What Exactly is a Commodity Anyway?

by Investing School on March 12, 2010

The word commodity was first noticed in the English language in the 15th century. Its origins are French and come from the word “commodite” meaning to benefit or to profit from. In modern times, a commodity is a good or tangible product where this is a demand in place. The good is supplied, however, without qualitative differentiation. It can be interchanged with another product of the same type. One example of this is petroleum. Petroleum is petroleum and is universally accepted as such. Its price will fluctuate daily only because of changes in global supply and demand. These goods can be bought or sold through futures contracts. Some very common commodities are iron ore, crude oil, coal, ethanol, salt, sugar, coffee beans, soybeans, aluminum, copper, rice wheat, gold, silver and platinum.

When goods or services lose differentiation this is called commoditization. This often happens when the intellectual capital that is necessary has dwindled and the good or service cannot be produced as efficiently any longer. Examples of this would be pharmaceutical drugs. These drugs are first rolled out and offer their companies premium margins. But what usually happens over a period of time (often after patent runs out) these same drugs become commodities and are offered at a much lower price point.

Risk is one of the reasons that exchange trading of agricultural commodities began. For example, the farmer will risk the cost of producing and farming his product to get ready for market at sometime in the future because he does not know what the selling price will be.

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