What makes something a commodity: Hard, soft and the fifteen families
Understanding Commodities / Module 1: What makes something a commodity Part 2 of 5Hard, soft and the fifteen families
The table groups its commodities into fifteen families. The grouping is not cosmetic: goods in one family tend to share substitutes, supply constraints and ways of being priced, so their prices often move together. This part starts with the oldest split in the trade, hard against soft, then sets out what each family shares.
2.1 Hard and soft: grown and mined goods are shocked from different sides
Traders call mined and pumped goods hard and grown goods soft. In the narrow trading sense, softs are tropical crops such as coffee, cocoa, sugar and cotton; Geman notes the group is often called simply the tropics, grown mostly in developing countries where information is harder to get. In this course Softs is one of six farm and forest families.
The split matters because shocks arrive from different sides. Farm output depends on the weather and mine output does not. Radetzki and Wårell conclude that farm price instability more often starts with supply, a frost or a drought, while mineral price swings more often start with demand over the business cycle, strikes and cartels apart. Crop failures of up to 15 per cent of world output in a year have hit geographically concentrated coffee and cocoa, while cereals, sugar and cotton have fallen far less.
Demand differs too. Basic foods are necessities, so demand for them varies little over the business cycle and grows slowly with income, because households spend a falling share of income on staples (Engel's law). Coffee, chocolate and beef are partial exceptions. Industrial materials ride the investment cycle: Radetzki and Wårell's chart of South Korean steel use per unit of GDP rises steeply after 1970, as roads, houses and factories are built, then levels off and falls.
One distinction they consider overrated is renewable against exhaustible: they find little evidence that exhaustible minerals are priced differently from renewable crops. What separates goods in practice is whether they store, how fast supply responds and whether users can switch, the subject of Part 3.
- Geman (2005), Commodities and Commodity Derivatives · pdf p. 164
- Radetzki & Wårell (2021), A Handbook of Primary Commodities in the Global Economy · pdf pp. 22, 41-42, 44, 203
- Blas & Farchy (2021), The World for Sale · pdf pp. 78-79
2.2 Families group goods that share substitutes and constraints
Radetzki and Wårell observe that a commodity's closest substitutes usually lie in its own broad group, so prices within a group move together: dearer oil lifts coal and gas but has no direct effect on copper or wheat. The table pushes that logic down to fifteen families.
Energy has five tiles: crude oil, natural gas, thermal and coking coal, and uranium. Five families are metals. Base metals has six: aluminium, copper, lead, nickel, tin and zinc. Steel and alloying has nine, from iron ore and steel to manganese, chromium, molybdenum, niobium, vanadium, tungsten and silicon. Precious has six, including diamonds. Battery and magnet has five: lithium, cobalt, graphite, magnesium and rare earths. Tech and minor metals is the largest, with 23 tiles from antimony and gallium to tellurium and zirconium.
Three families are non-metal minerals: industrial minerals (23 tiles, such as barite, boron, fluorspar, helium and salt), construction materials (seven, including cement, crushed stone and sand and gravel) and fertilisers (nitrogen, phosphate, potash and sulphur). Six are farm and forest families: grains; oilseeds and oils; softs; livestock and dairy; fruit, roots and pulses; and fibres and forest products, such as cotton, wool, rubber and timber.
Boundaries are judgement calls. Tilton and Guzmán note there is no uniform definition of ferrous metals; some systems include manganese, cobalt and chromium because they go into steel. The table follows use rather than chemistry, so chromium sits with steel, cobalt with batteries, and diamonds with precious metals. Geology supplies part of the logic. Nassar, Graedel and Harper find that metals obtained mainly as companions cluster in the periodic table, because elements with similar chemistry occur in the same ore bodies. Gallium, germanium, indium, selenium and tellurium sit near one another, and so does their fragile supply.
- Radetzki & Wårell (2021), A Handbook of Primary Commodities in the Global Economy · pdf p. 41
- Tilton & Guzmán (2016), Mineral Economics and Policy · pdf p. 27
- Nassar, Graedel & Harper (2015), Science Advances web ↗ · pdf p. 2
2.3 What each family has in common
Energy is the giant by value. Oil is exchange-priced and global; gas is still partly regional because pipelines and liquefaction are costly. Energy also prices into other families. Aluminium smelting uses so much electricity that traders call the metal congealed electricity, and Tilton and Guzmán describe Japan dismantling most of its smelting within a decade of the 1970s oil shocks.
Base metals are large, heavily recycled and traded on the LME, Comex and Shanghai. Steel and alloying pairs one bulk giant, iron ore, with small alloy markets on negotiated contracts, some dominated by one firm: Brazil's CBMM had 80 per cent of niobium in 2012. Precious metals pack high value into little weight and serve as stores of wealth, though silver and palladium are mostly by-products. Battery and magnet metals are young markets moving from contract pricing to indexes and futures, and concentrated: four firms held 87 per cent of lithium supply in 2013. Tech and minor metals are small, mostly by-products, and sold privately.
Industrial minerals and construction materials are heavy and cheap, so most trade locally, yet Tilton and Guzmán's 2014 estimates put cement sales at 411.7 billion dollars, above iron ore at 325.2 billion. Fertilisers follow the farm calendar, and potash still sells on producer prices.
Grains are storable annual crops with a harvest rhythm. Oilseeds are crushed into meal and oil, and Geman describes the crush spread, the processor's margin, as a popular traded spread. Softs are mostly tree and bush crops with long lags. Livestock and dairy are perishable and were globalised by refrigeration. Fruit, roots and pulses are often eaten near where they grow, and bananas face close substitutes. Forest products are bulky: only 7 per cent of world timber output was exported in 2018.
- Blas & Farchy (2021), The World for Sale · pdf p. 79
- Tilton & Guzmán (2016), Mineral Economics and Policy · pdf pp. 20-27, 69, 72, 96-98, 180
- Geman (2005), Commodities and Commodity Derivatives · pdf p. 159
- Radetzki & Wårell (2021), A Handbook of Primary Commodities in the Global Economy · pdf pp. 15-16, 24, 43, 48, 228-229
See it in the table
Oil Crude oilGas Natural gasKc Coking coalU UraniumK PotashCu CopperAl AluminiumZn ZincNi NickelFe Iron oreSt SteelMn ManganeseCr ChromiumMo MolybdenumCheck your understanding
According to Radetzki and Wårell, where does price instability in agricultural commodities most often originate?
Farm output depends on weather, so supply shocks drive much of farm price volatility. Mineral prices are more often moved by demand over the business cycle.Why do the prices of goods within a family tend to move together?
When one fuel or metal becomes dearer, users switch to its nearest substitutes, which are usually in the same group. That pulls neighbouring prices up together.Which of these goods, per Tilton and Guzmán's 2014 sales estimates, had the largest market by value?
Cement sales were estimated at 411.7 billion dollars, ahead of iron ore at 325.2 billion and copper at 129.9 billion. Low value per tonne does not mean a small market.