Commodity

Yerba mate (left), coffee bean (middle) and tea (right), all used for caffeinated infusions, are commodity cash
crops.

In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility:
that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced
them.[1][2][3]

The price of a commodity good is typically determined as a function of its market as a whole: well-
established physical commodities have actively traded spot and derivative markets. The wide availability of
commodities typically leads to smaller profit margins and diminishes the importance of factors (such as
brand name) other than price.

Most commodities are raw materials, basic resources, agricultural, or mining products, such as iron ore,
sugar, or grains like rice and wheat. Commodities can also be mass-produced unspecialized products such
as chemicals and computer memory. Popular commodities include crude oil, corn, and gold.

Other definitions of commodity include something useful or valued[4] and an alternative term for an
economic good or service available for purchase in the market.[5] In such standard works as Alfred
Marshall's Principles of Economics (1920)[6] and Léon Walras's Elements of Pure Economics ([1926]
1954)[7] 'commodity' serves as general term for an economic good or service.

Etymology
The word commodity came into use in English in the 15th century, from the French commodité, "amenity,
convenience". Going further back, the French word derives from the Latin commoditas, meaning
"suitability, convenience, advantage". The Latin word commodus (from which English gets other words
including commodious and accommodate) meant variously "appropriate", "proper measure, time, or
condition", and "advantage, benefit".

Description

Characteristics

In economics, the term commodity is used specifically for economic goods that have full or partial but
substantial fungibility; that is, the market treats their instances as equivalent or nearly so with no regard to
who produced them.[1] Karl Marx described this property as follows: "From the taste of wheat, it is not
possible to tell who produced it, a Russian serf, a French peasant or an English capitalist."[8] Petroleum and
copper are examples of commodity goods:[9] their supply and demand are a part of one universal market.
Non-commodity items such as stereo systems have many aspects of product differentiation, such as the
brand, the user interface and the perceived quality. The demand for one type of stereo may be much larger
than demand for another.

The price of a commodity good is typically determined as a function of its market as a whole. Well-
established physical commodities have actively traded spot and derivative markets.

Hard and soft commodities

Soft commodities are goods that are grown, such as wheat, or rice.

Hard commodities are mined. Examples include gold, silver, helium, and oil.

Energy commodities include electricity, gas, coal and oil. Electricity has the particular characteristic that it is
usually uneconomical to store, and must therefore be consumed as soon as it is produced.

Commoditization
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 DRAM chips. An article in The New York Times cites multivitamin supplements as an
example of commoditization; a 50  mg tablet of calcium is of equal value to a consumer no matter what
company produces and markets it, and as such, multivitamins are now sold in bulk and are available at any
supermarket with little brand differentiation.[10] Following this trend, nanomaterials are emerging from
carrying premium profit margins for market participants to a status of commodification.[11]

There is a spectrum of commoditization, rather than a binary distinction of "commodity versus

differentiable product". Few products have complete undifferentiability and hence fungibility; even
electricity can be differentiated in the market based on its method of generation (e.g., fossil fuel, wind,
solar), in markets where energy choice lets a buyer opt (and pay more) for renewable methods if desired.
Many products' degree of commoditization depends on the buyer's mentality and means. For example,
milk, eggs, and notebook paper are not differentiated by many customers; for them, the product is fungible
and lowest price is the main decisive factor in the purchasing choice. Other customers take into
consideration other factors besides price, such as environmental sustainability and animal welfare. To these
customers, distinctions such as "organic versus not" or "cage free versus not" count toward differentiating
brands of milk or eggs, and percentage of recycled content or Forest Stewardship Council certification
count toward differentiating brands of notebook paper.

Global commodities trading company

This is a list of companies trading globally in commodities, descending by size as of October 28, 2011.[12]

1. Vitol
2. Glencore International AG
3. Trafigura
4. Cargill
5. Salam Investment
6. Archer Daniels Midland
 7. Gunvor (company)
8. Mercuria Energy Group
9. Noble Group
10. Louis Dreyfus Group
11. Bunge Limited
12. Wilmar International
13. Olam International
14. Rochel International

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 were
considered equivalent. On a commodity exchange, it is the underlying standard stated in the contract that
defines the commodity, not any quality inherent in a specific producer's product.

Commodities exchanges include:

Bourse Africa (formerly GBOT)

Bursa Malaysia Derivatives (MDEX)
Chicago Board of Trade (CBOT)
Chicago Mercantile Exchange (CME)
Dalian Commodity Exchange (DCE)
Euronext.liffe (LIFFE)
Kansas City Board of Trade (KCBT)
London Metal Exchange (LME)
Marché à Terme International de France (MATIF)
Mercantile Exchange Nepal Limited (MEX)
Multi Commodity Exchange (MCX)
National Commodity and Derivatives Exchange (NCDEX)
National Commodity Exchange Limited (NCEL)
New York Mercantile Exchange (NYMEX)

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.

