Commodity

Definition

The term commodity refers to any mass-produced, unspecialized product which is oftentimes used as a raw material when creating a more specialized product. While the quality of a particular commodity may have specifications, its production oftentimes spans many suppliers.

Explanation

Commodities are typically a product of the agriculture and mining industries. Consumers are familiar with agricultural commodities such as corn and wheat as well as energy commodities such as gasoline, electricity, and natural gas. And while all of these commodities may have to conform to certain specifications, such as an octane rating for gasoline, many producers have the ability to create a uniform product.

Commodities traded on an exchange will also conform to a set of specifications, or grades, to ensure the quality of the product. Deliverable grades are the set of standards established and maintained by commodity exchanges. In addition to delivery grade, an exchange will also provide specifications for the quantity of the commodity. For example, the following is a specification for the 50 tons of corn traded in one futures contract:

“The goods must be delivered dry, without abnormal odor or smell, free from living parasites on the goods and must meet all current trading standards and the legislation in force, having the following specifications: Water content: 15 %, Broken grains: 4 %, Sprouted grains: 2.5 %, Grains impurities: 4 %, and Other impurities: 1 %.”

Related Terms

commodity trading advisor, commodity pool, commodity pool operator, Commodity Futures Trading Commission