ROLE OF COMMODITY MARKETS

Since the ancient times people used to trade in primary commodities like cotton, spices, and livestock. The traders used to engage in futures with the time frame normally that of the harvest duration. Later with the advent of the Industrial Revolution, people started trading in base metals. In the 2000s, the matured economies of US and UK also started to have exchange traded commodities (ETCs) and exchange traded funds (ETFs). 

The major role of the early commodity markets was to: 

a) Act as a platform for enabling farm produce growers and the end buyers to interact, 

b) Enabling intermediaries to engage in representing both the demand and the supply side of the commodity chain, 

c) Price discovery. 

Even today the above characteristics hold good in commodity exchanges. The added feature is of course, a regulated market that is transparent, and real time. 

Influence of commodity markets on prices 

Commodity markets influence prices at two levels: 

a. Enabling as a platform for both demand and supply factors to determine the prices for a particular commodity or grade of a particular commodity. 

b. Acting as an indicator for produce growers to take informed decision on which product to grow to reap better prices. 

Essentially both the above objectives culminate to price discovery. 

However, it’s very important that the information that is getting used to determine the price is real time, and transmitted across markets. In structured markets, the market prices are close to the ‘fair value’ prices. 

Negative Impact of Speculation 

The bane of the commodity market is speculation driven trades and short selling done to gain short-term profits. Precious metals like gold and diamond attract speculative investors given the hedge value of these assets. In some cases, there are also instances of black money and money

laundering that mires the true features of an efficient commodity market. A report released by World Bank in 2012 has laid the blame that ‘food prices globally soared by 10 percent’ squarely on the want on speculative trades executed in parts of the globe. 

Speculation cannot be ended in any market, however they can be regulated and offenders treated with high penalties. The European Securities and Markets Authority (ESMA), based in Paris and formed in 2011, is an "EU-wide financial markets watchdog", which aims at orderly pricing and settlement conditions. The individual exchanges also have brought their own check mechanisms like position limits, trade cutoffs, etc to discourage pure arbitrage traders.