What is commodity?

Investopedia defines commodity as a “basic good used in commerce that is interchangeable with

other commodities of the same type.” Grains, wheat, vegetable, oil, and precious metals are just few
examples. Recently, foreign currencies, bandwidth, and other financial instruments are now
considered as  part of commodity
Commodities are divided into two types: hard and soft commodities.

earning Essentials

What is commodity?

Investopedia defines commodity as a “basic good used in commerce that is interchangeable with

other commodities of the same type.” Grains, wheat, vegetable, oil, and precious metals are just few
examples. Recently, foreign currencies, bandwidth, and other financial instruments are now
considered as  part of commodity.

Commodities are divided into two types: hard and soft commodities.
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Hard commodities are natural resources that need to be extracted (i.e. golds and diamonds) while
soft commodities areagricultural products and livestocks (i.e. corn, wheat, vegetables, pork, and
beef).

Oftentimes, commodities are used as inputs to produce goods and services.  They are fundamentally
uniform across producers; however, they may vary in quality. For example, an oil, the most heavily
traded commodities in the world, is still an oil regardless of the producers.  In addition, commodity
prices are determined by the market interaction of demand and supply.

 Generally, when there is a decrease in the price of commodity, it is expected that the demand for the
commodity will increase; meanwhile, when there is an increase in the price of commodity, demand
for the commodity will decrease. Thus, there is an inverse relationship between the price and demand
of the commodity.

Commodity price risk is a risk attributed by the change in prices of commodities. The fluctuation of
commodity prices poses a threat to producers such that a change in price of inputs to production such
as raw materials-- oil, cotton, and steel-- may cause adverse impact. Due to the volatile movements
of commodity prices, producers are affected such that profit margin is reduced especially on tough
market environment.

The following are factors that influence commodity price changes:

 Political conditions- a war or a coup may signal a rise in the commodity prices since price of
imported goods from that country also rises
 Seasonal variations- as season changes, demand and commodity prices will also change. If
winter is severe in an area, the global price of oil rises as the economies of the affected area
raise their demand for oil to fuel household heating mechanism.

earning Essentials

What is commodity?

Investopedia defines commodity as a “basic good used in commerce that is interchangeable with

other commodities of the same type.” Grains, wheat, vegetable, oil, and precious metals are just few
examples. Recently, foreign currencies, bandwidth, and other financial instruments are now
considered as  part of commodity.

Commodities are divided into two types: hard and soft commodities.
Add note
View Notes

Hard commodities are natural resources that need to be extracted (i.e. golds and diamonds) while
soft commodities areagricultural products and livestocks (i.e. corn, wheat, vegetables, pork, and
beef).

Oftentimes, commodities are used as inputs to produce goods and services.  They are fundamentally
uniform across producers; however, they may vary in quality. For example, an oil, the most heavily
traded commodities in the world, is still an oil regardless of the producers.  In addition, commodity
prices are determined by the market interaction of demand and supply.

 Generally, when there is a decrease in the price of commodity, it is expected that the demand for the
commodity will increase; meanwhile, when there is an increase in the price of commodity, demand
for the commodity will decrease. Thus, there is an inverse relationship between the price and demand
of the commodity.
 Add note
View Notes

Commodity Price Risk

Commodity price risk is a risk attributed by the change in prices of commodities. The fluctuation of
commodity prices poses a threat to producers such that a change in price of inputs to production such
as raw materials-- oil, cotton, and steel-- may cause adverse impact. Due to the volatile movements
of commodity prices, producers are affected such that profit margin is reduced especially on tough
market environment.

The following are factors that influence commodity price changes:

 Political conditions- a war or a coup may signal a rise in the commodity prices since price of
imported goods from that country also rises
 Seasonal variations- as season changes, demand and commodity prices will also change. If
winter is severe in an area, the global price of oil rises as the economies of the affected area
raise their demand for oil to fuel household heating mechanism.
 Weather- when the weather is bad, expect that commodity prices will also rise. This is
because the raw materials that are produced may be affected as well as the final output.
 Technology- new product invention will lead to an increase in demand which will also signal
an increase in price of the commodity affected
 Taxation- when a certain commodity is taxed high, demand for that commodity decreases.
Hence, there is a reduction to the quantity of goods sold.
 Economic conditions- changes in government policies concerning commodity prices may
affect import and export cost. The price of oil is usually affected by these policies
 Prices of substitutes- Substitute goods are goods that can be used in place of another (e.g.
coffee and tea). Demand for a certain commodity is affected by the relative prices of
commodity substitutes. If price for substitute decreases, demand for the commodity will
decrease as consumers would now want to buy the substitute commodity for a lesser price.
Hence, there is a direct relationship between demand for a commodity and the price of its
substitute.
 Prices of complementary goods- Complementary goods are goods that are used together (e.g.
cameras and film, printers and ink). A decrease in the price of one results in an increase in
demand for the other and vice versa. For instance, the demand for printers increases when
prices of inks decrease
 iHence, there is an inverse relationship between demand for a commodity and price of its
complementary goods.
 Market speculation- there are always rumors and assumptions for certain commodity prices.
Investors or commodities speculators that expect prices to go up or down might affect
speculations in demand such that there will be an increase in demand if investors (e.g.
consumers and producers) expect that price of a certain commodity will rise in the future.

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Changes  in commodity price and its impact on consumers

There are many factors that influence movement in the world equity market. However, one factor
that is commonly disregarded is the impact of commodity prices. The fluctuation of commodity
prices can have massive impact not only to consumers but also to businesses. One good example is
the effect of oil price change. When there is fluctuation in oil price, everyone is affected. It is vital to
note that oil is the foundation of the economy and its price affects companies ranging from suppliers,
manufacturers, and largely, retailers. A company has two options when there is an increase in oil
price. It can either absorb the price increase or pass it on to consumers through increasing prices.
Either way, apparent is the effect of commodity price change in the market.

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Commodity prices may rise due to higher transportation cost. Just think about all the fuels consumed
on  each product’s delivery. Also, people may opt to buy substitute products instead to lessen cost