Commodity classes: energy, metals, agriculture

You can sort commodities into energy, metals and agriculture, and explain why each group reacts to different forces.

Raw materials everywhere

The fuel in a car, the copper in a phone, the wheat in a loaf of bread, the coffee in a morning cup. All of them start as commodities, traded in huge volumes on markets around the world.

For traders and investors, commodities are a separate world from stocks and bonds. They pay no dividends or interest, and their prices follow forces that have little to do with company profits. This lesson sorts them into their main groups.

Energy, metals, agriculture

A commodity is a standardized raw material: one unit of a given quality is like any other. A barrel of a specific oil grade or an ounce of gold of a given purity can be traded without inspecting each one. That is what makes them suitable for exchanges and futures contracts.

The main commodity class groups:

Energy: crude oil, natural gas, gasoline, heating oil. Prices react to production decisions, inventories, conflicts and the weather that drives heating and cooling.
Metals: split into precious metals, such as gold, silver and platinum, and industrial or base metals, such as copper, aluminum and nickel. Industrial metals follow factories and construction. Gold also follows investors and central banks.
Agriculture: grains such as wheat, corn and soybeans, livestock such as cattle, and so-called softs, such as coffee, cocoa, sugar and cotton. Weather, harvests and growing seasons dominate.

Another common split is into hard and soft commodities: hard ones are mined or extracted, like oil and metals, soft ones are grown, like coffee and cotton.

Because the groups follow different drivers, they often move independently. A broad commodity index mixes them, and in many indices energy carries a large weight. Investors buying such an index are often making a bigger bet on oil than they realize.

Most commodity trading happens through futures contracts, which the next chapter explains. Holding the physical goods is practical only for some precious metals.

Different drivers

A fictional month brings two pieces of news:

A drought in a major growing region cuts expected wheat harvests. Wheat futures rise 12%.
At the same time, weak factory data from large economies points to slower industry. Copper falls 5%.
Gold barely moves, as investors weigh both signals.

All three are commodities, traded on the same kind of exchanges, often by the same firms. Their prices still went in different directions, because each one answers to different supply and demand.

Common mistakes

Treating commodities as one asset. The groups follow different drivers.
Buying a commodity index without checking its weights. Energy often dominates.
Expecting income. Commodities pay no interest or dividends.
Ignoring how you get exposure. Futures-based products behave differently from the spot price.

The takeaway

Commodities are raw materials: energy, metals and farm goods. Each group follows its own drivers, from weather to factories to wars.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the class whose prices depend most on harvests and weather.

Tap the chart.

Farm goods depend on growing seasons, weather and harvests, as covered in the lesson on seasonality.
2What is a commodity?

A barrel of a given oil grade or an ounce of gold is interchangeable, which is why commodities can trade on exchanges.
3Which group is often called hard commodities?

Hard commodities are mined or extracted. Soft commodities are grown, such as coffee, cocoa, sugar or cotton.
4Why can copper and gold move in different directions?

Copper is an industrial metal. Gold has a large investment and central bank demand that follows other forces.

of 4 correct.