What is a 'Cash Commodity'

A cash commodity is a tangible product to be delivered in exchange for payment and is seen most frequently with futures options. A contract for a cash commodity will specify the exact amount of the commodity which is expected to be delivered, along with the delivery date, and the price. Cash commodities can include agricultural products, minerals, oil, gold, and treasury bonds.  

Cash commodities are also sometimes referred to as actuals.

BREAKING DOWN 'Cash Commodity'

​​​​​​​A cash commodity is a tangible commodity for which a person or company has a use. Companies enter into contracts for cash commodities because they are betting on, or hedging, the price for a commodity that they need. For example, a prominent sausage manufacturer may anticipate the price of pigs going up over the next six months. To lock in a reasonable price on meat they need for production, they may execute a futures contract.

With the futures contract, the sausage company agrees to buy a certain number of pigs for a set price at a predetermined date. This date may be, for example, three months in the future. At that date, the company will receive a delivery of pigs in exchange for their payment. The company was not speculating, because they were counting on the physical delivery of pigs which they use in the production of their product.

It is vital that contracts clearly state whether an actual cash commodity is expected for delivery at the contract's end or earlier. This requirement is because some commodities and futures contracts are cash-settled, which means that no physical goods change hands through the contract.

Speculating and Hedging Cash Commodities

In cash-settled contracts, only money changes hands, rather than the actual physical commodities. A contract would be cash-settled if the purchaser of the commodities was a speculator who was not actually interested in having the physical commodity but has an interest in the price fluctuations.

Speculators may only be interested in capitalizing on the change of the commodity’s price. A speculator may buy a shipment of corn at a low price, for example, and then sell it at a profit when the price of corn goes up. Through the use of a broker, it is possible for this investor never actually to have physical possession of this shipment of corn.

In actuality, our sausage company example and a speculator may purchase that same lot of pigs for the same price at the same time through a futures contract. But in the case of the speculator, that person does not actually want ten truckloads of pigs delivered to their door. They are only trying to profit off of the change in prices that they anticipate in the price of pigs. Thus, this futures contract would be cash-settled, as opposed to settled through the cash commodity.

  1. Cash Price

    The cash price is the actual amount of money that is exchanged ...
  2. Spot Commodity

    A spot commodity is any commodity available for immediate trade, ...
  3. Commodity ETF

    A commodity ETF is an exchange-traded fund that invests in physical ...
  4. Physical Delivery

    Physical delivery is a term in an options or futures contract ...
  5. Commodity Price Risk

    Commodity price risk is uncertainty from changing prices that ...
  6. Delivery Price

    The delivery price is the price at which one party agrees to ...
Related Articles
  1. Investing

    Commodities trading: An overview

    Trading commodities can seem challenging to a novice trader but we break it down for you. Learn more about the history of commodities, the types of commodities, and how to invest in them.
  2. Financial Advisor

    When Will it Be Safe to Buy Commodities?

    When will it be safe to buy commodities (and which ones)? A closer look at the commodities markets and how they move.
  3. Investing

    The Role Of Speculators In The Commodity Market

    Contrary to popular belief, speculators are important for the market. Find out exactly what they do.
  4. Investing

    DBC: PowerShares DB Commodity Tracking ETF

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  5. Investing

    Why Investing in Commodities Can Be Tricky

    While some exposure to commodities can enhance a portfolio, it is key to understand the investment vehicle you've chosen, or you could be in for a rude awakening.
  6. Trading

    Futures Fundamentals

    This tutorial explains what futures contracts are, how they work and why investors use them.
  7. Investing

    3 Reasons to Invest in Discounted Commodities

    Though they're selling at depressed prices, there are several reasons that it could make sense to invest in commodities now.
  8. Investing

    Top 3 Commodities ETFs for 2018

    Commodities funds trended down in the first half of 2017 but have been moving up since June. These ETFs could continue their momentum.
  1. How can I calculate the notional value of a futures contract?

    Learn how the notional value of a futures contract is calculated, and how futures are different from stock since they have ... Read Answer >>
  2. What are managed futures?

    Managed futures are futures positions entered into by professional money managers, known as commodity trading advisors, on ... Read Answer >>
  3. How do futures contracts roll over?

    Learn about why futures contracts are often rolled over into forward month contracts prior to expiration, and understand ... Read Answer >>
  4. What are tradable commodities?

    Understand what tradable commodities are as well as the rules and risks governing how they are sold and traded in the marketplace. Read Answer >>
Hot Definitions
  1. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  2. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  3. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  4. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  5. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
  6. Hedge Fund

    A hedge fund is an aggressively managed portfolio of investments that uses leveraged, long, short and derivative positions.
Trading Center