Commodity Price Mechanisms

Commodity Price Mechanisms
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(20 April, 2011)
Commodity Price Mechanisms
Commodity trading which includes petroleum, natural gas, precious and base metals, oil and many more can be viewed to be one of the greatest concepts of a market economy in the world even though it is seen to be a challenge and also can instigate some fear to most people. This is because most people who have engaged themselves in the issues of commodity have ended up losing greatly especially when it comes to financial matters concerning money. Apart from money which can be categorized under the economy of the supplier, the production of data, the consumption patterns and political wave have impacted greatly considering them to be challenges. To avoid some of these challenges affecting the supplier, one needs to choose a better trading system that will make them feel comfortable. This trading system is normally actively promoted or simple in design while others are complex.
Apart from the trading system, one needs to understand the concept of the commodity markets which always come in two forms, the physical market (Spot market) and the financial markets. The physical market consists of all the stakeholders selling or delivering of the commodity product. This is normally done by brokers, matching sellers and buyers of cargoes during a certain period of time and in the area in question. Financial commodity market is meant for derivatives contracts which are the forwards meaning the price which is found in the market for any kind of delivery of the commodity at a given period of time which goes hand in hand with the other derivative called future, and the third derivative being the options in regardless to the physical markets. The only difference the forward and future contracts posses is, the latter which is forward possessing more standardized and market-to-market every day even though such a difference can never be relied upon fully because at times, when the forward is fully established, the long position is the forward contract being done on the date which will end up paying off during that time of settlement.
The supplier of the commodity needs to note that as long as the physical market proves to be in liquidity, then the idea of physical of financial forward contracts is likely to be the same to the market risk since they both offer a fixed purchase price. This forward contract in the market has given the supplier to come up with a forward curve because they pave ways to the management of risks and making informative choices about the likelihood. These derivatives are actually used for the risk management especially by those companies that trade in the physical markets and in conjecture of the other parties. With this in place, they end up settling up alongside the spot markets hence bringing them together. Nevertheless, these derivatives are at times physically established. For instance, the consumer being offered the real commodity he or she needed. In some circumstances, the derivatives are normally settled in terms of financial besides a spot index which is normally available based on the transactions made in the physical market.
Understanding the commodity market, the supplier needs to have some few things in his or her mind that can enable him succeeded in the market where there are a lot of completions. Done with the physical markets and financial markets, one needs to look forward on the idea of the trading system to be used, some knowledge about some basics concerning the supply and the demands of those commodities in the market should be needed. Supply can be viewed in different perspectives that’s through microeconomic level involving small firms supplying certain particular product or macroeconomic which may involve many firms supplying different types of products as a whole. These basics concerning the supply and the demands of the commodities are normally the basis of commodity price. By this, it insinuates that, when the market price of a product is very high, the likelihood of its supply to increase is very high. By any chance if the product being supplied is unique, then the supply will not change at all. Future commodity supply and demands also determine the commodity future price. Annuals based commodities can be cattle, wheat, cotton, soybeans and many more.
Their supply of commodities which normally relies on networking with the consumers and the behavior of the commodities are normally done once in every harvest as the demand becomes uneven and segmented in the whole year. Once the supplier comes up with a good stock earlier, then the benefits are many because there likelihood of meeting the consumers needs and wants is very likely but the threat comes in at a period when the supplier stocks whatever is needed by the consumer or customer and eventually the challenge of using the already stored stock is about to be sold. This can demoralize their motivation of buying another stock. This kind of commodity trading can be viewed in terms of Perpetual Production Commodities. Technical commodity trading should are also be observed at this juncture since they give the insight of the commodities in the markets and which depends normally on the climate during a given period.
Having a good knowledge about the future price commodity can also be helpful in determining the futures market types which consist of Annual and perpetual production markets which rely in the production of the product and its consumption in the market. This can be best performed if the forward price curves can be used since they determine the market and the time period it analyses the commodity.
This normally depends on the future contracts and forwards (neaybys) offered to you based on the annual production commodities in the market. This forwards and futures on the commodities have got special characteristics which are traded in the market. The forwards and futures are such as the physical forward delivers, NYMEX futures, NYMEX Lookalike, publication forwards and calendar swap. These forwards come in two ways, which are the closest to expiry and the second closest. By closest to expire what is meant is that, the commodity is about to “roll-off” while the second closest refers to, the second nearby commodity should come first while the third commodity becomes the second and the chain continues. What should be noted, as much as the NYMEX are the future, they do not possess the cash settlement but those options trading on them always settle on their value at a given period after discovering the constituent prices needed. The only risks that are likely to affect these kind of forwards are barriers and average rates whereby they are written on nearbys instead of them being edited on the particular forwards so as to make them to refer to several different forwards. Another significant risk is that when the number of forward prices in the curve shots up, then it makes the analysis to be hard.
Apart from those risks the supplier needs to observe some of the basics fundamentals that always determine the supply and demand are the price, the cost, factors of production, land, labor, capital and government legislation. Under these fundamentals, the major factors that influence the supply and the demand in the market are the price of the commodity. This occurs in terms of variations in a given market for instance, if the commodity of a certain commodity increases in the sense of price and then there is the likelihood of it to be more. This is the reason why most suppliers or even the firms or companies will always trade in commodities in order to make profits. The much they receive through their commodities, the better the revenue because their insignificant cost will definitely be covered (HYPERLINK "/users/341581/show_articles" \o "About Me: Shaheen Darr"
Shaheen Darr, 2009). The only thing that is likely to become a challenge to the price though it takes quite a little period of time is the uniqueness of the product since its supply can unlikely be changed since most of the consumers have not been adapted to the product.
Another factor which can determine the profitability of a supply and demand is the cost of the production development. This is because, especially for example, the premises they set their businesses need to be paid for because of the cost which has been set fixed. This leads to changeable cost being looked upon to enhance the production process so that there can be some profitability. If this issue is not taken into consideration, then the commodity trading will not make any sense since it will be considered as a loss to the firm or the supplier or even a company. Some other conditions which can affect the cost of production or related products are the instability of the economy in a given nation, global warming, political instability, transportation and so on.
Factors of production can impact greatly especially when it comes to the land issues, the labor of the workers, capital and the enterprise since all this belongs under the factors of manufacture. Entrepreneurs also undergo through some difficulties in determining the consumer’s needs and wants and the commodities to be manufactured for them, marketing strategies for quicker profitability. Whatever changes that are made in any management of a given company may impact the result of that firm to produce positive results or the other way round. This is due to the adaptations of the new entrepreneur and the understanding of the company policy.
Land issues can be another factor due to the weather conditions and when it comes to the raw goods, the increase or the decrease in the availability of land for cultivation can reduce the production of certain commodities especially if they go hand in hand with the weather. For good production of commodities in a given firm, there is need for qualified labors to perform better task and produce quality commodities or else if the laborers lack the experience, then poor production is likely to be experienced.
Capital which involves the Equipments such as furniture, fittings, tools, machinery or even money can result in better...