Why are commodities traded?

4 Answers

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   zorathruster on Sep 08, 2011

   Commodity contracts allow a farmer to remove the risk from a crop yield. They sell their crop based on the contract and can be assured of their return while risk takers bet on the crop peculiarities. Many farmers don’t want to place their operations at risk.

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   John W on Sep 08, 2011

   There is a fair bit of logistics involved with commodities and therefore a significant lag till the goods are delivered hence commodities and futures goes hand in hand. People can change their minds during this lag period as their situation and needs may change and may no longer wish to buy the goods. Trading provides the liquidity for this to occur thereby reducing the risk of the commodity seller.

   Likewise, trading provides liquidity for the currency markets allowing for there to be an exchange to exist between currencies.

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   jeff410 on Sep 08, 2011

   Trading provides a liquid market for those who produce the commodities and those who use them. The traders who buy and sell futures contracts, but dont take delivery, help bear the risk that the producers and users cant or are unwilling to.

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   Thor on Sep 08, 2011

   First, a commodities contract is purchasing the goods. If you want to buy corn and have it delivered in a month you buy a contract to do that.

   Second futures were instituted to balance out prices and lock in prices for the producers. If a farmer can sell a contract at a good price for delivery after harvest they might grow more, plant more acreage. If they can’t they will grow less. That balances out supply and demand.

   Trading of commodities by people that have no intent of owning the commodity has been questioned if that provides any value to the business of producing and selling of the item.