What is a Commodity?

Commodity is every possession mass-produced by man, or even those that are available in nature in large quantities, which have a value or utility and a very low level of differentiation or specialization.

Well known examples are corn, soybeans and wheat, since they are produced in quantity and they have a very low level of differentiation, bear in mind that something planted in Uruguay may not be very different from something equal planted in Argentina, Brazil or any other country that could produce it, hence the low level of differentiation.

How are they classified?

They are classified in different groups:

Grains: Soybeans, corn, wheat, oats, barley Softs: Sugar, cotton, cocoa, coffee, etc.

Meat and derivatives: live cattle, live pigs, butter, milk Energies: Nafta, ethanol, fuel oil, gas, oil, etc.

Metals: Gold, silver, copper, platinum, aluminum.

There are also financial commodities, such as bonds of 30 years, Eurodollars, etc; indices as the Dow Jones, the Nasdaq100, etc, and even coin, as the pound, the euro, the Mexican Peso, etc.

How are these possessions managed in practice?

In most cases using the future method. Somehow, commodities market working way is to future, or in a forward market. A futures market is the one in which the transaction parts commit to consume it in a given future date, where the price will be settled and agreed. In turn there is the spot market in which the transactions are executed and settled on the day, or in a maximum term of 72 hours at a spot price, this as opposed to the first form of transaction. This makes sense especially in the stock or financial market, since the availability and delivery are performed faster and through a broker account.

Should we incorporate them into an investment portfolio?

If we believe that the price of a commodity will rise in the future, it might be a good decision to incorporate this product into our portfolio, for example, if today we pay $5 (Uruguayan pesos) for a commodity, and tomorrow this price goes up to $7,5 we would have materialized a return of 50%. This return is called capital gains.

Some commodities have high costs of storage or may be perishable (have an expiry date). For example, if you are proposing to keep beef in your portfolio, because you think that this commodity price will rise in the future, you must consider that this product requires special cooling conditions and proper packaging, so that the content does not deteriorate. It will be highly expensive, but it doesn’t mean they can not make profits.