Commodity Trading and the Future of Commodity Markets

Across the world commodity trading activity takes place on a range of modern, regulated commodity exchanges. A wide range of commodities will be traded between end user buyers and producer sellers under the umbrella of standard contract rules and commodity trading regulations.

In effect world commodity exchanges facilitate the buying and selling of raw commodities ranging from crude oil, copper and wheat to platinum and orange juice.

Some commodities such as crude oil and coffee futures have been traded for a considerable long time in mature markets, but now in the early years of the 21st century we are seeing new markets and futures contracts being introduced.

These more exotic commodity classes include carbon in the form of emission permits. With the growing concern about the serious environmental threats from climate change caused by greenhouse gases, a rapidly growing market has developed in emissions permits, a form of activity known as carbon trading.

For the foreseeable future, it is likely we will see the continual growth of markets that place a price on the environment, with further development in emissions, plastics and perhaps even water.

The basis of commodity trading activity is the buying and selling of futures contracts for a whole range of commodities. While the nickel or cocoa producer will use commodity futures contracts to hedge their future sales, commercial end-users will also use these contracts for hedging against sudden spikes in prices.

Yet these two actors in the commodity markets are dwarfed by the high activity levels of speculators or traders who move in and out of the markets trying to make profits.

A futures contract represents a specific type of contract either to buy or sell a specified quantity of a commodity at a price determined by supply and demand at the time of contract, at an agreed date in the future.

Across the time zones of the world there are commodity traders active in the markets either using an electronic trading platform or on the floor of an exchange, called open outcry. Over recent years the volume of electronically traded futures contracts has increased significantly, as a number of exchanges have combined to form a super commodity exchange.

Inevitably, with the access afforded by the internet, a combination of an accessible online trading software package and up to date market data, commodity trading has gradually become more available to the retail speculator, who will usually trade with smaller amounts of capital.

Some traders will prefer to focus on a specific area of the commodities markets, while others look more at the price action and do not worry unduly about the fundamentals of supply and demand for raw materials or food.

With the opening up of the emerging market economies such as Brazil, Russia, India and China (or BRIC countries), we are likely to see a continuation of the growth in commodity markets in these nations. For example, Dalian Commodity Exchange in China has ambitious plans to develop beyond its current specialism in agricultural commodities, and move to industrial metals and more.

While in the Middle East, Dubai is a growing financial centre and the Dubai Gold and Commodities Exchange has an interesting product range including WTI light, sweet crude oil, steel, plastics, gold and silver and the Indian Rupee.

While the world economy has suffered some serious shocks following the credit crunch and slowing rate of growth, with a number of companies and even some countries getting into serious financial difficulties, commodities as an asset class would appear relatively unimpaired.

Despite the short term difficulties, the global economy will continue to rely on key commodities such as crude oil, steel and copper, as well as basic softs like sugar, cotton and coffee, not to mention grains such as wheat, corn and rice.

For this reason we can expect commodity markets to see through these problems and for commodity trading as an activity to continue to be at the centre of world trade and finance.

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