CBSE Class 11 Financial Markets Commodities Market

Financial Markets-Commodities Market

LEARNING OBJECTIVES

After studying this chapter, you will be able:

To track the development of commodity markets in India.

To understand the basic fundamentals of physical and futures commodity markets.

To understand the main difference between the physical and futures markets.

To understand how commodity futures market perform the price risk management function of an economy.

To understand the salient features of select agricultural and precious metal commodities.Commodities have been in our lives ever since the civilization started. The very reason for this lies in the fact that commodities represent the fundamental elements of utility for human beings. The term commodity refers to any material, which can be bought and sold. Commodities in a market’s context refer to any movable property other than actionable claims, money and securities. Commodity can be understood as a basic good used in commerce that is interchangeable with other commodities of the same type.

Commodities are most often used as inputs in the production of other goods or services.The quality of a given commodity may differ slightly, but it is essentially uniform across producers. A commodity can be a physical substance, such as food, grains, metals, oils, etc. The term is sometimes used more generally to include any product, which trades on a commodity exchange (an exchange for buying and selling commodities for future delivery). The price of the commodity is subject to supply and demand factors.

The trading of the basic agricultural commodities in futures form began in order to avoid risk. For example, a farmer risks the cost of producing a product ready for market at sometime in the future because he doesn’t know what the selling price will be. This resulted in trading mechanism called trading in futures. Commodity futures are contracts to buy or sell a commodity at a specific price and on a specific delivery date in future.

In the early days people followed a mechanism for trading called Barter System, which involved exchange of goods for goods. This was the first form of trade between individuals.  The absence of commonly accepted medium of exchange had initiated the need forBarter System. People used to buy those commodities, which they lack and sell those commodities, which were in excess with them. The commodities trade is believed to have its genesis in Sumeria. The early commodity contracts were carried out using clay tokens as medium of exchange.

Animals are believed to be the first commodities, which were traded, between individuals. The internationalization of commodities trade canbe better understood by observing the commodity market integration occurred after the European Voyages of Discovery. The development of international commodities trade is characterized by the increase in volumes of trade across the nations and the convergence and price related to the  for the commodities trade was provided by the changes in demand patterns, scarcity and the supply potential both within and across the nations.

5.1 Development of Commodities Markets

In the view of the development of commodities markets, integration plays a major role in surmounting the barriers of trade. The development of trading mechanisms in the commodities market segment largely helped the integration of commodities markets. The major thrust for the integration of commodities trading was given by the European discoveries and the march of the world trade towards globalization. The commodities trade among different countries was originated much before the voyages of Columbus and Vasco Da Gama.

During the first half of the second millennium, India and China had trading arrangements with Southeast Asia, Eastern Europe, the Islamic countries and the Mediterranean nations. The advancements in shipping and other transport technologieshad facilitated the growth of the trade in this segment. The unification of the Eurasian continent by the Mongols led to a wide transmission of people, ideas and goods. Later,the Black Death of 1340s, the killer plague that reduced the population of Europe and Middle East by one-third, has resulted in more per capita income for individuals and thus increased the demand for Eastern luxuries like precious stones, spices, ceramics and silks. This augmented the supply of precious metals to the East. This entire scenario resulted in the increased reliance on Indian Ocean trade routes and stimulated the discovery of sea route to Asia.

The latter half of the second millennium is characterized by the connectivity of the markets related to the Old and the New worlds. In the year 1571, the city of Manila was found, which linked the trade between America, Asia, Africa ad Europe. During the initial stages, because of the high transportation costs, preference of trade was given to those commodities, which had high value to weight ratio. In the aftermath of the discoveries huge volumesof silver was pumped into world trade. With the discovery of the Cape route, the Venetianand Egyptian dominance of spice exports was diluted. Subsequently, Asia has become the prime trader of spices and silk and Americas became the prominent exporter of silver.

Please refer to the link below for - CBSE Class 11 Financial Markets-Commodities Market