What are Agricultural Commodities?
There are many different types of agricultural commodities, including foods, milk, and grains, and various applications for each. Many are vital to the economies of both developed and underdeveloped nations. Exporters of goods like soybeans and rice depend on the revenue from these agricultural goods as a major source of government funding, while millions of families depend on farming and growing commodities for their livelihood.
Although such commodities can be the economic drivers of leading exporting nations, their prices can prove to be quite volatile, and the effects of this variability can be far reaching. If there are sharp and sustained drops in demand and no change in production, it can hurt the economy of the exporting nation. When production is curtailed as a result, this in turn affects the farming industry, which could result in fewer agricultural jobs.
On the other hand, demand for agricultural commodities can become so strong that there may be not enough product to go around. For instance, in some places, corn is a key component in ethanol, which is used as a bio-fuel in cars and trucks to cut down on the use of fossil fuels. This commondy's primary use, however, is as feed for livestock. Demand for corn-based ethanol tends to rise when energy prices are trending higher. Countries have placed ambitious mandates for implementing alternative energy programs, which translates into higher demand for corn as a bio-fuel.
This increased demand for corn, however, can lead to problems. As mandates for the use of corn-based ethanol in bio-fuels intensifies, it puts additional stress on farmers to balance the demands of livestock and energy. There is an insufficient amount of farmland to plant enough corn to satisfy all the needs of the world, so as corn prices rise, livestock farmers may be unable to afford to feed their animals.
Despite the challenges, even underdeveloped nations often invest in innovation and infrastructure in the agriculture industry. New leaders in agriculture may soon emerge, as advances such as water purification can improve the proposition for a continent like Africa to become a major player in commodity production. This could have lasting implications on the world economy.
Beyond production and import/export, agricultural commodities are also traded on major exchanges around the world. Trading specialists trade billions of financial contracts every year globally. The underlying value of these contracts is tied to commodities ranging from carrots and tomatoes to chestnuts and goat's milk.
Trading strengthens the agricultural business. It provides a way for farmers to lock in constant prices for items on future dates. Without this option, farmers would be at risk of losing crops to vulnerabilities such as the harsh weather, disease, and natural disasters.
I find it extremely interesting how such different markets can impact each other so greatly. I never would have thought that the rising demand for corn based fuel, as an energy saving measure, could result in farmers not being able to afford to feed their livestock.
It would be nice if we could come up with a way so cut down on fossil fuel use, without having an adverse effect on farmers. The solution to one problem should not create another problem.
I'm always looking for information on trading and investing, but this is the first time I've heard that commodities trading actually helps strengthen the agricultural commodities business.
It really makes me want to start trading commodities -- I've kept to the foreign exchange so far. I would love it if I could think of my investing as actually being a help to other people.
Plus, I always spent the summers at my grandparent's farm when I was a kid, so farmers kind of hold a special place in my heart. I'd love to help keep farming jobs more stable.
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