Products that come from the earth and are used as raw materials for other manufacturing activities
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What are Commodities?
Commodities are another class of assets just like stocks and bonds. Most commodities are products that come from the earth that possess uniform quality, are produced in large quantities, and by many different producers.
Major commodities include cotton, oil, gas, corn, wheat, oranges, gold, and uranium. Basically, they are the raw materials needed by large manufacturing companies in running their businesses.
It is believed that commodities of the same type can be interchanged for as long as they are of the same grade. For example, a company that manufactures chocolates can buy cocoa produced in Ghana or in Cameroon, still producing the same quality of chocolates.
Types of Commodities
1. Agricultural
Agricultural commodities are those such as coffee, corn – an important source of food for livestock and humans, sugar, soybeans – whose oil is used for making crackers, breads, cakes, and cookies, and wheat – one of the most important food crops in the world.
2. Energy
Energy commodities include crude oil used in transportation activities and production of plastics, natural gas used for electricity generation, and gasoline, which powers light-duty trucks and cars.
3. Metals
Metals include gold, used in making jewelry; silver, also used for jewelry and many other industrial uses as well; and copper, the most widely used form of electrical wiring.
How are Commodities Traded?
Most commodities are traded on commodities exchanges, which include the New York Mercantile Exchange (NYMEX), the Chicago Mercantile Exchange, the Chicago Board of Options Exchange (CBOE), the Kansas City Board of Trade, the Minneapolis Grain Exchange, and the Chicago Board of Trade (CBOT).
Investors may opt for indirect exposure through stocks, exchange-traded funds, and mutual funds.
Differentiated Products
Commodities and differentiated products are both traded in the commodity markets, but they differ in a few ways, as discussed below.
Commodities are interchangeable, and every kind is the same regardless of their source. This means that crude oil from one producer is the same crude oil from another producer. The goods can be combined without affecting the quality of the commodity.
Differentiated products, on the other hand, are unique products or those that are not like the generic version of the products. For example, regular gasoline is priced in the same way across all oil companies. However, if they producehigh-octane gasoline, the product becomes better than what the competitors are selling.
Related Readings
Thank you for reading CFI’s guide on Commodities. To keep learning and advancing your career, the following resources will be helpful:
FAQs
What are Commodities? Commodities are raw materials used to create the products consumers buy, from food to furniture to gasoline or petrol. Commodities include agricultural products such as wheat and cattle, energy products such as oil and natural gas, and metals such as gold, silver and aluminum.
What do you mean commodity? ›
Commodities are raw materials used to manufacture consumer products. They are inputs in the production of other goods and services, rather than finished goods sold to consumers. In commerce, commodities are basic resources that are interchangeable with other goods of the same type.
What are the three types of commodities? ›
There are three major types of commodities; agriculture, energy, and metals. These three are differentiated in the means of accessing them. The means of accessing them is based on whether they are hard or soft.
What are the commodity items? ›
Most commodities are raw materials, basic resources, agricultural, or mining products, such as iron ore, sugar, or grains like rice and wheat. Commodities can also be mass-produced unspecialized products such as chemicals and computer memory.
What are 10 commodities? ›
The 10 largest sources of cash receipts from the sale of U.S.-produced farm commodities in calendar year 2022 are (in descending order): corn, cattle/calves, soybeans, dairy products/milk, broilers, hogs, miscellaneous crops, chicken eggs, wheat, and hay.
What are 4 examples of commodity money? ›
Historically, examples of commodity money include gold, silver, tea, alcohol, and seashells. Even if no one would accept such goods as trade, the owners could still use them for their purposes.
Is commodity a type of money? ›
Throughout history, money has come in many different forms. Most early money systems were based upon a commodity, or valuable good. Commodities are basic goods used by almost everyone. A commodity money system is based upon goods that would have value even if they were not being used as money.
Why would someone buy a commodity? ›
Commodities may minimize portfolio volatility.
Weather, politics or global production can affect commodities returns, so the historical correlation of commodities to traditional assets is low. As a result, the returns from commodities may help reduce volatility in a diversified portfolio.
Are homes considered a commodity? ›
Known as the financialization of housing, the phenomenon occurs when housing is treated as a commodity—a vehicle for wealth and investment—rather than a social good.
What is the most common form of commodity money? ›
The most common form of commodity money was dried indian corn, which was used to purchase the item depicted above and described below.
Electricity is a unique tradable commodity because it is not storable. Several characteristics differentiate it from other tangible commodities like crude oil or natural gas: It is completely interchangeable.
Is food considered a commodity? ›
Food commodities are extremely important for human consumption. Thus, a continuous supply of commodities such as grains, dairy products, meat, eggs, sugar, fruits and vegetables are required to meet the current demand of an increasing world population.
What is the most sold commodity in the world? ›
Crude oil ranks as one of the most traded commodities in the world. Commodity traders who had taken long positions on crude oil last year made a lot of money. Crude oil prices decreased in 2020 as a result of COVID-19 and the consequent global lockdowns. However, the rate of immunisations increased in 2021.
Is a car a commodity? ›
In fact, they're commodities. There is no difference in those vehicles sitting over there (all different makes and models) than there is in corn or wheat futures that are traded on the commodities exchange every day.
What isn't a commodity? ›
If a product isn't fungible – for instance, clothing or technology – then it can't be traded as a commodity.
What are the 20 food commodities? ›
- GRAND TOTAL.
- VEGETABLE PRODUCTS.
- CEREALS (EXCLUDING BEER) WHEAT. RICE (MILLED EQUIV.) BARLEY. MAIZE. RYE. ...
- STARCHY ROOTS. POTATOES. SWEET POTATOES. CASSAVA. YAMS. ROOTS, OTHER.
- SUGAR CROPS. SUGAR CANE. SUGAR BEET.
- SWEETENERS. SUGAR NON-CENTRIFUGAL. SUGAR (RAW EQUIVALENT) SWEETENERS, NES. HONEY.
- PULSES. BEANS. PEAS. PULSES, OTHER.
- TREE NUTS.
Most Actively Traded Commodities
- WTI Crude Oil.
- Brent Crude Oil.
- Natural Gas.
- Soybeans.
- Corn.
- Gold.
- Copper.
- Silver.
The US ranks among the top producers despite the fact that just 1% of the total employed population is employed by agriculture. Judging by the demand-supply relationship, wheat, rice, potatoes, maize, and sugarcane are the top five commodities produced in the world when measured in tons.
What is a real life example of a commodity? ›
A commodity is a raw product. Examples of commodities include grains, like corn, wheat and soybeans; livestock like cattle and hogs; metals like gold and silver, and energy sources like crude oil and natural gas. This raw product is typically sold, and then processed and/or packaged in some way.
