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
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 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 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 is a commodity vs goods? ›
A commodity is a raw material used in the production process to manufacture finished goods, while a product is a finished good sold to consumers. No value is added to a commodity, which can be grown, extracted, or mined.
What is considered a commodity? ›
A commodity, also called primary product or primary good, is a good sold for production or consumption just as it was found in nature. Commodities include crude oil, coal, copper or iron ore, rough diamonds, and agricultural products such as wheat, coffee beans or cotton; they are often traded on commodity exchanges.
What is the most common commodity? ›
The most traded commodity is crude oil. Crude oil is used in many products, from petrochemicals to petroleum to lubricants to diesel.
What are 5 cool commodities? ›
farm-raised fish and shellfish; muscle cut and ground chicken, lamb, and goat meat; peanuts, pecans, macadamia nuts, and ginseng. What are excluded items? Processed foods are excluded from COOL requirements.
What are the four main commodities? ›
4 types of commodities
- Precious metals. Precious metals are resources mined from the earth's crust. ...
- Agriculture. Agriculture includes any crops grown for food. ...
- Energy. Energy commodities are resources that power vehicles, homes, businesses and buildings. ...
- Meat and livestock.
- 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.
The smartphone is now a commodity. The followers will have to adopt lean methodologies and strive to reduce their operational cost to remain profitable. They will have to adopt unique pricing strategies and product differentiation to survive.
Food commodities are generic products unpackaged or with mainly plain labelling. Raw commodities [e.g. fruits, vegetables, meat] rely on their nutritional value or traditional use, and derived products and ingredients [flour, sugar, fats and oils] rely on their technical use for sale.
Why would someone buy a commodity? ›
Why invest in commodities. 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.
Is sugar considered a commodity? ›
Sugar cane is considered one of the most valuable agricultural commodities in the world.
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.
Are cars considered 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 are five commodities? ›
Top commodities for export included almonds, dairy and dairy products, pistachios, wine and walnuts. California's agricultural export statistics are produced by the University of California, Department of Agricultural and Resource Economics.
What are the top 5 food commodities? ›
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.
