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For anyone new to the commodities space, here is a little color on a few broad areas to help provide an overall big picture of things. Topics we will touch on include:

1. What are commodities?
2. Where do commodities trade and background on the exchanges
3. What main areas commodities break down into
4. Some examples of commodities used
5. Tracking commodities
6. How you can invest in commodities

What Are Commodities?

The Organization for Economic Co-operation and Development (OECD) definition:

Commodities are goods and services normally intended for sale on the market at a price that is designed to cover their cost of production.

This includes all goods and services produced by industries, all imported goods and services except direct purchases abroad by government and households, and that part of the gross output of producers of government services and a private non- profit services to households which is sold on the conditions, characteristic of sales of commodities.

Business dictionary:

A reasonably interchangeable good or material, bought and sold freely as an article of commerce. Commodities include agricultural products, fuels, and metals and are traded in bulk on a commodity exchange or spot market.

A more general definition:

Commodities are tangible items that people use to turn into energy, to make things with and to eat. More on this later. Commodities are things such as oil, gold, copper, corn, coffee, and orange juice.

Where Commodities Trade and Background on the Exchanges

Commodities have been around forever. Some say that the first futures trade happened 6,000 years ago in China, when rice futures traded. Some sources show that futures trading dates back to the 17th century in Japan, also when rice futures were traded.

Since commodities is such a massive topic, we will just focus on commodities that trade in financial markets.

1848: The very famous Chicago Board of Trade (CBOT) was formed in 1848. The CBOT originally traded only agricultural commodities such as wheat, corn, and soybeans.

The CBOT was created to help farmers and commodity consumers manage risks by removing price uncertainty from agricultural products such as wheat and corn. The Midwest grain market was chaotic, and the CBOT made the grain markets more sustainable, allowing farmers to get more fair prices throughout any given year.

1882: The New York Mercantile Exchange (NYMEX) was then formed in 1882, beginning as the New York Butter, Cheese and Egg Exchange.

1898: The Chicago Mercantile Exchange (CME), also known as “the Merc” was founded in 1898 as the Chicago Butter and Egg Board, an agricultural commodities exchange.

1919: Chicago Butter and Egg Board becomes Chicago Mercantile Exchange CME Clearing House

1933: The Commodity Exchange, Inc (COMEX) was first founded through the merger of four smaller exchanges based in New York: the National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the New York Hide Exchange.

1994: The Commodity Exchange Inc. merged with the New York Mercantile Exchange (NYMEX), known simply as COMEX.

2018: Today, the Chicago Mercantile Exchange Group (the CME Group) is the world's leading and most diverse derivatives marketplace. The CME Group is headquartered in Chicago.

The corporation was formed by the 2007 merger of the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT). On March 17, 2008, CME Group announced it had acquired NYMEX Holdings, Inc., the parent company of the New York Mercantile Exchange and Commodity Exchange, Inc (COMEX).

Now, the CME Group’s exchanges include the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBOT), the New York Mercantile Exchange (NYMEX) and the Commodity Exchange (COMEX).

In addition to these changes, the industry also got rid of floor trading (aka pit trading).

As a result, there are no actual closing prices.

After they got rid of pit trading, what they used to call closing prices, they now call settlement prices. However, the trading never stops.

Commodities Break Down Into Three Main Sectors

1. Energy (crude oil, natural gas, heating oil, gasoline, jet fuel, coal, propane, ethanol)
2. Metals (Precious metals: gold, silver, platinum, palladium; Base metals: copper, aluminum, zinc, tin, lead, nickel)
3. Agriculture (Grains and oilseeds: corn, wheat, soybeans; Soft commodities: coffee, sugar, cocoa, milk)

Examples of How Commodities Are Used:

1. Crude oil is used to make oil-related products such as gasoline, jet diesel and heating oil
2. Natural gas is used to generate electricity (electric utilities buy natural gas as an input to make this electricity. The other main commodity electric utility companies use to make electricity is thermal coal)
3. Gold is used to make jewelry
4. Silver is used to make jewelry and many industrial products (Almost every computer, mobile phone, automobile, and appliance contains silver)
5. Copper is used in building construction, electrical equipment, and transportation equipment, among many other things
6. Steel is used to make cars, skyscrapers, bridges, and many other structures
7. Iron ore and metallurgical coal are the two main commodities that are used to make steel
8. Platinum and palladium are used in catalytic converters in cars
9. Zinc is mainly used to coat and protect steel from corrosion
10. Grains such as corn are primarily used as feed cattle. Wheat is used as feed cattle as well. Wheat is also used to make breads, baked goods, and many other things. Some corn is also used to make ethanol.
11. Other soft agriculture commodities, such as sugar, coffee, rice, and cocoa, are used for more straightforward reasons

Tracking of Commodities

Here are seven main commodity indices out in the market:

1. The S&P Goldman Sachs Commodity Index (S&P GSCI) tracks 24 commodities (RELATED ETF = GSG)
2. The CRB Index (Thomson Reuters/CoreCommodity CRB Commodity Index) tracks 19 Commodities
3. The Bloomberg Commodity Index tracks 22 raw materials of energy, agriculture, and metal products
4. The Continuous Commodity Index (CCI) tracks 17 different commodities (RELATED ETF = GCC)
5. The Dow Jones-UBS Commodity Index tracks 20 commodities (RELATED ETF = DJP)
6. The Dow Jones Commodity Index Series is a measure of 20 commodities
7. The S&P World Commodity Index tracks 22 commodity futures

The problem is that none of these indices include all traded commodities, and each has a different weighting structure.

The S&P GSCI is the most tracked commodity index. As S&P says, "The widely tracked S&P GSCI is recognized as a leading measure of general price movements and inflation in the world economy."

However, the CRB Index is the most popular.

To have a visual of what commodities are in a popular commodity index like the CRB Index, let’s list its holdings here for more color.

The CRB is made up of 19 commodities, including aluminum, copper, gold, wheat, silver, heating oil, corn, orange juice, natural gas, lean hogs, sugar, coffee, cocoa, soybeans, WTI crude oil, RBOB gasoline, cotton, live cattle, and nickel).

The S&P GSCI holds 24 commodities, including WTI crude oil, Brent crude oil, heating oil, RBOB gasoline, gasoil, natural gas, aluminum, copper, nickel, lead, zinc, gold, silver, wheat (Chicago and Kansas) corn, soybeans, coffee, sugar, cocoa, cotton, lean hogs, live cattle, and feeder cattle.

In the case of the CRB, the index doesn't have a related ETF like the S&P GSCI does, or like the Continuous Commodity Index or the Dow Jones-UBS Commodity Index do.

How You Can Invest in Commodities

1. Through futures contracts
2. Through related ETFs/ETNs
3. Through companies that have exposure to related areas

Futures - that’s a whole other topic due to the higher risks involved.

The most common way the public invests in/trades commodities is through related ETFs and individual stocks of companies with a concentration in commodities or businesses that cater to the needs of commodity producers.