Tradable commodities consist of basic goods used in commerce that are often interchangeable with other goods of the same type. These tradable commodities are usually evaluated by economists as inputs in the production of other goods or services.
Tradable commodities are usually categorized into four basic groups: energy, metals, livestock, and agriculture. Among economists, there is little differentiation between a tradable commodity coming from one producer and the same commodity from another source. This is different from other products such as electronics, for example, where the quality may be very different from one brand to another.
Trading of commodities is usually executed through future contracts on exchanges that standardize the quantity and minimum quality of the products traded. For example, a city may allow for the trading of 500 bushels of wheat. However, city laws regulate how many bushels can be sold and the minimum quality standards required for the wheat. The future element of trading commodities can add risk to the transaction, since factors that cannot be controlled (such as weather) may affect the production of the commodity. For this reason, experts recommend allocating no more than 10% of a portfolio to tradable commodities.
Many products however are not considered tradable commodities, either because of the nature of the product or the demand for the product within its home country. For example, tomatoes in China are in high demand. Domestic production cannot keep up with demand for tomatoes, which are imported in high quantities. Because of this high rate of importation, economists cannot use the future trading and pricing technique normally used with tradable commodities.
Another example of non-tradable commodities is freshly cut flowers in New York City's floral district. While many flowers are present, they cannot be bought or sold on exchanges.