Commodities

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December 16, 2012

Uncategorized

The term “Commodity” is conventionally used to identify a set of fungible goods (in the sense of interchangeable, that is, given a certain property, it is sufficient that these correspond to specific quality standards because it is exchangeable, regardless of where it comes from or who is produced the manufacturer), the negotiation of which is adjusted on the basis of standardized features. Often commodities constitute the underlying derivative financial instruments, and the most common forms are represented by the futures, but also by the option and the ETC (Exchange Traded Commodities, which unlike the ETC are not funds but directly related securities or commodity contracts derivatives that use them as below).

There are therefore two types of markets in which commodities are exchanged: the cash or spot markets, which are those that serve them the producers of these commodities, and financial markets where officers refer speculators who exploit price fluctuations for the immediate profits, but also the producers who seek to take cover against the risk of price decreases on the basis of expectations about future events. There are different classifications of commodities, the two main groups: the hard commodities, including durable goods, which are not subject to deterioration over time, and soft commodities that are lacking these features.

A further classification of raw materials (which will still fall into one of two subcategories hard and soft) is made depending on the nature of the goods or where it came from, and they are: Energetic materials (such as gasoline, natural gas and petroleum), Cereals ( such as oats, wheat, wheat, corn, soy and dairy products), metals (aluminum, silver, nickel, gold, platinum, palladium, copper, zinc, and recently, even if they have a market of elite, are indented even the “rare earth” ), meat (pigs and some derivatives, beef cattle and dairy cattle), colonial products (cocoa, coffee, orange juice, tobacco, sugar), fibers (cotton) and Timber. For each type of commodities have been established standardized terms, not only in terms of quality, but also for the quantities purchased and the values or units of measure that can be expressed (for example, the dollar price per barrel for oil) . The biggest markets in which commodities are traded are of Anglo-Saxon extraction and are mostly located in the U.S. (CBOT, CME, NYMEX, NYBOT, CSCE, COMEX, MACE) and to a lesser extent also in London (LIFFE, ICE , LME).

HARD COMMODITIES

The market for hard commodities, while constituting a branch of that of raw materials (as well as livestock and derivatives, cereals, cotton, cocoa, etc. … known as soft commodities), has very different characteristics in the quotations, and not only because of their nature and the role we play within human society (support for production processes and as exchange-values or refuge), but above all for their greater interaction with financial markets. A fairly obvious example is represented by the black (oil) and yellow gold, traditionally regarded as safe havens. Another special feature of hard commodities is in the location of materials that end up creating real movements of the balance of the relationship between supply and demand to determine the price, increasingly influenced by the creation of real their signs (as in the case of oil).

The common points instead with other commodities are the standardization of the quality level (such as the degree of purity) and also quantity (an ounce for gold, a barrel for oil, and so on), and also the currency permissible for negotiations (there has to bear in mind the effect that is produced by foreign currency exchange rate, which may amplify or reduce any gain or loss, by introducing an extra variable to be taken into this). The prices of hard commodities are influenced by economic policy decisions, from macroeconomic data collected, changes in the prices of other commodities, the value of the real estate market, and so on. So it is sufficient to consider the impact of a natural disaster will have on the price (as is the case for soft commodities for which the start of a drought will inevitably lead to higher prices), but you have to consider many factors, sometimes imponderable (such as OPEC decision to reduce the amount of crude oil production, or the sudden effect close to political tensions and military). Even for hard commodities there are specific markets:

– New York Mercantile Exchange (NYMEX) crude oil (WTI) and derivatives, propane, electricity, natural gas, and in his section COMEX (Commodity Exchange) negotiations are palladium, gold and silver, platinum, aluminum, coal, copper.

– International Exchange (ICE): Oil (Brent);

– London Metal Exchange (LME) tin, zinc, aluminum, molybdenum, nickel, cobalt, lead, copper.

Recently they have also received some quotes from some specific chemicals, such as polypropylene and polyethylene, demonstrating that the commodity market is in constant evolution.

SOFT COMMODITIES

The soft commodities are perishable raw materials (such as cotton, coffee, sugar, cattle, orange juice, lumber, and wheat, and their derivatives), which characterizes the characteristics and needs that meet global market and niche, thanks Also the effect of standardization of their characteristics and the use of measuring systems that apply in front of every possible buyer (for example wheat is measured in bushels, while sugar in pound). The soft commodities market is one of the forms of “organized and regulated” one of the oldest, and many specialized markets in their trading today, were founded in 1800, and some of them have been retained traditional forms of purchase orders purchase and sale, or the “shouting”, even if the path to an ever more massive than the telematic support was inevitable and irreversible. The soft commodities have gained wide spread, trading through the use of derivatives and futures, for which the most important markets are:

– Chicago Board of Trade (CBOT, which together with the CME merged with the CME GROUP): raw materials are traded mainly cereals;

– Chicago Mercantile Exchange (CME): milk, livestock,

– New York Board of Trade (NYBOT) for cocoa, coffee, cotton, ethanol, pulp, sugar, orange juice;

– London International Financial Futures and Options Exchange (LIFFE) futures sugar, coffee and cocoa;

– Intercontinental Exchange (ICE): cocoa, coffee, sugar, cotton and orange juice;

– Tokyo Grain Exchange (TGE): coffee and sugar.

Trading in commodities, with the affirmation of derivatives, attracts a very diverse type of investor: the classic hedgers (producers and farmers who are hedging to protect against a decline in the selling price), and the speculators who profit from instead on fluctuations in commodity prices, and who have no interest to get to the end of the contract, when the spot price tends to comply with that stated in the contract of sale or purchase. Another aspect to consider, for soft commodities is the impact that natural events (ie outside of any form of control, as well as forecasting, especially when it comes to catastrophic events), can produce on prices: a ‘epidemic that decimates the cattle, a drought on the agricultural sector, a huge demand for coffee, or a bad year for the production of coffee and sugar, will inevitably lead to a price increase. Between the various stakeholders in the negotiation, speculators can only take advantage of opportunities (eg being aware of information that will inevitably have an impact on prices), without being able to rely psychological effect that generally govern and influence the financial markets.

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