Have we read or heard the word commodity without recognizing precisely what it is about? It is a term from the English Language, used in economic slang and the investment world many times as synonymous with raw materials. Expression futures contract, it is also linked to content related to the topic in question.
It is an interesting topic that deserves to be investigated and followed.
The word commodity is also closely related to commodity. With the expansion of bags of raw materials, new concepts about this term appeared.
The production of raw materials translates into obtaining wealth for a country or region. In general, they are resources that abound in a specific area and not in others, bringing a differentiation between areas of the planet that have them.
However, when a nation depends on the production of raw materials essentially or primarily as a source of income for its economy, it can be interpreted as economic backwardness. The economy of a country to be strong also needs to specialize in manufactured goods, services sector etc.
Raw materials they have little added value, they also present a considerable volatility of your prices, caused by its scarcity and dependence or influence on elements such as the weather.
Financial futures They allow protection from price volatility. Those who are producers of raw materials protect themselves from casual falls in this regard by developing a futures contract, ensuring specific prices before raw materials are produced. This type of negotiation has existed for more than a century.
In financial markets it is possible to invest in these assets as in other assets, without for this reason they have to be physically owned. Some commodities listed on these financial markets are natural gas, crude oil, sugar, gold, wheat, etc.
To make it exist profitability when exploitedThose who are producers of these elements have to resort to specific mechanisms to achieve this. Large initial investments are usually made to reach their exploitation.
Defining the term Commodity
A raw material is a good that will be transformed during a production process determined to convert it into a consumer good, otherwise it could not be used directly.
They are elements very close to their natural state before they are exploited. They come to occupy the primary step within manufacturing chains that will produce articles for consumption.
Natural resources such as energy or forestry, can be classified as examples of raw materials.
A kind of classification to distinguish them could be according to its origin:
- Vegetable: Seeds, fruits and vegetables, wood, cellulose, cereals etc.
- Fossil: Oil and natural gas.
- Animal: Leather, fur, meat.
- Mineral: Copper, iron, sackcloth etc.
There are other different types and forms of classification.
Influencers in the economy of nations
The great importance that these resources could have on the health of a country's economy is obvious.
Let's analyze a nation as an example: Argentina:
It is a country that has wealth in dissimilar resources. Gold, copper, silver, lithium, potassium, wood, sugar, corn, wheat, soy, fruits, hydrocarbons.
The percentage of GDP that the agribusiness sector generated in 2015 was 30%.
Effects on country policy
The prices of raw materials on many occasions they decisively influence the politics of a country. It can get to the point that a candidate for president or another important position has to pay attention to what is happening in this sector and what is referred to his nation, as it could cost him too much in his political maneuver.
In the Middle East, for example, raw materials are essentially the protagonists of income for governments. Well then, considering this, political campaigns are planned around this issue, with promises included. If prices fall or rise sharply, the influence could be significant.
What can change the offer?
Macroeconomic factors usually affect the supply of raw materials. Similarly, other more specific causes may be present.
Copper, for example, a relevant raw material, has recently been affected by problems in key extraction locations around the world. The causes have been clashes between producers and political entities, strikes that have taken place, meteorological phenomena, etc. All this causing intermittent productive breakdowns, which lead directly to an increase in the price of this raw material in the international market.
Exemplifying again: If, for environmental reasons, China decides to reduce the production rate in plants that process iron ore, an issue that will very possibly become a reality, its price could be positively affected by news of this type.
The worldwide incidence of this mineral is great, and its request or demand is closely related to investment in large civil works and infrastructures.
Prices and Investment
The IMF in a related report on the outlook for Latin America (April 2017) said that there is parallelism between investment flows and commodity prices. For this conclusion, countries such as Argentina, Chile, Mexico, Peru, Colombia and Brazil were analyzed.
There has been evidence for years that the Being dependent on raw materials leads to great vulnerability. High price rises can cause positive external shocks and vice versa.
The IMF stated that not only is the investment of companies producing raw materials capable of being affected, the effects may affect investment in sectors such as construction, public administration, commerce, transportation, among others.
Financial speculation with raw materials: How far does the problem impact?
The demand for commodities has been increased by speculative bubbles on raw materials. This has led to an increase in agricultural production, as well as mining and energy exploitation.
Among other negative impacts, price volatility has been established with preferred products indicated. This of course has influenced crop areas and products, bringing with it modifications in ecosystems, activating gear speeds and affecting adaptive capacities.
It is a phenomenon of course with a negative impact for the planet. The scope of economic benefits is placed above and with higher priority than the environmental impacts that could occur. A model is implemented to achieve economic results, which is by no means sustainable.
Commodities and the dollar
Commodities and the relationship they show with the reference rate of the American central bank (FED) is of the type: If rates rise, the currency in which raw materials are valued, which is the dollar, will tend to strengthen. This in turn will generate a sell in soybean investors, for example.
Today in context
Economists reflect that after the crisis, for the first time a growth synchronized in parallel on the globe.
The group of developed countries and the largest emerging economies are growing at the same time. The last time this event was seen was in 2006.
Iron, aluminum, copper, zinc and nickel, which are metals for industrial consumption, in five of the last six quarters followed an upward trend. China is influencing this event by restricting supply to exert control over productive capacity.
Stable prices are observed compared to the beginning of the current year 2017.
The presence of geopolitical tensions in Venezuela, Saudi Arabia and Qatar, they play higher. Washington in turn is planning protectionist actions.
According to the IMF, the outlook is uncertain, although there are balanced risks.
Goldman Sachs said that in the long run there will be sources of new demands that will support the comeback. As an example, metals were mentioned for the manufacture of batteries for the automotive fleet, for the production of solar panels or modules, wind farm turbines, etc. The required metals will be aluminum, copper, lithium, nickel among others.
For 15 years now, China has been the main buyer of industrial metals. It consumes half of the production according to the analyzes described. A moderation in demand and price relief can be expected in next year 2018, supported by the fact that China has to undergo a transition of its economy towards a more affirmed growth in consumption, unless there is an increase in consumption. global demand or those named bottlenecks in the production process.
In the case of energy, the demand is strong, but the supply is the difference. There was more than enough natural gas and oil on the market, the exuberance of availability capped prices and lowered energy values. The previous summer this situation changed. The barrel of crude oil showed an appreciation of 40% since last July.
There are readings for 2018 that the world will claim more crude from the United States. Although it cannot be specified whether the producers in this country will be able to meet the demand. The estimate is that it will be necessary to balance the market to raise daily production from over six million to seven million.