Financial markets / Financial markets: Commodity Markets

Overview

• Movement in the commodities market tends to be consistent overall. However, considered in more detail, there are specific factors influencing the movement of certain commodities in ways that differ from the market as a whole. Such commodities include:
  
  • Hard commodities: base metals used as raw materials in industrial manufacturing. These include copper, zinc, aluminum and lead. The prices of these commodities tend to track trends in major global industries.
  • Soft commodities: for the most part, food crops and other agricultural goods. Crops such as corn, soybeans, wheat, rice, sugar, oil palm, cotton, cocoa and coffee are characterized by high liquidity on commodity markets. Although the commodity prices of such crops tend to track oil prices and the overall market, agricultural commodities, a number of other factors, along with fluctuations in demand, influence prices. Such factors include soil and weather conditions, season, natural disasters, pests and level of demand for biomass for alternative fuels.
  • Precious commodities: These are a means of accumulating and securing wealth and are used as industrial inputs. Precious metals, such as gold, silver, platinum and palladium, are also seen by investors as financial assets. Investors show high levels of interest in gold because it is a safe asset for wealth accumulation, giving high rates of return and retaining its value even under heavy inflationary pressures.
  • Energy commodities: petroleum and other energy sources are important commodities with high levels of liquidity in futures markets. In the past, the price of petroleum has tended to move in an inverse relationship with the value of the U.S. dollar, stocks of crude in major consuming countries such as the U.S. and China, and OPEC production levels. Conversely, oil prices are positively related to inflationary pressures. Signs of strength in economic fundamentals also signal likely strengthening of demand for petroleum.
• Besides purchasing commodities directly from suppliers, manufacturers and investors trade commodities through futures contracts. This is the preferred means of investing in commodities with particular physical limitations and storage costs. At the same time, futures contracts help to shield suppliers against the price volatility. Alternatively, investors can invest in mutual funds that, in turn, invest in commodities on formal exchanges (commodity ETF), or they may invest in funds whose rates of return follow commodity price indices such as the S&P index or the Goldman Sachs Commodity Index (GSCI). These indices reference futures contracts for 24 commodities weighted by world production volumes over the previous five years.
• An agricultural country like Thailand cannot avoid the volatility that fluctuations in global supply and demand brings to the prices of agricultural goods, but growers and suppliers can use the Agricultural Futures Exchange of Thailand (AFET), which opened for business on May 28, 2004, to manage the risks. Futures contracts traded on the AFET include, for example, contracts for rubber sheet, cassava chips and rice in a variety of types and mixes.