Commodities

Commodities

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Commodities

In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.[1][2][3]

The price of a commodity good is typically determined as a function of its market as a whole: well-established physical commodities have actively traded spot and derivative markets. The wide availability of commodities typically leads to smaller profit margins and diminishes the importance of factors (such as brand name) other than price.

Most commodities are raw materials, basic resources, agricultural, or mining products, such as iron ore, sugar, or grains like rice and wheat. Commodities can also be mass-produced unspecialized products such as chemicals and computer memory.

Description

Characteristics

In economics, the term commodity is used specifically for economic goods that have full or partial but substantial fungibility; that is, the market treats their instances as equivalent or nearly so with no regard to who produced them.[1] Karl Marx described this property as follows: “From the taste of wheat, it is not possible to tell who produced it, a Russian serf, a French peasant or an English capitalist.”[4] Petroleum and copper are examples of commodity goods:[5] their supply and demand are a part of one universal market.

Non-commodity items such as stereo systems have many aspects of product differentiation, such as the brand, the user interface and the perceived quality. The demand for one type of stereo may be much larger than demand for another.

The price of a commodity good is typically determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets.

Hard and soft commodities

Soft commodities are goods that are grown, such as wheat, or rice.

Hard commodities are mined. Examples include gold, silver, helium, and oil.

Energy commodities include electricity, gas, coal and oil. Electricity has the particular characteristic that it is usually uneconomical to store, and must therefore be consumed as soon as it is produced.

Commoditization

Commoditization occurs as a goods or services market loses differentiation across its supply base, often by the diffusion of the intellectual capital necessary to acquire or produce it efficiently. As such, goods that formerly carried premium margins for market participants have become commodities, such as generic pharmaceuticals and DRAM chips. An article in The New York Times cites multivitamin supplements as an example of commoditization; a 50 mg tablet of calcium is of equal value to a consumer no matter what company produces and markets it, and as such, multivitamins are now sold in bulk and are available at any supermarket with little brand differentiation.[6] Following this trend, nanomaterials are emerging from carrying premium profit margins for market participants to a status of commodification.[7]

There is a spectrum of commoditization, rather than a binary distinction of “commodity versus differentiable product”. Few products have complete undifferentiability and hence fungibility; even electricity can be differentiated in the market based on its method of generation (e.g., fossil fuel, wind, solar), in markets where energy choice lets a buyer opt (and pay more) for renewable methods if desired. Many products’ degree of commoditization depends on the buyer’s mentality and means. For example, milk, eggs, and notebook paper are not differentiated by many customers; for them, the product is fungible and lowest price is the main decisive factor in the purchasing choice. Other customers take into consideration other factors besides price, such as environmental sustainability and animal welfare. To these customers, distinctions such as “organic versus not” or “cage free versus not” count toward differentiating brands of milk or eggs, and percentage of recycled content or Forest Stewardship Council certification count toward differentiating brands of notebook paper.

Global commodities trading company

This is a list of companies trading globally in commodities, descending by size as of October 28, 2011.[8]

  1. Vitol
  2. Glencore International AG
  3. Trafigura
  4. Cargill
  5. Salam Investment
  6. Archer Daniels Midland
  7. Gunvor (company)
  8. Mercuria Energy Group
  9. Noble Group
  10. Louis Dreyfus Group
  11. Bunge Limited
  12. Wilmar International
  13. Olam International

Commodity trade

Main articles: Futures exchange and Commodity market

In the original and simplified sense, commodities were things of value, of uniform quality, that were produced in large quantities by many different producers; the items from each different producer were considered equivalent. On a commodity exchange, it is the underlying standard stated in the contract that defines the commodity, not any quality inherent in a specific producer’s product.

Commodities exchanges include:

Markets for trading commodities can be very efficient, particularly if the division into pools matches demand segments. These markets will quickly respond to changes in supply and demand to find an equilibrium price and quantity. In addition, investors can gain passive exposure to the commodity markets through a commodity price index.

In order to diversify their investments and mitigate the risks associated with inflationary debasement of currencies, pension funds and sovereign wealth funds allocate capital to non-listed assets such as a commodities and commodity-related infrastructure.[9]

Inventory data

The inventory of commodities, with low inventories typically leading to more volatile future prices and increasing the risk of a “stockout” (inventory exhaustion). According to economist theorists, companies receive a convenience yield by holding inventories of certain commodities. Data on inventories of commodities are not available from one common source, although data is available from various sources. Inventory data on 31 commodities was used in a 2006 study on the relationship between inventories and commodity futures risk premiums.[10]

Commodity Super Cycle

Commodity Super Cycles are periods of times, around a decade where commodities as a whole trade at a price that is greater than their long term Moving average.[24] A Super Cycle will usually occur when there is large industrial and commercial change in a country or world that requires more resources to support the change. As prices rise goods and services that rely on commodities rise with them.

History of Super Cycles

There have been four super cycles over the last 120 years worldwide.[25] The first commodity super cycle started in late 1890 and was accelerated on the back of widespread U.S. industrialization and World War 1. In 1917 commodity prices peaked and then entered a downtrend to the 1930’s. As war erupted in Europe in the late 1930’s and eventually including the U.S. the world saw a new cycle begin. Countries were not just preparing for war but also the Aftermath of World War II as lots of Europe and Asia faced heavy rebuilding. This cycle eventually peaked in 1951 and faded away in the early 70’s.[26] In the 1970’s as world economies grew they needed more materials and energy to support expansion leading to increases in prices across the board. This boom came to an end as foreign investments fled as extractive industries became nationalized.[26] The most recent of commodity super cycles began in 2000 as China joined the World Trade Organization.[26] China was also in the beginning of their boom as industry and expansion took off. Workers moved into cities as emerging industries took off and offered a lots of new jobs and oppurtunities. In 2008 when the Great Recession hit it put a halt onto the supercycle as GDP’s across the world tanked leaving many economies in recessions.

The next or the fifth supercycle could arrive as the world enters the final phases of the Covid-19 pandemic and starts to build massive clean energy infrastructure in view of the commodity price increase.[27]

See also

Source: Commodity, https://en.wikipedia.org/w/index.php?title=Commodity&oldid=1032048467 (last visited July 14, 2021).

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