Definition of Commodity – In the world of commerce, commodity is a term that is often found. However, does Reader know the meaning of the term commodity?
Definition of Commodity
Based on the definition from the Indonesian Language Dictionary (KBBI), commodity is the main merchandise or merchandise. Commodities can also be defined as raw materials that can be classified according to their quality and conform to international trade standards, such as rubber, coffee, and wheat. In addition, commodity also has the meaning as a basic merchandise, commercial commodity, which can be classified according to the quality of international standards.
Commodities are goods or products that can be traded for profit. Therefore, it can be concluded that a commodity is a group of things that have an invisible form that can be stored for a certain period of time to be exchanged for other products that are equivalent in type and price.
The experts revealed that the concept of commodity is something that has an existence and is easily traded, can be transferred, can be stored for a certain period of time, and can be exchanged for other similar products.
The quality of the commodity goods conforms to international trade standards. Examples are coffee, wheat, rice, rubber, corn, etc. In addition, commodity products do not just cover daily needs such as groceries.
Some mining products such as precious metals gold, silver, aluminum, and energy resources such as coal and natural gas are also included as commodity categories. Forex, indices, and other commodities can also be included in the classification as commodities because they can be traded.
Commodity trading can be done by exchanging it for goods or products with the note that the value of the two goods has been considered to be equivalent. In general, goods or products that are considered as commodities are the main trade goods, products of the earth, and also handicrafts that can be used for export trade. After understanding the meaning of commodities, Reader should also understand the various characteristics of the commodity market. Here is the complete explanation.
Commodity Market Characteristics
One of the most common characteristics in the commodity market is the stability of the principle in terms of demand and supply. That is to say, all aspects of the two principles are believed to have great influence in the commodity market.
The principle that is the main influence of the commodity market is that demand cannot be met when the available supply is limited. On the other hand, that the available supply will also be wasted if the demand for the item is limited.
1. Energy Commodity
The first type of commodity is energy commodity. The meaning of energy commodities is actually related to the presence of energy in the earth such as fuel and a number of other mining products.
In general, commodities or products that belong to this type include petroleum such as gasoline, diesel, crude oil, light sweet crude, and brent crude oil. Not only that, the type of energy commodity also often trades coal with units such as tons, barrels, and metric.
2. Mining Commodities
The next type of commodity is mining commodity. Broadly speaking, mining commodities are divided into two groups namely precious metals and industrial metals. Some of the Reader must have known that examples of precious metal mining commodities can be in the form of gold, silver, platinum, or palladium.
Meanwhile, examples of industrial metal mining commodities have a larger scope, including iron, aluminum, copper, magnesium, titanium, nickel, tin, carbon, and many more.
3. Agricultural Commodities
In the agricultural sector, the concept of commodities is products that are produced directly from nature and are generally divided into two general groups, namely agricultural products and forestry products.
Meanwhile, agricultural commodities include various types of natural products that function as consumables such as rice, sugar, soybeans, wheat, coffee and so on.
4. Livestock Commodities
The last type of commodity is livestock commodity. From the name alone, it is certainly known that the products offered generally cover the entire animal husbandry sector, starting from animal feed, eggs, milk, and also meat from farm animals such as chicken, duck, fish, goat and cow.
Have Reader heard of commodity futures? In the trading world, commodity futures is a sale and purchase agreement on a commodity that has previously been determined regarding the price and time of sale with specifics.
Some examples of future commodities are metals, energy sources, and even foodstuffs. Considering its long-term nature, the price of the commodity is usually determined even far before the sale contract is executed.
With such an event, the seller can obtain certainty that the commodity will definitely be purchased so that both parties can prevent a decrease in demand or limited supplies.
Some examples of export commodities from Indonesia that are also applied using the futures system include textile, rubber, and automotive products.
Commodity Classification Based on Properties
Bearing in mind that commodities are things that can be traded through import and export, here are some classifications that are important to note before doing the buying and selling process:
1. Soft Commodity
The definition of soft commodity is goods or products that are generally the result of the agriculture, forestry, and animal husbandry sectors. For example, food ingredients that come from plants, various types of meat from farm animals, and plants that come from forests such as palm oil, and many more.
The commodity is named as a soft commodity because its type and price tend to present fluctuating movements so that it can go up or down without warning and can happen suddenly depending on the climatic conditions of the surrounding area.
Therefore, the price and availability of soft commodities usually cannot be accurately predicted considering the climate and weather conditions that keep changing and have significant differences in each region of the country.
3. Hard Commodities
Hard commodities are products that are generally the result of extraction from large mines that include petroleum and precious metals. Experts say that hard commodities are often dominated by energy commodities such as coal, petroleum, and natural gas.
Commodity Trading System
One of the most common characteristics of the commodity market is the stability of the principle in terms of demand and supply. This means that all aspects of the two principles are a great influence in the commodity market.
The principle that is the main influence in the commodity market is that demand cannot be met when supply is limited. On the other hand, a lot of supply will be useless if the amount of demand is limited.
