Understanding Commodities: Meanings, Types, and Commodity Trading

What is meant by commodity ( commodity )? In general, the definition of a commodity is an item or product that can be traded for profit, or exchanged for other goods of equal value.

Another opinion says the meaning of a commodity is a real object that is relatively easy to trade, can be submitted physically, can be stored for a certain period of time, and can be exchanged with other products of the same type, which are traded by investors through the futures exchange.

According to the Big Indonesian Dictionary (KBBI), commodities are the main merchandise, commercial items; raw materials which can be classified according to their quality in accordance with international trade standards (coffee, corn, rice, wheat, rubber, etc.). Thus, a commodity is a primary trade item and other commercial items which can be traded as export-import products for profit.

The word “commodity” is adapted from the English ” commodity ” which etymologically comes from the French ” commodite ” which means something that is pleasant in quality and service.

This term began to be known and used in the 15th century in England where the word refers to a way to measure things precisely, such as; state or condition, quality, ability to produce something, and profit / added value.

Also read: Definition of Export

Types of Commodities

There are several types of commodities that are commonly traded on the futures exchange. Referring to the understanding of commodities, as for several types of commodities are as follows:

1. Energy

Energy commodities are all mining and exploration products that humans can use as fuel. Generally energy commodity products are traded internationally in barrels, tons and metric units.

Some of the products included in the types of energy commodities include;

• Coal
• Natural gas
• Fuel
• Petroleum (light sweet crude oil and Brent crude oil)

2. Metal

Metal commodities are all products produced from mining that are metal in nature. These metal products can be divided into two types, namely:

• Precious metals (gold, silver, palladium and platinum)
• Industrial metals (tin, aluminum, copper, magnesium, cobalt, titanium, etc.).

3. Agriculture

Agricultural commodities are all products produced from agriculture and can be used to meet human needs. This type of commodity can be divided into two, namely;

• Agricultural products (corn, rice, soybeans, wheat, coffee, soybeans, etc.).
• Forestry products (rattan, cotton, palm, etc.).

4. Animal Husbandry

Animal husbandry commodities are all products produced from livestock that are beneficial to humans. This type of livestock commodity can be divided into three, namely:

• Live animals (cows, pigs, chickens, fish, etc.).
• Meat, milk, eggs and others.
• Animal feed.

When viewed from its nature, in general commodities can be categorized into two types, namely:

1. Hard commodities ( hard commodities) , which is a commodity where the products obtained from nature through mining activities or extraction (metals, petroleum, and others).
2. Soft commodities ( soft commodities) , which is a commodity where the products derived from agricultural, livestock, and forestry (rice, corn, soybeans, wheat, rubber, beef, eggs, milk, and so forth.

Also read: Definition of Imports

Commodity Trading

In commodity trading, prices are determined by demand and supply in the commodity market. Fluctuations in commodity prices are one of the risks that must be faced in commodity trading.

Fluctuations in commodity prices can occur due to various factors, such as; production capacity, season, weather conditions, political situation, government incentives and prohibitions, and others. That is why in commodity trading there are futures contracts in which there are basic standards regarding the minimum quantity and quality of traded commodities.

In commodity markets there are two types of traders, namely:

1. Manufacturer; traders who use futures contracts to protect the value or price of commodities until the end of the contract period. Example; wheat farmers who hedge against losing money when the price of wheat falls before the harvest.
2. Speculators; traders who carry out trading activities in the commodity market with the aim of gaining profits from fluctuating commodity price movements. This type of trader does not use a futures contract, but instead utilizes commodity price fluctuations to make a profit.

Commodities on the World Exchange

The following are some types of commodities which form the basis of contracts traded on various world exchanges:

1. Food

Source: Wikipedia

2. Live cattle & meat

Source: Wikipedia

3. Fuel

Source: Wikipedia

4. Precious Metal

Source: Wikipedia

Also read: Definition of Foreign Exchange

Thus a brief explanation of the understanding of commodities, their types, and commodity trading. Hopefully this article is useful and broadens your horizons.