Commodity

Business, Legal & Accounting Glossary

Definition: Commodity


Commodity

Quick Summary of Commodity


A reasonably interchangeable good or material bought and sold freely as an article of commerce. Commodities include agricultural products, fuels, and metals and are traded in bulk on a commodity exchange or spot market.




What is the dictionary definition of Commodity?

Dictionary Definition


A commodity is anything for which there is demand, but which is supplied without qualitative differentiation across a given market.

  1. obsolete Convenience; usefulness, suitability.
  2. Anything movable (a good) that is bought and sold.
  3. Something useful or valuable.

Full Definition of Commodity


  1. A physical substance, such as food, grains, and metals, which is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts. The price of the commodity is subject to supply and demand. Risk is actually the reason exchange trading of the basic agricultural products began. For example, a farmer risks the cost of producing a product ready for market at some time in the future because he doesn’t know what the selling price will be.
  2. More generally, a product that trades on a commodity exchange; this would also include foreign currencies and financial instruments, and indexes.

A commodity is a product that is used as a basic source of production for any given industry. A commodity can be defined as any physical substance applied in commerce that is exchangeable with other commodities of similar type. The list of physical substances includes grains and metals. A modern interpretation of commodities includes financial products like indexes and foreign currencies. Commodities are usually traded in commodity exchanges like London Metal Exchange, Multi Commodity Exchange, and Euronext LIFFE. Investors purchase and sell through futures contracts.

A characteristic of commodities is that their prices are determined as a function of their market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, ethanol, sugar, soybeans, aluminum, rice, wheat, gold, and silver.

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 silicon chips.

Linguistically, the word commodity came into use in English in the 15th century, derived from the French word “commodité”, similar in meaning to “convenience” in terms of quality of services. The Latin root meaning is Commoditas, referring variously to the appropriate measure of something; a fitting state, time, or condition; a good quality; efficaciousness or propriety; and advantage, or benefit. The German equivalent is Die Ware, i.e. wares or goods offered for sale. The French equivalent is “Produit De Base” like energy, goods, or industrial raw materials.

The price of any commodity is dependent upon supply and demand. It is believed that risk is the primary reason for the initiation of commodity trading. A farmer takes risk of producing a crop for a market in the future as he does not know the price of his crop at that time. Commodity markets help him to hedge against such uncertainties.

Generally speaking, any tangible good can be categorized as a commodity. A commodity is typically a bulk good such as gold, silver, natural gas, and oil. A commodity may also be a bulk food product like grain, oats, corn, beef, pork bellies, and coffee. Traditionally, a commodity was merely a good, subject to sale or barter. Today, however, a commodity can also represent an investment vehicle. One example is commodity futures. A commodity is traded at the commodities exchange. Commodities exchanges not only facilitates the commodity trade but also establishes and enforces rules and regulations pertaining to the commodity trading process. Depending on its use and trading purpose, a commodity may come in two types – cash commodity and spot commodity. A cash commodity is an actual commodity that is under a futures contract. A spot commodity, on the other hand, is one that is traded on a spot market, pending delivery.

Commodity Trade

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 are considered equivalent. It is the contract and this underlying standard that define the commodity, not any quality inherent in the product.

Commodities exchanges include:

  • Chicago Board of Trade
  • Euronext.liffe
  • London Metal Exchange
  • New York Mercantile Exchange
  • Multi Commodity Exchange

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.

Basis Grade

Basis grade is the minimum commodity standard that is acceptable to meet the obligations of a futures contract. It is also known by the names ‘contract grade’ and ‘par grade’. This standard is essential for maintaining uniformity across a specific product. An example of basis grade is the predetermined ratio of components of sulfur and hydrogen in crude oil.

Delivery Date

The delivery date is referred to as the date of maturity of a currency forward contract. Alternatively, a delivery date is defined as the final date by which the underlying commodity for a futures contract must be delivered so that contract terms are fulfilled.

