Commodity Exchange in Commerce, Types, Methods, Benefits

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Hello welcome to this blog on COMMODITY EXCHANGE: at the end of this blog you should be able to:

Table Of Contents

  1. Explain the term commodity.
  2. Types of tradable commodity.
  3. Meaning of commodity exchange
  4. Tradable commodities.
  5. Requirement for trading
  6. Methods of trading.
  7. Benefit of commodity exchange
  8. Major constraints to commodity trading in Nigeria.
  9. Differences between commodities and stock.
  10. Similarities between commodities and stock.

DEFINITION OF A COMMODITY

In commerce, a commodity refers to a marketable item produced to satisfy wants on needs. Economic commodity is comprises of goods and services. Commodity is specifically applied to goods. It is used to describe a class of goods for which there is demand, but which is supplied without qualitative differentiation across a markets.

MEANING AND TYPES OF TRADABLE COMMODITIES

Meaning: Tradable commodities include basic resources and agricultural products such as iron ore, crude oil, coal, salt, sugar, tea, coffee beans, soya beans, aluminum, copper, rice, wheat, gold, silver, palladium and Platinum.

Types of tradable commodities

  1. Soft and hard commodities: Soft commodities are goods that are grown such as crop while hard commodities are the ones that are not extracted through mining. There is another important class of energy commodities which include electricity, gas, coal, and oil. Electricity has the particular characteristics that it is not usually uneconomical to store, hence, electricity must be consumed as soon as it is produced.
  2. Energy commodities: All these commodities mentioned above are collectively regarded as tradable commodities because they are items which can be traded (imports and exports) between one country and another. It involves buying and selling with the purpose of making profits.

DEFINITION OF COMMODITY EXCHANGE

A commodity exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, Barley, sugar, maize, Cotton, cocoa, coffee, milk products, pork bellies and other metallic commodities include gold, silver, diamond, iron ore and copper).

Conditions necessary for Trading

The condition necessary for trading are the following:

  1. knowledge of the products: You must know the product you want to trade in.
  2. Familiarity with customers desire: You must be familiar with your customers desire or buying culture.
  3. Need to carry out feasibility study: You must carry out a feasibility study of the area you want to carry out the trade, i.e, you must know how close your products are to the people.
  4. Familiarity with mode of transport: You must be familiar with the type of transport network you want to use.
  5. Familiarity with computer: You must be familiar with a computer or knowing how to trade online.

REQUIREMENT FOR TRADING

Trading also involves sequential method of arranging the tradeable commodities in order to ensure the delivery of quality commodities to the customers. This trading requirements includes:

  • Grading system: This involves the process of arranging the commodities in a manner to ensure quality delivery of the commodities to the customers. Such grading may include low, medium and high grade of the products.
  • Warehousing: warehousing is the act of storing commodities produced or bought in a place until they are needed by the customers. Warehousing ensures that there is a regular and steady supply of goods or commodities. The producer or wholesalers must hold stock until the customers or consumers demand for it.
  • Clearing system: This refers to the situation where commodities exported are carefully cleared from the seaports or airports. During clearing efforts must be made to ensure that the commodities do not get damaged and goods must be intact in order to meet up customers requirements.
  • Standardizing: This is a process which the wholesaler or the importer do to ensure that the commodities exported are able to meet the standard set by a particular country. Nobody export goods to another country without meeting the standard set by the destination country. In Nigeria for example, the standard organization of Nigeria (SON) ensure that all commodities imported into the country meet up with certain standard.

TYPES OF TRADING ON COMMODITIES

There are two major types of trading on commodities. These are:

1. Spot Trading: This involves the system in which buyers pay immediately they receive the goods under special arrangement and conditions. The seller may receive part payment before the commodity is delivered (i.e, bill of collection) or full payment made after the commodity are received and confirmed to be alright and in good condition (i.e, in form of letter of credits).

2. Forward futures: Commodities exchanges may also trade on future contract, such as trading contracts to receive something say corn in a certain month.

Speculators and investors do buy and sell the future contract in an attempt to make a profit and provide liquidity to the system. However, due to the financial leverage provided to traders by The Exchange, commodity futures traders face a substantial risk.

METHODS OF TRADING ON COMMODITIES

There are two methods of trading on commodities. These are:

1. Open outcry: Open outcry is a traditional methods of trading on commodities. It simply involves the use of natural voices, other means like whistle, bells, trumpet and flute etc, to make their availability of certain commodities known to certain buyers. This method does not really serve any purpose except at the local market.

