When we talk about commodities, we think of goods or products that we need in our day-to-day life. These products can be categorised into two: hard and soft commodities. While hard commodities refer to products provided by our natural resources such as oil and metals, soft commodities are flexible products such as livestock and agricultural goods.
But the question is, how do we go about procuring these goods or products? In the past, we resorted to commodity trading by exchanging stuff such as spices, fruits, vegetables, and livestock. Today, we trade commodities through the use of money. That is where the commodity market comes into the picture.
The commodity market allows us to trade vital things such as precious metals, energy, oil, spices, and livestock, among others. These products can be accessed through traditional holdings, contracts, exchange-traded funds (ETF), and associated markets.
In this blog, we’ll cover the five benefits of a commodity market. Keep on reading to learn more!
Improvement in product quality
The commodity market aims to improve the quality of products being traded. This goal is achieved through the existence of warehouses with grading facilities. The standardisation of commodity trade is set in place to ensure quality products, and along with this is the certification issued by the exchange-certified warehouses.
Price discovery
The commodity market allows easy discovery of prices. Pricing is set based on the data and information on specific markets, the demand and supply balance, weather forecasts, government policies, environmental factors, and the position of buyers and sellers making product exchanges. The goal is to set a fair value of price per commodity for proper trade execution.
Hedging
Price risk management is vital to the overall equation in the commodity market. For the most part, risk management is attained through the most common method known as hedging. This strategy takes an equal but opposite position in the futures market to protect businesses from an adverse price change. This particularly benefits farmers, processors, merchandisers, manufacturers, exporters, importers, and more.
Competitiveness in export
The commodity market ensures competition in exporting products. For one, exporters can hedge their price risk and improve their competitiveness through the futures market. This market allows exporters to hedge their proposed purchase by temporarily substituting for the actual purchase. Without it, the commodity market will have time-consuming and expensive physical transactions.
Accessibility to credits
What’s good about the commodity market is how it allows businesses to have access to credit. Easy credit accessibility has brought financial institutions’ confidence in proper risk management set in the commodity market. Without risk management, marketing and processing commodities can be a risky business activity to fund. Through proper regulation and full compliance, banks will be more confident than ever in funding commodity-trading companies.
Conclusion
There are valuable reasons the commodity market exists. As shown above, the commodity market ensures product quality, price discovery, pricing management, export competitiveness, and credit accessibility.
Ultimately, proper trading implementation, regulation, and compliance are set in place for the good of the participating businesses and the entire commodity market.
We specialise in online commodities, raw materials, and industrial supplies. If you are looking to optimise your supply chain in the commodity market, contact us today to see how we can help!