Tradable commodities consist of basic goods used in commerce that are often interchangeable with other goods of the same type. These tradable commodities are usually evaluated by economists as inputs in the production of other goods or services.

Key Takeaways

  • Tradable commodities are basic goods used in commerce and are interchangeable with other goods of the same type.
  • The inputs in the creation of finished goods and services are tradable commodities.
  • Tradable commodities are classified as energy, metals, livestock, and agriculture.
  • The trading of tradable commodities is done through futures, and futures contracts are used as hedging tools for the producers of tradable commodities as well as speculative investments by investors.

What Are Tradable Commodities?

Tradable commodities are usually categorized into four basic groups: energy, metals, livestock, and agriculture. Among economists, there is little differentiation between a tradable commodity coming from one producer and the same commodity from another source.

This is different from other products such as electronics, for example, where the quality may be very different from one brand to another.

The Commodity Futures Trading Commission (CFTC) regulates futures trading and other derivatives trading, such as options and swaps.

The trading of commodities is usually executed through futures contracts on exchanges that standardize the quantity and minimum quality of the products traded. For example, regulatory bodies allow for the trading of 5,000 bushels of wheat; however, laws regulate how the bushels can be sold and delivered and the minimum quality standards required for the wheat.

The future element of trading commodities can add risk to the transaction, since factors that cannot be controlled (such as weather) may affect the production of the commodity. For this reason, experts recommend diversifying a portfolio of tradable commodities with other assets.

Tradable vs. Non-tradable Commodities

Many products are not considered tradable commodities, either because of the nature of the product or the demand for the product within its home country.

For example, tomatoes in China are in high demand. Domestic production cannot keep up with the demand for tomatoes, which are imported in high quantities. Because of this high rate of importation, economists cannot use the future trading and pricing technique normally used with tradable commodities.

Another example of non-tradable commodities is freshly cut flowers in New York City's floral district. While many flowers are present, they cannot be bought or sold on exchanges.

What Types of Commodities Are Traded?

Common tradable commodities include crude oil, wheat, soybeans, gold, silver, livestock, coffee, sugar, cotton, corn, frozen orange juice, and natural gas. The derivative products of some commodities are also traded as well, such as soybean oil and soybean meal. Similarly, oil and natural gas have such derivative products.

How Do I Buy Commodities?

There are a few ways an investor can buy commodities. One way is to purchase the commodity outright, though that can prove difficult due to transportation and storage costs. Another method is to invest in the stocks of companies that deal in commodities, such as oil and gas companies. Another method would be to buy the futures contracts of the commodities, though that can be speculative and must be sold before delivery. One of the easiest ways to buy commodities is to invest in exchange traded funds (ETFs) that follow commodity indexes.

What Is the Most Traded Commodity?

The most traded commodity is crude oil. Crude oil is used in many products around the world, from petrochemicals to petroleum to lubricants to diesel and more. Other important commodities are wheat, soybeans, and gold.

The Bottom Line

Tradable commodities are typically used in the creation of other goods and are classified as energy, metals, livestock, and agriculture. Unlike finished goods, the producer of the tradable commodity is not so important, as long as the quality guidelines are met.

For example, buyers are not particularly concerned if wheat comes from Company A versus Company B, whereas buyers are concerned whether their computer is from Apple or Dell.

Tradable commodities are traded via futures and make up an important sector of financial markets. Futures help determine the price of these commodities and are used as hedging tools by producers as well as speculative investments by investors.