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What is a Commodity?

Brendan McGuigan
Brendan McGuigan

In the broadest sense, a commodity is anything that has value, from watches to time to oranges. In a more specific market sense, however, it is an item which is roughly the same market value across the board, with no difference based on quality. Watches, for examples, are not market commodities, because a well-crafted, artisan watch might cost a hundred times as much as a cheap, lower-quality watch. Copper, on the other hand, is always roughly the same price at a given time, because copper is always copper.

Because of this feature, it acts as an excellent investment vehicle, and so fluctuates more or less entirely based on the market itself. A company that mines copper, for example, may gain or lose value based on any number of factors, including the hiring of a new CEO, new legislation in the company’s home country, or simply a perceived weakness in the country. Copper itself, however, has a value determined only by the global supply, the global demand, and the amount of investment being shuffled into copper.

Palm oil is part of the commodity market.
Palm oil is part of the commodity market.

The mainstream commodity market can be split into a number of different markets: precious metals, industrial metals, livestock, agricultural products, energy, and some other items that don’t easily fall into a classification. Precious metals include gold, silver, platinum, and palladium. Industrial metals include aluminum, aluminum alloy, nickel, lead, zinc, tin, recycled steel, and copper. Livestock includes live cattle, feeder cattle, pork bellies, and lean hogs. Agricultural products include soybeans, soybean oil, soybean meal, wheat, cotton number two, sugar numbers eleven and fourteen, wheat, corn, oats, rice, cocoa, and coffee. Energy includes ethanol, heating oil, propane, natural gas, WTI crude oil, Brent crude oil, Gulf Coast gasoline, RBOB gasoline, and uranium. The commodity market also includes rubber, wool, polypropylene, polyethylene, and palm oil.

Wheat is an agricultural commodity.
Wheat is an agricultural commodity.

Many other things could be considered a commodity as well, but they are not traded on a global spot market, and so aren’t usually lumped in with the above items. These include things like rare metals, such as silicon, cobalt, lithium, titanium, selenium, or magnesium, minerals such as bromine or cement, or agricultural products like potatoes, eggs, or flowers.

Items that maintain the same market value, like copper, are considered commodities.
Items that maintain the same market value, like copper, are considered commodities.

Each commodity is usually traded on a different market, and in a different currency. Each one also has a minimum quantity that must be purchased on the spot market. For example, the precious metals are traded in units of one Troy ounce, with gold and silver traded on the CBOT exchange, and platinum and palladium traded on the NYMEX, all in US Dollars (USD). Almost all of the industrial metals are traded on the London Metal Exchange, all in USD, and all by the metric ton. Most gasoline and oil futures are traded in minimum quantities of 42,000 US gallons. Livestock, on the other hand, is all traded on the Chicago Mercantile Exchange, in 40,000 pound increments.

Livestock is considered a commodity.
Livestock is considered a commodity.

Generally, when the stock market becomes volatile, people tend to move their investments into the commodity markets, because they are less volatile. These markets are viewed as being one of the most efficient sorts of markets, responding rapidly to any shift in supply and demand, reaching an equilibrium point rather easily and without too much drastic fluctuation.

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    • Palm oil is part of the commodity market.
      By: uckyo
      Palm oil is part of the commodity market.
    • Wheat is an agricultural commodity.
      Wheat is an agricultural commodity.
    • Items that maintain the same market value, like copper, are considered commodities.
      By: kotomiti
      Items that maintain the same market value, like copper, are considered commodities.
    • Livestock is considered a commodity.
      By: sedineinunes
      Livestock is considered a commodity.
    • Corn is a commodity.
      By: smereka
      Corn is a commodity.
    • Wool is an item considered to be a commodity.
      By: shagliy
      Wool is an item considered to be a commodity.
    • Oats are a type of cereal grass.
      By: Liaurinko
      Oats are a type of cereal grass.
    • Natural gas is a commodity.
      By: Ingo Bartussek
      Natural gas is a commodity.
    • Pork bellies are a common commodity.
      By: Whitebox Media
      Pork bellies are a common commodity.
    • Soybeans and other agricultural products are traded as commodities.
      By: Vasilius
      Soybeans and other agricultural products are traded as commodities.
    • Beef cattle are a commodity.
      By: branex
      Beef cattle are a commodity.
    • Commodities trading is often associated with Chicago in the US.
      By: rudi1976
      Commodities trading is often associated with Chicago in the US.