Commodities are broadly defined as natural resources, chemicals and physical products you can touch, taste, smell, grow, mine, consume or deliver.
From their origins in the 1800s until the 1970s, commodities and futures markets were one in the same; financial futures are a modern-day invention. To confuse things slightly, today the term “commodities” is still often used as a broad industry term describing all futures commodity contracts, including financials. For example, “commodity trading advisor” is used to define an individual or firm who operates a managed futures program, even though many of them trade exclusively in the financial futures markets such as interest rates or stock indexes.
Trading commodities that encompass physical products are the roots of today’s commodity futures industry and still play a valuable role in the global marketplace, even though the most highly traded futures today are financial contracts such as U.S. Treasury notes, Eurodollars, and Standard & Poor’s 500®.
The most popular contracts for commodity trading cover several broad categories: metals, energy, grains, livestock, and food and fiber. These are not paper assets, and in general, are produced and consumed at a price based on the forces of supply and demand.
A commodity futures contract represents an agreement to buy or sell a specific type and grade of commodity for delivery at a specific time in the future at an agreed upon place at a market-determined price. In reality, commodity futures rarely lead to the delivery of an actual product, because the contract positions are typically closed out before the delivery date.
Commodity investing also includes commodity options that convey the right to buy or sell the underlying commodities futures contract.