# What makes something a commodity: What turns a good into a commodity

Source page: https://www.materialinsights.org/learn/commodities/what-is-a-commodity/p1/

[Understanding Commodities](https://www.materialinsights.org/learn/commodities/) / [Module 1: What makes something a commodity](https://www.materialinsights.org/learn/commodities/what-is-a-commodity/) Part 1 of 5

## What turns a good into a commodity

Wheat, copper and crude oil look nothing alike, yet they share a market form: a buyer asks for a grade, a quantity, a place and a date, never a brand. This part explains how that form is built, from specifications and interchangeable units to a price discovered in one place and borrowed everywhere, and where it frays.

### 1.1 A commodity is bought by description, not by maker

A commodity is a good that changes hands against a written description. The contract names a grade, a quantity, a delivery point and a date, and any lot that meets the description will do. Economists call this fungibility. One tonne of grade A copper cathode can stand in for any other, so buyers compare price and delivery terms rather than producers, and one price can be quoted for the whole market.

Fungibility is partly made by the supply chain. Conway follows ore out of Chuquicamata in Chile. Some is refined on site into cathode; much leaves as concentrate of about 30 per cent copper for refineries in China, and once refined nobody can say which mine it came from. He reckons about 80 per cent of the world's copper is produced this way, far from the pit. That anonymity is what lets one world price work.

Pirrong describes what happens between mine and user as transformation in space (shipping), in time (storage) and in form (processing, including blending lots to a buyer's specification). Traders aim to earn the difference between the untransformed and the transformed good, not to bet on the price level. A commodity market is therefore a family of prices: a benchmark plus spreads for location, date and quality.

Radetzki and Wårell add a statistical boundary. National accounts count only farming, forestry, fishing, mining and utilities as primary, which misses refined copper, meat and pulp, whose value is partly added in smelters, slaughterhouses and mills. Trade statistics use the UN SITC classification, which captures them but also sweeps in cheese, spaghetti and metal pipes. Its four groups are food, agricultural raw materials, minerals and metals, and fuels.

- Conway (2023), Material World · pdf pp. 204-205
- Pirrong (2014), The Economics of Commodity Trading Firms · pdf pp. 4, 6-8
- Radetzki & Wårell (2021), A Handbook of Primary Commodities in the Global Economy · pdf pp. 39-41

### 1.2 Grades are built, and every price refers to one

Standard grades had to be built. Geman describes widespread forward dealing in Chicago grain and London metals in the eighteenth and nineteenth centuries; the need to fix quantity, quality and delivery date in such deals produced organised exchanges, among them the Chicago Board of Trade in 1848. Grading was also a political fight. Morgan records the Minneapolis millers' buying cartel of 1876 to 1885 grading and pricing farmers' grain arbitrarily, and Canada making federal grading compulsory in 1912 to stop merchants cheating farmers. A public grade protects the weaker side of a bargain.

A price means little until you know what it refers to. Radetzki and Wårell list the checks: currency; unit, since tons, ounces and bushels come in several sizes; basis, since iron ore may be priced per tonne of ore or per unit of iron, and chrome ore per tonne of gross weight, of oxide or of metal; processing stage, such as raw or refined sugar; quality; delivery date; and place. The place can dominate. For Brazilian iron ore or South African manganese ore, the price free on rail at the mine is well under half the cost, insurance and freight (CIF) price in the user's country.

Grades can split one product into separate markets. Arabica and robusta coffee trade on different contracts, as do WTI and Brent crude. Within one contract an exchange may publish a scale of premiums and discounts so several qualities can be delivered; Geman notes that the New York Board of Trade set one for coffee because the crop comes in so many varieties. She lists five US wheat classes for 2003/04, from hard red winter at 45.5 per cent of output to durum at 4.1 per cent, traded on three exchanges.
 In the data

#### Reading one quotation: seaborne iron ore

Humphreys shows how much work a single price conceals. Old annual contract prices for Australian fines sold to Japan were quoted per dry metric tonne unit, free on board, and had to be converted to dollars per tonne of 62 per cent iron ore delivered to China before they could be compared with spot prices. That form, 62 per cent Fe CFR China, is now the benchmark, published daily by reporters such as Platts. Other cargoes are priced off it, adjusted for iron content, impurities and freight.

