Growing Money And Managing Risk With Indirect commodity Exposure by Ricky Weber

 If you talk to your financial advisor about whether or not you should become a trader in the commodity market, chances are that they will steer you away from this idea and instead recommend that you maybe put your money into stocks or bonds in order to achieve decent growth. Is this because you cannot achieve decent growth on your money by buying commodities? No, rather this is because of the inherent risk and volatility when trading in the commodity market, as well as the fact that smaller investors do not have as much direct access to commodities as they do to stocks and bonds.

However if you have decided that you would like to commit at least some of your money to the commodity market, the vehicle that most people would be familiar with is a futures contract. This type of commodity trading is called direct exposure, and it is risky because most futures contracts are traded on margin as well as the fact that betting on any one single commodity can be risky due to the volatile nature of how rapid price changes can occur.

Minimizing Risk With Indirect Commodity Exposure

While there is nothing inherently wrong with trading commodity futures contracts, and indeed if you really know what you are doing you can reap great rewards from trading on margin in this fashion, for a large percentage of people they are looking for a way to get consistent returns without the risk of losing their initial investment. The answer to this is to enter into the commodity market with indirect exposure using mutual funds, which can be a smarter and safer way to access the gains associated with these markets while minimizing as much risk as possible.

There are dozens of mutual funds that buy and sell futures contracts linked to individual commodities, and very often these funds will trade across a basket of different related commodities which is much safer than trading a single individual commodity. Putting your money into these funds instead of directly into the futures contract can help to give you consistent growth without any sharp decline in value. Another even more indirect way to trade is to find the mutual funds that buy and sell the shares of different companies that are directly involved with the production of certain commodities. While this is the least risky approach, it is also true that you will not benefit from the full upswing in value if the market moves favorably in your direction.

Gold, Silver and Precious Metals: Betting Against The Economy

Gold and other precious metals are unique commodities because they fly in the face of traditional logic when it comes to deciding which commodities to buy. If you consider the example of corn, timber, or steel, you would buy each of these commodities when the economy is in full gear and all of these commodities are being used heavily, so the price will stay high or go higher. However gold and silver are the commodities you would buy when you think that the economy is going to slow down, because these are where there are the biggest price increases during economic downturn, which means that when you purchase these commodities you are literally betting against the economy.
 

Ricky Weber frequently posts new articles about how to make money online at his personal blog http://RickyWeber.com

Article Source: http://www.articlerich.com

Once regarded as competitive markets, many agricultural commodity chains are now seen to contain players with considerable market power The traditional pattern of agricultural production and markets as described by economists was (and to a large extent, still is) one of more-or-less perfect competition, typified by product homogeneity, a large number of buyers and sellers, and freedom of entry to the market. Under this model, each small farmer determines the volume and type of output to be produced and placed on the market. The relationships between seller and buyer (producer:wholesaler; wholesaler:retailer) are generally limited to simple spot transactions. In recent decades, this perception of commodity markets has been changing. Some analysts believe that market power has not been adequately recognised in the literature. Raw commodities are typically inputs into a vertical commodity chain, such that the raw commodity is only a small proportion of the value of the final product, the downstream stages of which may, in both developed and developing countries, be less than perfectly competitive. Market power can be exerted by participating firms in these chains. If the retail or processing sector is highly concentrated, then there is the possibility of oligopoly power being exerted by these firms in selling their produce. At the same time, the downstream firms can act as oligopsonists in purchasing produce from farmers, middlemen and processors. Where the retail and processing sectors are imperfectly competitive, successive market power may be exercised at each stage of the food chain. These market players can influence prices upward or downward to enhance their profit, at the expense of other, less-powerful, players in the chain. Actually, however, several studies have shown that the actual exercise of market power in commodity value chains may be less than is commonly thought. See papers by Gilbert and by Hallam & Rapsomanikis. The exercise of market power in the supply chain is particularly evident where successive stages are closely coordinated by contractual arrangements. Arrangements of this type, which have become much more developed in recent decades, are particularly evident in the supply of fresh food to supermarkets, where there are close vertical relationships in the chain, controlled by private companies. The development of supermarkets, initially in the developed countries and more recently, but at a rapid rate, in developing countries, has been one of the drivers behind these developments. These markets are typified by small numbers of buyers, and by product differentiation (the provision of particular product qualities for a particular outlet). Farmers in this system produce under contract to agents acting on behalf of supermarkets, with product quantities, qualities, delivery times and prices specified in advance. Centralized procurement offers a number of cost-savings to firms, from reduced coordination costs, less inventory management, reduced supervision, savings in transport and other transaction costs for suppliers and buying in one place in bulk. Farmers under contract generally supply produce of a higher quality, and often add value by sorting, cleaning, processing and packaging. These contractual arrangements with firms can provide farmers with a number of advantages. Firms may provide farmers with inputs, training, technical assistance and other services, and credit, as well as having a guaranteed market for their produce. These farms are larger, and more highly capitalised, and have more access to credit, and they use more fertilizers and chemicals than those in the traditional sector. They receive higher prices for their produce and, despite facing higher costs, make larger profits. At the same time, however, farmers give up their independence to varying degrees. In some cases firms employ extension agents to supervise farmers to ensure that they adhere to the company’s production requirements. Farmers are locked in to producing a specific product, possibly following practices prescribed by the firm, and may have limited capacity to negotiate advantageously with the firm. Despite their limited bargaining power, however, it is typically found that farmers in this sector have higher levels of income and wealth than those in the traditional sector. Coordinated supply chains are most likely to be feasible where market requirements on product quality, consistency, safety and delivery schedules are more demanding. Small producers might successfully participate in coordinated supply chains when they have a cost advantage over large producers, typically with labour-intensive production. However, many farmers are unable to enter this system. Small, less capitalised, less technically advanced farmers are unable to reach the required standards. Often a two or three-tier system develops in agricultural production in a region, with some farmers producing on contract to supply to tightly controlled standards for export; other, typically smaller farmers, producing independently for the traditional local market; with perhaps an intermediate group supplying local supermarkets. Traditional wholesalers who do not get involved in production support programs and usually do not enter into long term commercial relationships with producers generally buy and sell on a day-to-day basis. They do not provide credit or other inputs or services. They typically lack the capacity to define, monitor, or enforce a quality or safety standard beyond basic requirements such as refusing decayed produce. The level of competitiveness in the supply chain of agricultural commodities has important implications for productivity in the sector, for growth of production and incomes, for equity and farmer welfare, and on the impact which trade liberalisation can have on the sector. Competition in the chain results in better returns to producers who are able to capture a larger percentage of the export price. Where firms compete with one another, farmers are offered higher prices, and are typically also offered inputs and credit as firms attempt to secure their supplies. Conversely, under monopolised systems, where a state-owned enterprise is the only trader, such as in some east European countries, rent is extracted from farmers, who fare more poorly than under a competitive system. Competition among buyers can, however, undermine enforcement, and side-selling can become a problem. Although contracted to sell to one firm, farmers may be tempted to dishonour contracts and sell to another who offers higher prices.