A commodity is a physical type of good in economics that can be purchased, sold, or traded for similar economic value goods. Natural resources, such as oil, and staple crops, such as corn, are two examples of commodities. Like other asset classes such as bonds, Commodities have value and can be exchanged on free markets. Commodities, like other properties, can fluctuate in price due to supply and demand on commodity markets as well.
Characteristics
A product has the following two characteristics in terms of economics. First, it is a product that is manufactured and/or marketed by a variety of companies or manufacturers. Second, consistency is consistent across companies that manufacture and distribute it. It isn’t easy to differentiate between the products of one company and those of another. Fungibility is the term for this consistency.
Coal, gold, and zinc are all examples of raw materials that are processed and graded according to industry requirements, making them easy to trade. However, Levi’s jeans will not be considered a commodity. Clothing is a finished product, not a base material, even though everybody wears it. This is referred to as product differentiation by economists.
The term “commodity” does not apply to all raw materials. Natural gas, unlike oil, is too costly to transport across the world, making it impossible to set global prices. Instead, it is most likely traded on a regional level. Another example is diamonds, which differ too much in quality to be sold as graded goods due to the large scale required.
What constitutes a product can shift over time as well. In the United States, onions were traded on commodities markets until 1955, when Vince Kosuga, a New York farmer, and his business partner, Sam Siegel, attempted to corner the market. What’s the end result? Consumers and producers were outraged when Kosuga and Siegel entered the market and made millions. With the Onion Futures Act of 1958, Congress made trading in onion futures illegal.
Markets and Trading
Commodities, including stocks and bonds, are traded on free markets. Most trading in the United States occurs at the Chicago Board of Trade or the New York Mercantile Exchange, though some trading still takes place on the stock exchanges. These markets develop commodity trading rules and units of measurement, making goods easier to exchange. For example, corn contracts are for 5,000 bushels of corn, with a price per bushel set in cents.
Commodities are sometimes referred to as futures because trades are made for delivery later, usually because a good requires time to develop, harvest, or extract and refine. Corn futures, for example, come in four different delivery dates: March, May, July, September, and December. Commodities are typically sold for their marginal cost of production in textbook scenarios, but the real world’s price could be higher due to tariffs and other trade barriers.
This type of trading has the advantage of allowing growers and producers to collect payments in advance, providing them with liquid capital to invest in their companies, take income, pay down debt, or increase output. Buyers prefer futures because they can boost their holdings by taking advantage of market dips. Commodity markets, like commodities, are prone to market fluctuations.
Commodity prices affect both buyers and sellers, as well as customers. For example, as crude oil price increases, gasoline’s worth makes shipping goods more costly.
In conclusion
A commodity-based economy will always be a tricky subject, not only because of its depletion but because of global crisis and politics, on a much larger scale. While a long time ago commodities were the only way of trading and doing any transactions for other goods, we evolved far beyond that, and there are other solutions. Having liquid capital is great, but in a modern world where we have many options we can explore, maybe it’s time to try them out finally. Let’s see if politics and money let us do so and what will bring.
