What are commodities?
Commodities are natural products that are essential to the global economy and have been traded for thousands of years. From oil to wheat, commodities are used by people, animals, and industries. They are the building blocks of the modern economy and play a crucial role in global economics. In this article, we will delve deeper into the world of commodities, how they are defined, categorized, and traded.
Defining a commodity A commodity is a natural product that is fungible, meaning it can be swapped with another commodity of the same type, regardless of its origin. To make trading easier, buyers and sellers need to know that every asset is of standard size and quality. Clothing or technology, for instance, cannot be traded as commodities. Therefore, commodities traded must be fungible, and that’s why each commodity is standardized.
Soft vs hard commodities Commodities come in two broad variations: soft and hard. Soft commodities are grown or bred for human or animal consumption and are farmed all over the world. On the other hand, hard commodities are mined, extracted or pumped out of the ground and form the basis of the industrial process.
Commodity categories Commodities can also be classified into three main categories: energies, agriculture, and metals. Energy commodities are pumped out of the ground and can significantly impact the global economy. The prices of energies are often driven by the health of the global economy. Agricultural commodities form the basis of the world’s food supply for both humans and animals, and their prices can be affected by weather and spoilage. Metals come in two main types: precious and industrial. Precious metals, such as gold, silver, or platinum, are seen as a “safe haven” by global investors, while industrials, such as aluminum, lead, or copper, are driven by demand from the industries that use them.
Who trades commodities? There are four main types of participants in the commodities market: producers, consumers, speculators, and hedgers. Producers are the companies that make or extract the commodities themselves, such as farmers for softs, miners, or oil companies for hard commodities. Consumers use the products sold by producers, and their demand can influence the prices of commodities. Speculators aim to earn a profit by using volatility in commodity prices, without taking delivery of any actual physical assets. They use derivatives such as futures or options to trade. Hedgers are investors who use the relationship between commodities and other markets, such as stocks and bonds, to protect against negative moves in their portfolios.
Conclusion Commodities are essential to the global economy and humankind overall. They have been traded for thousands of years and continue to play a crucial role in global economics. Commodities can be categorized into three main categories: energies, agriculture, and metals. They can also be classified as soft or hard commodities, depending on how they are produced. Commodities are traded by producers, consumers, speculators, and hedgers, each with their own goals and requirements. Understanding the world of commodities is essential for anyone interested in trading or investing in them.