Commodity Swap

A commodity swap is a type of swap where the price of an underlying commodity affects exchanged cash flows. Commodity swaps are usually executed to hedge against commodity price fluctuations. In practice, the swap mechanism consists of a commodity user who would ensure a maximum price and then consent to pay this fixed price to a financial institution. Commodity users would take payments based on the specific commodity price in the market.


Examples of Commodity in a sentence


And Slade said: It really makes me sad that football club chairmen and boards seem to have lost that most precious commodity – patience. Sam’s sacking at Newcastle had, I suppose, been on the cards for a while, but it is really ridiculous to fire a manager after such a short time.


Synonyms For Commodity


product
goods
merchandise
commodities
cargo


Related Phrases


Stock
Bond
Broker
Commodities exchange
Futures market


Commodity FAQ's


What Is A Commodity?

A commodity is something that is bought or sold in commerce but has no measure of differentiation. No matter who produces it, it’s essentially the same; like a bale of hay.

A commodity is a basic ingredient, a building block used in the production of other goods and services. There’s wheat and cotton and pork bellies. Gold, silver, and copper are a few of the metals traded as commodities. Oil and natural gas are in the energy category. Commodities are interchangeable in terms of quantity and quality: A barrel of oil is a barrel of oil; a bushel of wheat from Kansas is the same as a bushel of wheat from Montana. (Although no one buys or sells anything as paltry as a bushel.) Standards of quality and quantity are ensured via rules set by the federal government and the individual commodities trading exchanges — such as the Chicago Board of Trade and the New York Mercantile Exchange.

Water is a commodity in the traditional sense of the word, but is not traded on commodities exchanges … yet.

Trading in commodities is not for the inexperienced or investors with a low tolerance for risk. Commodities can be traded in spot markets, but are more commonly traded as futures. The spot market is a cash-and-carry sort of operation. The futures market involves trading contracts that specify the date for delivery of a certain amount of a commodity and the price that will be paid. Someone who has no use for 15,000 bushels of wheat could still be a player trying to make money by buying and selling wheat futures at opportune times as others try to lock in good prices.

Commodity moves have a typical pattern: Demand for, say, corn rises, as ethanol becomes popular. Farmers plant more and more. Then there’s an oversupply. So the plantings decrease, and there could be a shortage.

In the chemical industry, it is common to distingush between commodity products and specialty chemicals. Specialties are products that are customized to the needs of the customer. Commodities are those that are made to industry specifications. Often commodities are produced in large, highly automated plants. That keeps costs down, but competitive pressures also keep margins lower.

Specialties are usually developed by working closely with a customer to find a product that meets his particular needs or solves a problem. A good example is 3Ms development of masking tape for use in autopainting in the era of two-tone paint styling. The product had to be adapted to exactly meet customer needs. And as a reward, 3M got the lions share of the business. But in time, others learned to make competitive products. As this happens, specialties become commodities and margins fall. Hence, chemical companies must constantly reinvent themselves to maintain their margins.

Because commodities are made to industry specifications, the industry experiences efficiencies. Competitors often swap product to save shipping costs. Hence, your order placed with a distant supplier with a nice salesman may be filled by the closest supplier. Similarly, product is often comingled in distribution. Ammonia comes up to the midwest in a pipeline fed by numerous producers on the Gulf coast. Gasoline and diesel fuel work similarly. Methanol comes up by barge and is stored in terminals in large tanks. All suppliers in the region sell out of the same tank.


Cite Term


To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
https://payrollheaven.com/define/commodity/
Modern Language Association (MLA):
Commodity. PayrollHeaven.com. Payroll & Accounting Heaven Ltd.
January 26, 2022 https://payrollheaven.com/define/commodity/.
Chicago Manual of Style (CMS):
Commodity. PayrollHeaven.com. Payroll & Accounting Heaven Ltd.
https://payrollheaven.com/define/commodity/ (accessed: January 26, 2022).
American Psychological Association (APA):
Commodity. PayrollHeaven.com. Retrieved January 26, 2022
, from PayrollHeaven.com website: https://payrollheaven.com/define/commodity/

Definition Sources


Definitions for Commodity are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 28th November, 2021 | 22 Views.