Commodity

1. Definition

A Commodity is a basic good used in commerce that is interchangeable with other goods of the same type. * Key Feature (Fungibility): Commodities are treated as equivalent regardless of who produced them. A barrel of WTI oil is the same whether it came from Well A or Well B.

2. Classification

They are generally categorized into two main groups: Hard and Soft.

2.1. Hard Commodities

Natural resources that are mined or extracted. * Energy: Crude Oil, Natural Gas, Coal. * Precious Metals: Gold, Silver, Platinum. * Base Metals: Copper, Aluminum, Iron Ore, Lithium.

2.2. Soft Commodities

Agricultural products or livestock that are grown or raised. * Agriculture: Corn, Wheat, Soybeans, Coffee, Sugar, Cotton. * Livestock: Live Cattle, Lean Hogs.

3. Key Characteristics

1. Inflation Hedge: Commodity prices typically rise when inflation accelerates, making them a popular asset class to protect purchasing power.
2. Supply Shocks: Prices are highly sensitive to physical factors like weather patterns (El Niño), geopolitical conflicts, and supply chain disruptions.
3. Standardization: To be traded on an exchange (like CME or LME), commodities must meet strict standards of quality (basis grade) to ensure standardization.