— Ch. 1 · Defining Fungibility And Markets —
Commodity.
~4 min read · Ch. 1 of 6
In 1920, Alfred Marshall published Principles of Economics to define the term commodity as a general economic good. The text states that markets treat instances of these goods as equivalent regardless of who produced them. A Russian serf and an English capitalist might both grow wheat, but the market sees no difference in taste or quality between their harvests. This fungibility means price becomes the primary factor for buyers rather than brand names. Well-established physical commodities have actively traded spot and derivative markets that determine value based on the whole market. Companies like Vitol and Glencore trade these items globally without regard to specific producer identity. The wide availability of such goods typically leads to smaller profit margins compared to differentiated products.
Hard Versus Soft Classifications
Soft commodities are goods that are grown, such as wheat or rice. Hard commodities are mined resources including gold, silver, helium, and oil. Energy commodities include electricity, gas, coal, and oil. Electricity has the particular characteristic that it is usually uneconomical to store and must be consumed as soon as it is produced. World exports of cereals by main commodities show the scale of agricultural trade. These categories form the material foundation covering the entire industry chain. Investors can gain passive exposure through commodity price indices to diversify portfolios. The distinction between mined and grown goods helps organize how traders manage risk across different sectors.The Commoditization Process
Commoditization occurs when a goods or services market loses differentiation across its supply base. Generic pharmaceuticals and DRAM chips became examples where premium margins disappeared over time. An article in The New York Times cited multivitamin supplements as an example of this trend. A 50 mg tablet of calcium holds equal value to a consumer regardless of which company produces it. Nanomaterials emerged from carrying premium profit margins for market participants to a status of commodification. There is a spectrum of commoditization rather than a binary distinction of commodity versus differentiable product. Even electricity can be differentiated based on generation methods like fossil fuel or solar power. Many products' degree of commoditization depends on the buyer's mentality and means.