The importance of commodities in the world economy
Greatly relevant to the entire global economy, commodities are raw materials used by industries around the world
Commodity markets are some of the largest and busiest in the world economy. Each country has its specificities, both in terms of supply and demand. But what’s certain is that everyone needs these “goods” (which is the literal translation of the word commodity).
Many of the commodities are at the base of food and energy generation. That is, they’re necessary for all nations. The consumption of each reflects the culture, preferences, and characteristics, such as each country’s climate.
Every year, billions of tons and dollars circulate around the world in the form of commodities, either for import or export. In this post, we’ll look a bit more into this market and its importance.
What are commodities and their characteristics?
There are some characteristics common to all commodities. It’s these definitions that give rise to these products as a single category since there are so many of them.
Commodities can be classified by origin:
- Agricultural (soy, corn, sugar, cotton, biofuels)
- Mineral (oil, natural gas, ores)
- Industrial (petrochemicals).
Or by use:
- Food (soy, corn, sugar)
- Metals (ores, steel, aluminum)
- Energy (oil, gas, gasoline, biofuels)
- Fibers (cotton feather, synthetic fibers).
They’re raw materials generally produced on a large scale and that aren’t industrialized. But the characteristic that’s perhaps the most striking is the volatility of their price formation, as we’ll soon see.
Who are the world’s principal commodity producers?
Brazil is currently among the largest commodity producers in the world, outstanding mainly in grains, such as soybeans. We can cite the following countries as the most important commodity producers:
China – China is the world’s largest producer of food in general, including rice, wheat, and corn. In addition, the country is a major producer of coal and oil.
The United States – The U.S. is one of the world’s main grain producers, including corn, wheat, and soybeans, as well as beef and chicken. The country is also a major producer of oil and natural gas.
Brazil – The world’s largest producer of coffee, sugar, and soybeans, as well as one of the main producers of corn, beef, and chicken, the country is also a major producer of mineral commodities.
Russia – Russia is one of the world’s main producers of oil and natural gas. The country’s also a major producer of wheat and other grains.
India – One of the world’s largest producers of rice, as well as other agricultural products, such as wheat, cotton, and sugar, the country’s also a key producer of oil and natural gas.
Argentina – Argentina is one of the world’s largest soy producers, as well as beef, poultry, and pork. It also stands out in corn, wheat, and other grain production.
Ukraine – Ukraine takes its place as the fourth largest grain-exporting country in the world.
How are commodity prices formed?
One of the characteristics that define commodities as a unique category is the way their prices are formed. Since they’re indispensable for human survival, and as raw materials for industry, price determination takes place on a global scale.
Clearly, there are many factors that influence commodity price calculation, from the costs incurred by the producer, logistic expenses, the export premium value, and various tariffs. However, the main reference is the price formed on global exchanges, with the most dependable references being those in Chicago (for grains) and New York (coffee, cocoa, sugar, and oil, among others).
At this point, having a risk management strategy is most useful for any business along the commodity chain. We’re at the mercy of various volatilities, from different rates, including exchange rate fluctuation, unstable political and economic scenarios, to the unpredictability of bad weather and climate change since natural phenomena directly cause price variations.
Thus, hedging offers itself as a means to protect against market volatility.
Facing so much instability, how can you manage risk in commodity markets?
With so many aspects strongly influencing commodity price formation, it’s essential to plan to ensure more predictability for the future of your business.
Using hedging products is a great solution that’s readily available to avoid unpleasant surprises in the financial planning of those working with the commodity chain.
hEDGEpoint’s specialty, this mechanism operates as a kind of insurance against market price variations, reducing transaction risks.
hEDGEpoint brings together the knowledge of experts who know the field and its many variables, with risk management products, to always offer you the best experience in futures operations.
We’re globally present, and always prepared to serve you—at any time, in any place. Get in touch with our team today to learn more about how to use this instrument to favor your business.
Talk to a hEDGEpoint specialist soon.
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