Post by Trade Coach on Jan 28, 2021 20:43:40 GMT 1
How Nigerian Exporters and Farmers Can Benefit From Commodity Markets and Exchanges in 2021 – Module 2
In module 1 of this article we looked at the basic terms that farmers and small scale exporters need to know about Commodity Markets and Exchanges now coming up fast in Nigeria. The problem we have is that when new things are being introduced into the business community, many people, especially small scale business people will stand afar and be watching others taking positions. This is very bad, go in when others are going in and see what is happening from the beginning; hence these article series on commodity markets and exchanges. The aim is to bring the market to our door steps and make us pick interest in their activities.
Who are the main participants at the commodities markets and exchanges? It is important to know who the main participants are. The commodities market and exchanges depend on different types of participants who perform different roles so as to maintain a fully functional and efficient market. One person or organization cannot perform all the functions in the market. The main role or job of the exchange is to put rules and laws in place that are fair and just for all participants in the market.
The following are the participants in the market. Be sure to pay attention and know where you belong and what you are expected to do in the market.
Producers:
These are individuals, cooperatives and companies that supply the commodity markets and exchanges the commodities that are traded. These people are very vital and important in the market, without them there will be no goods to be traded in the market. As a farmer you can fall into this category. The remaining categories can be classified as follows: Cattle rearers or ranchers, oil and gas companies, mining companies, and many others.
It is very important to understand that producers in most cases sell commodities futures contracts even before producing the commodity. Let us say that you farm and produce sesame seeds in Kano state of Nigeria, and you are expecting the harvest of your sesame seeds in three months’ time, and you feel that the price might fall during that time which is still in the future, you can lock in the current price by selling a futures contract three months before your harvest.
You can see how the farmer now has satisfied himself with his desired price, he can now go ahead and face his farming work and harvest fully bearing in mind that any fluctuation in price will not affect him in future. That is the beauty of the futures contract of the exchange market. But remember that in the event that the price of sesame seeds increases, you the farmer that has entered into a futures contract three months back cannot increase your price. You must deliver at the price agreed in the contract.
Another group that participates at the Commodities Market and Exchanges are the Industrial End-Users:
These are companies and individuals that use these commodities in their manufacturing businesses. We refer to them as end users, and they are the category of people or parties that need the commodities being traded. They are the parties that provide the demand needed to keep the exchanges working. These industrial end-users come to the exchanges to purchase their raw materials or other commodities they use in advance. Remember, the seller that sold a futures contract? This is the buyer that bought the futures contract. Examples of end-users are: Factories, Food manufacturers, Construction companies, Rice millers, etc.
The next group are the traders:
This group that is known as traders are professional independent business people and organizations that play the part of intermediaries in the market. They play the professional role of acting as the go-between the producers and industrial end-users. For example, if a producer has excess corn he could not dispose of due to non-availability of a buyer, the trader comes in and purchases the commodity and adds to his inventory. When an end-user needs commodities and there is no producer having the commodity, he goes to the traders.
These professional traders negotiate prices between both buyers and sellers, they provide liquidity in the market, and are usually compensated by earning a spread, which is like a commission.
The final party to the operators of the commodities and Exchange markets are the speculators:
Speculators are people who engage in speculative investments. In other words, a speculator is a person who buys assets, financial instruments, commodities, or currencies with the hope of selling them for a profit on a future date.
When you hear the term speculators, most people associate the term with fraudulent activities, but it is not so, these people play a very important role in the efficient running of the commodities markets. They take the risk no one wants to carry. No one wants to take the risk of facing fall in prices against his position. They provide the market with liquidity, aid in price discovery. They stave off shortages of goods by bidding them up when prices fall and financing the traders who link the supply chains.
If for example a speculator feels that the price of corn will increase in the future based on the futures contract, the speculators buy to benefit in the future. If the price really goes up, he gains, but if it goes down, he loses. They also make goods available where there are shortages, of course with a gain, but the economy gains in general as the supply chain is oiled to function smoothly.
