Commodities We Consume in Everyday Life

Commodities are items that are consumed by businesses, governments, and people. Generally, commodities are naturally grown or naturally occurring resources that are collected and sold. Examples of commodified items we use every day are precious metals, corn, wheat, and oil.

Most people are consistent consumers of commodities, which means we have a wealth of knowledge about many of these things. If you're interested in investing, consider using the everyday expertise you gain as a commodity consumer to hone your investment skills and grow your nest egg.

Investing in Commodities

Commodities trade on the commodities exchange, which is regulated by the Commodity Futures Trading Commission (CFTC) rather than the Securities Exchange Commission (SEC). Most commodity investors trade on the exchanges using instruments based on commodity exchange prices.

These securities are called "commodity futures," and commodity exchange-traded funds (ETFs) or exchange-traded notes (ETNs) allow investors indirect access to commodities trading.

Commodity suppliers and purchasers create contracts that specify an amount, price, and delivery date. Both parties can gain or lose value, depending upon the commodity price at the time of sale.

For example, a purchaser signs a contract for 30 bushels of corn for $100 in May to be delivered in August. In August, if 30 bushels of corn sell for $75, the purchaser still will have to pay $100. The supplier will have gained $25, while the buyer will have lost it unless they can sell it somewhere else and gain it back. The securities created based on bushels of corn also gain or lose value from the price difference, affecting the returns of commodities investors.

Commodities We Consume Every Day

Six main segments in the commodity markets trade on U.S. futures exchanges. These commodities offer a high degree of liquidity, and most have ETF and ETN products that attempt to replicate price action in the futures contracts.

Here are some of the most typical commodities that have securities traded by investors:

• Energy
• Precious metals
• Other metals
• Grains
• Soft commodities
• Animal proteins and products

Energy

We put gasoline in our cars, heat and cool our homes, and use electricity to power many things daily. Crude oil, petroleum products like gasoline and heating oil, and natural gas are some of the main ingredients in fueling our lives.

Energy commodities generally trade on a highly liquid basis (they are easily bought and sold) on futures exchanges and have ETF and ETN products that replicate price movements (price fluctuations) in the futures and physical markets.

Precious Metals

Gold, silver, platinum, and palladium each play a part in our daily lives. If we wear or buy jewelry, we are consumers of precious metals. When we drive a car, our automobile likely has a catalytic converter containing precious metals with high melting points.

Other Metals

When we turn on the water faucet, the water flows through pipes that likely contain copper. The homes we live in and the cars we drive contain steel, zinc, nickel, and tin. We wrap our leftovers in aluminum foil or have aluminum siding on our homes. We use batteries that contain lead or other metals that store power.

Agricultural Products

The main ingredient in most bread is wheat. Corn is an important food source for humans and the animal proteins we eat, but it is also a critical biofuel in the U.S. Each time we fill our car with gas, a percentage of the fuel is corn-based ethanol. We consume mayonnaise, salad dressings, and cooking oils that are products of soybeans.

Soft Commodities

Many of us start the day with a cup of coffee, possibly stirring in some sugar—both are soft products. We drink orange juice, eat chocolate, and wear clothes made of cotton.

Animal Proteins

Whether we eat a steak, burger, or hot dog for dinner, they all start as cattle that trade on the futures markets. Pork chops, bacon, or ribs are commodities traded on the hog market.

Using Your Commodities Experience

You know the commodities you consume every day. If you have staple items that are always on your grocery list, there is an excellent chance that someone else does, too. Some commodities are available seasonally, and some are available year-round.

Invest in commodities that you know through experience are available or in demand. Once you choose your commodities investments, be sure to monitor the industries they belong to, and learn some commodities-investing strategies to help you maximize your returns.

Final Thoughts

The population of our planet continues to expand. Commodities are finite goods; there is only so much available. As global demand for raw materials increases, it will likely lead to increased demand and higher production costs, which increases commodity prices.

Commodity prices tend to respond more to shifts in both micro- and macroeconomic cycles than other assets do. Commodities are volatile assets, and many external factors impact their prices. Weather, political factors, civil unrest, and pandemics are all examples of circumstances that can cause prices to rise and fall within hours.

Choosing staple commodities that historically have created positive returns can help your portfolio grow, as long as you diversify your investments to reduce your risk exposure.