Trading in commodities commodity trade, which is commodity trade, world trade in goods that are primary. These are either raw or partially refined materials whose value is primarily based on the costs involved in getting, gathering and harvesting them. They are trade in exchange for processing or integration into final products. Some examples include crude oil, cotton and rubber, grains and minerals and other metals.
The value of manufacturing products, such as clothing and machinery, is largely determine by their manufacturing costs. Manufacturing processes like these contribute only a small amount to the value of basic products, which undergo minimal processes before being sold.
Primary Commodities Markets
Trading in primary goods could take the form of an ordinary swap of goods for money, as is the case with every other transaction. It could also be done by using options.
The term futures refer to an arrangement to provide or receive a specified amount of an item at a predetermined amount at a specific date in the near future. Trade has declined dramatically, and in some cases such as those at the Liverpool markets for grains and cotton, it has ceased.
Commodities Price Fluctuations
Prices can vary greatly in the commodity market, and not just in the short term but also in the long term. In the short-term, there are often fluctuations of supply because of changing climatic weather conditions for agriculture-related products as well as due to various political events that take place on the international stage such as the closing of the Suez Canal and in specific nations such as strikes.
Price fluctuations don’t typically lead to significant fluctuations in supply or demand for primary products due to the low elasticity of demand and supply. Business cycles in the import countries, however, exert an impact on the demand.
Market conditions can vary naturally between different products. For both wheat and sugar, the demand is relatively steady, but supply not. With regard to tin, and in fact the majority of the metals, the opposite is the case. For industrial commodities, like cotton it is possible to see fluctuations in quantity and the amount of demand.
In the long term, the degree of fluctuations in supply and demand is generally more. The emergence of alternative products could result from a sustained and large price increase. After a certain period of time, it is possible that supply will rise in response to an increase in demand.
Which is reflect in higher prices. The time needed to adjust supply in response to demand is different between commodities. For example, tree crops require a lengthy time to grow. While mineral reserves can be tapped only in the event that expectations regarding price trends are favorable.
Interests Of The Countries With Less Development
Insofar as the producer’s nations are concerned, stabilization of incomes, not of price is the primary aspect. Although commodity agreements could aid in this, but their limit effectiveness has resulted in other plans to be considered.
Compensatory financing is financial aid to countries whose export earnings have been adversely affect. This system established during the year 1963, by the International Monetary Fund IMF. In 1969, the IMF also began to make loans to countries with the need for balance of payments. These loans were for the purpose of funding buffer stocks as part of the international agreements on commodities.
OPEC And Oil Commodities
One of the most important international organizations that influence the price of commodities is the Organization of the Petroleum Exporting Countries OPEC.
Middle Eastern countries and Venezuela established it in 1960. However, its membership has expanded to include countries that are developing in other regions of the world. Some of the major oil exporting countries remain outside of the organization including Mexico as well as Russia.
The main goal of OPEC is to raise the cost of oil for oil exporting countries. Despite its beginnings, the organization did not succeed because oil remained plentiful throughout the 1960s, keeping the price low. In the 1970s, however, significant changes made.
The rapid expansion of the economies in several nations increased the demand for oil. While at the same time oil production was declining and settling down to fall across the United States. This meant that U.S. demand for imported oil was growing quickly.
In 1973, OPEC was able to take advantage of the opportunities presented by the shifting market conditions-as well as by the economic and political turmoil that triggered by the conflict in the region between Israel as well as its Arab neighbors-to raise prices dramatically from around $3 to over 12 dollars per barrel. From 1974 to 1979, the global oil market was fairly stable.
However, OPEC had another success in raising the price significantly. This reached over $30 per barrel by the time of 1980. The price hikes caused massive shifts in profits from oil-importing nations to oil exporting nations. They also led to a rise the rate of inflation within the importer countries.