The Economist explains

What makes something a commodity?

Global commerce is underpinned by these unsexy items, but how do they attain that status?

By H.T.

To mark the publication of "Go Figure", a collection of The Economist’s explainers and daily charts, the editors of this blog solicited ideas on Facebook and Twitter. This week we publish five explainers suggested by our readers, who will each receive a copy of the book.

A COMMODITY, said Karl Marx, “appears at first sight an extremely obvious, trivial thing. But its analysis brings out that it is a very strange thing, abounding in metaphysical subtleties and theological niceties.” A commodities trader might snort at such a definition: there is nothing much metaphysical, after all, about pork bellies—however divine (or sinful) the taste of bacon. Yet for thousands of years, from rice in China to gold, frankincense and myrrh in Biblical times, to spices in the days of empire, they have been the building blocks of commerce. At the peak of the China-led super-cycle in 2011, they accounted for one-third of the world’s merchandise trade. They encompass an array of materials—from food and flowers to fossil fuels and metals—that appear to bear little relation to each other. What makes something a commodity?

In society at large, the word gets pretty bad press. In business-school jargon, commoditisation, of everything from silicon chips to Christmas cards, is associated with dull, repetitive products, however useful, that generate low margins. The extraction of physical commodities has an unseemly air to it. People talk of the “resource curse” (the impact of cyclical ups and downs in prices on poor countries), “Dutch disease” (the impact of high prices on exchange rates), and “blood oil” and “blood diamonds” (the use of extraction proceeds to fund conflict). According to some Debbie Downers, even love has been commoditised by dating apps and the like.

In economic terms, commodities are vital components of commerce that are standardised and hence easy to exchange for goods of the same type, have a fairly uniform price around the world (excluding transport costs and taxes) and help make other products. They are extracted, grown and traded in sufficient quantities that they underpin highly liquid markets, often with futures and options to help producers and consumers protect themselves against price swings. They include cocoa and coffee, zinc and copper, wheat and soyabeans, silver and gold, and oil and coal among numerous other raw materials. Our lives, literally, depend on them. So do many of the world’s economies—and not just corrupt dictatorships. Britain’s Industrial Revolution may not have got going without coal.

Some raw materials that would benefit from being treated like commodities have not yet become so, though. Diamonds do not qualify, because each one differs in quality. Rare earths, though not as rare as the name suggests, are sold in differing grades, often via murky backroom deals, and the volumes are too low for a commodities exchange. Unlike oil, natural gas is not traded worldwide. Its price is mostly determined by long-term contracts that vary from region to region. It may, however, be next in line to join the ranks of global commodities, as the growing worldwide shipments of liquefied natural gas make it more fungible and its price more uniform. Meanwhile, other once-celebrated commodities have lost their claim to fame. With the 1958 Onion Futures Act, America banned futures trading of onions, after two men cornered the Chicago market. The frozen concentrated-orange-juice market is being squeezed despite Eddie Murphy’s best efforts to popularise it in “Trading Places” (pictured)—consumers are opting for fresh varieties. In 2011, the Chicago Mercantile Exchange even stopped offering trade in frozen pork-belly futures. Some commodities may have existed since before the dawn of mankind. But not all will be commodities forever.

Correction (February 1st): A previous version of this explainer mis-stated the plot of “Trading Places”. It was the frozen concentrated-orange-juice market that Eddie Murphy and Dan Ackroyd profited from, not pork-belly futures. Apologies to everyone involved with the 1983 classic and thanks to the many commenters who pointed out the error.

Today's explainer was suggested by Nicholai. This is the second in a series of five. Other explainers in this series include:

Monday: Can markets be too free?
Wednesday:What is the point of spam e-mail?
Thursday: What do think-tanks do?
Friday:
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