Commodity

Commodity

Overview
In economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services.

The more specific meaning of the term commodity is applied to goods only. It is used to describe a class of goods for which there is demand, but which is supplied without qualitative differentiation
Product differentiation
In economics and marketing, product differentiation is the process of distinguishing a product or offering from others, to make it more attractive to a particular target market. This involves differentiating it from competitors' products as well as a firm's own product offerings...

 across a market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...

. A commodity has full or partial fungibility
Fungibility
Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution, such as crude oil, wheat, precious metals or currencies...

; that is, the market treats it as equivalent or nearly so no matter who produces it.
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In economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services.

The more specific meaning of the term commodity is applied to goods only. It is used to describe a class of goods for which there is demand, but which is supplied without qualitative differentiation
Product differentiation
In economics and marketing, product differentiation is the process of distinguishing a product or offering from others, to make it more attractive to a particular target market. This involves differentiating it from competitors' products as well as a firm's own product offerings...

 across a market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...

. A commodity has full or partial fungibility
Fungibility
Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution, such as crude oil, wheat, precious metals or currencies...

; that is, the market treats it as equivalent or nearly so no matter who produces it. Petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...

 and copper
Copper
Copper is a chemical element with the symbol Cu and atomic number 29. It is a ductile metal with very high thermal and electrical conductivity. Pure copper is soft and malleable; an exposed surface has a reddish-orange tarnish...

 are examples of such commodites. The price of copper is universal, and fluctuates daily based on global supply and demand. Items such as stereo systems, on the other hand, have many aspects of product differentiation, such as the brand
Brand
The American Marketing Association defines a brand as a "Name, term, design, symbol, or any other feature that identifies one seller's good or service as distinct from those of other sellers."...

, the user interface, the perceived quality etc. And, the more valuable a stereo is perceived to be, the more it will cost.

In contrast, one of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot
Spot market
The spot market or cash market is a public financial market, in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market in which delivery is due at a later date...

 and derivative
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...

 markets. Generally, these are basic resources and agricultural
Agriculture
Agriculture is the cultivation of animals, plants, fungi and other life forms for food, fiber, and other products used to sustain life. Agriculture was the key implement in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that nurtured the...

 products such as iron ore, crude oil, coal
Coal
Coal is a combustible black or brownish-black sedimentary rock usually occurring in rock strata in layers or veins called coal beds or coal seams. The harder forms, such as anthracite coal, can be regarded as metamorphic rock because of later exposure to elevated temperature and pressure...

, salt
Salt
In chemistry, salts are ionic compounds that result from the neutralization reaction of an acid and a base. They are composed of cations and anions so that the product is electrically neutral...

, sugar
Sugar
Sugar is a class of edible crystalline carbohydrates, mainly sucrose, lactose, and fructose, characterized by a sweet flavor.Sucrose in its refined form primarily comes from sugar cane and sugar beet...

, coffee bean
Coffee bean
A coffee bean is a seed of a coffee plant. It is the pit inside the red or purple fruit often referred to as a cherry. Even though they are seeds, they are referred to as 'beans' because of their resemblance to true beans. The fruits - coffee cherries or coffee berries - most commonly contain two...

s, soybean
Soybean
The soybean or soya bean is a species of legume native to East Asia, widely grown for its edible bean which has numerous uses...

s, aluminium
Aluminium
Aluminium or aluminum is a silvery white member of the boron group of chemical elements. It has the symbol Al, and its atomic number is 13. It is not soluble in water under normal circumstances....

, copper
Copper
Copper is a chemical element with the symbol Cu and atomic number 29. It is a ductile metal with very high thermal and electrical conductivity. Pure copper is soft and malleable; an exposed surface has a reddish-orange tarnish...

, rice
Rice
Rice is the seed of the monocot plants Oryza sativa or Oryza glaberrima . As a cereal grain, it is the most important staple food for a large part of the world's human population, especially in East Asia, Southeast Asia, South Asia, the Middle East, and the West Indies...