This often creates a risk that the price of goods will fluctuate and can have a negative impact on commodity trade.
In general, actors in the commodity market can be divided into two, namely producers and speculators. Although both have the same profession, trading, but the principles they adhere to are still different. For example, producers often do price protection by using futures contracts so that their commodities do not fall in price before harvest time arrives.
Meanwhile, speculators have a principle not to apply futures contracts and tend to choose to take advantage of changes in the price of their commodities in order to obtain abundant profits.
Indonesia’s Top Products and Export Destination Countries
In order to simplify data collection, the Central Statistics Agency classifies each commodity based on a systematic item code that conforms to international standards, namely the Harmonized System (HS) code.
Not just for statistical data needs, the HS code also has a function to simplify the tariff system, trade transactions, transportation, and other things. Currently, there are thousands of HS codes for each commodity that can be accessed through the BPS official website, and are updated periodically. Of the many export products of Indonesian origin, the following is a list of the most superior export commodities from Indonesia in the global market.
Non-oil and gas export commodities
Non-oil and gas exports still dominate Indonesia’s total exports, reaching US$22.84 billion in November 2021. Featured commodities in non-oil and gas exports include:
1. Palm Coconut
Indonesia has been known as the world’s oil palm king because it controls up to 55 percent of the global oil palm export market share. In 2021, data from the Association of Indonesian Palm Oil Producers (GAPKI) records that Indonesia’s palm oil export volume reached 34 million tons, worth US$22.97 billion.
Palm oil and its derivatives fall into the category of fat and animal/vegetable oil. BPS notes that the export performance of this category of goods is the highest in the non-oil and gas export category. A lot of palm oil is exported to India, China, Europe, and others.
Indonesia is the third largest producer of coal in the world, after China and India. Coal production can reach up to more than 500 million tons per year. Meanwhile, domestic demand is still low, so most coal or up to around 70 percent of national coal is sent abroad.
The Ministry of Energy, Mineral Resources and Energy noted the realization of Indonesia’s coal exports in 2020, which is up to 405 million tons or more than the export target (102.5 percent) that was set at the beginning of 395 million tons. The ten countries that are the destination of coal exports include China, India, the Philippines, Japan, Malaysia, South Korea, Vietnam, Taiwan, Thailand, and Bangladesh.
3. Iron and Steel
Iron and steel are in the third position of non-oil and gas commodity exports after fats and animal/vegetable oils and mineral fuels. In November 2021, iron and steel export revenue reached up to US$276 million. The government continues to encourage the export of iron and steel through the downstream program or the processing of nickel ore to be used as iron and steel.
Iron and steel products originating from Indonesia are exported to a number of countries namely China, South Korea, India, Singapore, Thailand, Australia, Malaysia, UAE, Taiwan, USA, and others.
Rubber is one of the agricultural products that is a leading export from Indonesia. In 2020, BPS has recorded that Indonesia managed to export up to around 2.2 million tons of rubber to foreign countries with a value of US$2.9 billion. The main countries that are the destination for the export of rubber and goods from rubber include the US, Japan, China, India, South Korea, Brazil, Canada, Germany, Belgium, Turkey, and others.
5. Coffee, tea, and cocoa
Tea, coffee, and cocoa are agricultural products from Indonesia that excel in the export market. Indonesia sends tea, coffee, and cocoa products to a number of countries such as Japan, Singapore, Malaysia, India, Egypt, the US, England, Italy, and so on.
Not only from the plantation and mining sectors, Indonesia also exports industrial products. One of the products of the industry that is a flagship for export is footwear. The footwear products that are sent abroad include technical field shoes, athletic shoes, industrial shoes, and also footwear for everyday needs. Indonesian footwear products are sold to various countries including the US, China, Germany, Belgium, Japan, South Korea, the Netherlands, England, Italy, Mexico, and so on.
Oil and Gas Export Commodities
The contribution of oil and gas exports still tends to be lower when compared to non-oil and gas products. In November 2021, the non-oil and gas export contribution is US$21.51 billion.
The leading commodities for oil and gas exports from Indonesia are crude oil, oil products, and gas. Examples of oil and gas products sent by PT Pertamina (Persero) to foreign countries are avtur, lubricants, High Speed Diesel (HSD), Marine Fuel Oil (MFO), and others.
Meanwhile, export products from the industrial sector include paper, cardboard, various chemical products, consumer goods, plastic, wood pulp (pulp), machinery, processed food, home furniture, and so on. The export of mining products includes: copper, tin, gold, nickel, aluminum, and so on.
Reader must have often heard or read about the term price fluctuation, right? Some experts say that fluctuations indirectly become a double-edged sword that can give high risk of loss for commodity traders.
Although fluctuation is defined as a symptom of price fluctuations that can cause adverse effects on the commodity market, sellers and buyers can jointly prevent the risk by analyzing the needs of the market in a more organized manner.
Some of the ways that can be done include limiting demand and supply in the commodity market, although the risk of loss is also not less great.