A commodity is a class of assets or items essential in daily life, such as food grains, meat, edible oil, fruits & vegetables, energy, metals, gold, and natural gas are examples of commodities.
The basic commodities that drive the market include eatable items, oil and gas products, solid minerals, metals, and above all agricultural products.
They are exchanged globally, with firms in two nations acting as the primary catalysts for the trades, while their governments provide the essential facilities.
The commodities trading industry has grown more accessible to smaller participants in recent years. Previously, only giant corporations dominated the sector, making it impossible for small businesses to thrive.
However, today, a person without even having a large infrastructure can start a commodity trading business with less capital, depending on the volume of a particular commodity desired by the prospective buyer.
Here, we will discuss the basics and functioning of Global Commodity Trade-
Physical commodities include soft (agricultural goods) and hard (minerals & metals) commodities such as rice, wheat, pulses, oil, copper, gold, silver, etc.
These consignments are often shipped through waterways in huge quantities and at economical pricing across the world in well-preserved conditions.
A commodity trader is an individual or organization who deals in any sort of physical commodity between two marketplaces, either as a broker or as a direct seller or buyer.
The commodity trader’s responsibility is to make the transaction happen because most countries do not handle trades directly but instead rely on local organizations to conduct trade with firms in international markets.
Commodity Trading Supply Chain:
The parameters of the contract and the supply chain operation have a lot to do with successfully trading and ensuring the buyer and seller stay in business.
Essentially, the supply chain method for each item differs, although, on a broad scale, they may be comparable depending on the commodities.
- The price of a commodity is significantly influenced by four distinct factors:
- The commodity category requested.
- The amount of processing would be determined by the quality of the product sought.
- Where the commodity will be delivered to evaluate freight rates, insurance, and route risk.
- And when delivery is expected, so that the cost of the item at the moment is determined by shortage or abundance.
Some Important Factors Affecting Successful Commodity Trading
Logistics & Merchandise Origin Location:
As commodities are acquired from a bunch of locations, commodity traders must analyze the best alternatives for where to source items in terms of logistics challenges and, ultimately, profitability.
It may be preferable to pay more for a product in a location where transportation expenditures are much lower than to pay less for the commodity in a location where logistics is a major problem.
Commodity traders must constantly be aware of where they can store commodities procured at the best potential price.
Some variables to consider are accessibility to ports, security, the ability to combine commodities in the site, and storage costs.
Commodity traders must always assure that the price wherein the commodity is procured, regardless of source, allows them to satisfy the minimum product specification agreed upon in the contract.
The futures market provides information on what the supply and demand for a commodity will be in the future, as well as how commodity merchants and even consumers may behave today.
It primarily provides an accurate future price of a commodity at a later point in time.
Cost & Availability of Alternative Products:
When the availability of a substitute product increases and the price lowers, demand for the commodity decreases, and the price falls as well. Hedging risks in this area is a key to success.
Another important measure in assessing the profitability of any commodities trading transaction is freight costs.
Depending on the volume of what is being exported, you may either lease the vessel at a reasonable rate or locate a shipper that offers cheap freight fees for your destination.
It is one of the most crucial concepts for commodities traders to understand to optimize their profits.
It’s the simultaneous purchase and sale of commodities in multiple marketplaces or derivative forms to profit from price differences for the same asset.
For example, if a commodity trader anticipates that the price of a specific product will treble in 6 months, they may buy the commodities at cheap rates and profit handsomely in the future.
Commodity Trade Finance:
Commodity traders use trade finance to ensure that they always have adequate money or capital resources to export commodities whenever an overseas customer requests them.
It makes financial institutions significant participants in the commodity trading industry, as commodity traders cannot achieve accelerated growth and success without them.
Payment Guarantee from a Buyer:
Requesting an irrevocable verified Letter of Credit is the safest approach to ensure payment from an international customer.
Prepayment is often consented to in certain cases, although this poses a significant risk to the buyer.
When a top-rated international bank issues a letter of credit to a seller, the buyer’s bank is obligated to pay as long as the shipment satisfies the requirements of the L/C.
Tradologie.com is the world’s 1st Next-Generation B2B inquiry to delivery trade enabling a platform facilitating trade of Agro-commodities, raw industrial, and construction material, across the globe.
Over the past four years of operation, Tradologie.com has been able to develop a network of over 3,25,000 verified buyers across 65 countries who have successfully transacted trade over 40 billion through tradologie.com with more than 30000 verified manufacturers and exporters working out of 30 countries.
Tradologie.com works by standardizing buyer requirements and arranging live negotiations with verified sellers capable of supplying the buyer on the platform on standardized trade policies which allow for the trade without a phone call or email through the safe conduit provided by Tradologie.com.