Tuesday, January 19, 2010

Commodities 101: What are Commodities?

This post is part of Asset Prime's "Commodities 101" series.
Commodities are the basic goods upon which businesses, economies, indeed entire civilizations rely for their continued existence. In the investing world, the term refers to a specific set of about forty or so products used as the primary inputs in the world's major industries.
As a rule, they are fungible and generic; a batch of a given commodity harvested in Wisconsin ought to be just as useful as a batch of that same commodity harvested in Brazil. With very few exceptions (the most notable being gold), all commodities end up getting used for something, whether it's building houses, powering nuclear reactors, or feeding cows.
Typically, commodities are categorized by their use or origin, and are often divided into five broad categories:
  • Metals - These include the precious metals, such as gold, silver, and platinum; as well as non-precious, industrial metals like copper and aluminum.
  • Grains - Just like it sounds, grains include wheat, oats, barley, rice, corn and soybeans.
  • Meats - Livestock, such as pigs and cows, as well as animal products like milk and butter.
  • Energy - The inputs needed to power engines, generators, and the like. This includes crude oil and its various refinements, as well as natural gas, ethanol, and uranium.
  • Softs - A hodgepodge of "other" commodities, includes cocoa, coffee, sugar, cotton, orange juice, and lumber. The term used to refer to tropical, agricultural commodities, but for whatever reason Pacific Northwestern wood products were thrown into the category.
Depending on where you get your news, you may see people divide metals into precious and non, refer to grains and oilseeds separately, make finer distinctions in energy, or break wood products out of the softs, but for the most part, those are the types of commodities that exist in the financial world, and they are the basis of the entire global economy.

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