What is a commodity?
Commodity is the term used to refer to products of primary origin that are traded on commodity exchanges. They are all products in the raw state or with a small degree of industrialization, with almost uniform quality and produced and commercialized in large volumes from the global point of view. They can also be stocked without significant loss in quality during the period. They can be agricultural, mineral or financial products.
The main commodities currently traded in the world are coffee, wheat, soy, corn, cotton, sugar, alcohol, gold, silver, copper, steel and oil, dollar, euro, shares of large companies, national government bonds, among others.
The concept of commodity is also synonymous with raw material for are used to produce goods manufactured or incorporated in them.
Thus, standardized and non-differentiated products, in which the producer has no pricing power and whose market is characterized by the presence of small barriers to entry and ease of arbitrage in domestic and foreign markets.
Likewise are considered commodities, products of common use worldwide, such as lots of jeans, because some segments in search of lower prices have chosen to homogenize their products, even if there is a worldwide trend towards a difference of products that can differentiate anything, with the argument that the products are provided by being extended.
Commodity relevance
Ate the beginning of the 21st century, characterized by increasing global economic interdependence, where new international trade patterns are fundamental, it has been observed that adding value to raw materials, rather than exporting them to the primary state, is important. In an open economy, domestic commodity prices tend to converge to the international price, and since this tends to fall, it becomes difficult to implement the strategy of reducing costs.
Commodities are of fundamental importance and tend to offer risks and vulnerability. The technologies used to produce them are universally known and widespread, creating very low barriers to entry. As a result, the markets for these products are highly competitive, producing a race for increased productivity and reduced costs. Since, however, there are limits to efficiency reduction, it has been found that a more sustainable strategy is needed for commodities to remain competitive in the globalized market.
The great importance given to commodities in the economy is due to the fact that they can be a form of investment, an option among the many options of application in the market, such as savings or Investment Funds. Thus, the possible oscillations in the prices of these products in the international market can cause losses to the economic agents that transact them.
Commodity negociation
The negotiation of these goods is carried out with future delivery. Unlike what happens in a commercial port, there is no physical movement of products on the exchanges. What is traded are futures contracts, that is, guarantees to buy and sell the products at a future date. For one of the products mentioned to be considered a commodity, there must be a market structure, where sellers and buyers meet and where this form of investment becomes possible.
Through the futures contracts, commitments are made for the purchase and sale of assets in which the quantities negotiated, delivery periods, amounts and payment dates are specified. They are called futures contracts because traders define a price today for a certain quantity of product that will be delivered only later. The money can be received on the date of delivery of the product or anticipated. A futures transaction determines that the buyer must buy a quantity of product at a future date and the seller has to sell but with the price that was combined the day he was entering into the contract.
