Let The Tea Party Begin

The long and painful bearish phase is over for the domestic tea sector, which has so far been a laggard in the commodity bull run

KI R AN K ABT TA ET INTELLIGENCE GROU P

THE DOMESTIC tea industry has finally recovered from a seven-year long bearish phase, spanning 1999 to '06, and now looks set to participate in the current bull run in commodities. Tea prices have been firming up since CY07 and future prospects appear to be bullish, too.
    If financial indicators are anything to go by, the industry has already started showing signs of recovery. Its operating profit margins, which had dipped to around 4% during the middle of '06, have now risen above 9%. And there are indications that this rise is likely to continue.
    With tea being a staple drink of Indians, it is no wonder that the country is the largest producer and fourthlargest exporter of tea in the world. The labourintensive industry directly employs over 1.1 million workers.
    The bulk of tea trading in the domestic market is done through auctions. Companies generally strike private deals to export the commodity. Kolkata, Guwahati, Siliguri, Kochi, Coonoor and Coimbatore are the major auction centres.
    However, the Rs 10,000-crore domestic tea industry is a fragmented one. So, while the Rs 600-crore Mcleod Russell is the largest tea producing company in India, it has only an 8.3% share of the domestic tea market.
    On the other hand, Tata Tea is India's largest independent tea marketer and has emerged as the world's second-largest tea manufacturer after a spate of international and domestic acquisitions.
    The industry has a wide spectrum of companies, ranging from pure plantation companies like Mcleod Russell, Apeejay Group, Harrisons Malayalam and Assam Company to companies like Hindustan Unilever (HUL) and Tata Tea, which are focussed on marketing branded teas.
    Around 80% of the costs of plantation companies go towards fixed expenses like fuel, power and labour. Inflationary pressures are now pushing up these fixed costs. Labour unrest is another major problem faced by such companies.
    All these reasons are forcing companies like HUL and Tata Tea to sell off their plantations and concentrate on brand building. Branding helps marketing companies to ride over crop cycles by passing on the increase in costs to consumers. However, marketing companies face an increase in raw material costs (in
the absence of plantations) as well as competition from regional brands.
    Last year, India produced 940 million kg, of which, more than 800 million kg was consumed domestically. Indian tea consumption is growing at a rate of 3.3% annually. The production trend in India has been weak since the beginning of this year.
    This, coupled with lower production in Kenya (the world's second-largest producer of tea) and Sri Lanka, make for a bullish case for tea prices, going forward. The prices in CY07 were up 15-20% year-on-year.
    During times of rising prices, tea marketing companies face margin pressures if they are not able to pass on the increase in prices to customers. For instance, a rise in tea prices may not augur well for Tata Tea, which gets only 10% of its revenues from plantation tea. However, many tea companies today have diversified into other related products to hedge themselves from the acute cycle in the tea industry.
    Among the existing companies, Tata Tea seems to be the most promising one, as it has diversified into tea, coffee, bottled water and other valueadded beverages. HUL, despite having the largest selling branded teas, earns only around 10% of its revenues from the tea business. Harrisons Malayalam also produces rubber and pepper on a large scale in South India.
    So, which companies are likely to benefit from the rally in tea prices? Companies with plantations in North India, where the quality of tea is better than that in South India, will benefit from the rise in tea prices on the back of strong domestic demand.
    Among the existing plantation companies, Mcleod Russell stands to gain the most. After acquiring plantations of Williamson Tea and Doom Dooma Tea from HUL, Mcleod Russell has now become the largest tea plantation company in India.
    Other companies which have North Indian plantations are Jayshree Tea, Goodricke Tea and Duncans Industries. Harrisons Malayalam, South India's largest tea company, also has good growth prospects.
    kiran.kabtta@timesgroup.com 

Who are those oil speculators, anyway? Maybe you

Friday June 27, 7:44 pm ET
By Matthew Perrone, AP Business Writer Retirement funds plowing cash into oil, riding its remarkable rise -- but there are risks WASHINGTON (AP) -- All those speculators getting the blame for driving up the price of oil these days -- just who are they? For part of the answer, look in the mirror.

