Commodity can be described as hard assets that you can touch or any homogenous good traded in bulk on an exchange. They are grouped into agricultural, energy, and metals, with their prices traded in the everyday commodities market.
Commodity as a Business Term
The business will define a commodity as any good or service that is bought and sold purely on price. These encompass traded commodities and. Can also include products that are not differentiated from. Others depending on the brand, benefits, or other distinguishing features.
Types of Commodity
There are various kinds of commodities, but on the whole. There are grouped into three major categories, which include agriculture. Energy, and metals. Let’s take a look at these categories, one after the other:
When we talk about commodities as agriculture, they include:
- Drinkable products like pineapple juice, cocoa. Sugar, coffee, etc., are known as soft markets.
- Grains are also part of agricultural commodities. They include soybeans, oats, corn, wheat soybean oil, etc.
- When it comes to animals, it refers to animals that become food. Like live cattle and pork.
- Also, things that you don’t eat, such as cotton and lumber.
The energy category of commodities includes crude oil. RBOB gasoline, natural gas, and heating oil.
The metal category includes mined commodities, like gold, copper, silver, and platinum.
Commodities as a Hedge for inflation
It is common knowledge that commodity prices typically. Rise when inflation accelerates, which is why investors are always seen flocking to them for their protection in times of increased inflation. Mostly unexpected inflation. Understand that as the demand for goods and services increases, the price of goods and services also rises, and commodities and the raw materials for these goods and services are commodities. Since commodities prices often rise with inflation, this asset class can often serve as a hedge against the decreased buying power of the currency.
How Commodities Are Traded
Here are the following ways commodities are traded:
Buyers and sellers can trade a commodity, either in the spot market otherwise known a the cash market. Here, the buyer and seller immediately complete their transaction based on current prices, or in the futures market.
Most buyers and sellers, on the other hand, trade commodities on the futures markets owing to the fact that many commodity producers, mostly those traditional commodities like grain, bear the risk of potentially negative price changes when their products are finally ready for the market. With futures contracts, the buyer purchases the obligation to receive a specific quantity of a commodity at a particular date and at a specific price. Thus offers some price stability to commodity producers and commodity users.
Futures contracts are standardized, this implies that each commodity has the same specifications for the product’s quality, quantity, as well as delivery. This helps to ensure that all prices mean the same thing to everyone in the market.
Still, in futures trading, there are those who hedge as well as those who speculate on commodities. Hedgers on their end do not seek profit, but rather, they trade primarily to protect against rising (or falling) prices, in order to stabilize the costs (or revenues) of their business’s operations. On the other hand, speculators are strictly in the business for profits and are essentially placing bets on the future prices of certain commodities.