2. Electronic means (i.e online): This involves the use of the computer system to trade either national or international. The computer system enable traders to do business successfully. The computer system provide the useful information on how buyers and sellers can communicate on all matters that borders on tradable commodities.

BENEFITS OF COMMODITY EXCHANGE

The benefits of commodity exchange include the following:

  1. Increase in agricultural production: Commodity exchange ensures that increase in agricultural production in the sense that once produce are harvested and sold with ease and with good profits, this will give more encouragement for the Farmers to produce more.
  2. Stabilization in agricultural product pricing: Positive commodity exchange do encourage the Farmers to produce more because of the assurance that whatever they produce, their products must be purchased because of the stable prices they enjoy.
  3. Generation of employment: Commodity exchange generally involves export and imports and these activities enable many people to be gainfully employed in making is possible.
  4. Encourages exploration of solid minerals: A country that enjoy more income as a result of the importation of some minerals resource will be encouraged to explore more minerals resources in order to increase more income.
  5. Foreign exchange earnings: Countries that export their commodities (agricultural and other mineral resources) generally earn more income through foreign exchange earnings.
  6. Improves agricultural output and quality: With continuous importation of agricultural goods which bring income to the individuals and to the nation, efforts are being made by farmers to produce commodities in larger quantities and in qualities.

CONSTRAINTS TO COMMODITY TRADING

The major constraints to commodity trading in Nigeria are:

  • Inadequate supply: Majority of the commodities produce are always in short or inadequate supply. This tends to cause shortage or inadequate supply to the market, thereby leading to scarcity and increase in the prices of such commodities.
  • Poor storage: Poor storage of commodities, e.g, power problem (i.e, electricity) generally lead to wastage and poor prices. Poor storage do lead to low prices and poor quality of commodities.
  • Bad weather: Bad weather such as flooding, drought etc do affect agricultural production and this may lead to poor harvest and low markets for these products.
  • Activities of the middlemen: The activities of the middlemen like wholesalers and retailers do create artificial scarcity and high cost of commodities and this go a long way to affect the price of these commodities and getting to the final consumers.
  • Ethical issues: Many marketers lack The manners and other considerations in marketing certain commodities. Their manners and attitude do result in bad marketing of tradeable commodities. Some religion belief may prevent certain commodities from selling e.g, the Islam religion forbid any activities related to trading or production of pork, e.g, the meat of pigs.
  • Inadequate knowledge and commodity exchange: Many traders or investors do not have adequate knowledge of the working of the commodity exchange. This tends to slow down their activities or they do different things which may not benefit commodity exchange’s activities.
  • Corrupt officials: There are so many corrupt officials that make difficult for people to trade effectively by virtue of wanting to be settled before a business can be transacted.
  • Bad government policies: Every government enacts various policies that tend to work against commodity traders in the country. In other words, this policies are not business friendly because they frustrate the traders in carrying out their businesses.
  • Fraudsters: There are many fraudsters who are creating difficulties for genuine traders in that business.
  • Poor road network: The country is plague with so many poor road network. Most of these roads are in a bad states. These prevent the smooth flow of transporting goods or commodities for One region of the country to the other.

SIMILARITIES AND DIFFERENCES BETWEEN COMMODITIES AND STOCK

Meaning: Commodity refers to a marketable item produced to satisfy wants or needs. Commodities are goods initially sold by the parties who produced them.

Stock refers to the bundle of shares or mass of capital which can be transferred in fractional amount. When a company wishes to make itself available to ownership by outside parties, they will often issue shares of stock. Each person buying a stock owns a piece of the company.

(a) Similarities

  • They both can be bought and traded only.
  • They require large sum of money to trade with.
  • Both can be bought from the same source.
  • The profit from trading of stock and commodities are usually high.

(b) Differences

Stocks accommodities differ in a number of ways. For one, many commodities, such as food items are perishable, meaning they can be resold in a limit number of times. For another, stocks commonly entitle their holder to receive dividends – the profits made by the company. Unlike stocks, commodities do not generally produces income. However, like stocks, they do increase or decline in value based on supply and demands.

Revision Questions

  1. Explain the following concepts: (a) commodity, (b) commodity exchange (c) tradable commodities
  2. List four tradeable commodities each under the following subheadings (a) soft commodities (b) hard commodities (c) energy commodities
  3. Discuss the requirement for trading
  4. Name and discuss two major types of trading.
  5. List and discuss two major methods of trading.
  6. Name and explain five benefits of commodity exchange.
  7. List and discuss six major constraints to commodity trading in Nigeria.
  8. Explain briefly: (a) commodity (b) stock
  9. State and explain similarities and differences between commodities and stock.
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