- Geman (2005), Commodities and Commodity Derivatives · pdf pp. 13, 162, 165
- Morgan (1979), Merchants of Grain · pdf pp. 90, 103
- Radetzki & Wårell (2021), A Handbook of Primary Commodities in the Global Economy · pdf pp. 123-124
- Humphreys (2015), The Remaking of the Mining Industry · pdf pp. 124, 126

### 1.3 Price discovery: one market sets the number everyone uses

The third ingredient is a price formed in the open and borrowed widely. Radetzki and Wårell rank trading arrangements from most to least transparent. Exchanges bring many buyers and sellers together continuously, and their published prices become the reference for deals elsewhere. Auctions also draw many parties but meet at intervals; they suit goods sold in many grades, such as tea in Kolkata and Colombo, or dairy on the Global Dairy Trade platform set up in 2007. Bilateral contracts are probably the commonest arrangement, and often take an exchange price as their guide.

Where no exchange exists, conventions fill the gap. In manganese, one large supplier and one large buyer settle first and the industry copies them. Producer prices, set by a few sellers, change less often than exchange prices, so producers ration in tight markets and give hidden rebates in weak ones; a series of producer prices misstates what buyers paid. Transfer prices inside integrated firms, as in much of the bauxite trade, are the most opaque of all.

Not every good can support an exchange. Radetzki and Wårell's conditions: many buyers and sellers; hedgers willing to use it and speculators to take the other side; enough price variability to make hedging worthwhile; a product easy to grade; and storability, so spot and futures prices are linked. Tea and ferrochrome fail on grading; chromium and niobium because one producer dominates. Tilton and Guzmán add that negotiated prices are the rule for ferroalloys, cadmium, bismuth and lithium carbonate, with trade journals publishing reference prices from confidential surveys.
 Case

#### The end of the iron ore benchmark, 2010

For decades seaborne iron ore sold on annual contracts: once one big miner and one steel mill settled, everyone else adopted that price, adjusted for grade. Humphreys shows China's boom breaking this. Small Chinese and Indian mines outside the talks sold spot cargoes far above contract prices, and spot rose from 15 per cent of seaborne trade in 2001 to almost 40 per cent in 2008. When prices crashed after 2008, some buyers walked away from contracts to buy cheaper spot ore. By 2010 the benchmark had given way to quarterly prices tied to spot indexes.

- Radetzki & Wårell (2021), A Handbook of Primary Commodities in the Global Economy · pdf pp. 117-122, 147-148
- Tilton & Guzmán (2016), Mineral Economics and Policy · pdf pp. 97-98
- Humphreys (2015), The Remaking of the Mining Industry · pdf pp. 123-126

### 1.4 Where the definition blurs

Commodity status is a matter of degree. At one end sit Brent crude and LME copper, with standard grades, deep exchanges and published prices. At the other sit goods with bulk output and price-taking producers that still lack full fungibility or an open price.

Minor metals are one grey zone. Tilton and Guzmán list lithium, iodine, potash, gemstones and many minor metals among goods sold in producer markets. Nassar, Graedel and Harper note that companion metals such as indium and tellurium lack the transparent markets of copper or nickel: deals between producers, brokers and users are mostly private contracts, so even recovered quantities are poorly reported. They are commodities in a physical sense but only partly in a market sense.

Coffee and cocoa show quality premia living inside a commodity. Physical coffee is priced as a differential to futures, adjusted for origin and quality, and the arabica-robusta gap is itself a spread; Geman describes African producers trying to narrow it with a 'robusta gourmet' coffee. Côte d'Ivoire and Ghana now add a Living Income Differential to their cocoa sales. The exchange price opens the negotiation rather than ending it.

