Updated on March 30, 2023
Beginner investors often ask: what is a commodity product? Although the terms commodity and product are often used interchangeably, the terms refer to different production and manufacturing stages.
Commodity products are the final goods produced and sold to consumers after commodities have been mined/harvested, and processed. Commodities include wheat, sugar, crude oil, natural gas, gold, silver, and many others. Investors can trade physical commodities such as wheat through various well-established commodity markets or even invest by purchasing stock in commodity-specific companies.
Commodities Vs. Differentiated Products
Though similar, commodities differ from differentiated products in the following ways;
Producers can interchange commodities with each other because there is virtually no differentiation between them. For instance, crude oil from a producer in one place should be the same as that provided by another. Wheat is the same regardless of where it comes from. This means combining these commodities would not affect the overall quality of the batch.
Conversely, differentiated products are often unique products or those that have a slight variation from the original product. For example, regular gasoline typically has the same price across oil companies. However, if a company produces a high-octane gasoline version, it usually prices it at a higher level than the regular one.
Types of Commodities
When it comes to the agricultural sector, investors have many avenues they can use to invest their money. Agricultural commodities include products such as coffee, corn, sugar, cotton, and others. These commodities have many uses, from food for humans and livestock to producing paper and cardboard products. Agricultural commodities are a relatively stable investment opportunity with an average of 11%- 12% returns.
These investments are both recession and inflation-proof, and globally, the market is worth at least $9 trillion. The market experiences less volatility than others because demand for its products only increases with time- with the increase in the global population and demand for alternative fuel sources, there is an expectation for the industry to grow further.
There are many opportunities for investors to tap into and reap big within the Agricultural sector such as:
Across the world, the major crop nutrients are nitrogen, phosphorus, and potassium. The process of synthetic chemistry results in the production of nitrogen- while mining produces potash and phosphate. The world’s major crops traded on stock exchanges across the globe include corn, soybeans, and wheat which all rely on these key nutrients.
Fertilizer prices skyrocketed in 2021 because raw material costs increased for nitrogen fertilizers in tandem with demand. This led to a boom year for producers such as Nutrien. Following the Russian invasion of Ukraine, prices for fertilizers like nitrogen and potash rose even higher since both countries are major fertilizer producers.
Price hikes have been common in this industry owing to supply chain constraints and material shortages. The industry as a whole has experienced massive shifts due to consolidations that have reshaped the industry. Pesticides being a key component of successfully harvesting agricultural products makes this industry an excellent avenue for investors to get in on the action. Investors can purchase shares in companies such as Bayer Corp, Corteva, and other prominent players in the pesticide market.
Technological advancement has sprung a new digital agriculture industry that utilizes technology to improve agricultural productivity. Advances in satellite imagery, data crunching, mobile computing, and others have increased farmers’ productivity in developed and remote locations worldwide. Investing in such company stocks could be an exciting way to make profitable bets on the commodities market.
This has been gaining traction as an alternative to regular meat, especially among climate change and animal rights activists. Although still in its nascent stages, the industry has enormous growth potential. Investors can invest in stocks like Beyond Meat, Gardien, and others.
Energy is one of the most critical factors of production. Everything from electricity and heating in homes to powering modern technology and transportation is possible by exploiting vital resources. Fossil fuels and alternative energy make up the industry.
Fossil fuels include oil, natural gas, and coal that are mined from the earth and applied to a wide variety of uses. Even though uranium is technically a metal, it is also included under this category.
The alternative energy industry is made up of solar, wind, water, biomass, i.e., geothermal, and fuel cells. These energy sources must be produced, transported, and distributed to consumers 24 hours a day, 7 days a week. The industry moves non-stop, and as has been witnessed with the Russian invasion of Ukraine, any disruption to the supply of these vital resources sends shock waves in markets across the globe.
Investors interested in investing in energy commodity products can do so by purchasing stock oil companies, industry-specific mutual funds, or ETFs. Alternatively, investors might opt for mutual funds or energy sector ETFs, which hold direct investments in oil company stocks.
Much of human history has involved using precious metals, whether as a form of currency or jewelry. People have been mining of gold, silver, platinum, and other metals for centuries. Today, gold and silver still hold much of their former glory owing to their relative stability and consistently increasing demand.
Investors interested in gold or silver can hold them physically in the form of coins or bullion. Alternatively, an investor might buy EFTs or mutual funds that specifically invest in companies that mine the metals.
Commodities under this category feature examples such as gold, silver, copper, and others used for different purposes, both practical and otherwise. For instance, gold is both a pseudo-currency and creates beautiful jewelry. The advantages associated with investing in gold or silver EFTs or mutual funds are the easy liquidity, the fact that one doesn’t have to own the assets physically, and the ability to diversify your investment in different gold or silver stocks quickly.
An exception to the standard definition of commodities, digital commodities result from technological evolution that has created a new category of commodities. Digital commodities include things such as internet bandwidth, mobile phone minutes, and blockchain tokens like cryptocurrencies and NFTs.
Although still in the nascent stages, there is a widespread belief that these commodities will eventually surpass traditional commodity investments as more people adopt blockchain technology in their daily lives.
In conclusion, the answer to the question of what is a commodity product is simple. Commodity products are the final goods a consumer receives after mining or harvesting and processing. Commodities fall under different categories: agriculture, energy, metals, and digital commodities. There are many advantages associated with investing in commodities; however, you must conduct adequate research before determining which product satisfies your investment goals.
Abstract as FAQ
What Is a Commodity Product?
- Digital commodities
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