The retirement savings of workers across the country, entrusted to pension fund managers, are being plowed into one of the few investments that has delivered phenomenal returns in recent years.

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For decades, futures contracts were mostly traded by commodity producers and the people who used the actual products, such as crude oil, corn and soybeans. Agreeing to a price today for a commodity to be delivered in, say, two months is a way to smooth out price fluctuations for those supplies.

But large investors faced with the threat of inflation have increasingly used them as protection against the falling dollar. That includes pension funds, along with investment banks, mutual funds and private hedge funds.

Research firm Ennis Knupp and Associates says $139 billion had been funneled into energy commodites, primarily crude oil, by the end of March -- and it estimates more than half of that is from retirement money.

The investments have paid off. The Standard & Poor's GSCI index, which tracks a basket of commodities, is up 19 percent in the past five years, compared with just 9 percent for the S&P 500 stock index.

The risk is that if the remarkable run in oil and other futures markets reverses course, billions of dollars of retirement benefits could be wiped out.

"A pension fund is supposed to be investing money in secure, stable investments for the benefit of the people whose money they are investing," said Dan Lippe, an energy analyst at Houston-based Petral Consulting Inc.

"When we hit that wall and things start falling," he said, "they will fall very fast, and the pension funds that invested in commodities will see a tremendous loss of value."

The retirement system for public employees in California, the largest in the nation, has $1.3 billion invested in commodities. Most of it tracks the S&P commodity index.

That's still just one-half of 1 percent of the fund's total $240 billion in assets, said Michael Schlachter, who advises the California pension fund. He said a collapse in oil or other commodity prices would have little effect on retirees.

Still, a growing chorus of experts is convinced retirement investments are enough to distort prices.

Billionaire George Soros, the airline industry and the International Monetary Fund are all pressuring Congress to curb speculation by large investors. Democrats in Congress say they hope to vote on restrictions by August.

"Your pension fund manager may be using your retirement money to drive up the price of oil," said Rep. Bart Stupak, D-Mich., at a hearing earlier this week on speculation in commodities.

"What would happen if pension fund managers decided to increase their commodity investment by another 20-fold?" he asked.

Speculators put money into commodity markets simply to make money on their investments -- unlike commercial investors, who are actually buying or selling orders for physical goods.

Energy analysts say it's unclear what effect speculators have had on oil prices, which climbed briefly to a new record above $142 on Friday before falling back.

But Stupak and other lawmakers have already dashed off more than a dozen proposals to rein in commodity trading, including limiting how many contracts speculators can hold and closing loopholes that allow them to skirt regulations.

Sen. Joe Lieberman, I-Conn., proposed banning pension funds and other large investors from commodities altogether. He dropped the idea after vigorous opposition by an association of public and private pension funds.

Schlachter, who is also managing director for investment consulting firm Wilshire Associates, called the idea "horrendously bad." He said pension funds should not be compared to Wall Street speculators, who assume huge risks every day to maximize returns.

"The pension plans we work with are using commodities only as a long-term hedge against inflation," he said.

Unlike the stock market, where there are a limited number of shares for each company, futures markets have no limits on contracts available. As long as a buyer can find a seller for each contract, investment opportunities are virtually unlimited.

Critics say retirement funds that accumulate contracts are artificially driving up commodity prices. In the case of oil, that means higher gas prices and more expensive food and other goods.

"If they're going to be in the futures market they need to trade rather than take this buy and hold strategy," said Michael Masters, portfolio manager of hedge fund Masters Capital Management. "That is the worst possible thing for the futures market."

Masters and other experts told members of Congress this week that eliminating excessive speculation could drive oil prices down to about $65 a barrel, less than half the current price.

Retirement funds have suffered at the hands of the market before. In 2002, when the stock market swooned after the dot-com crash and 9/11, retirement assets dropped $7 billion, losing 8 percent of their value.

