INTRODUCTION TO COMMODITIES :
- A commodity is a fundamental economic good
that exists in a raw or minimally processed state,
possessing uniform quality and utility across
producers.
- Unlike manufactured goods, commodities are
standardized, one unit of a commodity is
essentially the same as another.
- This interchangeability allows them to be traded
on a massive scale.
INTRODUCTION TO THE COMMODITY MARKET :
● A commodity market is an organized system of
exchange that facilitates the trading of
standardized raw materials and primary goods.
● It establishes a framework where contracts are
defined by quality, quantity, and delivery terms,
thereby ensuring uniformity and transparency
across transactions, irrespective of the participants
involved.
● Unlike traditional consumer markets, the
commodity market functions as a pricing and
allocation mechanism on a global scale.
● Aggregating demand and supply through both spot
and derivative contracts, it creates a continuous
process of price discovery while simultaneously
enabling participants to manage risk in volatile
economic conditions.
IMPORTANCE :
●The commodity market establishes a structured
system of price discovery, where global demand
and supply dynamics translate into transparent
benchmarks. These benchmarks serve as reference
points for domestic markets, influencing inflation,
trade balances, and overall economic stability.
●It functions as a platform for *risk management*,
enabling participants to hedge against uncertainty.
By locking prices in advance through derivative
contracts, producers and consumers mitigate the
adverse effects of volatility, ensuring continuity in
industrial and commercial operations.
●For instance, Fluctuations in crude oil prices
directly transmitted through the commodity
market affect transport costs, manufacturing
inputs, and even currency valuations —
demonstrating how deeply the market’s
functioning shapes day-to-day economic realities.
TYPES OF COMMODITIES :
Commodities are usually classified into different
categories based on their nature, usage, and source of
production. The following are the major types :
●Agricultural Commodities
●Energy Commodities
●Metal Commodities
AGRICULTURAL COMMODITIES :
●Agricultural commodities such as cereals, oilseeds,
and dairy are vital yet perishable and seasonal,
with production closely linked to climate, soil, and
rainfall.
●Agricultural commodities are highly volatile, as
small weather or pest shocks trigger price swings
impacting inflation, trade, and food security.
●Example - In recent years, global issues like climate
change, rising population, and geopolitical
conflicts (such as the Russia-Ukraine war affecting
wheat exports) have intensified their importance,
making agricultural commodities a key driver in
shaping international trade, economic stability,
and policy decisions.
ENERGY COMMODITIES :
●Energy commodities such as crude oil, natural gas,
coal, and electricity are vital for global industry,
transport, and power. Their prices hinge on
geopolitics, supply decisions, and growing demand
from emerging nations.
●Fluctuations in energy prices drive inflation, affect
manufacturing and transport costs, and influence
trade balances. Sudden price swings push central
banks to adjust policy and drive economies toward
renewables.
●Example - The Israel–Iran conflict has raised
shipping costs and risks in the Strait of Hormuz
(~20% of global LNG), fuelling price volatility and
underscoring Europe’s fragile energy security and
diversification push.
METAL COMMODITIES :
●Industrial metals like copper, aluminium, and zinc
fuel construction and technology, while gold and
silver serve both industrial uses and safe-haven
investment.
●Gold and silver play a critical role in stabilizing
financial markets, as investors flock to them during
economic uncertainty. Their prices move inversely
with interest rates and currency strength, making
them indicators of global financial health.
●In 2024, global silver demand surged due to its use
in solar energy technologies, pushing prices to a
12-year high. Simultaneously, gold crossed the
$2,400 oz mark amid concerns of U.S. debt and
global inflation.
