Commodity

COMMODITY

A commodity is a basic good, material, or product that is produced in very large quantities and is usually sold in raw or only partly processed form. The most common commodities are essential agricultural products such as wheat, sugar, rubber, and coffee and basic mineral-derived products like copper, tin, or silver. On a more general level, a commodity may also be any manufactured product—for example, computer chips— that has become so common or inexpensive in design or manufacture that it is almost impossible to tell the difference between two producers' versions of that commodity.

Commodities are bought and sold in three markets: the spot market, the forward market, and the futures market. When an individual or company wants to buy (or sell) a commodity right away, they do so on the spot market, where they can negotiate the price, quantity, and other conditions with the seller (or buyer) immediately. When an individual or company wants to prearrange a purchase or sale of a commodity for a specific future date, they turn to the forward market where they can finalize a commodity transaction in advance and according to their requirements without having to wait and see what market conditions will be like months down the road. Both the spot market and the forward market are called the "actuals" market because actual commodities are bought and sold. The third commodities market, the futures market, involves the buying and selling of contracts or "bets" on the future price of commodities rather than the commodities themselves. For example, if the price that a commodities trader is planning to pay for a ton of wheat in six months is lower than the current price for that commodity, he or she may buy a futures contract on wheat that acts as a kind of insurance "bet" that the price of wheat six months from now will be higher. If the price of wheat goes down, the trader can buy the wheat at the price he or she desired. However, if the price of wheat goes higher the trader will win his or her insurance "bet" and make money anyway.

The earliest market or exchange for buying and selling commodities in the United States was a produce exchange operated in New York City during the 1750s. In the nineteenth century, Chicago emerged as the major U.S. commodities market because it was the primary hub for shipping Midwestern farmers' grain to the east coast and beyond. By the time the Chicago Board of Trade (the world's largest commodities exchange) was established in 1848, cotton, tobacco, lumber, and sugar were also being bought and sold there, and new commodities exchanges were being opened in New Orleans, Minneapolis, Duluth, and St. Louis.