In order to diversify their investments and mitigate the risks associated with inflationary debasement of
currencies, pension funds and sovereign wealth funds allocate capital to non-listed assets such as a
commodities and commodity-related infrastructure.[13]

Inventory data
The inventory of commodities, with low inventories typically leading to more volatile future prices and
increasing the risk of a "stockout" (inventory exhaustion). According to economist theorists, companies
receive a convenience yield by holding inventories of certain commodities. Data on inventories of
commodities are not available from one common source, although data is available from various sources.
Inventory data on 31 commodities was used in a 2006 study on the relationship between inventories and
commodity futures risk premiums.[14]

Commodification of labour
In classical political economy and especially in Karl Marx's critique of political economy, a commodity is
an object or a good or service ("product" or "activity" [15]) produced by human labour.[16] Objects are
external to man.[17] However, some objects attain "use value" to persons in this world, when they are
found to be "necessary, useful or pleasant in life".[18] "Use value" makes an object "an object of human
wants",[19] or "a means of subsistence in the widest sense".[20]

As society developed, people found that they could trade goods and services for other goods and services.
At this stage, these goods and services became "commodities". According to Marx, commodities are
defined as objects which are offered for sale or are "exchanged in a market".[21] In the marketplace, where
commodities are sold, "use value" is not helpful in facilitating the sale of commodities. Accordingly, in
addition to having use value, commodities must have an "exchange value"—a value that could be
expressed in the market.[22]

Prior to Marx, many economists debated as to what elements made up exchange value. Adam Smith
maintained that exchange value was made up of rent, profit, labour and the costs of wear and tear on the
instruments of husbandry.[23] David Ricardo, a follower of Adam Smith, modified Smith's approach on this
point by alleging that labour alone is the content of the exchange value of any good or service.[24] While
maintaining that all exchange value in commodities was derived directly from the hands of the people that
made the commodity, Ricardo noted that only part of the exchange value of the commodity was paid to the
worker who made the commodity. The other part of the value of this particular commodity was labour that
was not paid to the worker—unpaid labour. This unpaid labour was retained by the owner of the means of
production. In capitalist society, the capitalist owns the means of production and therefore the unpaid labour
is retained by the capitalist as rent or as profit. The means of production means the site where the
commodity is made, the raw products that are used in the production and the instruments or machines that
are used for the production of the commodity.

However, not all commodities are reproducible nor were all commodities originally intended to be sold in
the market. These priced goods are also treated as commodities, e.g. human labour-power, works of art and
natural resources ("earth itself is an instrument of labour"),[25] even though they may not be produced
specifically for the market, or be non-reproducible goods.

Marx's analysis of the commodity is intended to help solve the problem of what establishes the economic
value of goods, using the labour theory of value. This problem was extensively debated by Adam Smith,
David Ricardo[26] and Karl Rodbertus-Jagetzow among others.

All three of the above-mentioned economists rejected the theory that labour composed 100% of the
exchange value of any commodity. In varying degrees, these economists turned to supply and demand to
establish the price of commodities. Marx held that the "price" and the "value" of a commodity were not
synonymous. Price of any commodity would vary according to the imbalance of supply to demand at any
one period of time. The "value" of the same commodity would be consistent and would reflect the amount
of labour value used to produce that commodity.

Prior to Marx, economists noted that the problem with using the "quantity of labour" to establish the value
of commodities was that the time spent by an unskilled worker would be longer than the time spent on the
same commodity by a skilled worker. Thus, under this analysis, the commodity produced by an unskilled
worker would be more valuable than the same commodity produced by the skilled worker. Marx pointed
out, however, that in society at large, an average amount of time that was necessary to produce the
commodity would arise. This average time necessary to produce the commodity Marx called the "socially
necessary labour time".[27] Socially necessary labour time was the proper basis on which to base the
"exchange value" of a given commodity.

Commodity Super Cycle

Commodity Super Cycles are periods of times, around a decade where commodities as a whole trade at a
price that is greater than their long term Moving average.[28] A Super Cycle will usually occur when there
is large industrial and commercial change in a country or world that requires more resources to support the
change. As prices rise goods and services that rely on commodities rise with them.

