By Aniket Bose. Edited by Arjun Chandrasekar.
Commodities are essentially basic goods used in commerce that are interchangeable with other goods of the same type. Commodities are most often used as inputs in the production of other goods or services. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.
Since there are so many different commodities they have been split into three different groups: Raw, Soft, and Hard. Let us dig deep into each of these types of commodities.
These types of commodities are consisting of raw materials used in the production process of manufacturing finished goods, while a product is a finished good that is sold to customers. They are resources that are used by companies to produce their finished goods and products. Indirect materials are often used throughout the production process, but they are not directly included in the company’s final product. Some examples of raw commodities are the oils used by companies that use a lot of machinery so that they can maintain them for a long period of time and the lightbulbs that are installed in a company’s factory. These raw commodities are usually recorded on a balance sheet as an inventory asset. When companies record their raw commodities, there is a debit recorded to the raw materials inventory account, while a credit is made to the accounts payable account.
These types of commodities consist of the following: coffee, cocoa, sugar, wheat, corn, soybean, fruit, and livestock. The term “soft” usually refers to commodities that are grown, compared to the ones that are mined; the latter (copper, silver, gold, etc.) are most commonly known as hard commodities. Soft commodities are going to play a major role in foreseeing the future of the market. Soft commodities are among the oldest traded products in the world and they still continue to be traded at high rates on list exchanges. These commodities are more volatile as their price-setting mechanism relies on multiple external factors. The production of these goods depends largely on the environmental conditions of a country. This is a main reason why agricultural economies suffer much more because they are subjected to events like climate change. In addition to what has been said, bumper crops can depress prices by creating a surplus in the market. Owing to such a vulnerability, countries like India do not prefer being export-dependent with primary agricultural goods.
These types of commodities are typically natural resources that must be mined or extracted from Earth’s surface, such as gold, rubber and oil, whereas soft commodities are more agricultural products like corn, wheat, sugar, soybeans, and pork. Hard commodities form the basis of the economic health of a country, and international demand for these resources can be monitored to gauge the future stability of an economy. It is because the supply and demand for the products are largely predictable due to its fixed nature. For example, in Venezuela a heavy oil export-dependent country, was majorly hit with oil prices when they slipped in September of 2015. The global market is mainly dominated by resources like oil, natural gas, and gold.