, wheat
Wheat
Wheat is a cereal grain, originally from the Levant region of the Near East, but now cultivated worldwide. In 2007 world production of wheat was 607 million tons, making it the third most-produced cereal after maize and rice...

, gold
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...

, silver
Silver
Silver is a metallic chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal...

, palladium
Palladium
Palladium is a chemical element with the chemical symbol Pd and an atomic number of 46. It is a rare and lustrous silvery-white metal discovered in 1803 by William Hyde Wollaston. He named it after the asteroid Pallas, which was itself named after the epithet of the Greek goddess Athena, acquired...

, and platinum
Platinum
Platinum is a chemical element with the chemical symbol Pt and an atomic number of 78. Its name is derived from the Spanish term platina del Pinto, which is literally translated into "little silver of the Pinto River." It is a dense, malleable, ductile, precious, gray-white transition metal...

. Soft commodities are goods that are grown, while hard commodities are the ones that are extracted through mining
Mining
Mining is the extraction of valuable minerals or other geological materials from the earth, from an ore body, vein or seam. The term also includes the removal of soil. Materials recovered by mining include base metals, precious metals, iron, uranium, coal, diamonds, limestone, oil shale, rock...

.

There is another important class of energy commodities which includes electricity, gas, coal
Coal
Coal is a combustible black or brownish-black sedimentary rock usually occurring in rock strata in layers or veins called coal beds or coal seams. The harder forms, such as anthracite coal, can be regarded as metamorphic rock because of later exposure to elevated temperature and pressure...

 and oil. Electricity has the particular characteristic that it is either impossible or uneconomical to store, hence, electricity must be consumed as soon as it is produced.

Commoditization
Commoditization
Commoditization is the process by which goods that have economic value and are distinguishable in terms of attributes end up becoming simple commodities in the eyes of the market or consumers. It is the movement of a market from differentiated to undifferentiated price competition and from...

 (also called commodification) occurs as a goods or services market loses differentiation across its supply base, often by the diffusion of the intellectual capital
Intellectual capital
The value of an enterprise is made of physical assets, various financial assets and, finally, intangible assets, i.e., intellectual capital . The term intellectual capital conventionally refers to the difference in value between tangible assets and market value. ....

 necessary to acquire or produce it efficiently. As such, goods that formerly carried premium margins
Profit margin
Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.Net profit Margin = x100...

 for market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...

 participants have become commodities, such as generic pharmaceuticals
Generic drug
A generic drug is a drug defined as "a drug product that is comparable to brand/reference listed drug product in dosage form, strength, route of administration, quality and performance characteristics, and intended use." It has also been defined as a term referring to any drug marketed under its...

 and silicon chip
Silicon Chip
Silicon Chip is an Australian electronics magazine. It was started in November, 1987 by Leo Simpson. Following the demise of Electronics Australia, it is the only hobbyist-related electronics magazine remaining in Australia.- Magazine :...

s.

There is a spectrum of commodification, rather than a binary distinction of "commodity versus differentiable product". Few products have complete undifferentiability and hence fungibility; even electricity can be differentiated in the market based on its method of generation (e.g., fossil fuel, wind, solar). Many products' degree of commodification depends on the buyer's mentality and means. For example, milk, eggs, and notebook paper are considered by many customers as completely undifferentiable and fungible; lowest price is the only deciding factor in the purchasing choice. Other customers take into consideration other factors besides price, such as environmental sustainability and animal welfare. To these customers, distinctions such as organic-versus-not or cage-free-versus-not count toward differentiating brands of milk or eggs, and percentage of recycled content or forestry council certification count toward differentiating brands of notebook paper. Larger considerations can enter these equations, such as systemic socioeconomic unfairness (as poor people point out, "sure, it's easy to buy the expensive food when you've got plenty of money") and deception and authentication
Authentication
Authentication is the act of confirming the truth of an attribute of a datum or entity...

 (e.g., a brand may greenwash its product and consumers lack practical ways to authenticate the claims).

Etymology


The word commodity came into use in English in the 15th century, from the French commodité, to a benefit or profit. Going further back, the French word derived from the Latin commoditatem (nominative commoditas) meaning "fitness, adaptation". The Latin root commod- meant variously "appropriate", "proper measure, time or condition" and "advantage, benefit".

Recently, many industry individuals have begun to identify workers' compensation insurance as a commodity.

Commodity trade



In the original and simplified sense, commodities were things of value, of uniform quality, that were produced in large quantities by many different producers; the items from each different producer were considered equivalent. On a commodity exchange, it is the underlying standard stated in the contract that defines the commodity, not any quality inherent in a specific producer's product.

Commodities exchange
Commodities exchange
A commodities exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials and contracts based on them...

s include:
  • Chicago Board of Trade
    Chicago Board of Trade
    The Chicago Board of Trade , established in 1848, is the world's oldest futures and options exchange. More than 50 different options and futures contracts are traded by over 3,600 CBOT members through open outcry and eTrading. Volumes at the exchange in 2003 were a record breaking 454 million...

     (CBOT)
  • Chicago Mercantile Exchange
    Chicago Mercantile Exchange
    The Chicago Mercantile Exchange is an American financial and commodity derivative exchange based in Chicago. The CME was founded in 1898 as the Chicago Butter and Egg Board. Originally, the exchange was a non-profit organization...

     (CME)
  • Dalian Commodity Exchange
    Dalian commodity exchange
    The Dalian Commodity Exchange is a Chinese futures exchange based in Dalian. It is a non-profit, self-regulating and membership legal entity established on February 28, 1993....

     (DCE)
  • Global Board of Trade (GBOT)
  • Euronext.liffe (LIFFE)
  • Kansas City Board of Trade
    Kansas City Board of Trade
    The Kansas City Board of Trade , is an American commodity futures and options exchange regulated by the Commodity Futures Trading Commission...

     (KCBT)
  • Kuala Lumpur Futures Exchange
    Bursa Malaysia
    Bursa Malaysia is an exchange holding company approved under Section 15 of the Capital Markets and Services Act 2007. It operates a fully integrated exchange, offering the complete range of exchange-related services including trading, clearing, settlement and depository services.- History :Bursa...

     (KLSE)
  • London Metal Exchange
    London Metal Exchange
    The London Metal Exchange is the futures exchange with the world's largest market in options, and futures contracts on base and other metals. As the LME offers contracts with daily expiry dates of up to three months from trade date, along with longer-dated contracts up to 123 months, it also...

     (LME)
  • New York Mercantile Exchange
    New York Mercantile Exchange
    The New York Mercantile Exchange is the world's largest physical commodity futures exchange. It is located at One North End Avenue in the World Financial Center in the Battery Park City section of Manhattan, New York City...

     (NYMEX)
  • National Commodity Exchange Limited
    National Commodity Exchange Limited
    Pakistan Mercantile Exchange Limited is Pakistan's first futures commodity market having its registered Head office in Karachi. It is the only company in Pakistan to provide a centralized and regulated place for commodity futures trading and is regulated by Securities and Exchange Commission of...

     (NCEL)
  • Multi Commodity Exchange
    Multi Commodity Exchange
    Multi Commodity Exchange is an independent commodity exchange based in India. It was established in 2003 and is based in Mumbai. The turnover of the exchange for the fiscal year 2009 was US$ 1.24 trillion, and in terms of contracts traded, it was in 2009 the world's sixth largest commodity exchange...