Read about Module 1 here.
In module 1 of this article we looked at the basic terms that farmers and small scale exporters need to know about Commodity Markets and Exchanges now coming up fast in Nigeria. The problem we have is that when new things are being introduced into the business community, many people, especially small scale business people will stand afar and be watching others taking positions. This is very bad, go in when others are going in and see what is happening from the beginning; hence these article series on commodity markets and exchanges. The aim is to bring the market to our door steps and make us pick interest in their activities.
Who are the main participants at the commodities markets and exchanges? It is important to know who the main participants are. The commodities market and exchanges depend on different types of participants who perform different roles so as to maintain a fully functional and efficient market. One person or organization cannot perform all the functions in the market. The main role or job of the exchange is to put rules and laws in place that are fair and just for all participants in the market.
The following are the participants in the market. Be sure to pay attention and know where you belong and what you are expected to do in the market.
Producers:
These are individuals, cooperatives and companies that supply the commodity markets and exchanges the commodities that are traded. These people are very vital and important in the market, without them there will be no goods to be traded in the market. As a farmer you can fall into this category. The remaining categories can be classified as follows: Cattle rearers or ranchers, oil and gas companies, mining companies, and many others.
It is very important to understand that producers in most cases sell commodities futures contracts even before producing the commodity. Let us say that you farm and produce sesame seeds in Kano state of Nigeria, and you are expecting the harvest of your sesame seeds in three months’ time, and you feel that the price might fall during that time which is still in the future, you can lock in the current price by selling a futures contract three months before your harvest.
You can see how the farmer now has satisfied himself with his desired price, he can now go ahead and face his farming work and harvest fully bearing in mind that any fluctuation in price will not affect him in future. That is the beauty of the futures contract of the exchange market. But remember that in the event that the price of sesame seeds increases, you the farmer that has entered into a futures contract three months back cannot increase your price. You must deliver at the price agreed in the contract.
Another group that participates at the Commodities Market and Exchanges are the Industrial End-Users:
These are companies and individuals that use these commodities in their manufacturing businesses. We refer to them as end users, and they are the category of people or parties that need the commodities being traded. They are the parties that provide the demand needed to keep the exchanges working. These industrial end-users come to the exchanges to purchase their raw materials or other commodities they use in advance. Remember, the seller that sold a futures contract? This is the buyer that bought the futures contract. Examples of end-users are: Factories, Food manufacturers, Construction companies, Rice millers, etc.
The next group are the traders:
This group that is known as traders are professional independent business people and organizations that play the part of intermediaries in the market. They play the professional role of acting as the go-between the producers and industrial end-users. For example, if a producer has excess corn he could not dispose of due to non-availability of a buyer, the trader comes in and purchases the commodity and adds to his inventory. When an end-user needs commodities and there is no producer having the commodity, he goes to the traders.
These professional traders negotiate prices between both buyers and sellers, they provide liquidity in the market, and are usually compensated by earning a spread, which is like a commission.
The final party to the operators of the commodities and Exchange markets are the speculators:
Speculators are people who engage in speculative investments. In other words, a speculator is a person who buys assets, financial instruments, commodities, or currencies with the hope of selling them for a profit on a future date.
When you hear the term speculators, most people associate the term with fraudulent activities, but it is not so, these people play a very important role in the efficient running of the commodities markets. They take the risk no one wants to carry. No one wants to take the risk of facing fall in prices against his position. They provide the market with liquidity, aid in price discovery. They stave off shortages of goods by bidding them up when prices fall and financing the traders who link the supply chains.
If for example a speculator feels that the price of corn will increase in the future based on the futures contract, the speculators buy to benefit in the future. If the price really goes up, he gains, but if it goes down, he loses. They also make goods available where there are shortages, of course with a gain, but the economy gains in general as the supply chain is oiled to function smoothly.
Read about Module 1 here.
