What Makes a Product a Commodity? Things You Should Know?

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Elena

11/06/2023
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When you work in certain businesses, you may deal with commodities on a regular basis, but if you’re curious to know how a commodity is different from a product, you’ve come to the right place.

Before you start working in an industry that works with commodities, it’s good to learn a little bit about them first. Fortunately, once you learn the differences between a commodity and a product, the rest is fairly simple.

What Makes a Product a Commodity?

The best way to answer the question, what is a commodity product, is to go into detail about the differences between products and commodities. Once you’re familiar with each of these things on their own, it’s easier to compare the two and grasp their differences and similarities.

Simply put, a commodity is an economic good that is interchangeable with other goods that are the same type and have a uniform price. It doesn’t matter who manufactured the commodity, and a good example of a commodity is a raw material or a basic resource. Commodities are also often mass-produced and are components of other products.

Examples of commodities include energy products, including natural gas and crude oil; agricultural products, such as corn and wheat; and even metals, including silver and gold.

If you research the word commodity, you’ll notice that there are several definitions for it, but most of the time it refers to something that is valued or useful.

What Characteristics Are Associated with a Commodity?

Commodities are always economic goods that are essentially interchangeable. Think about when wheat is traded — it doesn’t matter who produced the wheat because when you’re a trader, you’re simply concerned about wheat as a general item. The producer of the wheat is irrelevant.

Compare that to when you’re shopping for a television set. In this case, the brand, type, and even the size of the television will indeed matter. This makes a television set a product and not a commodity, since it does indeed matter who made it and what the specific characteristics are.

There are also hard commodities such as gold, oil, and other mined items, and soft commodities, which include items that are grown, including wheat and soybeans. Hard commodities come from the earth, while soft commodities are grown and you cannot store them for long periods of time.

Most of the time, commodities are raw materials that are used to produce a finished good. In financial markets, commodities are physical goods that are bought and traded, as opposed to securities such as stocks and bonds.

How Does a Product Differ From a Commodity?

If these concepts are still confusing, let’s take a look at the two terms in more detail, starting with these features:

  • A commodity is movable and is bought and sold; a product is a commodity that is put up for sale.
  • A commodity is something that provides an advantage, especially in commerce; a product is a tangible or intangible product or service.
  • A commodity is loosely similar to a wholesale item; a product is almost always a retail item.
  • A commodity is bought and sold and can include merchandise, land, and more; a product is geared towards a customer or end user.
  • A commodity is an undifferentiated good usually with a low profit margin; a product is a branded item that has a retail price.

As you’ve likely already guessed, a commodity can be a product in many instances. Let’s take coffee, for example. Coffee can be traded on the New York Coffee Exchange and it is interchangeable with other types of coffee.

You can buy and sell coffee beans, but you are not buying or selling a specific brand of coffee. On the other hand, specialty coffee is not traded and has a price based on its quality.

Specialty coffee is graded and considered to have a point value of at least 80 points (on a 100-point scale). It is not traded on the New York Coffee Exchange. It is considered a retail product and not a commodity at that point. Coffee that is traded is called commodity coffee, whereas coffee that you buy and pay a retail price for is considered specialty coffee.

The Process: Commodities vs. Products

If you think of any item on the market today, it’s easy to recognize that there is always a process involved. Coffee, for example, is traded and then used as a “raw material” in the production of specific brands of coffee.

Commodities can be grown, mined, or extracted, but no value is added to them because they are simply components of a product that will eventually be sold to the public.

Once a certain commodity — be it coffee or something else — gets to the point where it’s ready to be sold to the public, it becomes a product. There is always a process that all retail products or services need to go through, and you can think of a commodity as one of the components or “ingredients” that is eventually used to make the product.

Commodities are traded on exchanges via ETFs, futures contracts, and stocks. They can also be bought and sold in the physical state they are in at that time. Products, on the other hand, are sold retail to consumers, but they can also be found in people’s investment portfolios.

What are Some Examples of Commodities and Products?

Commodities can include the following items:

  • Crude oil
  • Wheat
  • Ground beef
  • Tires
  • Coffee and tea
  • Clothing
  • Orange juice
  • Petroleum products (oil, gas, etc.)
  • Sugar
  • Cocoa
  • Metals (copper, gold, etc.)

Products include the following items:

  • Specialty coffee
  • Retail gas
  • Tobacco products
  • Groceries
  • Certain financial products
  • Apparel
  • Jewelry
  • Appliances
  • Furniture

What Is a Digital Commodity?

These days, more and more items are offered in digital form, and they can be found everywhere. If a commodity is offered in digital form, it is called a digital commodity, but the term can also refer to digital currency, or cryptocurrency.

Bitcoin is the most well-known digital commodity, but there are others as well, including Ethereum, Binance coin, and Tether, to name a few.

Cryptocurrencies also come in various types, including utility tokens, stablecoins, meme coins, exchange tokens, Central Bank digital currencies (CBDCs), and security tokens, among many others.

If you go online and purchase cryptocurrency in its final form, you are purchasing products at that point and not commodities. It all depends on what stage of the process it is.

Until just a few years ago, digital commodities were not regulated, but that is no longer the case. To protect consumers, the Digital Commodity Exchange Act was passed in 2020, which means you can now buy and trade digital currency with confidence. They were safe to trade even before 2020, but now they are even safer.

Conclusion

To produce a product, there are several steps involved. Commodities are raw materials or basic resources that can be traded or purchased, usually through an exchange of some sort. In contrast, products can be thought of as the final result of the process and are sold directly to consumers.

Commodities are not purchased by consumers but products are, which can be demonstrated by thinking of generic coffee being traded and exchanged, as compared to specialty coffee that is sold on the shelves of grocery and other types of stores.

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