up, he investor will lose money. It's all about making right predictions but the commodity market can be very unpredictable at times.

ddljohn
Post 1

In regards to futures, does this mean that buyers are buying a commodity that actually isn't there? I don't understand. Why if the commodity doesn't turn up later?

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