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A commodity is usually a basic physical good—such as wheat, crude oil, or copper—that can be traded interchangeably with goods of a similar grade. In U.S. futures law, the word is broader: it also covers certain goods, services, rights, and interests tied to futures contracts. Trading a futures contract or a fund linked to commodities does not necessarily mean owning the physical commodity.
What is a commodity?
In everyday use, a commodity is a raw material or agricultural product bought and sold in markets. Commodities of the same specified grade are generally fungible: one unit can be substituted for another unit that meets the same requirements.
The legal meaning in U.S. futures markets is wider. The Commodity Futures Trading Commission (CFTC) includes enumerated agricultural products and other goods, as well as services, rights, and interests in which futures contracts are dealt. The CFTC also uses “physical commodity” more narrowly for agricultural products and natural resources, as distinct from financial instruments such as currencies or interest rates. See the CFTC glossary.
What are the main types of physical commodities?
A useful beginner’s classification is agriculture, energy, and metals. The products and eligible grades differ by market and contract.
- Agriculture: crops and other agricultural products, such as wheat.
- Energy: natural resources and fuels, including crude oil.
- Metals: metals such as copper, traded under contract-specific specifications.
These categories describe the underlying goods, not every investment that has a commodity connection. A commodity futures fund, for example, is an investment vehicle rather than the physical product itself.
How do spot markets, forwards, futures, and commodity funds differ?
| Instrument | What it represents | Terms and exit | Important distinction |
|---|---|---|---|
| Spot transaction | A cash transaction for the actual commodity. | Terms depend on the transaction; it concerns the good itself rather than a standardized futures contract. | The buyer acquires the physical commodity under the agreed transaction. |
| Private forward | An agreement between parties for a future transaction involving a commodity. | Terms are privately negotiated rather than standardized on an exchange. | It is not the same as an exchange-traded futures contract. |
| Exchange-traded futures | A standardized agreement to buy or sell a commodity for future delivery at a price set when the contract begins. | Contract rules establish key terms and an expiration; a position may be offset or settled under the contract’s rules. | Holding the contract does not necessarily mean taking ownership or delivery of the commodity. |
| Commodity futures fund or pool | Shares or interests in a vehicle that may invest in futures contracts. | The fund’s structure and holdings govern how it behaves over time. | Shares do not convey ownership of the underlying commodity, and performance may not track its spot price. |
The CFTC explains that futures-based products can diverge from the underlying commodity’s price over time. A fund holding futures may have to offset, settle, or roll expiring contracts into later ones, so its returns can reflect more than changes in the spot price. See the CFTC guidance on commodity pools and related products. CME Group’s guide to futures and forwards distinguishes spot transactions, private forwards, and exchange-traded futures.
How do commodity futures exchanges work?
A futures exchange lists contracts with standardized terms. Depending on the product, specifications can set the contract quantity and size, acceptable quality or grade, delivery location, delivery month or time, and last trading day. Standardization lets market participants trade the same contract terms rather than negotiate every detail bilaterally. Read the specifications for the exact contract: one commodity’s rules do not automatically apply to another.
Exchange-traded futures are centrally cleared. In CME Group’s description, the clearing mechanism stands between counterparties, becoming buyer to every seller and seller to every buyer. This reduces the credit exposure that would come from relying on an individual counterparty, but it does not remove market, liquidity, operational, or clearing-system risks. See CME Group’s explanation of futures contracts and clearing and the CFTC’s glossary.
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Why do businesses and traders use futures?
Hedging business price exposure
Producers and consumers may use futures to reduce the effect of unfavorable price movements on a business. For example, a farmer concerned that wheat prices may fall before harvest could sell wheat futures. A business that expects to buy an input later and fears prices may rise could buy futures. A hedge can reduce a particular price exposure, but it does not eliminate all business or market risk.
Speculating on price changes
Speculators take positions in the hope of gaining from price movements. Their activity can contribute to market liquidity, but futures speculation involves substantial risk; it is not a way to guarantee a return. The CFTC describes hedgers and speculators among futures-market participants in its Basics of Futures Trading.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How does a futures trade reach expiration and settlement?
A futures contract is time-limited, not indefinite ownership of a commodity. Before expiration, a trader may close a position by taking an offsetting position, extend exposure by moving into a later contract, or keep the position through settlement. The contract’s terms determine whether settlement is in cash or by physical delivery.
Most contracts are liquidated before delivery, according to the CFTC. CME Group notes that physical delivery is important for some energy, metals, and agricultural contracts, but only a small proportion of commodity futures contracts are physically delivered; its statement does not give a numerical percentage. Do not assume that every futures contract requires delivery—or that delivery is impossible. Check the specific contract’s settlement rules and deadlines. See the CFTC’s futures trading guidance and CME Group’s lesson on expiration and settlement.
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How can an individual access commodity futures in the U.S.?
Individuals in the United States do not trade directly on a futures exchange. The CFTC says they access futures and options through specified registered firms or people. Before opening an account, verify the intermediary’s registration and review the exact contract specifications, account terms, and required risk disclosures. Registration and account arrangements can change, so confirm current details with the relevant authorities and provider.
Futures accounts are not insured. A trader can lose all of the money in an account and may lose more than the initial investment, depending on the position and market movement. The CFTC warns: “Speculating in commodity futures and options is a volatile, complex and risky venture that is rarely suitable for individual investors or ‘retail customers’.” Read the CFTC’s risk guidance for futures trading before considering a trade.
What can move commodity prices?
Price drivers vary by commodity, and the following are broad examples rather than a forecasting model:
- Agricultural commodities: weather can affect production and supply.
- Energy: supply and storage availability can influence prices.
- Metals: industrial conditions and broader economic factors can matter.
Because futures prices can move sharply and contract obligations are specific, understanding the underlying market is only part of understanding the trade. The contract’s expiration, settlement method, and potential delivery obligations matter too.
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