What Is a Commodity Market?

A commodity market is a physical or virtual marketplace for buying, selling, and trading raw or primary products. There are currently about 50 major commodity markets worldwide that facilitate trade in approximately 100 primary commodities.

Commodities are split into two types: hard and soft commodities. Hard commodities are typically natural resources that must be mined or extracted—such as gold, rubber, and oil, whereas soft commodities are agricultural products or livestock—such as corn, wheat, coffee, sugar, soybeans, and pork.

Key Takeaways

  • A commodity market involves buying, selling, or trading a raw product, such as oil, gold, or coffee.
  • There are hard commodities, which are generally natural resources, and soft commodities, which are livestock or agricultural goods. 
  • Investors can gain exposure to commodities by investing in companies that have exposure to commodities or investing in commodities directly via futures contracts. 
  • The major U.S. commodity exchanges are the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Board of Trade, and the New York Mercantile Exchange.

Commodity Market

How Commodity Markets Work

Commodities can be invested in numerous ways. An investor can purchase stock in corporations whose business relies on commodities prices or purchase mutual funds, index funds, or exchange-traded funds (ETFs) that have a focus on commodities-related companies. The most direct way of investing in commodities is by buying into a futures contract. A futures contract obligates the holder to buy or sell a commodity at a predetermined price on a delivery date in the future.

Types of Commodity Markets

The major exchanges in the U.S., which trade commodities, are domiciled in Chicago and New York with several exchanges in other locations within the country. The Chicago Board of Trade (CBOT) was established in Chicago in 1848. Commodities traded on the CBOT include corn, gold, silver, soybeans, wheat, oats, rice, and ethanol. The Chicago Mercantile Exchange (CME) trades commodities such as milk, butter, feeder cattle, cattle, pork bellies, lumber, and lean hogs.

The Commodity Futures Trading Commission (CFTC) is the main regulatory body for commodity markets in the U.S.  

The New York Board of Trade (NYBOT) commodities include coffee, cocoa, orange juice, sugar, and ethanol trading on its exchange. The New York Mercantile Exchange (NYMEX) trades commodities on its exchange such as oil, gold, silver, copper, aluminum, palladium, platinum, heating oil, propane, and electricity.

Key commodity markets in regional centers include the Kansas City Board of Trade (KCBT) and the Minneapolis Grain Exchange (MGE). These exchanges are primarily focused on agriculture commodities. The London Metal Exchange and Tokyo Commodity Exchange are prominent international commodity exchanges.

Commodities are predominantly traded electronically; however, several U.S. exchanges still use the open outcry method. Commodity trading conducted outside the operation of the exchanges is referred to as the over-the-counter (OTC) market.

Commodity Market Requirements 

In the U.S., the Commodity Futures Trading Commission (CFTC) regulates commodity futures and options markets. The CFTC's objective is to promote competitive, efficient, and transparent markets that help protect consumers from fraud, manipulation, and unscrupulous practices. Regulation of commodity markets has continued to remain in the spotlight after four leading investment banks were caught up in a precious metals manipulation probe in 2014.