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What Is a Commodity?

A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade. They tend to change rapidly from year to year.

Understanding Commodities

The basic idea is that there is little differentiation between a commodity coming from one producer and the same commodity from another producer. A barrel of oil is basically the same product, regardless of the producer.

By contrast, for electronics merchandise, the quality and features of a given product may be completely different depending on the producer. Some traditional examples of commodities include the following:

  1. Grains
  2. Gold
  3. Beef
  4. Oil
  5. Natural gas

More recently, the definition has expanded to include financial products, such as foreign currencies and indexes. Technological advances have also led to new types of commodities being exchanged in the marketplace. For example, cell phone minutes and bandwidth.

Commodities Speculators

The second type of commodities trader is the speculator. These are traders who trade in the commodities markets for the sole purpose of profiting from the volatile price movements. These traders never intend to make or take delivery of the actual commodity when the futures contract expires.

Many of the futures markets are very liquid and have a high degree of daily range and volatility, making them very tempting markets for intraday traders. Many of the index futures are used by brokerages and portfolio managers to offset risk. Also, since commodities do not typically trade in tandem with equity and bond markets, some commodities can also be used effectively to diversify an investment portfolio.

Commodities as a Hedge for Inflation

Commodity prices typically rise when inflation accelerates, which is why investors often flock to them for their protection during times of increased inflation—particularly unexpected inflation. As the demand for goods and services increases, the price of goods and services rises, and commodities are what's used to produce those goods and services. Because commodities prices often rise with inflation, this asset class can often serve as a hedge against the decreased buying power of the currency.

How to trade sugar?

Sugar is a commodity once reserved for the wealthy, but today it is one of the most traded assets worldwide. Here we look at what moves the price of sugar and discuss popular sugar trading strategies.

Sugar trading basics

According to global researchers, the sugar market will be worth more than $52.9 billion by 2022.1 Produced from sugarcane or sugar beets, it’s used for much more than just sweetening food stuffs everything from skin products to fossil fuel alternatives. Due to its versatility, sugar has captured the attention of traders and investors all over the world. They often choose this market because of its size and volatile nature, which offers the opportunity to profit whether its price is rising or falling. Learn how you can get started with these sugar trading basics.

Top sugar-producing countries

The top sugar producers in the world are emerging markets such as Brazil, India and Thailand. Brazil alone is responsible for producing around 39 million tonnes – the same amount as the second and third-ranked countries combined.

What moves the price of sugar?

The price of sugar is moved by several factors that affect supply and demand. Essentially, if more people want to buy sugar than sell it, the price will rise because it is more sought-after (the ‘demand’ outstrips the ‘supply’). On the other hand, if supply is greater than demand, the price will fall. Sugar is priced in US dollars (USD), therefore any ups and downs in the currency will affect its international price. A weak dollar generally means that commodity prices drop, and the demand increases. If the dollar strengthens against other currencies, sugar becomes more expensive and demand decreases. And, because Brazil is the largest sugar producer in the world, fluctuations in the Brazilian real (R$) also affect the price.