Types of Commodities
The definition of a commodity is:
A raw material used to manufacture finished goods. Therefore, a product is the finished goods sold to consumers. That is where the main difference of a commodity vs product lies
A commodity can be grown, extracted, or mined.
Producers use various commodities in the manufacturing processes to turn them into everyday consumer goods.
Commodities are found in the majority of goods that end up in the hands of consumers, including tires, tea, ground beef, orange juice, and clothing. Other examples are Gold, Silver, Chrome and other mined minerals.
Commodities are traded mainly on exchanges as futures contracts, stocks, and ETFs. They can also be bought and sold in their physical states on Sellmycommodity.com
The most common commodities include:
- crude oil
- coffee beans
Commodities can be broken down into two main categories:
- Hard Commodities
- Soft commodities
Soft commodities are grown and cannot be stored for extended periods.
Soft commodities futures and contracts are more volatile than others because of the unpredictable levels risks involved.
Hard commodities, however, are mined and extracted from the earth, such as fossil fuels and precious metals. All Hard and Soft commodities are a major part of the futures market.
With advances in technology, newer forms of commodities have been added. These include foreign currencies, cell phone minutes, and bandwidth.
Commodities are taken from their natural state. Value is not added to the commodity. All commodities of the same type and quality sell at the same price regardless of the producer.
The majority of globally traded commodities have well-established markets and are traded on Commodity exchanges in the form of futures.
Commodity Exchanges standardize the grade of the commodity that is being traded.
Besides futures, commodities can also be traded through stocks.
Traders and Investors can buy and sell the stocks of companies related to a particular commodity.
A trader or investor interested in taking a position in an oil and gas company can buy its stock.
Exchange-traded funds also allow investors to take a position in a commodity without investing directly in futures contracts.
Investors can also buy physical commodities, such as gold or silver. These usually hold value as they are valuable. Even Bitcoin has become a commodity recently and the growth has remained steady.
Since commodities are traded in Commodity exchanges, there are several different factors that affect their prices.
The main driver of commodities prices is supply and demand.
Oil for instance, when demand increases the price will increase, but when supply increases, the price falls. Political affairs, economic uncertainty, civil unrest and unfavourable export policies coupled with other issues such as weather can also have a big impact on oil prices.
Products are typically classified as either durable or disposable goods. Durable goods, such as appliances, furnishings, and jewellery, are generally long-lasting and purchased infrequently.
Consumable goods include finished products such as electronics, groceries, or tobacco products, are used quickly or need frequent replacement.
Products are traded and found in many investment portfolios.
Companies that produce consumable goods are generally considered safe investments based on their relative stability and historical performance.
Despite their stability, consumable goods are sensitive to competition and to changes in the prices of the commodities used to produce consumable goods.
The idea of differentiation presents itself within goods and products. Products are not differentiated if they run in separate but similar commodity markets. For example, a butcher that sells organic beef is not offering a differentiated product from a butcher that sells non-organic beef. Rather, the butcher that sells organic beef is operating in a differentiated commodity market.
The only way that the organic beef butcher can offer a differentiated product is if they offer a different value when compared to other organic beef butchers. For example, the first organic beef butcher can differentiate their product from other organic beef butchers by marketing the unique way in which they cut their beef that imparts a unique flavour, while other organic beef butchers use only traditional methods that don’t impart a unique flavour. The first butcher has differentiated their product from their competitor by this technique and the marketing of it.