Commodity Prices 2011 – Commodities Rising Due To Emerging Markets

by Dan Harrington on April 11, 2011

2011 Commodity Trading Guide, Commodity Futures Contracts, Commodity Definition

Commodity Investor and Consumer Report: Overview of Commodities Markets and Exchanges, Traded Commodity Contracts

Definition of a Commodity

Fundamentally, commodities are products that have value and which may be shown to be very uniform in quality even though numerous producers are creating the product (e.g., cultivating, mining, etc.), so that there is a large overall quality.

In this regard all of the products categorized under the particular commodity market may be considered equivalent to one another, and thus may be traded as if equivalent in every way (though there may be a certain tolerance for variations as stated in the specifications for that particular commodity).

The Root of the Word Commodity

The term commodity comes from the French “commodite” or “to benefit or profit.” It was first seen in the English language around the 1400s and comes originally from the Latin “commoditatem” which translates to “fitness or adaptation.” The Latin root “commod” means “benefit, appropriate, or proper time, condition or measure.”

Definition of Commodity continued:

Another important aspect for a product to be a traded commodity is that there exists a demand for that particular product (e.g., full or partial fungibility is demonstrated without regard to the particular producer of the commodity or where the production takes place).

Throughout and across that particular commodity marketplace all of the individual units of that particular commodity show now qualitative difference.

Emerging Markets Driving Commodities Demand in 2011 continued:

Determining the Price of a Specific Traded Commodity

The marketplace as a whole determines the trading price of a particular commodity at any given time.

Spot markets and derivative markets allow trading to take place for a range of physical commodity products (e.g., natural resources, agricultural products), and there is a distinction between soft and hard commodities.

Hard and Soft Commodities – What is the Difference?

Mining retrieves hard commodities from the earth, while farming and cultivation produces soft commodities (e.g., agricultural products).

Some examples of hard commodities are copper, palladium, aluminum, platinum, gold, silver, coal, crude oil and iron ore. Some agricultural products include soybeans, coffee beans, sugar, cotton, wheat and rice.

Commodity Prices are Increasing in 2011 Due to Emerging Markets

Precious Metal Commodity Markets

Platinum, silver, gold and palladium are all consider precious metal commodities. In the industrial commodity category are molybdenum, copper, aluminum, cobalt, lead, tin, zinc, aluminum alloy, nickel and recycled steel.

Commodity Prices 2011 – Commodities Rising Due To Emerging Markets

The Energy Commodities and Agricultural Commodities

Coal, gas, oil are energy commodities. Electricity is also considered an energy commodity though it differs from the others in that it is typically used as it is produced and thus there are no “stockpiles” as there are in the others.

Energy commodities include Gulf Coast gasoline, propane, ethanol, crude oil, natural gas, heating oil and Brent crude.

Agricultural commodities include grains, food and fiber. Some examples are wheat, coffee, soybean mean, soybean oil, cotton, cocoa, frozen concentrated orange juice and sugar.

Meat and Livestock Commodities

Feeder cattle, lean hogs, live cattle and frozen pork bellies all fall under the category of meat and livestock commodities.

Commodity Prices – Futures Trading, Commodity Market, Chicago Mercantile Exchange – Commodities Overview continued:

Environmental Commodities

This is a fairly new category of commodities and includes white certificates that represent energy efficiency credits, carbon offsets and Renewable Energy Certificates.

Commodity Definition in Regard to Commodities Exchanges

A specific standard is written into the particular contract for each commodity exchange, and that written standard is what defines the particular commodity.

It should be noted that the standard that is written bears no relation to and is not defined in any way by any specific quality that is inherent in the product of any individual producer of that commodity.

Principal Quality Defining A Commodity Market

The principal quality that defines a particular commodity market is that raw or primary products are exchanged and thus usually occurs using standardized contracts which are bought and sold for specific commodities on a regulated exchange.

Both commodities as well as derivative products are actively traded in highly organized markets that are known as commodities exchanges.

Commodities Rising Due To Emerging Markets – Commodity Prices 2011

The Trading that Occurs In Commodity Markets

The world’s commodity markets trade a wide variety of different commodities as well as various contracts that are based upon these commodities.

Among the many raw materials traded are numerous agricultural products as mentioned above, from oil and natural gas to pork bellies, sugar, milk, maize, wheat and barley. Cocoa, coffee and cotton are also important traded commodities.

Traded Contracts Which Are Based Upon Commodities

The contracts that are based upon the commodities include a variety of structured options from futures and forwards to spot prices and options. There are also more sophisticated financial products such as environmental and interest rate instruments as well as ocean freight contracts and swaps.

Commodity Markets and Futures Markets continued:

Trading On A Commodities Exchange Explained

A typical trade on a commodity exchange is a contract that includes a promise to receive the specific commodity in a particular month in the future. For example, a certain amount of coffee beans with the delivery date being about three months from when you buy the contract.

Commodity Prices 2011 – Commodities Rising Due To Emerging Markets

This allows the farmer to sell such a future contract for their coming harvest at a certain price which in effect guarantees that farmer that price for their crop when it is eventually delivered.

The buyer of the contract, who for example may be a Coffee Roaster, then also has a guarantee that they will be able to acquire the coffee beans at that future date for that specific price even if the general world market price of the particular commodity has risen during the time the contracts were bought and sold and the delivery date of the contract.

Commodity Markets Provide Price Protection

In this way the commodities markets allow producers as well as purchasers of commodities to protect themselves against price drops or price increases and helps to protect investments and avoid financial disasters.

The ability to insure against potential losses is important in the business world and is known as hedging. This can protect a farmer against a horrible harvest year and can also protect the buyer of the harvest from a huge spike in prices due to supply and demand issues or other causes.

Rules for Commodities Markets and Futures Markets are primarily enforced by the National Futures Association while the Commodity Futures Trading Commission promulgates the regulations.

Commodities Rising in Price in 2011 – Emerging Markets Creating Huge New Demand continued:

Speculative Trading on Commodity Futures Markets

Futures contracts are also purchased by investors and speculative traders seeking to make a profit by predicting whether a particular commodity will go up or down in price in the future.

Industry analysts and company CEOs (e.g., Starbucks) have complained recently that large infusions of investor money and speculative trading in commodity markets has artificially driven up prices and exacerbated the commodity price spikes across a whole range of commodities.

The large amounts of investor money including hedge fund money that has poured into commodity markets is attributed in large part to easy-money credit policies allowing investors to take advantage of the huge growth in emerging markets though futures speculation in an inflationary environment.

Meanwhile the U.S. has acquired massive new debt that has weakened the U.S. dollar effectively creating higher commodity prices for all Americans.

Emerging Markets Driving Demand for Commodities

The world’s emerging markets have been creating a huge new demand for commodities which is one of the fundamental reasons that commodities have been rising in price.

India, China, Brazil, Latin America and Russia are all emerging economies with growing middle classes that now have more disposable income for everything from fine coffee beans to the use of much more oil.

Emerging markets have shown a much faster economic growth in recent years than the United States and the devalued U.S. dollar has further exacerbated the problems of rising commodity prices for Americans.

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