By: Shreya Enjeti
Imagine a market where prices are unpredictable. Fluctuation frequently occurs in commodity markets, making it more challenging to produce these goods. You might wonder why expenses are so unexpected. The chart below lists quite a few commodities sold in this market. Many of these crops are only grown at certain times of the year. For example, corn is a highly perishable crop. There is a possibility that the prices will be high enough to make a profit. However, if too much risk is involved in the investment, the farmer will act as a hedger and pass on the chance to a speculator. If I could change one thing about the system, I would alter the amount of risk involved.
This market involves high risk since crops are unavailable year-round, so I would do my best to produce more sustainable crops. Perennial crops automatically grow back, so they don’t need to be replanted. The increased use of perennial crops will facilitate the production of crops year-round . As a result, the prices of commodities will be more predictable and involve less risk.
- Why are commodity markets important?
Generally, individuals that buy and sell metal, energy, livestock, and agricultural products invest in the commodity market. However, commodity markets are essential to everyone because we all need commodities to survive. It would be more difficult for individuals to receive all the resources listed above without commodity markets. Commodity markets matter to me because I feel as though it is essential to understand how natural goods function in the market. By researching commodity markets, I learned that futures contracts are agreements between buyers and sellers that are used to pre-determine prices for the futures. In addition, both the farmer and speculator agree to a forwards contract which serves the same purpose as a futures contract. Even younger individuals should learn about the commodity market because all of our needs are produced through this market. We all need food and water, so it is essential to understand where these goods come from and how they are bought and sold by investors. I would like to teach children about commodities by writing a children’s book about wants and needs. If children understand how essential commodities are, they will learn how to spend money wisely at a young age.
- What is one way of investing in commodities?
If you are interested in the commodity market, you should invest in exchange-traded funds. ETFs are a type of investment that is similar to trading stocks. This process occurs with the help of a broker. A broker is a person who buys and sells goods. By trading with ETFs, individuals will gain exposure to the commodity market with less risk involved. In addition, ETF shares can be maintained for extensive periods. However, it is important to start with a demo exchange-traded fund so that you fully understand how to invest your money wisely. It is recommended to implement futures contracts after lots of experience and due diligence in the industry. For example, if you wanted to buy 20 tons of coffee 2 months from now, you should set up a futures contract with a pre-determined price. Hopefully, the price fluctuates so that a profit is made.
- Examples of the most popular exchanges for futures contracts
- What are specific companies that work in the commodity market? Why is this important to us?
British Petroleum
British petroleum is an example of a company in the commodity market. This company invests in businesses that reduce carbon emissions, allowing for greater environmental sustainability. You might wonder why this company is so important to us? Companies like these are needed to supply petroleum for everyday uses like motor oil, deodorant, and solvents. Many of these items are valuable but require lots of fossil fuel combustion. This process releases lots of carbon dioxide into the atmosphere, leading to environmental issues like global warming. Therefore, individuals need to become aware that companies invest lots of capital to reduce carbon emissions. There are many ways society can reduce its carbon footprint. For example, meat production requires more land and water than plants. In addition, manure is released from feedlots which releases carbon dioxide. As a result, we can reduce our carbon footprint by consuming less meat daily.
Rio Tinto:
Rio Tinto is another commodity market participant. This company has the world’s largest microgrids of gas-based power. The Pilbara Project was implemented to utilize solar and wind power for electricity generation. The data in the table below indicates the annual profit made according to Rio Tinto’s financial news.
According to the Rio Tinto Annual Results, the net cash generated from operating activities will increase by 60% by 2021. This increase in net cash stems from the increased use of commodities.
- What are the subjects that have a strong interplay with commodity markets?
Commodity markets correlate with Environmental Policy since governments set environmental policies that reduce greenhouse gases and reward renewable energy production. For example, governments promote cap and trade by placing an annual cap on the release of greenhouse gases. In addition, carbon offsets are projects that limit the number of greenhouse gasses, with many companies installing solar panels or planting trees to reduce carbon emissions.
