Understand Product vs. Commodity

5 mins read

The phrases commodity and product are commonly misinterpreted and used interchangeably; however, they are significantly distinct. A commodity is a raw resource that is utilised in the production of finished items. On the other hand, a product is a finished good that is sold to the general public.

Commodities and products are both parts of the manufacturing and production process; the only variation is where they are in the chain. Commodities are usually in the early phases of manufacturing, whereas products are nearing completion.

To compete effectively in today’s highly competitive marketplace, it’s critical to grasp the distinction between commodities and products, as well as how organisations differentiate their products. Commodities and products are comparable in that they are both things that are sold in order to fulfil business objectives. On the other hand, commodities and products differ in terms of their features, the prices that may be paid, and the target markets to which they are marketed. The following article discusses the distinctions between commodities and products and offers a detailed understanding of the differences between the two.

What are Commodities?

Commodity refers to a fundamental and undifferentiated generic version of a product. Sugar, wheat, copper, biofuels, coffee, cotton, potatoes, and other commodities are examples of commodities. Commodities are products that cannot be differentiated from one another since they are all the same and cannot be separated. Copper, for example, is a commodity since it is hard to distinguish between metals like copper because they are all the same. Certain copper goods, such as electrical stereo systems, are products since they may be differentiated by brand, quality, sound system, and so on. It’s vital to remember that because commodities can’t be distinguished from one another, the price paid for them will be the same everywhere.

There is little, if any, the distinction between commodities. They are taken from their natural form and raised to fulfil minimal market criteria if required. There is no additional value to the commodity, and regardless of the producer, all commodities of the same products sell at the same price.

Commodity Exchange

Commodities can also be exchanged in stocks, in addition to the futures market. Investors can buy and sell stocks of firms involved in a particular commodity. A stock in an oil and gas firm can be purchased by an investor who wants to invest in it. Investors can also acquire a position in a commodity using exchange-traded funds (ETFs) rather than directly investing in futures contracts. Physical commodities like gold and silver are also available for purchase by investors.

The majority of the world’s frequently traded commodities have well-established markets and are generally traded on exchanges in the form of futures, which are contracts to buy or sell a commodity at a specific price at a future date. A contract’s settlement entails the delivery of a physical object or cash. Exchanges standardise the amount and grade of the commodity being exchanged. Commodity trading has the potential for high market volatility.

Because commodities are exchanged on exchanges, their prices are influenced by a variety of variables. Supply and the demand are the primary drivers of commodity pricing. In the case of oil, as demand rises, so does the price, but as supply increases, so does the price. Politics, economic instability, and other factors such as the weather may all affect pricing.

Commodity Exchange in India

Commodity trade has a long history in India. Commodity trade in India began far earlier than it did in many other nations. Years of foreign domination, droughts, and periods of shortage and government regulations have all contributed to a decline in commodities trade in India.

In 2016, India had six national commodity exchanges, including the Multi Commodity Exchange (MCX), the National Commodity and Derivatives Exchange (NCDEX), the Indian Commodity Exchange (ICEX), the National Multi Commodity Exchange (NMCE), the ACE Derivatives Exchange (ACE), and the Universal Commodity Exchange (UCX) (UCX).

Both the NSE & BSE (National Stock Exchange and the Bombay Stock Exchange) began trading commodities in 2018.

The former Forward Markets Commission (FMC), which was established in 1953, was the regulating agency. FMC amalgamated with the Securities and Exchange Board of India, or SEBI, in September 2015. SEBI has forced the withdrawal of various commodities exchanges due to this merger.

What are Products?

In many aspects, a product differs from a commodity in that it may be differentiated in terms of appearance, feel, scent, quality, and so on. Coffee beans, for example, are a commodity that cannot be distinguished. Drinks prepared with coffee beans, such as coffee lattes and cappuccinos, coffee mochas, and so on, are considered goods since they differ in flavour, quality, and brand. Because prices may be differentiated and more value can be added, the prices charged for a product will also change. Because products differ from one another, they can be offered under various brands. Examples are Starbucks, Costa, Dunkin Donuts, and other coffee beverage businesses.

Products are usually divided into two categories: durable and consumable. Appliances, furniture, and jewellery are durable consumer products that are often long-lasting and rarely acquired. Gas, food, and tobacco products are examples of consumable commodities that are consumed rapidly and need to be replaced frequently.

Investment Aspect

Products are exchanged and included in a wide range of investment portfolios. Consumable products companies are often regarded as safe investments due to their relative consistency and past success.

Because individuals still need to buy essential products even in a bad economy, demand for consumables stays robust regardless of economic or market conditions. Despite their stability, consumable products are vulnerable to competition and price changes in the commodities needed to manufacture them.

Differentiation is a concept that appears in commodities and goods. If products operate in distinct but comparable commodity marketplaces, they are not differentiated.