Sweet surprise for Indian sugar in export markets

ThE country is expected to export a record 4.2 million tonnes of sugar in the crop year to September, exceeding earlier estimates of 3.5 million tonnes, a top trade official said on Wednesday.
    With the surge in exports, which have never topped 2 million tonnes in a year, India would sell more sugar abroad than Australia, Shanti Lal Jain, director general of the Indian Sugar Mills Association (ISMA), said, adding "With India's emergence, the whole sugar exporting community feels threatened," he said.
    ISMA, the apex body of leading private sugar mills, had earlier estimated that exports in the current crop year would double to about 3.5 million tonnes.
    Analysts said overseas sales accelerated in the past two to three months, the peak of the sugarcane crushing season, and were now tapering off. Out of the projected exports of 4.2 million tonnes, 3.6 million tonnes have already been exported, Mr Jain said, adding that raws accounted for 2.3 million tonnes. He said India's efforts to tap raw sugar export markets had helped overall sales surge.
    "The secret of our success is that we are giving the best quality of raw sugar and making the best out of our strategic location, which gives us freight advantage," he said.
    India, the world's second-biggest sugar producer, entered the raw sugar export market in 2007 by selling to Dubai's Al Khaleej, the world's largest refinery, which has now switched to India from top producer Brazil.
    A ban on overseas sales from July 2006 to January last year capped exports at 1.7 million tonnes in the previous crop year. Record output of 28.4 million tonnes added to the woes of mills and prices crashed. Swamped with massive stocks, mills suffered losses and the government stepped in with a slew of incentives, including a freight subsidy to boost exports.
    Freight incentives evoked sharp criticism from Brazil, Thailand and Australia, which accused the South Asian nation of becoming the international rogue of the sugar trade. "Our rising exports are looked at negatively. What we got was WTO-consistent subsidy and we are very transparent about it," Mr Jain said.
    He said the country's sugar output was expected at 26.5 million tonnes in this crop year to September. Production was expected to drop to 21-22 million tonnes next crop year, he said, echoing trade views that India might have to import sugar in 2009-10.
TASTE OF INDIA
Plans afoot to export record 4.2 mt of the sweetener
Mills sell 2.3 mt raws so far this year
Sugar output seen at 21-22 mt in 2008-09
India may need to import sugar in 2009-10

Spices Board sees future in retail marketing abroad

THE Spices Board is encouraging Indian exporters to upgrade from basic bulk spice exports to access retail markets worldwide.
The chairman of Spices Board, VJ Kurian said that currently the average farm-gate price in India is 10% of the retail price. "This can be jacked up to 30-35% by selling the products at retail level through value addition and branding." He added that by 2017 India's spice exports would touch $10 billion and by then it could be the only spice processing centre in the world. "India has the advantage of cost and quality," he said.
    Mr Kurian, who was in the city to inaugurate the Board's second testing laboratory said that to facilitate value added exports the central government has sanctioned seven spice parks in different states. The Board would invest Rs 12 crore each, in basic infrastructure of these seven parks. "We are encouraging manufacturers to set up processing facilities at these parks," he said.
    With better facilities India could also import in bulk from other countries and re-export after value addition, he reckons.. Spices exporters are of the view that so far there had been no concerted efforts to improve the value added exports. They are hoping that the new spice parks will generate more interest. India now exports only 10% of its total production which ranges between 35-40 lakh tonne. "We can increase this share to 35% by 2015," Mr Kurian said.
    India accounts for 35% of world trade in value terms with exports topping $1billion in 2007-08. The Board has estimated that exports will cross $1.2 billion in the current financial year. The major spices exported would include turmeric, chilli, coriander and cumin in the current year.
    The Board has also suggested that exporters should tap new markets including China, Russia, and some African and West Asian markets. Currently the US accounts for a major part of spices export from India.
    The Board is promoting the development of organic spices in North East and will invest close to Rs 60 crore in the region. "We would like to develop North East as an organic hub of spices exports," he said. They expect exports to grow four-fold in next four years from Rs 65 crore.
    The Board has entered a tripartite agreement with FMCG major ITC and the government to grow Naga chillies to be procured by ITC. It is also in talks with other prominent companies to replicate this model. Mr Kurian, however, did not elaborate, saying it was too early to comment.

