What are Commodities?
What are Commodities?
Commodities are raw materials that are grown or mined –- They serve as the building blocks with which all other products are made.
A commodity is a raw material that’s either consumed directly or used to make finished goods. Soft commodities include agricultural products like corn or wheat, while hard commodities include oil, gas, and minerals like copper and gold. Commodities are the foundation of the global economy and are often traded on commodity exchanges. All commodities have intrinsic value (meaning they are worth something on their own) and are interchangeable (one unit of a commodity is considered the same as another). In many early societies, commodities acted as currency or were traded directly for other materials.
People have been trading commodities for centuries. Historical evidence suggests that rice was among the first commodities to be traded on futures contracts. As early as 17th-century Japan, people appear to have bought and sold volumes of rice to hedge against poor crop yields. Some archaeologists believe that the practice goes back much further than that — Possibly as far as 6,000 years ago. Rice was an important commodity in human history, and agricultural commodities are still critical in the modern world.
Commodities are like ingredients in a recipe...
The food that comes out of the oven is the final product. But you can’t just make cookies out of thin air. You need eggs, flour, milk, sugar, and all the other things that you combine to create something tastier. The economy functions the same way. It requires copper, oil, steel, iron, and all the other things (collectively called commodities) that turn into added-value products.
The most traded commodities in the world include:
- Crude oil
Commodity markets can be generally broken down into two classes:
These are mostly food-related products, which have a shelf life. They are typically grown rather than mined. Once they get used, they cannot be used again. These are also renewable products, meaning they can be replaced. Soft commodities include:
Hard commodities are things that can last forever. Because they are non-perishable, it’s possible to stock up on these materials until prices rise. Hard commodities are mined and include things like:
- Rare earth minerals
Hard commodities are non-renewable, meaning there is only a finite amount of each of these products. Having a finite amount of something creates scarcity, which makes pricing these commodities different from soft commodities. These materials are also durable –- They can generally be reused, recycled, and repurposed.
Another commodity group worth noting falls between these definitions. Energy products are non-renewable like a hard commodity but are consumed when used. They include things like:
- Natural gas
Commodities are the raw materials used to make products. Products are finished goods — like many of the things people buy at the store. Many companies are in the business of turning commodities into products.
One key difference between a commodity and a product is fungibility. Commodities are generally all the same, at least within the same grade. For example, there are no defining characteristics that differentiate Iowa corn from Kansas corn –- It’s all just corn. The commodity exchange sets an expected quality level for a contract, which is called a basis grade, to account for differences in quality. But the commodity is not differentiated based on branding.
Products, on the other hand, can have different prices based solely on the brand selling them. Products are usually differentiated in other ways too. For instance, cornmeal is not the same as corn tortillas. Products do not sell for the same price, cannot be directly substituted for one another, and are differentiated through branding and advertising.Edit this page on GitHub