Commodities are raw products that can be processed by someone other than the producer of new products. Examples of commodities include grains, like corn and wheat, Livestock such as cattle and hogs, metals including gold and silver and energies like crude oil and natural gas.
These raw products, or commodities, are processed into products like ethanol, jewelry, and gasoline that consumers purchase at retail outlets. The quality of the commodity must be uniform from all producers. So all the bushels of corn and all the bales of cotton and all the barrels of crude oil are essentially the same regardless of who produced them.
There are hundreds, if not thousands, of commodities produced and consumed all over the world. But it would be difficult to establish a global price for these goods without some form of central market. Similarly, it would be inconvenient and expensive to have an enormous, focal area to which every one of the vendors would convey their wares and from which every one of the purchasers would pull them elsewhere.
Commodity markets are also known as futures markets or commodity exchanges function as central locations which connect buyers and sellers to determine the current value of the products. While commodity markets may not be recognized as a vital link in the producer to consumer food chain, they have a profound effect on the agricultural community because it is in the markets that prices of raw commodities are determined. That is true whether farmers sell their goods in the cash markets or the futures markets themselves.
Formed by the merger of Chicago Board of Trade and the Chicago Mercantile Exchange in 2007, the CME Group in Chicago is the world’s largest exchange. The CME Group owns and operates the Chicago Board of Trade, or CBOT, which focuses primarily on grains and oilseeds like soybeans. CME also owns the Chicago Mercantile Exchange where livestock like cattle and hogs are traded. Other commodities also are traded in other markets. Precious metals and cotton, for instance, are traded in New York exchanges.
Regardless of their names or locations, these trading centers all provide the same thing, a central location for buyers and sellers to negotiate prices and execute trades.