SS1 Commerce Lesson Note on Constraints to Commodity Trading

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TOPIC: COMMODITY EXCHANGE

CONTENT:

1. Benefit of Commodity Exchange (i)Increase in agricultural production (iii) encourage exploration of solid minerals (iv) Foreign exchange earnings (v) improved agricultural output and quality.
2. Constraints to commodity trading
3. Differences between commodities and stocks (ii) Items traded – Tangible and intangible methods of pricing

SUB-TOPIC 1: BENEFITS OF COMMODITY EXCHANGE.

The following are the major benefits or importance of commodity exchange. They also entail the roles which commodity exchange plays in the economic development of a country.

1. Increase in Agricultural Production: Commodity exchange has helped in enhancing and promoting large-scale agricultural production. For example, those engaged in agriculture will be inclined to plant seeds for crops that they know are guaranteed to be sold so long as they achieve minimum standards of quality.
2. Stabilization in Agricultural Product Pricing: this is done by fixing price to be executed in trading at a pre-determined period so as to prevent the risks of price fluctuation in the world market.
3. It encourages the exploration of solid minerals: the exploration of metals and oil is encouraged since present and future demands are visible.
4. They ensure increase foreign exchange earnings: It has served as a source of revenue and income to individuals, firms and government in a country and this helps to ensure increase or improvement in the standard of living.
5. Improved Agricultural Output and Quality: Commodity exchange help to standardize prices and quality of commodities to be traded between the participants.
6. They provide a good and secure environment where members meet to trade their commodities.

EVALUATION:

Give four advantages provided by commodities exchanges.

SUB-TOPIC 2: CONSTRAINTS TO COMMODITY TRADING.

1. Inadequate Supply: the supply of some commodities may be inadequate especially when unexpected poor harvest affects discharge of future contract.
2. Bad Weather: most of tradable commodities, especially agricultural products, are subjected to climatic or weather condition, thereby causing a limitation to commodity trading.
3. Inadequate knowledge of the workings of the Commodity Exchanges: inexperienced and unskilled agents and contractors which lack the skills and knowledge of the workings of the commodity exchange hinder patronage and participation.
4. The problems of Middlemen: the presence of middlemen or agents who often cause artificial scarcity inflation of commodity process is also a major constraint to commodity trading in Nigeria.
5. Poor Storage Facilities: this usually reduces the quantity of soft commodities available for sale as some quantity decays over time.
6. Ethical Issues: speculative activity may have a destabilizing effect on prices. Speculators can collectively cause prices to rise or fall in their pursuit of Profit.
7. Problem of Price Fixing: the prices of tradable commodities that are fixed ahead of trading period often suffer certain fluctuation due to shortage or overproduction which may warrant a change in already fixed prices of commodities.

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