Demand for soybean oil is rising globally!

Gold shines brighter despite concerns on inflation

DESPITE the rate of inflation touching a 13-year high of 11.05%, the Delhi bullion market remained strong following firm global advices. Spot Silver (.999) stepped ahead by Rs 50 to Rs 24,550 per kg as silver in London scaled a high of 1,743 cent per ounce. Bar silver was also traded strong at Rs 24,250 per kg on stockists' support. Gold Standard (.999) flared up by Rs 120 to Rs 12,690 per 10 gm closely following London gold, which surged to $902 per ounce. Gold one kg bar (.950) was also traded firm at Rs 12,630 per 10 gm, Gold Sovereign was up Rs 25 at Rs 9,625/10,025 per 8 gm. Gold ornaments 22 carat, in tandem, moved up from Rs 11,522 to Rs 11,632 per 10 gm on local demand.
OIL & OILSEEDS
Closely following the overseas trend, the Delhi oil and oilseeds market remained bearish on Friday, with all major edible oils dropping by Rs 50/60 a quintal on stockists' selling. Mustard oil and Cottonseed oil were traded lower by Rs 50 per quintal. Mustard oil was seen quoting at Rs 7100 per quintal, while cottonseed oil stood at Rs 6500 per quintal. Mustard seed also eased by Rs 25/30 at Rs 2950/3225 per quintal on weak demand. Mustard DOC was down by Rs 10 at Rs 1050/1150 per quintal on lack of buying support. CPO (crude palm oil) on KLCE was down by 54 Ringgit, while Chicago soya oil futures went down by 134 cent on speculative selling. CPO in Malaysian spot market fell by $ 30 to $ 1175/1180 per tonne pulling down CPO in Kandla by Rs 50 to Rs 5150 per quintal.
GRAINS & PULSES
Expectation of good crop due to early monsoon kept rice weak on the Delhi grains and pulses market on Friday. Rice 1121 dropped by Rs 400/500 to Rs 6900/7400 per quintal. Rice basmati was also traded weak at Rs 7900/8200 per quintal depending on the quality. Rice sharbati fell by Rs 200 to Rs 3200/3500 per quintal. Rough rice though edged up by Rs 40/50 with rice permal and wand quoting at Rs 1440/1490 and Rs 1650/1725 per quintal on fresh buying. In the pulses section, Rajmash Chitra China shot up by Rs 200/250 to Rs 4100/4300 per quintal as its prices in China surged by $ 75 to $ 1100/1150 per tonne. Kabuli gram Mexico and Rangoon appreciated by Rs 250 to Rs 4000 and Rs 2850/2900 per quintal on rise in import booking rate. Masoor (lentil) Bold was up Rs 150 at Rs 3600/4050 per quintal on tight stocks. Masoor small, too settled firm at Rs 3700 per quintal on buying support. Masoor dal and malka gained Rs 150/200 on retailers' buying. Urad (black matpe), Peas and Lobia also closed firm on local demand.
NON-FERROUS METALS
Nickel Russian plate and Inco nickel tumbled by Rs 30/35 a kg to Rs 1,200/1,210 and Rs 1,310/1,315 on stockists and importers' selling as its prices on LME dropped from $22,870 to $22,520 per tonne on speculative selling. Zinc sheet was down Rs 1.0/2.50 per kg to Rs 103.50/125 on lack of buying interest. Copper scrap firmed up by 50 paise a kg as its prices on LME surged from $8,495 to $8,543 per tonne. Aluminium scrap also held firm with prices quoting higher by 50 paise a kg on industrial demand.
CHEMICALS
Thin arrivals coupled with good industrial demand kept Delhi chemical market buoyant on Friday. Sodium Bichromate surged to a fresh high of Rs 6,500, gaining sharply by Rs 1,000 per 50 kg bag amid tight supply. Thiourea was up Rs 50 at Rs 310 per kg on the back of reduced imports from China coupled with heavy demand from glass and other consuming industries. Resin scaled to a high of Rs 775/815 per tin, gaining smartly by Rs 25 following thin arrivals from Jammu & Kashmir and Himachal Pradesh. Turpentine oil and Varnish edged up by Rs 5 per litre at Rs 65 on local demand. Among the losers was Caustic Soda flake, which was down Rs 30 at Rs 1380 per bag on higher arrivals.

