What is a Commodity?

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A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type; commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers.

When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.

The basic idea is that there is little differentiation between a commodity coming from one producer and the same commodity from another producer. A barrel of oil is basically the same product, regardless of the producer. By contrast, for electronics merchandise, the quality and features of a given product may be completely different depending on the producer. Some traditional examples of commodities include grains, beef, coffee, oil, and natural gas.

The sale and purchase of commodities are usually carried out through futures contracts on exchanges that standardize the quantity and minimum quality of the commodity being traded. For example, the Chicago Board of Trade stipulates that one wheat contract is for 5,000 bushels and also states what grades of wheat can be used to satisfy the contract.

You can trade commodities for a speculative motive, to participate in the price changes of a commodity. You make your decision on what position to take on a commodity based on, for example, economic forecasts.

 


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