Econ Grapher

Commodities

What are commodities?
Commodities are basic goods that are undifferentiated, and interchangeable with commodities of the same type. Because of the lack of differentiation it is often true that a single price exists for a certain type of commodity; this is truer for commodities that are frequently traded. Thus commodities lend themselves to being traded on exchanges due to this uniformity or near-uniformity (sometimes required to meet minimum quality grades). As such these markets are also highly suited to the use of derivatives such as futures (indeed it is often commodity futures that people talk about when they say "commodities", or refer to a commodity's price e.g. crude oil futures).

How does it relate to Markets?
Commodities are strongly linked to the markets. Indeed commodities are an instrument or an underlying reference on many organized exchanges, the biggest example is the CME (Chicago Mercantile Exchange). Aside from being an instrument to trade in, commodities also play a key role in other markets, and the wider economy; for example rising commodity prices will impact on headline measures of inflation; and even economic growth (e.g. if the oil price rose significantly, it would put an increased burden on the cost base of many enterprises). But commodities can also be an indicator in themselves e.g. if the price of copper is rising, it can indicate growing levels of construction activity. And of course companies that are exposed to commodities (on the cost or revenue side) will be impacted by commodity markets; and thus can be used as part of implementing strategies that take advantage of commodity market views.

Soft vs Hard Commodities
Often people will refer to softs and hards in commodities. Soft commodities are basically agricultural and related types (things that are grown); whereas hard commodities are things like metals, energy, etc (things that are mined). For example soft commodities include: sugar, coffee beans, soybeans, rice, wheat, milk, pork bellies, etc. Hard commodities include: iron ore, crude oil, coal, aluminium, copper, gold, platinum, etc.

Spot vs Futures
The terms "spot" and "future" refer to the different types of trading that occur in exchange traded commodities. Spot trading refers to transactions in the physical commodity itself, with delivery occurring immediately, or as soon as practical. Spot trading on exchange often takes place with standardized contract sizes and quality. Futures refers to contracts to buy or sell the commodity at a future time. Futures contracts are also standardized, with set maturities, delivery dates, quantity and quality. The price of futures is driven off the price of spot commodities (with differences usually relating to the cost of storage, interest rates, etc).

Sources and further reading:
Chicago Mercantile Exchange
Facts and Fantasies about Commodity Futures
Wikinvest - Commodities
Reuters - Commodities data and news
IBISWorld - Commodity Dealing and Brokerage
CRB Indexes - Commodity Indexes
About.com - Commodities
Thomson Reuters/Jefferies CRB Index

Graph Library:
Metric - Commodities

Original Source: http://www.econgrapher.com/encyclopedia-commodities.html

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