what is a Commodity

Commodity is any good or material produced to satisfy wants or needs. Commodities may also be defined as materials or products that can be traded or exchanged for value at a particular time and at a pre-determined price. Any material or anything regarded as commodity must possess standard quality and price. For instance, gold, silver are commodities because they have standardized quality and price which are objective and are determined in line with local or international standard. Commodity is used to describe a class of goods for which there is demand but which is supplied without qualitative differentiation across a market.

However, gold jewellery is not a commodity because the price is subjective depending on factors such as design, period of sale, etc.

Types of Commodity

Commodities are basically classified or divided into three categories.

(i) Agricultural produce: These are goods that are grown or cultivated for human consumption. They include food crops, cash crops and livestock which are traded or exchanged at a pre-determined price and graded quality. Cash crops are sold in international market based on certain standardized price and quality. Another name for agricultural produce are soft commodities. Examples are beans, wheat, sugar, coffee etc.

(ii) Solid minerals: They are basically solid materials which are extracted thorough mining. They include natural or mineral resources which can be sold in the local market or international market based on regulated pre-determined quality, quantity and price. Examples are gold, iron ore, silver, copper, tin, etc. Solid minerals can also be called hard commodities

(iii) Oil and gas/energy commodities: These entail commodities which are generated from certain sources for the purpose of domestic or industrial consumption. Such commodities are consumed as soon as they are produced because they cannot be stored for many years. Examples are electricity, gas, oil etc.

EVALUATION

1. What is a commodity?
2. List ten commodities and classify them into: (i) Food crops (ii) Cash crops (iii) Solid crops (iv) Oil and gas
3. Explain the following terms: oil and gas commodity, agricultural produce, and solid minerals.

Meaning of Commodity Exchange

Commodity exchange can be defined as an open and organized market place where ownership and titles to certain quantity of tradable commodity are exchanged at a predetermined standardized price and quality. It can also be defined as an organized process and procedure where buyers and sellers of tradable commodities come into contact to exchange such commodities at a pre-determined price and quality. Commodity exchange is characterized by commoditization or commodification in which commodities are made to lose any form of differentiation across their supply base for the purpose of arriving at a globalised standard. Example of commodity exchange in Nigeria is the agricultural commodity board where samples of agricultural commodities are physically examined and graded to meet the international standard.

Meaning of Tradable Commodity

Tradable commodities are materials which are exchanged for value in big quantities and whose quality standards and prices are universally applicable (have international markets). Examples of tradable commodities in West Africa are: energy (natural gas, crude oil, furnace oil), fibre (cotton, raw jute), Grains (rice, maize, cowpea, millet etc. Non-tradable commodities are the goods that have only domestic markets. For example, land is a non-tradable commodity.

Distinctions between Tradable and Non-tradable Commodities

Distinctions between Tradable and Non-tradable Commodities

EVALUATION

1. Explain the term commodity exchange.
2. Explain the term tradable commodity.

Requirements for Trading in Commodity Exchange

(i) Grading System: This involves the process of arranging the commodities in a manner to ensure quality delivery of the commodities to the customers. This is a systematic procedure and process involved in examining and sorting of tradable commodities in order to meet up with the world standard.

(ii) Warehousing: It is the process whereby tradable commodities are stores for a specified future period to satisfy trading purpose i.e. until they are needed.

(iii) Clearing system: This is the process of ensuring that commodities exported are carefully cleared from the seaports or airports. During clearing, efforts must be made to ensure that the commodities do not get damaged and goods cleared must be intact in order to meet up customers’ requirements.

(iv) Standardizing: This process ensures that commodities being traded are able to meet the standard set by the destination country. It also involves the process of establishing or obtaining agreement or standard for tradable commodities in order to meet up with the taste of the buyers. Standardizing gives room for consistent quality, uniformity and reduction in variety of commodity in the commodity exchange market.

(v) Simplification: It is the process of reducing wasteful and irrelevant commodity which may not contribute to effective exchanging process.

Types of Commodity Exchange

The following are the types or forms of commodity exchange:

(i) Spot Trading: It is a system or type of commodity trading or transaction on the spot where delivery takes place immediately as well as payment. The seller may receive part payment before the commodity is delivered or full payment after the commodity is received.

(ii) Forward Future: This can be regarded as forward contract. It is a trading agreement between sellers and buyers to exchange a pre-determined quantity of commodity at a pre-specified market price and fixed future period of time. It involves trading which shall be completed at a later date between the parties involved.

(iii) Hedging: This is a system of future contract of selling or buying goods at a pre-determined fixed market price in order to prevent fluctuations in price of the commodity.

Methods of Trading

(i) Open Outcry: This is the name of a method of communication between professionals on a future exchange (and also on a stock exchange), which involves shouting and use of hand signals, whistles, bells, trumpets etc to transfer or send information about buying and selling orders. The part of the trading floor where this takes place is called a ‘pit’. Open outcry allows the sellers and buyers to physically meet for trading purpose.

(ii) Electronic Trading: This is otherwise known as e-trading or online trading. It is a method of trading securities (such as stocks and bonds), foreign exchange or financial derivatives electronically. The use of electronic trading method is supported due to the fact that it is faster, cheaper, more efficient for users and less prone to manipulation by market makers and broker or dealers.