COMMODITY

MARKET
Michaela Revilleza
Mikki Bautista
Herlene Lapitan
Rommel Besana
 A commodity market
is a physical or virtual
marketplace for buying,
selling, and trading raw
or primary products.
Commodities are split into two BROAD
types: hard and soft commodities.

HARD COMMODITIES SOFT COMMODITIES

are typically natural are agricultural
resources that must be products or livestock—
mined or extracted— such as corn, wheat,
such as gold, rubber, coffee, sugar,
and oil, whereas soybeans, and pork.
Energy: such as natural gas, gasoline
(UK: petrol), heating oil, and crude oil.
Metals: including silver, gold, platinum,
nickel, zinc, and copper.
Livestock and Meat: examples include
feeder cattle, live cattle, poultry, eggs,
pork bellies, and lean hogs.
Agricultural Foodstuffs: including sugar,
cotton, coffee, cocoa, rice, wheat, corn,
and soybeans.
• Commodity markets date back to Sumer
between 4500 BC and 4000 BC. Sumer was
where modern day southern Iraq is.
• Sumerians used clay tokens to represent
quantities of livestock. They specified
details of time and date of delivery. In fact,
their clay tokens resembled today’s futures
contracts.
• Commodity markets, as we know them
today, have their roots in the trading of
agricultural products in Europe. >>>
• People in Europe and America have traded
cattle, pigs, corn, and wheat extensively
using standard instruments since the
1800s.
• However, trading in other basic foodstuffs,
such as soybeans and coffee, is a relatively
recent activity.
• For a commodity market to establish itself,
people need to agree on what types of
products there are. They must also agree
on acceptable standards of quality.
• Manila Commodity Exchange (MCX) is
a commodity and derivatives exchange located
in Ayala Avenue, Makati, Philippines.

• MCX was reportedly to have 84 registered members

throughout the Philippines. The monthly volume on
all contracts is around US$12.6 million.

There are six major commodity exchanges in the U.S.:

• The New York Mercantile Exchange
• Chicago Board of Trade
• Chicago Mercantile Exchange
• Chicago Board of Options Exchange
• Kansas City Board of Trade
• Minneapolis Grain Exchange.
INSTRUMENTS TRADED,
PLAYERS AND TRADING
PLATFORMS
 Commodities can be invested
in numerous ways:
1. An investor can purchase stock in corporations
whose business relies on commodities prices
2. Purchase mutual funds or index funds
3.Exchange-traded funds (ETFs) that have a focus
on commodities-related companies.
4. Most direct way of investing in
commodities is by buying into a futures
contract.
VALUATION, PRICING
AND PROFIT TAKING
OPPORTUNITIES
What are the Main Drivers of Commodity
Prices?
Each individual commodity has unique factors
that drive its price. However, certain common
factors play a role in determining prices for
most commodities:

1. Emerging Market Demand

2. Supplies
3. The US Dollar
4. Substitution
5. Weather
Prices of a commodity are based on the
supply and demand of the commodity. This is
similar to other non-commodity products.

Commodities however are bought and sold at

prices while exchange of these products
usually takes place on a later date
somewhere in the future.

Therefore there is a lot of uncertainty

whether the market or spot price will be in
line with the pre-determined price of a
contract.
Parties agree on a pre-determined price to
cover themselves against adverse price
movements. They however also risk missing
out on positive price movements in the future,
due to the obligation to a contract.

Therefore a number of different methods have

evolved for determining a price upon which
both parties can agree.
A fixed price is the most basic form for
settling a price for
a commodity or futures contract. A
fixed price is determined at the start
of a contract and is in many cases
based on the price futures, that have a
comparable size and delivery date.
This agreed upon price is the price for
which the contract will be settled at
the delivery date.
Parties can also agree on minimum and
maximum price, called floor and ceiling
prices. In this situation, when a price would
move outside of these boundaries, both
parties would share the profit from this price
evolution.

This way both parties benefit from large

price movements. When the price remains
within the boundaries, the contract will be
settled according the market price upon the
time of delivery.
Another method for determining a price for
a commodity contract, is using a floating
price. A floating price can be calculated as
an average of a reference price over a set
period of time.

This methods reduces the risks of an

temporarily extreme price at the date
of delivery. While calculating averages, a
sudden increase will only have a small effect
on the overall price of the commodity >>>
The price can also be established upon the basis of
a commodity. A basis is the difference between the
local cash price (spot price) and futures price.

This contract gives the holder the ability to lock in on

a basis, which he thinks will be profitable in the future.
The final price for the commodity however will be
decided when the holder exercises the contract.

When he decides to exercise the contract the price

will be determined by taking the current futures price
and reducing this with the agreed upon basis. This
result in the final price the buyer will pay for
the commodity.
The numerous traders working the market,
can have major impact on the
price volatility of the commodity markets.
These traders only trade with the prospect of
making a profit, without ever owning a
physical commodity. Therefore they will
attempt to move prices in their favor. This
can result in unforeseen price fluctuations
and thus create risks for companies, who
depend heavily on commodities and their
prices.
 ACTUAL CASES OF MARKET COLLAPSE
2015
Crude oil dipped below $40 a barrel for the first time since
2009. The situation was so dire that the Bloomberg
Commodity Index, which covers a wide range of natural
resources, dropped to its lowest level since June 1999.
CAUSE:
A combination of oversupply and weak demand has
wreaked havoc on the natural resources industry.
The growth slowdown in China and other emerging
economies such as Brazil has reduced demand for natural
resources like steel, iron ore and crude oil.
Meanwhile, on the supply side, cheap borrowing costs and a
failure to predict China’s slowdown led producers to expand
too much in recent years.
 DISADVANTAGE
Falling commodity prices are forcing
the world’s mining giants to
restructure their businesses in order
to stay afloat as they battle declining
ADVANTAGE profits. The market capitalization of
Conversely, in Britain and the top 40 global mining companies
the Eurozone, low energy has fallen by nearly $300 billion this
year.
prices have benefited The crash is particularly devastating
both consumers and for economies that rely on export
businesses. earnings from commodities. The oil-
producing states of the Middle East,
Russia, Brazil and a number of
African nations have all been badly
affected.