History of Super Cycles

There have been four super cycles over the last 120 years worldwide.[29] The first commodity super cycle
started in late 1890 and was accelerated on the back of widespread U.S. industrialization and World War 1.
In 1917 commodity prices peaked and then entered a downtrend to the 1930s. As war erupted in Europe in
the late 1930s and eventually including the U.S. the world saw a new cycle begin. Countries were not just
preparing for war but also the Aftermath of World War II as lots of Europe and Asia faced heavy
rebuilding. This cycle eventually peaked in 1951 and faded away in the early 70s.[30] In the 1970s as world
economies grew they needed more materials and energy to support expansion leading to increases in prices
across the board. This boom came to an end as foreign investments fled as extractive industries became
nationalized.[30] The most recent of commodity super cycles began in 2000 as China joined the World
Trade Organization.[30] China was also in the beginning of their boom as industry and expansion took off.
Workers moved into cities as emerging industries took off and offered a lots of new jobs and opportunities.
In 2008 when the Great Recession hit it put a halt onto the supercycle as GDP's across the world tanked
leaving many economies in recessions.

The next or the fifth supercycle could arrive as the world enters the final phases of the COVID-19
pandemic and starts to build massive clean energy infrastructure in view of the commodity price
increase.[31]

See also
2000s commodities boom
Commercial off-the-shelf or "commercially available off-the-shelf" (COTS)
Commodification
Commodity (Marxism)
Commodity currency
Commodity fetishism
Commodity market risk and values
Commodity money
Commodity price shocks
Commodity price index
List of traded commodities
Sample grade
Standardization
 Trade

