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A commodity is a physical substance, such as food, grains, and metals, which is interchangeable with another product of the same type. Commodities are raw materials that are used in the production of manufactured goods and foods for industrial and consumer uses. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, ethanol, sugar, soybeans, aluminium, rice, wheat, gold and silver. Commoditization is the process through which the market for a good loses differentiation across its supply base. This happens when the manufacture or production of a good ceases to be a proprietary process and becomes generic, so that the product can no longer be produced at a premium margin. Recently commoditized goods include generic pharmaceuticals, silicon chips, and increasingly personal computers.[1] Risks associated with the purchase and use of commodities caused investors to trade commodities futures as securities, similar to stocks on a stock exchange. Investors buy or sell commodities through futures contracts, agreeing to buy specific quantities of a commodity at a specified price with delivery set at a specified time in the future. Commodity prices are subject to supply and demand, and futures are traded on a variety of international commodity exchanges. Futures trading reduces the risk for producers of raw materials - a good example is a farmer, who must risk the cost of producing agricultural goods without knowing the price they will earn on the market several months later.[2] In early 2008, commodity prices have surged due to an increasing global population and the rapid industrialization of large, developing countries such as China and Russia. Rising prices for commodities have widespread financial impact, as they impact the cost of sales, and operating margin, for almost any business. Rising oil prices, for example, make it more expensive for companies to transport their goods to market. Rising steel prices, meanwhile, make it more expensive to build the trucks or planes that transport these goods. Fluctuations in the prices of diamonds and other precious metals have a major impact on companies like Zale (ZLC). Consumers feel the pinch of rising commodity prices most clearly at the grocery store, where milk, bread, and packaged goods go up in price as companies pass the increased cost of production onto their customers. On average, food prices increase about 2.5% each year. This year, according to federal data, the overall cost of food is predicted to jump 3% to 4%. Food prices were perhaps the report’s biggest eye-catcher, climbing 0.9% for the month, the biggest upsurge since January 1990. Fruit and vegetable prices rose 2% and bread prices increased 1.5%[3]. The cost of bread was 14.1% higher than the year-ago period. Milk prices rose 0.9% and are up 13.5% from a year ago. The International Monetary Fund’s claims that increased production of biofuels is the biggest factor in rising food prices. The IMF estimates that the shift of crops such as corn and soybeans out of the food supply to produce biofuels accounts for almost half of the recent increases in the global food prices. See also: Commodity Exchange, Commodity Futures Trading Commission Pages on Individual Commodities: Oil Prices Links related to commodities prices: Charts for Commodity Prices over the last 20 years [edit] references |
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