Govt hikes minimum support price of paddy

   
THE GOVERNMENT raised the minimum support price (MSP) for paddy by Rs 105 to Rs 850 per quintal for this kharif season. Also, it approved the new pricing policy for fertilisers which is likely to reduce the cost of complex fertilisers by Rs 1,416 per tonne. Announcing the measures finance minister P Chidambaram said the MSP hike of paddy was only an ad-hoc measure as the states had divergent views on the subject. The matter has been referred to the prime minister's Economic Advisory Council (EAC) for a final solution. Earlier, the Commission for Agricultural Costs and Prices (CACP) had recommended Rs 1,000 per quintal as MSP for paddy for the 2008-09 kharif season. An official source said the government is optimistic about paddy procurement in the kharif season. "The government is hopeful of a good harvest and that is the reason they have restrained from hiking the MSP to the expected level," the official said. Under the new fertiliser subsidy scheme, the government would provide subsidy for nutrient-based, organic complex fertilisers to encourage their use in place of single-nutrient manure. Complex fertilisers contain more than one nutrient. "The prices of complex fertilisers will come down by Rs 1,416 per tonne or Rs 70 per
bag," Mr Chidambaram told reporters after the meeting of the Cabinet Committee on Economic Affairs (CCEA). There will, however, be no change in prices of urea, MoP, DAP and SSP during 2008-09, he said.
GOVT SEEKS ROOM FOR DRUG FIRMS IN JAPAN
Endorsing the Daiichi-Ranbaxy deal, the Indian government is planning to make the most of it in its bilateral trade and investment pact being negotiated with Japan. The government plans to cite the Japanese subsidiary's (read Ranbaxy) case and press the country to open the doors of its highly protected pharmaceuticals industries to the Indian companies as part of the comprehensive economic partnership agreement (CEPA). India will put up its demand in the next bilateral meeting scheduled next month in Tokyo. Speaking to ET, commerce department officials said that Japan is one of the major players in the global pharmaceutical market, but has kept its doors closed for other countries, including India, by putting in place regulations. "We have been trying to convince Japan to relax the regulations for Indian pharmaceutical companies as part of the CEPA," an official said.

Google Alert - commodites

Google Blogs Alert for: commodites

Friday the 13th
By museg25
So..figures show sugar prices hasn't exactly increased as much as some of the other commodites, relatively speaking - but it would, wouldn't it? I've not heard much of ethanol derived from sugar here but it's in place in other countries ...
Museg25's Weblog - http://museg25.wordpress.com

Commodity Scapegoats
By Independent Accountant(Independent Accountant)
And such causation that can be shown to exist actually runs the other way: Rising commodites prices cause the dollar value of [CIF] to rise, just as rising stock prices would make a stock index fund more valuable. ...
Skeptical CPA - http://skepticaltexascpa.blogspot.com/

Why you should keep faith with commodities
Everyone may be saying commodites – especially oil – are in a bubble, but that doesn't make it true. What we are seeing now is a primary bull market - and there is certainly no need to pull out.
MoneyWeek.com - http://www.moneyweek.com/file/1/home.html

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Virtual Gold: The Best Way to Invest in Precious Metals (Gold ...
By admin
Well, as Jim Rogers once said - once your local newspaper starts talking about how the dog next door just got started in commodites, then it's probably time to get out. I've read more [...]
MoneyEnergy - http://www.getmoneyenergy.com

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Oil Spike, Inflation Concerns Sink Stocks
Briefing.com - Burlingame,CA,USA
Oil prices surged 4.0% and commodites advanced 2.7%, which fueled increased concerns over global inflation and interest rate increases. ...
See all stories on this topic

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Re:commodites
Re:commodites. Posted By: Sonia Quinones. Post Response --- Flag message: Spam - Miscategorized - Scam. Date: Wed May 28 14:40:00 2008 ...

