There are mainly two types of commodity markets. They are normal future market and the inverted future market. In the normal future market, the prices of future market contracts increase with maturity. This is because the possession of a commodity carries a cost over the period. These costs are insurance cost, storage cost, and interest factors. The contract with the nearest contract month is priced lowest. On the other hand, the contract with the longer period is priced at a higher level.
In the inverted market, the price of the future market contract decreases with the decrease in a period of maturity. The contract is priced highest for the nearest contract month and the lowest for the distant contract monthly.
The market for a commodity is inverted. When short term supply disruption creates a shortage of the commodity in the market. This temporary shortage pushes up its short term price. It also affects the future prices of nearby months. If the supply is expected to recover over a longer period, the prices of long term contracts remain unaffected.
There are two types of commodities which are traded in the market. They are hard commodities and soft commodities.
The soft commodities include commodities grown on agricultural farms. Wheat, corn, soybean, and sugars are examples of soft commodities. Soft commodities have a short shelf life and highly prone to damage due to bad weather. As a result, their prices are more volatile in the short term. So the weather is the primary price determinant in soft commodities. Further, the weather forecast plays an important role in a price change for commodities.
Hand commodities include those who are mined or extracted from the earth’s natural resources. Examples are metals, energy resources like crude oil, petrol or natural gas, etc.
Hand commodities are easier to store as compared is soft commodities. Besides, the weather does not have a direct impact on their production and supply. Due to this reason, their prices are less volatile in the short run. The price of hard commodities depends more on global macroeconomic factors like GDP growth industrial production and interest rates.