Diamonds are the clearest mined good that is not a commodity. Every stone differs in colour, clarity, cut and carat, so there is no exchange and no standard contract. Radetzki and Wårell call the De Beers system the example par excellence of producer-dictated prices, and Tilton and Guzmán note that around 2013 De Beers controlled about half of world output through its marketing arm, though Russia's Alrosa mined more. Industrial diamond is the opposite: mostly synthetic grit and powder, which the United States imported at an average of 19 cents a carat in 2024.
 Common misreading

#### Mined in bulk does not mean traded as a commodity

Volume does not settle the question. Crushed stone is quarried in enormous tonnages, yet Tilton and Guzmán note that the United States alone has many separate crushed stone markets with different prices at the same moment. Bauxite moves largely inside integrated aluminium firms at transfer prices. The test is whether lots are interchangeable and a price is visible and shared. Refined copper passes, gem diamonds fail, and many minor metals sit in between.

- Tilton & Guzmán (2016), Mineral Economics and Policy · pdf pp. 31, 72, 97-98, 180
- Nassar, Graedel & Harper (2015), Science Advances [web ↗](https://doi.org/10.1126/sciadv.1400180) · pdf p. 2
- Geman (2005), Commodities and Commodity Derivatives · pdf p. 165
- Radetzki & Wårell (2021), A Handbook of Primary Commodities in the Global Economy · pdf pp. 120, 122
- USGS Mineral Commodity Summaries 2026, Diamond (Industrial) [web ↗](https://pubs.usgs.gov/publication/mcs2026) · pp. 74-75

### See it in the table
[K Potash](https://www.materialinsights.org/commodities/potash/)[Cu Copper](https://www.materialinsights.org/commodities/copper/)[Al Aluminium](https://www.materialinsights.org/commodities/aluminum/)[Ni Nickel](https://www.materialinsights.org/commodities/nickel/)[Fe Iron ore](https://www.materialinsights.org/commodities/iron_ore/)[St Steel](https://www.materialinsights.org/commodities/steel/)[Mn Manganese](https://www.materialinsights.org/commodities/manganese/)[Cr Chromium](https://www.materialinsights.org/commodities/chromium/)[Nb Niobium](https://www.materialinsights.org/commodities/niobium/)[Dm Diamonds](https://www.materialinsights.org/commodities/diamond/)[Li Lithium](https://www.materialinsights.org/commodities/lithium/)[Bi Bismuth](https://www.materialinsights.org/commodities/bismuth/)[In Indium](https://www.materialinsights.org/commodities/indium/)[Te Tellurium](https://www.materialinsights.org/commodities/tellurium/)

### Check your understanding

Radetzki and Wårell note that Brazilian iron ore priced free on rail at the mine costs well under half its cost, insurance and freight price in the user's country. What is the main lesson for reading a quoted price?
 For cheap, heavy goods freight is a large part of the delivered price, so the same ore can carry very different prices depending on where it is delivered. Delivery terms are part of the specification.

Why, according to Radetzki and Wårell, is tea not traded on a futures exchange?
 A futures contract must specify what can be delivered. Tea, like ferrochrome, comes in so many qualities that a workable standard grade is hard to define, so it sells at auctions instead.

What finally broke the annual benchmark system for seaborne iron ore around 2010?
 Humphreys shows spot cargoes rising from 15 to almost 40 per cent of seaborne trade between 2001 and 2008. When spot prices fell below contract prices after 2008, some buyers reneged, so the benchmark protected nobody and gave way to index-linked quarterly pricing.

[← Module contents](https://www.materialinsights.org/learn/commodities/what-is-a-commodity/)[Mark read · Part 2: Hard, soft and the fifteen families →](https://www.materialinsights.org/learn/commodities/what-is-a-commodity/p2/)

## Other sections

- [Module overview](https://www.materialinsights.org/learn/commodities/what-is-a-commodity/index.md)
- [Hard, soft and the fifteen families](https://www.materialinsights.org/learn/commodities/what-is-a-commodity/p2/index.md)
- [The economics the families share](https://www.materialinsights.org/learn/commodities/what-is-a-commodity/p3/index.md)
- [Why commodities matter, and how their markets grew](https://www.materialinsights.org/learn/commodities/what-is-a-commodity/p4/index.md)
- [How to read a tile](https://www.materialinsights.org/learn/commodities/what-is-a-commodity/p5/index.md)
- [Key terms, quiz and sources](https://www.materialinsights.org/learn/commodities/what-is-a-commodity/review/index.md)