SS1 Commerce Lesson Note on Commodity Exchange

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TOPIC: COMMODITY EXCHANGE

CONTENT:

1. Meaning of Commodity
2. Types of commodity – Agricultural produce, solid minerals, oil and gas.
3. Meaning of commodity exchange
4. (d) tradable commodity (e)
5. Requirement for trading (i)Grading system (ii) Warehousing (iii) Clearing system (iv) Standardizing (f)
6. Types of commodity exchange – Spot and forward futures € Method of trading. (i) Open outcry, (ii) Electronic. (g)

SUB-TOPIC 1: MEANING OF 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.

1. 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.
2. 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.
3. 3. 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.

SUB-TOPIC 2: MEANING OF COMMODITY EXCHANGE AND TRADABLE COMMODITY

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.

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

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