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Commodities Will Draw In Fresh Investors

llOIL AND metals markets are undergoing a correction that fund managers say can take some prices down by 10-20%, but the longterm uptrend seems intact and a fall is only likely to draw in more investors. Many of the investors who missed out on the commodities rally early this year are preparing to enter those markets for the first time or add to their holdings.The notable exception is grains and other agricultural products, where relatively illiquid markets, previously populated by consumers and producers, have made it difficult for funds and to invest large amounts. Overall, however, across the commodities complex, prices can fall by 10-20% over coming weeks and months as short-term players take profits or cut their losses.
    "In the last stages of an upswing, you get a lot of short-term investors and traders coming into the market, who don't care about fundamentals," said Ashok Shah, chief investment officer at London & Capital. "The underlying fundamentals will reassert themselves."
    One of the tenets underlying the bull run of the past few years has been demand growth from emerging countries such as China and India, with their growing middle classes and massive amounts of money allocated to infrastructure.
    Unless the US falls into deep recession, which will damage export-reliant economies, commodity demand from these countries is something investors cannot afford to ignore. That is a major reason why many institutions such as pension funds are still making new allocations to commodities and why new funds dedicated to the sector are still being launched. And in oil and copper — used in power and construction — there is the ever-present worry over supply, often triggered by disruptions, politics or stockpiling.
VIOLENT CORRECTIONS: Crude oil hit a record peak above $135 a barrel on May 22 and is now at around $128 a barrel, copper on the LME hit an all-time peak of $8,880 a tonne on April 17 and has since fallen about 10%. Part of the reason behind those falls has been the firmer dollar, which makes commodities priced in the US currency more expensive for holders of other currencies.After European Central Bank (ECB) president Jean-Claude Trichet said on Thursday that euro zone rates can rise as soon as July, the dollar sell-off boosted oil and gold prices. But if markets take to heart the change in tack at the US Federal Reserve whose chairman Ben Bernanke this week shone the spotlight on inflation, the dollar can stage a significant recovery and accelerate the retreat from commodities.
    "Markets don't go up in a straight lines," said Kevin Arenson, chief investment officer at Stenham Asset Management. "We can see violent corrections, but ultimately, we are still in a bull run that will last for another 5-10 years." The reduction of subsidies on commodities such as petrol in places like India can also hit crude sentiment as higher prices can erode demand in the short term. Spot gold, down about 15% from a peak above $1,030 an ounce touched briefly on March 17, is also likely to see a fall-out from a resurgent dollar as the precious metal has the strongest relationship with the dollar.
    reuters

Truth About Commodity Futures Trading

Commodity futures trading is an on going battle between return and risk. Because of the high amount of leverage involved, you can achieve a higher rate of return than from most other forms of investment, but at a higher risk. Commodity trading is speculative, involves a high degree of risk, and is designed only for sophisticated investors who are able to bear the loss of more than their entire investment.

You should keep in the front of your mind that past performance is not necessarily indicative of future performance. Commodity trading is just one step in solving complex agriculture problems. Interestingly, the concept of futures trading started from farming when a French wine merchant started locking in prices for his wine produce before his grapes were ready for harvest.

Commodity futures trading is speculating on the future price movements of the basic raw materials on which global trade is based. The two most traded commodities are oil and coffee; however, all of the other basic materials like copper, wheat, and sugar are also included in this market. Commodity trading is reaching an all-time high in popularity. Although many individuals are able to make a profit with futures trading, there are also many who end up losing money. Commodity trading is a big game, just like the stock market.

