Commodity

A commodity is a tangible good that is interchangeable regardless of the producer. Commodities are almost always an input for the production of other goods. A commodity such as crude oil is essentially the same no matter where it comes from and can be used to do all of the same tasks. A car is not a commodity because cars from different producers do not possess the same capabilities or composition and do not perform the same way.

Commodities are traded according the quality of the good, with the level of quality being called the basis grade. A basis grade establishes a certain level of quality so that commodities can be traded in advance of any actual transaction.

For example, a basis level for silver (Ag) is 99.999% pure silver. This basis level ensures the quality of the metal for the buyer and improves the efficiency of transactions so buyers and sellers have a clear expectation about the quality of the good they are purchasing.

Commodity Futures

The guaranteed quality of commodities allows for transactions to be predetermined. Two firms will agree to a transaction at a future date that processes automatically. These transactions are done through a futures market, named as such because firms transact in the present for future exchanges of goods. Future markets make production more efficient as a firm buying the commodity can worry less about the stability or quality of supply. A firm that is selling also benefits from the future transaction because it can worry less about the demand for their product.

Examples of Commodities

• Oil
• Coal
• Natural Gas
• Metals
• Agricultural products such as beef and wheat.