What Are Commodities, Exactly?

Commodities : Definition | Futures Contracts | Types

A commodity is a raw, primary product which has not been manufactured or refined. It is a product that is traded internationally, to be used in, or converted to, mass produced products.

What Are Commodities?

Commodities have a fixed price, that price being the cost of finding, mining or harvesting, and as a result, they have no differential value. If their price rises or falls, then it does so universally. The term ‘commodity’ came into English use in the 15th century, and derives from the French ‘commodité’, which means to benefit or profit. This in turn derives from the Latin word ‘commoditatem’, meaning fitness or adaptation. Commodities in the modern sense derive from the trading of agricultural products, whether that be animals, such as goats or pigs; or grain, such as wheat or corn. Commodities such as these were often regarded as a type of primitive currency, and were used to trade with other commodities, or purchase goods that were not commodities. Complex mazes of trade agreements between many countries throughout the world were common, with metals such as gold and silver being traded for wool, spices, and materials.

Commodities today include a range of basic energy sources, foodstuffs and precious metals, and are traded on the world commodity market under strict regulations. A number of commodity exchanges exist around the world, and on each commodity exchange each commodity has its own trading symbol, and its price is based on a specific measurement, such as a tonne or a ounce. Commodities specific to an exchange are traded using one universal currency, irrelevant of where the commodity trader is buying from or selling to. This is to avoid a confusing conflict between what is being traded, and the exchange rates of different currencies. The most commonly used currency is the US Dollar ($). This is regarded as the primary universal currency and can be easily exchanged in any country.

Futures Contracts

Commodities are also traded on a contractual basis, through what is called a commodity futures exchange. This is where a company or organisation agrees a contract to buy a commodity, which will be delivered to them at an agreed time in the future. Each commodity has an agreed set of months in which futures contracts can be delivered. Often these futures contracts can be bought and sold many times before the commodities they specify are delivered: this is the main way that participants in commodity trading make money, and also lose it.

Types of Commodities

A range of commodities are traded today, which may be split into a number of main categories. Sometimes commodities are classified broadly as hard commodities and soft commodities: hard commodities are products that are mined, such as oil or gold, while soft commodities are products that are grown, such as wheat and coffee.

However with the increasing number of commodities now being traded, it is perhaps more helpful to classify commodities more precisely, according to method of production or physical qualities. One category is agricultural commodities, which can include grains, pulses, livestock and other cultivated materials. Examples include corn, rubber, cocoa, sugar, soybeans and feeder cattle. Energy commodities, mostly based around gas and petrochemicals, include Brent Crude oil, heating oil, natural gas and the increasingly important ethanol. Metal commodities can encompass both precious metals and industrial metals: examples are copper, aluminium, silver, and zinc. The emerging category of environmental commodities includes products such as carbon emissions and renewable energy certificates. Indeed, there are many new commodities starting to be traded as technolgy advances, with nanomaterials and polyetylene being two recent examples.

Aside from these, other elements, metals and minerals may have an agreed value, and would therefore be traded as a commodity, however there is no universal market for them and therefore are not included as commodities, even though they may be traded globally. As global demand changes, though, some of these may gain the staus of commodities in the near future.

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