Chapter 18 The Relevance of Commodities
In business, the term commodity is used to refer to an item which is specified so closely, in terms of
its form and quality, that it may be bought and sold purely on price; the price reflects the availability
or scarcity and the level of demand.
The principle of commodity actually runs through every purchase. There is still a tendency for
commodities to be bought and sold in a small number of centers, located in countries and cities
where traders gather. To be a trading center, the location must be seen as stable and established –
as it is trust that is key to the successes of its business. So, commodities are materials and services
which can be specified precisely and bought largely on the basis of price and availability. The
standardization of quality of a commodity is often very precise.
There are many ways of referring to types of commodity, and new ones appear from time to time.
One traditional and significant differentiation is between ‘hards’ and ‘softs’:
1. Hard commodities include metals, also divided into types:
- Base metals, such as aluminum alloys, lead, nickel, tin zinc, copper;
- Precious metals, such as gold, silver, platinum, palladium.
2. Soft commodities include such things as cocoa, cocoa mash, white sugar, cotton, orange
juice.
3. Other categories are known by more straightforward generic names:
- Grains and seeds (wheat, maize, barley, soybeans, soybean oil, soybean meal, potatoes,
rice, palm oil);
- Meat and livestock (live cattle, lean hogs, pork bellies, etc.);
- Energy (heating oil, gas oil, unleaded gasoline, natural gas).
The value-adding work represents potential income for the company (or country) conducting it, and
possibly a chance to differentiate the material. As countries grow and develop so commodity
markets change. However, while a developing country might decide for itself that it wants to move
from selling unprocessed crops to processed materials, it relies upon its credibility for its opportunity
in the global marketplace. The other major factor that lies beyond the developing country is the
location of the marketplace or ‘exchange’ where the commodity will be traded – the actual building
within which traders will gather to buy and sell the item. Whereas the conditions that are important
to the production of a commodity revolve around its geography and the level of a country’s
development, those governing the location of the exchange are to do with economic and political
stability – relative, of course, to the period in history. For an exchange to work there must be
sufficient liquidity in the market – enough people who wish to buy and sell and enough of the
commodity available to be traded.
To be a true commodity, the liquidity (availability for trade) of an item must be quantifiable (i.e.
manageable lot sizes are agreed) and quality stabilized and guaranteed (usually including regulation
or international agreement on specification). For purchasing and supply the commodity market
presents a problem. While the principle of levelling all offers to a perfectly common specification and
then buying purely on price fits the basic interest of the purchaser, the complexity of commodity
trading, the degree of long-term specialized knowledge that is required do not match the skill sets
commonly found in Purchasing departments. It is common practice to move buyers from one type of
purchasing to another fairly frequently whereas a commodity trader may expect to spend many
years in one area, building a network and a rich experience or ‘nose’ for the market. This situation
1
In business, the term commodity is used to refer to an item which is specified so closely, in terms of
its form and quality, that it may be bought and sold purely on price; the price reflects the availability
or scarcity and the level of demand.
The principle of commodity actually runs through every purchase. There is still a tendency for
commodities to be bought and sold in a small number of centers, located in countries and cities
where traders gather. To be a trading center, the location must be seen as stable and established –
as it is trust that is key to the successes of its business. So, commodities are materials and services
which can be specified precisely and bought largely on the basis of price and availability. The
standardization of quality of a commodity is often very precise.
There are many ways of referring to types of commodity, and new ones appear from time to time.
One traditional and significant differentiation is between ‘hards’ and ‘softs’:
1. Hard commodities include metals, also divided into types:
- Base metals, such as aluminum alloys, lead, nickel, tin zinc, copper;
- Precious metals, such as gold, silver, platinum, palladium.
2. Soft commodities include such things as cocoa, cocoa mash, white sugar, cotton, orange
juice.
3. Other categories are known by more straightforward generic names:
- Grains and seeds (wheat, maize, barley, soybeans, soybean oil, soybean meal, potatoes,
rice, palm oil);
- Meat and livestock (live cattle, lean hogs, pork bellies, etc.);
- Energy (heating oil, gas oil, unleaded gasoline, natural gas).
The value-adding work represents potential income for the company (or country) conducting it, and
possibly a chance to differentiate the material. As countries grow and develop so commodity
markets change. However, while a developing country might decide for itself that it wants to move
from selling unprocessed crops to processed materials, it relies upon its credibility for its opportunity
in the global marketplace. The other major factor that lies beyond the developing country is the
location of the marketplace or ‘exchange’ where the commodity will be traded – the actual building
within which traders will gather to buy and sell the item. Whereas the conditions that are important
to the production of a commodity revolve around its geography and the level of a country’s
development, those governing the location of the exchange are to do with economic and political
stability – relative, of course, to the period in history. For an exchange to work there must be
sufficient liquidity in the market – enough people who wish to buy and sell and enough of the
commodity available to be traded.
To be a true commodity, the liquidity (availability for trade) of an item must be quantifiable (i.e.
manageable lot sizes are agreed) and quality stabilized and guaranteed (usually including regulation
or international agreement on specification). For purchasing and supply the commodity market
presents a problem. While the principle of levelling all offers to a perfectly common specification and
then buying purely on price fits the basic interest of the purchaser, the complexity of commodity
trading, the degree of long-term specialized knowledge that is required do not match the skill sets
commonly found in Purchasing departments. It is common practice to move buyers from one type of
purchasing to another fairly frequently whereas a commodity trader may expect to spend many
years in one area, building a network and a rich experience or ‘nose’ for the market. This situation
1