Commodity trading is a risky venture and in order to produce profits takes some special education and a sound trading system. Many commodity traders seem to fight the markets in an attempt to gain profits quickly only to find the market continues sideways or moves in the opposite direction. Commodity trading is based on leverage, and the power of leverage is what makes people rich. Alas, leverage also increases the loss on poor trades and can work in reverse to make one poor. Commodity trading is the one area of the financial markets where any person with tenacity, risk capital, and discipline can be highly successful. BUT there is also considerable risk of loss, particularly for the uneducated or misinformed.

Commodity trading is simply buying commodities (such as gold, or silver or platinum) as a tangible asset. When inflationary pressures are strong (and interest rates are low), these can give a better return on investments. Commodity trading is not inherently risky. It is only as risky as you want to make it according to the amount of leverage that you use. Commodity trading is a zero sum or cash business. Your trading account is settled at the end of each trading day with your trading account balance changing daily.

Obviously, unlike having money in a fixed account, a commodity investment can lose as much or more than is gained. One advantage of using commodities is that commissions are much lower than with other investing, such as in mutual funds. If you do run out of money on a trade you will be forced out of the market and will lose the lion's share of your capital allocated for that trade. In an extreme situation, such as if wheat was linked to cancer in humans, then obviously if we were long wheat we would most likely get out and take the loss.

Commodities futures trading is economically beneficial because it facilitates better production planning in the agriculture and agro-based industries. In these sectors it is also utilised as a hedging device against violent movement in the price of commodities over a period of time which, in the case of agricultural produce, stretches over crop seasons, often from sowing to harvesting time. Futures trading has recently grown by leaps and bounds making the most of the bull-run witnessed globally. Fueled by the rally in equity markets, stock market players jumped into commodity markets to leverage on the all round boom.

Commodities futures trading includes widely traded commodities like coffee, oil, gold, sugar or financial instruments like stock market indices, bonds, or currencies. Futures and options markets are risk management tools, helping to offset the exposure of contracting to supply a given amount of commodity ahead of harvest time. The commodity futures exchanges in practice seem to be less a way to spread risk, and more a way to concentrate profits for those who know the most about a market.

Commodities futures contracts allow speculators the right to buy or sell a specified quantity of a commodity at a contracted price before an expiration date. Less than 3% of all futures contracts result in the physical delivery of any commodity. The vast majority of contracts are liquidated before expiration.

It is not wise to trade commodities without a good foundation of commodity market knowledge. In getting started it is best to focus on just one or two commodities. That will be enough to keep you busy for a long while.

About the Author:

If you are thinking of becoming a Commodity Futures Trader you may want to review and bookmark the Commodities Futures Trading web site. Visit the Uber Article Directory to get a totally unique version of this article for reprint.

Why oil prices will fall

Arguments that $4-a-gallon gas (or even higher) is here to stay are dead wrong. Housing's boom-and-bust cycle tells you why.

By Shawn Tully, (source: CNN Money)

NEW YORK (Fortune) -- High-flying tech stocks crashed. The roaring housing market crumbled. And oil, rest assured, will follow the same path down.

Not everyone agrees. In an echo of our most recent market frenzies, some experts pronounce that the "world has changed," and that the demand spikes, supply disruptions, and government bungling we face now will saddle us with a future of $4, $5 or even $10 a gallon gasoline.

But if you stick to basic economics, it's clear that the only question is when - not if - prices will succumb.

The oil bulls are correct in their explanations of why prices have jumped. It's indisputable that worldwide demand has surged, chiefly driven by strong growth in China, India and the Middle East. It's also true that most of the world's reserves are controlled by governments in places like Russia and Venezuela that mismanage production, thus curtailing supply growth.

But rather than forming a permanent new plateau for prices - as the bulls contend - those forces are causing a classically unstable market that's destined for a steep fall.
What do you think: Is $4-a-gallon case here to stay?

