Commodity Futures Contracts - Grains, Livestock, Energy & Metals

    What are Commodity Futures?

    A commodity futures contract is an agreement to buy or sell fixed amounts of a specified commodity at a predetermined price and date. While there are speculators in every market, commodity futures are traded predominately by those looking to hedge the downside risk. The futures market for commodities allows buyers to hedge against falling prices of the physical commodity while sellers will use futures contracts to guarantee a sales price in the future.

    As opposed to index futures, commodity futures are settled through physical delivery. For example, one "live cattle futures contract" commands 40,000 pounds of live cattle. At expiration, the buyer will be responsible for taking physical delivery of those cattle.

    Various Types of Commodity Futures

    Commodity futures can be broken up into a few main categories: grains, livestock, energy, metals, and food/fiber.


    Grain futures contracts include corn, soybeans, soybean oil, wheat, oat, and soybean meal. Grain trading is very tricky around dates when key crop reports are released. You can almost compare the volatility at these points to the volatility that erupts in the stock markets when the federal reserve speaks. Crop development reports and weather information also play a huge role in prices as this affects the supply of grains. Finally, grain traders keep seasonal stocks and historical market performance in the back of their mind to help predict future movements.


    Livestock futures contract are traded on live cattle, hogs, pork bellies, and feeder cattle. Like grains, livestock prices are affected by external factors such as weather and diseases. A clear example of this can be seen with the "mad cow" epidemic that hit a couple years back; thereby, tanking the futures market for this commodity. Other influential factors in this market include supply of competing protein sources and consumer demand.


    Energy futures contracts are traded on many different forms of energy such as: crude oil (including Brent and West Texas Crude), heating oil, natural gas, coal, electricity, propane, and gasoline to name a few. In today's environment, energy futures are extremely volatile due to world political and economical conditions. Terrorist activity, weather conditions, OPEC, and political relations with producer countries impacts the prices of energy dramatically. Energy futures and options are traded on the NYMEX.


    Metal futures come with a firm commitment to take physical delivery of the commodity; however, less than one percent of contracts are actually exercised. Offsetting positions are taken to close the liability before the contract matures. The most common types of metal futures traded are gold, silver, copper, and palladium.

    Gold and silver futures prices are affected by seasonal demand and external political and economic drivers. For example, India and China traditionally drive up gold prices during the wedding season in those countries. Gold has long been used as a hedge against uncertainties such as geo-political risk and inflation. It is often purchased by central banks to back the currency with gold bricks.

    For copper, building construction is the largest consumer of this commodity; therefore, you can see how statistics that relate to housing data would have a strong effect on this commodity. For this reason, copper can be looked at as a general barometer for the health of the economy.


    The final category, food and fiber futures includes commodities such as cocoa beans, coffee, cotton, frozen orange juice, and sugar. Food and fiber futures are affected by the same drivers that can affect the price of grain futures; weather, demand, and disease.

    Tim Ord
    Ord Oracle

    Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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