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Commodity Trading – An Insight

March 12, 2016 | Blog, Uncategorized

By Prof. Soman Nambiar

What are the dynamics at play in Commodity Trading and Markets?

In financial terms “commodities” refers to industrial raw materials and other agricultural produce. Even energy and other precious metal products are treated as commodities. A commodity also refers to any other commodity underlying a “futures” contract at a Commodities exchange.

 

Commodities markets, over its years of evolution, have had far reaching economic impact on different countries and its citizens, in varying magnitude. Though its origin is not readily documented, it is believed that it could have found its roots in Amsterdam in 1695. Shortages of critical commodities have always been the cause of wars over centuries [such as in World War II, when Japan invaded neighbouring countries to secure oil and rubber]. Coupling this has been the intermittent oversupply of core commodities which, in turn, have had a devastating impact on its respective and relative prices

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Prices and Supply of Energy commodities such as crude are closely monitored by countries, businesses and consumers alike. The average global consumer is deeply affected by high crude prices. Conversely, oil-producing countries [that are largely dependent on petro-money as their source of income] can become adversely affected by low crude prices. Price volatility is also triggered by unexpected disruptions in output, caused by weather or natural calamities.

There have been many connotations to what constitutes Commodities. According to Marv Dumon there are four categories of trading commodities as under

  • Energy [including crude oil, heating oil, natural gas and gasoline]
  • Metals [including gold, silver, platinum and copper]
  • Livestock and Meat [including lean hogs, pork bellies, live cattle and feeder cattle]
  • Agricultural  Produce [including corn, soybeans, wheat, rice, cocoa, coffee, cotton and sugar]

 

The 16th and 17th centuries witnessed trading in a wide array of commodities, livestock, spices, precious stones and gold. Notwithstanding that the quality of product, date & time of delivery and logistics of delivery were unreliable, commodity trading was a flourishing business. The might of the then empires was directly proportionate to their ability to facilitate commodity trades, as these served as the wheels of commerce, economic development and taxation for the kingdom’s treasuries. Reputation of the rulers and their reliability to fair trade practices were critical factors to secure the trust of ancient investors, traders and suppliers. Thus formed the foetus of the commodity markets

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