The essential role of commodity markets in sustainable economic development

Commodity trading through the Commodity Exchange allows market participants to proactively use tools to hedge prices against unpredictable fluctuations, while creating a transparent, modern and comprehensive reference mechanism for trading major commodities, ensuring stability and sustainable development of the macro economy...

Transparent prices, regulating supply and demand

Essential commodities have a very large trading scale and fluctuations in this group of commodities have a profound impact on economic entities, industrial and agricultural sectors, as well as the entire economy. In addition to the usual supply and demand factors or predictable seasonal factors, there are still unpredictable unusual factors such as weather, natural disasters, or geopolitical fluctuations, which can cause major disruptions and changes in supply and demand, and supply chain disruptions.

The challenge is therefore enormous in effectively managing the critical input commodity groups that are currently involved in all global supply chains. Clearly, a coordinated and strategic solution is needed, and the answer to this question is the long history of existence and strong development of commodity trading via Commodity Exchanges.

Commodity trading through the Commodity Exchange. Photo: Source: Vietnam Commodity Exchange (MXV)

For example, in the energy market, as the world's largest trading market, crude oil prices are an important variable for the global economy. Fluctuations in crude oil prices, due to factors such as the political situation in major oil-producing countries or increased demand from industrialized countries, can have a ripple effect on many other sectors of the economy. When crude oil prices increase, the prices of finished petroleum products and other preparations also increase, of course, transportation and production costs increase, leading to inflation in consumer goods, and vice versa.

However, the actual prices of crude oil are now reflected online in real time on information technology systems using centralized data sources from Commodity Exchanges. Thanks to that, economic entities can completely take the initiative in business plans, seek alternative supply opportunities, strategic reserves or price insurance with very little support from the Government.

For the agricultural sector, which produces strategic food security commodities, regulating supply and demand through commodity markets is particularly important. Fluctuations in agricultural production, due to factors such as climate change, pests, or changes in crop cycles, can create temporary shortages or surpluses in the market.

Specifically, in favorable weather years, grain production can increase sharply, causing prices to fall, creating favorable conditions for countries to import food. However, in years of extreme weather, supply shortages can lead to escalating food prices, causing inflation and food crises in some countries. Commodity trading markets allow countries and businesses to anticipate these situations through price indexes and adjust policies in time.

Economist Ngo Tri Long said, “ The formation of transparent prices in the commodity trading market helps businesses and state management agencies have clear information to make appropriate business and policy decisions. Commodity prices listed on the market are reference prices for import and export contracts of physical goods applied by domestic enterprises. Any price fluctuations in the commodity trading market also directly affect the business results of domestic production and trading enterprises. ”

In addition, in some countries, transactions of import and export goods or goods of great value must be carried out through the Commodity Exchange, on the one hand to ensure optimal national quality standards for each product, on the other hand to have a source of quality and reliable data of those goods, helping the Government and ministries and agencies to come up with accurate solutions and reduce price manipulation, fraud and other negative issues.

Risk management, input material price insurance

In addition to regulating supply and demand and price transparency, the commodity trading market also plays an important role in risk management, facilitating the sustainable development of economic sectors. The commodity trading market is a large market with the participation of many countries in the world, so price fluctuations are extremely large, especially during times of political conflict or natural disasters.

Vietnam is a leading exporter of raw materials such as rice, coffee, rubber, cashew nuts, etc. However, the prices of these goods are often greatly affected by price fluctuations in the international market. By using derivative instruments provided by the commodity trading market such as standard futures contracts, options, etc., businesses can proactively develop effective price insurance plans, thereby stabilizing production and business plans and enhancing competitiveness.

The physical commodity trading market is considered one of the important strategic planning of countries. Through trading at the Commodity Exchange, the Government's ability to control and enforce the law with the subjects of buying and selling goods is clearly effective, ensuring the sustainable and safe development of the market. By creating optimal conditions for participants, with high liquidity, the market attracts all the price insurance needs of businesses, regardless of size.

A standard forward contract (also known as a futures contract) is a standardized agreement between parties that allows buyers and sellers to fix the price of a commodity at a point in the future. At that time, profits and losses in the physical trading market will be offset by profits and losses in the derivatives trading market, the total benefit is successful price insurance, no matter how the price fluctuates, it will not be affected. A standard forward contract is a highly liquid contract, the most traded in the world and widely used with most commodities such as corn, wheat, crude oil, copper, silver, platinum, sugar, cotton, coffee, etc.

In 2022, there was a time when the price of Brent crude oil contracts on the Intercontinental Exchange (ICE) rose to nearly $140/barrel due to concerns about supply following geopolitical instability. Previously, in December 2021, oil prices were only at $65/barrel. Faced with unpredictable fluctuations, most of the world's major oil and gas corporations have implemented "price insurance" by purchasing standard futures contracts in the $65-70/barrel price range. This means that even if oil prices increase to $100 or even $150/barrel, these businesses will still benefit from having hedged at $65-70/barrel.

In addition, options contracts (also known as options contracts) with the ability to control the maximum risk level of the business, but without limiting profits, are also an ideal choice for businesses in price insurance.

Specifically, with call or put options, the buyer here is a business that will have to pay a fixed cost to buy the right (without obligation) to buy or sell a certain amount of goods within a predetermined period of time. Depending on the favorable or unfavorable price movements later, the business will decide whether to exercise the right in the contract or not. At that time, the maximum risk will be the option purchase fee, while the profit will not be limited.

Mr. Trinh Quang Khanh, Permanent Vice President and General Secretary of the Vietnam Petroleum Association said , “The trend of world commodity prices fluctuates constantly, so price insurance is almost a mandatory business for international corporations and enterprises. We need to learn the tools that the world has successfully applied for decades. The faster a business catches up with world trends, the more it will create a difference and make a strong breakthrough.”

When businesses are able to hedge price risks, this not only protects their profits but also reduces financial shocks to the economy as a whole. This stability is important, especially in a global economy that can be affected by many factors such as natural disasters, political changes, or economic crises.

Source: https://congthuong.vn/vai-tro-thiet-yeu-cua-thi-truong-giao-dich-hang-hoa-trong-phat-trien-nen-kinh-te-ben-vung-352406.html