In a normal oil market, the cost of producing the last, most expensive barrel of oil needed to satisfy worldwide demand sets the price for every barrel the world over. Other auction commodity markets work much the same way.

So even if Saudi Arabia produces at $4 a barrel, if the final, multi-millionth barrel required to heat houses and run cars costs $50, and is produced, for argument's sake, at a flagging field in West Texas, the world price is $50. That's what economists call the equilibrium price: It's where the price that customers are willing to pay meets the production cost, including a cushion, naturally, for profit or "the cost of capital."

But today, the sudden surge in demand and the production bottlenecks have thrown the market radically out of balance.

Almost exactly the same thing happened in the housing market. And both housing and oil supply react to a surge in demand with a long lag. In housing, the lag is caused by restrictive zoning and development laws, especially in coastal markets like California and Florida.

So when the economy roared back in 2002 and 2003, builders couldn't turn out homes fast enough for buyers armed with those cheap mortgages. As a result, prices spiked. They no longer bore any relation to the actual cost of buying and improving land, or constructing and marketing a new house (at some reasonable profit margin). Instead, frenzied buyers were setting the price.

Because builders were reaping huge windfall profits, they rushed to buy and develop land. And sure enough, those new houses were ready just as buyers were retreating to the sidelines because they could no longer afford to buy a home. That vast overhang of unsold homes is what's driving down prices today.

The story is much the same with oil, with a twist. A big swath of the market isn't really paying that $125 a barrel number you hear about seemingly every hour. In China, India and the Middle East, governments are heavily subsidizing oil for their consumers and corporations, leading to rampant over-consumption - and driving up prices even more.

But sooner or later the world won't keep paying those prices: Eventually, the price must fall back to the cost of that last barrel to clear the market.

So what does that barrel cost today? According to Stephen Brown, an economist at the Dallas Federal Reserve, that final barrel costs just $50 to produce. And when the price is $125, the incentive to pour out more oil, like homebuilders' incentive to build more two years ago, is irresistible.

It takes a while to develop new supplies of oil, but the signs of a surge are already in place. Shale oil costing around $70 a barrel is now being produced in the Dakotas. Tar sands are attracting investment in Canada, also at around $70. New technology could soon minimize the pollution caused by producing oil from our super-plentiful supplies of coal.

"History suggests that when there's this much money to be made, new supplies do get developed," says Brown.

That's just the supply side of the equation. Demand should start to decline as well, albeit gradually.

"Historically, the oil market has under-anticipated the amount of conservation brought on by high prices," says Brown. Sales of big cars are collapsing; Americans are cutting down on driving. The airlines are scaling back flights.

We've learned another important lesson from the housing market: The longer prices stay stratospheric, the worse the eventual crash - simply because the higher the prices and bigger the profit margins, the bigger the incentive to over-produce.

It's even possible that, a few years hence, we could see a sustained period of plentiful oil supplies and low prices, meaning $50 or below.

A similar scenario occurred following the price explosion in the 1970s and early 1980s. The price spike caused the world to cut back sharply on oil consumption. By the mid-80s, oil prices had fallen from almost $40 to around $15. They remained extremely low for two decades.

It's impossible to predict how the adjustment this time will take shape, just as it was in housing. There the surge in supply came in places the experts swore there was "no supply," and wouldn't be any. Builders found a way to extend vast tracts of homes into California's Inland Empire and Central Valley, and even build "in-fill" projects near the densely-populated coasts.

An earlier bubble is also instructive. In the early 1980s silver prices jumped from $10 to $50 on the theory that the world was facing a permanent shortage of silver. Suddenly ads appeared asking homeowners to bring their tea sets and jewelry to Holiday Inns for a big price. Silver supplies poured from seemingly nowhere, out of America's cupboards, of all places.

And so it will be with oil. We don't know where the new abundance will come from, from shale, or tar sands or coal or an OPEC desperate to regain market share. We just know that it will appear. With prices like these, it always does.

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