Wednesday, January 30, 2019 12:20 PM / Afex Nigeria
are many benefits for individuals and nation states in having a
well-established and efficient commodities exchange. On the national level,
commodities exchanges are critical drivers of economic development and
transformation, which present benefits to citizens of the nation in the areas
of wealth and job creation. Benefits of commodities exchanges also include
improvement of market transparency – making it easier for players in the commodities
value chain to make informed decisions, and hedge against price fluctuations.
the numerous benefits of commodities exchanges, limited understanding of the
concept hinders adequate participation in the commodities market. Here we
present a definitional guide for commodities exchanges to facilitate
Investopedia’s Definition of a
Investopedia defines a commodities exchange as “a
legal entity that determines and enforces rules and procedures for the trading
of standardized commodity contracts and related investment products.”
Business Dictionary’s Definition
of a Commodities Exchange
Business Dictionary breaks that down even further in
explaining commodities exchanges as an open and organized marketplace where
ownership titles to standardized quantities or volumes of certain commodities
(at a specified price and to be delivered on a specified date) are traded by
Key Words/ Phrases to Understand
entity: The designation of a commodities exchange as a legal entity
explains its capacity to enforce contracts and agreements with the ability
to assume an obligation and discharge indebtedness.
commodity contracts: Also known as futures contracts, these are
agreements to buy or sell a predetermined amount of a commodity at a
specific price on a specific date in the future.
marketplace: Refers to commodities exchanges being a securities
marketplace where purchasers and sellers regularly gather to trade
securities according to the formal rules adopted by the exchange.
quantities or volumes: This signifies the requirement in a commodities
exchange that specific stipulations of quantity, quality, price and date
of delivery of the commodity are made clear in the contracts.
- Commodities: These
are the goods, property or assets that can be bought or sold on an
exchange. They are mainly raw materials or agricultural products; goods
that get mined or grown, and their value is intrinsic based on market
supply and demand making them distinguishable from securities. Commodities
are typically divided into two main categories – hard commodities which
are raw materials that are mined or extracted like gold and oil, and soft
commodities which include agricultural products and livestock.
Putting it all together – What is
a Commodities Exchange
commodities exchange is an open and regulated market where people can trade in
standardized futures contracts. This means, in simple terms, that they get into
agreements to buy or sell specific quantities of raw materials or other primary
products at a specific price for delivery on a future (specified) date. On the
side of the buyer there is an agreement to accept delivery of the commodity on
the agreed upon date, and on the side of the seller there is an agreement to
deliver the commodity on the agreed upon date. Exchanges primarily present a
benefit of managing price risks to buyers and sellers, but they particularly
help sellers to improve the marketing of their physical products.
exchanges are typically categorized in three ways: metals exchanges, fuels exchanges,
and soft commodity exchanges or agricultural exchanges. No matter the type,
commodities exchanges provide three basic functions: price transparency, price
discovery and reduced transaction costs. By simply centralizing trade in a
certain commodity, an exchange facilitates title transfer, market transparency,
and price discovery.
Benefits of Commodities Exchanges
the length of this article we have mentioned some benefits of commodities
exchanges, and below we spell out five main benefits of a well established
exchanges provide a ready and continuous market for the purchase and sale
of commodities. This enables the producer to be independent of middlemen
and therefore to derive more value from their production activities.
provide hedging facilities, which make them necessary in reducing
fluctuations in price of raw material and consequently also reducing
fluctuations in the price of finished products.
exchanges provide the producers an opportunity to transfer their risk to
the professional risk-bearers.
providing continuity in the trading of commodities, commodities exchanges
induce bankers and financiers to lend against commodities.
exchanges provide facilities and opportunities for arbitrating and thus
equalizing the price levels of commodities at various centers
Diversion Of Sugar for Ethanol Production Is Expected To Drive Up Prices
Chocolate Demand To Depress Cocoa Prices
Conditions in Ivory Coast Could Result in Increased Cocoa Prices
Sesame Seeds Now
Becoming A Globally Consumed Commodity
Weather Conditions In Brazil Could Prop Up Sugar Prices In The Near Term
Down By -0.19% Despite Concerns Of High Global Demand
Producers – Market Map Of Industry Leaders
Robust Main Crop
Harvest From West Africa Should Keep Cocoa Prices Down
Down By 0.12% To $5.24 Per Bushel
10. Increased Global
Wheat Supply in 2018-2019 Season Would Push Prices Down
Melon Output Is Only 0.09% of Global Production