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A commodity is a physical substance, such as food, grains and metals, that can be sold without differentiation by all suppliers. They are raw materials and agricultural products that are used to manufacture foods and goods for individual and industrial consumption. By and large, commodities are the building blocks of more complex products. Some examples of commodities include iron ore, crude oil, sugar, soybeans, aluminium, rice, wheat, gold and silver.
[edit] PricesThis is the chart for milk prices with a December 2008 delivery date. Scroll down or click here for a list of other commodities listed on Wikinvest. [edit] Commodity Prices are Heavily Inter-ConnectedCommodities prices, more so than stocks or currencies are vastly inter-dependent; that is to say the price of one commodity depends heavily on the prices of other commodities as their production and transportation often require the use of, or are in some way intrinsically linked to, other commodities. For example, the ability to raise and deliver beef requires a significant input of feed grains. As such, if demand for beef increases, so too demand for grains. If demand for beef increases dramatically, grains producers may convert their land for the raising of cattle instead of grains to realize more profit from the highlydemanded beef. Conversely, if the supply of feed grains is somehow diminished (bad weather, for example) the price of beef will likely increase to reflect this grain scarcity, as will the price of grain itself. Further, both grains and beef must be transported from their production center to the delivery location, which requires the use of oil. An increase in the price of oil then necessarily creates higher prices for beef and grains. [edit] Commodity Prices have Immense and Far-Reaching Impact on the Economy as a WholeAs commodities are the raw materials and goods used in the production of finished goods or the facilitation of services, even small fluctuations in commodity prices have far reaching effects on industries or the economy in general. For example, in the above described grain/beef relationship, an increase in the price of grain necessitates an increase in the price of beef, which in turn would have direct effects on either the prices or profit margins (or both) of the fast food industry, the grocery industry, and the restaurant industry. [edit] Commodity Prices are Dependent upon Global Currency ValuesFor commodities traded internationally, the strengths of producers and consumer's currencies can affect the prices of the commodities. For example, even if Brazil (the world's leading sugar producer) produces an abundance of sugar in a given year, if the Brazilian Real is particularly strong relative to other currencies, sugar prices will remain inflated. [edit] Futures Contracts vs. SpotsGenerally speaking, coverage or discussion of commodity prices is in terms of futures prices, wherein the buyer is paying for a specified quantity of the commodity for delivery at a later, predetermined date. It should be noted, however, that seldom does a futures investor actually receive the commodity in question, but instead sells it to some other buyer upon the contract's expiration (if not before). Futures trading reduces the risk for producers of commodities - 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.[1] In this case, futures contracts assure the farmer that he will be paid for the commodity when it is ready for delivery. Spot prices are another means of valuing commodities, wherein the buyer pays the commodity's producer for the immediate delivery of the product. Spot prices can be thought of as the amount of money a buyer would pay a producer for the former to throw the commodity into the back of the latter's truck. [edit] Delivery DatesSince a commodity is by definition a tangible good, its trading is not a continuous and ongoing activity (like that of a stock) as the good must be at some point delivered in order have any usefulness. As such, commodities futures contracts have typically two or more delivery dates per year. For example, corn is delivered in March, May, July, September, and December of every year. Investing in a futures contract necessarily means that the contract will necessary expire. [edit] Old ArticleCommoditization 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.[2] 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. 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 Links related to commodities prices: Charts for Commodity Prices over the last 20 years [edit] Commodities on Wikinvest[edit] References
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