     (MCX)
  • International Indonesian Forex Change Market (IIFCM)
  • Marché à Terme International de France (MATIF)


Markets for trading commodities
Commodity markets
Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts....

 can be very efficient, particularly if the division into pools matches demand segments. These markets will quickly respond to changes in supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...

 to find an equilibrium
Economic equilibrium
In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the values of economic variables will not change. It is the point at which quantity demanded and quantity supplied are equal...

 price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...

 and quantity. In addition, investors can gain passive exposure to the commodity markets through a commodity price index
Commodity price index
A commodity price index is a fixed-weight index or average of selected commodity prices, which may be based on spot or futures prices...

.

Inventory data


The inventory
Inventory
Inventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English...

 of commodities, with low inventories typically leading to more volatile future prices and increasing the risk of a "stockout
Stockout
A stockout, or out-of-stock event is an event that causes inventory to be exhausted. Reorder points are often specified in such a way as to reduce the likelihood of stockouts during replenishment, due to the vendor's lead time, which cause interruptions to sales or deliveries.Stockouts are...

" (inventory exhaustion). According to economist theorists, companies receive a convenience yield
Convenience yield
A convenience yield is an adjustment to the cost of carry in the non-arbitrage pricing formula for forward prices in markets with trading constraints....

 by holding inventories of certain commodities. Data on inventories of commodities are not available from one common source, although data is available from various sources. Inventory data on 31 commodities was used in a 2006 study on the relationship between inventories and commodity futures risk premiums.

Commodities in Marxism


In classical political economy and especially Karl Marx's critique of political economy, a commodity is any good or service produced by human labour and offered as a product for general sale on the market. Some other priced goods are also treated as commodities, e.g. human labor-power, works of art and natural resources, even though they may not be produced specifically for the market, or be non-reproducible goods.

Marx's analysis of the commodity is intended to help solve the problem of what establishes the economic value of goods, using the labor theory of value
Labor theory of value
The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...

. This problem was extensively debated by Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

, David Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...

 and Karl Rodbertus-Jagetzow among others. Value and price are not equivalent terms in economics, and theorising the specific relationship of value to market price has been a challenge for both liberal and Marxist economists.

See also

  • 2000s commodities boom
    2000s commodities boom
    The 2000s commodities boom is the rise in many physical commodity prices which occurred during the decade of the 2000s , following the Great Commodities Depression of the 1980s and 1990s...

  • List of traded commodities
  • Commodity fetishism
    Commodity fetishism
    In Marx's critique of political economy, commodity fetishism denotes the mystification of human relations said to arise out of the growth of market trade, when social relationships between people are expressed as, mediated by and transformed into, objectified relationships between things .The...

  • Commodity (Marxism)
    Commodity (Marxism)
    In classical political economy and especially Karl Marx's critique of political economy, a commodity is any good or service produced by human labour and offered as a product for general sale on the market. Some other priced goods are also treated as commodities, e.g...

  • Commodity markets
    Commodity markets
    Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts....

  • Commodity currency
    Commodity currency
    A commodity currency is a name given to currencies of countries which depend heavily on the export of certain raw materials for income. These countries are typically developing countries, eg...

  • Commodity money
    Commodity money
    Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....

  • Commodity price index
    Commodity price index
    A commodity price index is a fixed-weight index or average of selected commodity prices, which may be based on spot or futures prices...

  • COTS
    Commercial off-the-shelf
    In the United States, Commercially available Off-The-Shelf is a Federal Acquisition Regulation term defining a nondevelopmental item of supply that is both commercial and sold in substantial quantities in the commercial marketplace, and that can be procured or utilized under government contract...

  • Jim Rogers
    Jim Rogers
    James Beeland Rogers, Jr. is an American investor, author, and occasional financial commentator. He is currently based in Singapore. Rogers is the Chairman of Rogers Holdings and Beeland Interests, Inc...

     (commodities expert)
  • Standardization
    Standardization
    Standardization is the process of developing and implementing technical standards.The goals of standardization can be to help with independence of single suppliers , compatibility, interoperability, safety, repeatability, or quality....

  • Trade
    Trade
    Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...


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