A commodity is any type of item, that is exchanged for an item of value in commerce. The item of value might either be money, time, other commodities etc. Most commodities are usually used as raw materials in the production process of goods and services. In order for a particular commodity to be traded, it must meet basic minimum standards, sometimes known as basis grade. Among common commodities are raw materials, basic resources, agricultural and mining products and finished products. Commodities can also be mass-produced unspecialized products such as chemical products and microchips.
Types of Commodities
Hard commodities are items that are mined or extracted from the earth. These include solid minerals, petroleum and natural gas.
Soft commodities are items that are grown and mostly sourced through agriculture such as cocoa, corn and wheat.
Based on the standard of uniformity that is ingrained in the world of commodity trade, items that are produced in large quantities by different producers are usually compared with the sole aim to achieve point of value equivalence in order to aid their exchange. It is this underlining principle that makes the idea of item swapping possible on an established commodity exchange. The principle behind this exchange is defined by the standard of the item as indicated in the contract document (See World’s Top Traded Commodities).
A commodity exchange is the market where various commodities are traded. Some of the popular commodities that are traded in exchanges around the world include agricultural products such as corn, wheat, barley, malt, cotton, cocoa, coffee, sugar, beef etc and other raw materials such as crude oil, precious metals, industrial metals etc. The details of the exchange is determined by the contract that guides the exchange process. The mode of the contract can be spot prices, forwards, futures and options on futures. Other tools that might guide the contract include interest rates, environmental instruments, swaps or ocean freight contracts.
The commonest type of contract in most exchanges is the futures contracts on commodities. This type of contract is implemented to receive a volume of item such as cocoa, during a future date. For the farmer, this may entail receiving a contract on a yet to be matured wheat field, thus guaranteeing the price he would be paid when he delivers the item after harvest. This is done to protect the farmer from adverse price fluctuations in the market.
It is this same principle that is adopted by Speculators and investors who buys and sells futures contracts in an attempt to make profit from the market.
Most manufacturing are carried out in the far East in countries such as China, India, South Korea, Japan and Vietnam. In order to get the finished goods to the market countries, the items would have to be transported and this is done majorly by sea.
There exists a diverse spread of producing and consuming nations around the world. Transportation, mostly through shipping has been able to serve as the bridging force between the areas of high supply and areas of high demand for commodities and finished products (See World Trade).
For example, the bulk of the world’s crude oil supply is from the Middle East, while the bulk of the demand lies in North America, Europe and the Asia. To balance this, huge Crude Oil Tankers load crude oil from the Middle East en-route those consuming locations. The inverse is the case for manufactures goods.