Notes
1. "Learn What Commodities Are in These Examples!" (http://beginnersinvest.about.com/cs/co
mmodities/f/whatcommodities.htm).
2. "Commodity definition" (https://www.merriam-webster.com/dictionary/commodity). Merriam-
Webster Dictionary. Retrieved 30 July 2018.
3. T., H. (3 January 2017). "What makes something a commodity?" (https://www.economist.co
m/the-economist-explains/2017/01/03/what-makes-something-a-commodity). The
Economist. Retrieved 22 January 2020.
4. Merriam-Webster Dictionary, commodity, def. 2a. (https://www.merriam-webster.com/dictiona
ry/commodity) Archived (https://web.archive.org/web/20220420162300/https://www.merriam-
webster.com/dictionary/commodity) 2022-04-20 at the Wayback Machine. Retrieved January
2022.
5. Mas-Colell, Andreu, Michael D. Whinston, and Jeffery R. Green (1995). Microeconomic
Theory, Oxford, p. 17.
6. Alfred Marshall (1920). Principles of Economics Press cntrl-f to search for commodity vis- à-
vis goods and services. (https://eet.pixel-online.org/files/etranslation/original/Marshall,%20Pr
inciples%20of%20Economics.pdf) Archived (https://web.archive.org/web/20220114181004/
https://eet.pixel-online.org/files/etranslation/original/Marshall,%20Principles%20of%20Econ
omics.pdf) 2022-01-14 at the Wayback Machine
7. Léon Walras ([1926] 1954). Elements of Pure Economics Press cntrl-f to search for
commodity vis- à-vis goods and services. (http://digamo.free.fr/walras96.pdf) Archived (http
s://web.archive.org/web/20220115062653/http://digamo.free.fr/walras96.pdf) 2022-01-15 at
the Wayback Machine
8. Karl Marx, "A Contribution to the Critique of Political Economy" contained in the Collected
Works of Karl Marx and Frederick Engels: Volume 29, p. 270.
9. O'Sullivan, Arthur; Steven M. Sheffrin (2004). Economics: Principles in action. Pearson /
Prentice Hall. ISBN 0-13-063085-3.
10. Natasha Singer; Peter Lattman (15 March 2013). "Workout Supplement Challenged" (https://
www.nytimes.com/2013/03/17/business/a-soldiers-parents-take-aim-at-gnc-and-a-suppleme
nt-maker.html?hpw&pagewanted=all). The New York Times. Retrieved 17 March 2013.
11. C. McGovern, "Commoditization of nanomaterials". Nanotechnology Perceptions 6 (2010)
155–178.
12. "Corrected: Commodity Traders: The trillion dollar club" (https://www.reuters.com/article/us-c
ommodities-houses-idUSTRE79R4S320111028). Reuters. Oct 28, 2011. Retrieved
2008-06-12.
13. M. Nicolas Firzli & Vincent Bazi (2011). "Infrastructure Investments in an Age of Austerity :
The Pension and Sovereign Funds Perspective" (https://web.archive.org/web/20110917182
931/http://www.turkishweekly.net/op-ed/2852/infrastructure-investments-in-an-age-of-austerit
y-the-pension-and-sovereign-funds-perspective.html). Revue Analyse Financière, volume
41. . Archived from the original (http://www.turkishweekly.net/op-ed/2852/infrastructure-invest
ments-in-an-age-of-austerity-the-pension-and-sovereign-funds-perspective.html) on 17
September 2011. Retrieved 30 July 2011.
14. Gorton, GB; et al. (2007). "The Fundamentals of Commodity Futures Returns".
SSRN 996930 (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=996930).
15. Karl Marx, "Outlines of the Critique of Political Economy" contained in the Collected Works
of Karl Marx and Frederick Engels: Volume 28, 80.
16. Karl Marx, Capital, Volume I (International Publishers: New York, 1967) p. 38 and "Capital"
as contained in the Collected Works of Karl Marx and Frederick Engels: Volume 35
(International Publishers: New York, 1996) p. 48.
17. Karl Marx, Capital, Volume I, p. 87 and "Capital" as contained in the Collected Works of Karl
Marx and Frederick Engels: Volume 35, p. 97.
18. Aristotle, Politica (Oxford, 1966) p. 1257.
19. Karl Marx, "Capital in General: The Commodity" contained in the Collected works of Karl
Marx and Frederick Engels: Volume 29 (International Publishers: New York, 1987) p. 269.
20. Karl Marx, "Capital in General: The Commodity" contained in the Collected Works of Karl
Marx and Frederick Engels: Volume 29, p. 269.
21. Karl Marx, Capital: Volume I p. 36 and "Capital" as contained in the Collected Works of Karl
Marx and Frederick Engels: Volume 35, p. 46.
22. Adam Smith, Wealth of Nations (Pelican Books: London, 1970) p. 131 and David Ricardo,
Principles of Political Economy and Taxation (Pelican Books: 1971, London) p. 55.
23. Adam Smith, Wealth of Nations (Pelican Books: London, 1970) p. 153.
24. David Ricardo, Principles of Political Economy and Taxation (Pelican Books: London, 1971)
pp. 56-58.
25. Karl Marx, Capital: Volume I, p. 179 and "Capital" as contained in the Collected Works of
Karl Marx and Frederick Engels: Volume 35, p. 189.
26. David Ricardo, Principles of Political Economy and Taxation (Pelican Books, London, 1971)
pp. 56-58.
27. Karl Marx, Capital: Volume I, p. 39 and "Capital" as contained in the Collected Works of Karl
Marx and Frederick Engels: Volume 35, p. 49.
28. Spilker, Gregor (March 22, 202). "Are We Witnessing the Start of A New Commodities Super
Cycle?" (https://www.institutionalinvestor.com/article/b1r0r28fl471c5/are-we-witnessing-the-
start-of-a-new-commodities-supercycle). institutional investor.
29. Büyükşahin,Mo, Zmitrowicz, Bahattin,Kun, Konrad (January 2016). "Commodity Price
Supercycles: What are they and What lies ahead?" (https://www.bankofcanada.ca/wp-conte
nt/uploads/2016/11/boc-review-autumn16-buyuksahin.pdf) (PDF). Bank Of Canada.
Archived (https://web.archive.org/web/20170501191732/http://www.bankofcanada.ca/wp-co
ntent/uploads/2016/11/boc-review-autumn16-buyuksahin.pdf) (PDF) from the original on
2017-05-01. Retrieved May 2, 2021.
30. Brown, Randy (April 13, 2021). "Are We About To Enter A Commodity Supercycle?" (https://
www.forbes.com/sites/randybrown/2021/04/13/are-we-about-to-enter-a-commodity-supercyc
le/?sh=333754d82d89). Forbes. Retrieved April 28, 2021.
31. Levick, Ewen (2021-03-09). "New commodity supercycle may benefit Mongolia" (https://ww
w.mongoliaweekly.org/post/new-commodity-supercycle-may-benefit-mongolia). Mongolia
Weekly. Retrieved 2021-05-09.

External links
Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality (http
s://ssrn.com/abstract=592262)
Collection of current and historical commodities data (https://web.archive.org/web/20150402
130050/https://www.quandl.com/c/markets/commodities) from Quandl
United Nations Human Rights Council (http://www2.ohchr.org/english/issues/food/docs/Brief
ing_Note_02_September_2010_EN.pdf)
Conceptual problems in commodity regulation (https://web.archive.org/web/2009051021320
4/http://blogs.reuters.com/great-debate/2009/05/05/conceptual-problems-in-commodity-regul
 ation/)

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