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What Are Commodities?

Commodities are physical assets, usually raw materials, used in the production of goods or services.

Deeper Definition

Commodities are raw materials or agricultural products that can be bought and sold. They are one of the major asset classes of investment. In general, they are not appropriate for individual investors due to their bulk nature. However, businesses from packaged food companies to airlines rely on them. Some examples of commodities include Wheat, corn, soybeans, or other foodstuffs, cattle or other stock animals, cotton, lumber, precious metals such as gold, domestic and foreign currencies, coal, oil, and other fossil fuels. Commodities of the same grade are considered fungible or interchangeable, with each other. This is regardless of who produced, mined, or farmed them.

The fundamental belief is that there is little differentiation between a commodity coming from one producer and the same commodity from another producer. A barrel of oil is essentially the same product, regardless of the producer. On the contrary, for electronics merchandise, the quality and features of a given product may be completely different depending on the producer. For example, if high-quality copper is produced by two mining companies, one in Chile and one in Peru, it is considered fungible. To a buyer, it doesn’t matter which mining company produced it if it has the same quality and purity.

The tangibility of a commodity means it is a physical item that can be seen, touched, and used in a specific field. There are two types of commodities:

  • Soft commodities: Examples are Wheat, coffee, sugar, etc.
  • Hard commodities: Examples are gold, silver, and oil.

For a more precise understanding, it is pertinent to be aware of different commodities in their markets: Base metals (Aluminium, Copper, Lead, Nickel, Zinc), Bullion (Gold, Silver), Energy( Crude oil, natural gas), Agriculture (Corn, cotton, Wheat), etc.

Commodities Example

Some people in 2020 bought gallons of palm oil, an agricultural commodity, to keep and sell when the demand was high. Unfortunately, the Coronavirus pandemic hindered movement and stalled businesses, thus making the palm oil that could have raked in a lot of profits for the investors to waste.

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