commodity

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

In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs.^[1] Economic commodities comprise goods and services.^[2]

The more specific meaning of the term commodity is applied to goods only. It is used to describe a class of goods for which there is demand, but which is supplied without qualitative differentiation across a market.^[3] A commodity has full or partial fungibility; that is, the market treats it as equivalent or nearly so no matter who produces it. "From the taste of wheat it is not possible to tell who produced it, a Russian serf, a French peasant or an English capitalist."^[4] Petroleum and copper are examples of such commodities.^[5] The price of copper is universal, and fluctuates daily based on global supply and demand. Items such as stereo systems, on the other hand, have many aspects of product differentiation, such as the brand, the user interface, the perceived quality etc. And, the more valuable a stereo is perceived to be, the more it will cost.

In contrast, one of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, salt, sugar, coffee beans, soybeans, aluminum, copper, rice, wheat, gold, silver, palladium, and platinum. Soft commodities are goods that are grown, while hard commodities are the ones that are extracted through mining.

There is another important class of energy commodities which includes electricity, gas, coal and oil. Electricity has the particular characteristic that it is either impossible or uneconomical to store, hence, electricity must be consumed as soon as it is produced.

Commoditization (also called commodification) 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 silicon chips.

There is a spectrum of commodification, 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). Many products' degree of commodification depends on the buyer's mentality and means. For example, milk, eggs, and notebook paper are considered by many customers as completely undifferentiable and fungible; lowest price is the only deciding 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 forestry council certification count toward differentiating brands of notebook paper. Larger considerations can enter these equations, such as systemic socioeconomic unfairness (as poor people point out, "sure, it's easy to buy the expensive food when you've got plenty of money") and deception and authentication (e.g., a brand may greenwash its product and consumers lack practical ways to authenticate the claims).

Etymology

The word commodity came into use in English in the 15th century, from the French commodité, to a benefit or profit. Going further back, the French word derived from the Latin commoditatem (nominative commoditas) meaning "fitness, adaptation". The Latin root commod- meant variously "appropriate", "proper measure, time or condition" and "advantage, benefit".

Recently, many industry individuals have begun to identify workers' compensation insurance as a commodity.

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:

• Chicago Board of Trade (CBOT)
• Chicago Mercantile Exchange (CME)
• Dalian Commodity Exchange (DCE)
• Global Board of Trade (GBOT)
• Euronext.liffe (LIFFE)
• Kansas City Board of Trade (KCBT)
• Kuala Lumpur Futures Exchange (KLSE)
• London Metal Exchange (LME)
• New York Mercantile Exchange (NYMEX)
• National Commodity Exchange Limited (NCEL)
• Multi Commodity Exchange (MCX)
• International Indonesian Forex Change Market (IIFCM)
• Marché à Terme International de France (MATIF)

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.

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.^[6]

Commodities in Marxism

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"^[7] produced by human labour.^[8] Objects are external to man.^[9] However, some objects attain "use value" to persons in this world, when they are found to be "necessary, useful or pleasant in life,"^[10] "Use value" makes an object "an object of human wants,"^[11] or is "a means of subsistence in the widest sense."^[12]

As society developed people found that they could exchange goods and services for other goods and services. At this stage, these goods and services became "commodities." Commodities are defined as objects which are offered for sale or are "exchanged in a market."^[13] 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.^[14]

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.^[15] 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.^[16] 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, therefore, 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 labor-power, works of art and natural resources ("earth itself is an instrument of labour",^[17] 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 labor theory of value. This problem was extensively debated by Adam Smith, David Ricardo^[18] 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 the 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 labor 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"^[19] Socially necessary labour time was the proper basis on which to base the "exchange value" of a given commodity.

Value and price are not equivalent terms in economics, and theorising the specific relationship of value to market price has been a challenge for both liberal and Marxist economists. However, Marx held that the value and price of any commodity would coincide only when demand and supply were equivalent to each other.

See also

• 2000s commodities boom
• List of traded commodities
• Commodity fetishism
• Commodity (Marxism)
• Commodity markets
• Commodity currency
• Commodity money
• Commodity price index
• COTS
• Jim Rogers (commodities expert)
• Standardization
• Trade

Notes

External links

Look up commodity in Wiktionary, the free dictionary.

• Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality