What actually makes something a commodity?
A share of a company exists in a register. A bond exists as a promise. A commodity exists as a physical thing sitting somewhere, and that single difference generates every rule in this course.
The definition, in four verbs
A commodity is a physical good, interchangeable within a defined grade, that must be:
- produced — mined, drilled, grown or raised, on a timetable set by geology or biology;
- stored — in a tank, a silo, a vault or a warehouse, at a cost;
- transported — by pipeline, ship, rail or truck, at a cost;
- consumed — burned, eaten, smelted, spun or fed, at which point it is gone.
The word doing the quiet work is interchangeable. One tonne of Grade A copper cathode is as good as any other tonne of Grade A copper cathode, so buyer and seller can agree a price without inspecting a specific lot. A painting is not a commodity, however valuable — there is only one of it. Fungibility within a grade is what makes a market possible at all.
Why the calendar is part of the price
Here is the difference from a share, stated as plainly as it can be. If you hold a share for six months, holding it costs you nothing. It does not rot, leak, evaporate or need a warehouse. It is a row in a database, and the row is the same row wherever you are standing.
Hold a physical commodity for six months and you pay for the privilege. Take 1,000 barrels of crude at $75 a barrel — $75,000 of oil — and rent tank space at an illustrative $0.50 per barrel per month:
- Storage: 1,000 × $0.50 × 6 = $3,000
- Financing the $75,000 at 5% a year for half a year: $1,875
- Total: $4,875 — about 6.5% of the value of the oil, paid simply to still own the same oil in six months.
Nothing happened. No trade, no news. Time itself charged you. That is negative carry, and it is the reason commodity markets are organised around dates in a way equity markets never have to be. The next few lessons keep returning to it.
The three sectors and their clocks
Everything in this domain sorts into three families, each with its own rhythm:
- Energy — crude oil and refined products, natural gas, power, coal. Consumed continuously, produced continuously, stored expensively or (for power) not at all. The clock is weekly inventory data and seasonal heating and driving demand.
- Metals — precious (gold, silver, platinum, palladium) and industrial (copper, aluminium, nickel, zinc, iron ore). Almost never destroyed, so above-ground stock accumulates for decades; new supply takes a decade to build. The clock is very slow.
- Agriculture — grains and oilseeds (corn, wheat, soybeans), softs (coffee, cocoa, sugar, cotton) and livestock (cattle, hogs). Produced on a growing season, in a hemisphere. The clock is a calendar year, and there are two of them because the world has two hemispheres.
A share of a software company and a share of a bank behave differently, but both are claims on cash flows. A barrel of oil and a live steer barely belong to the same conceptual family — one can be stored for years, the other cannot be stored at all. Treating "commodities" as one asset class is convenient and slightly misleading, and this course will keep pointing out where the generalisation breaks.
Try it now
- Twelve months of crude oil and twelve months of corn are below — one energy, one agricultural. Use Measure on each, dragging from its own highest point to its lowest, and write down the two percentage ranges.
- Now compare where the moves happened rather than how big they were. Corn's widest weeks sit in the growing season; crude's sit wherever the supply news landed. Corn does not care what crude did last Tuesday — that is the first practical consequence of "three sectors, three clocks".
- Say the definition out loud once: produced, stored, transported, consumed — and interchangeable within a grade. Every later lesson is a consequence of one of those five words.