Food Production and Commodity Markets
Written by Baaba Toffah
We humans as a species began farming roughly 12,000 years ago in the Neolithic era. Ever since then Humans as a species have gathered and developed an intimate knowledge surrounding the food we eat and the sources of this food, even more so in recent times. The production of food or food production as the term suggests is all about the making of food. Making in the sense of turning raw material into an edible state. In this state, food products can be used directly at home for the preparation of meals or by industries for processing into other forms. Most of the food produced for processing or the food industry as a whole comes from commodity crops that were produced using agricultural methods. The purpose of the production of these commodities was for consumption.
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The OECD–FAO Agricultural Outlook 2020–2029 reports that in the coming decade, the relative importance of food, feed and biofuel use will not change significantly, as no major structural shifts in demand for agricultural commodities are expected. However, the ever-growing global population would be the main factor contributing to any changes in the demand for these commodities. Ensuring the continuous supply of agricultural commodities or raw materials, especially staples like rice, wheat, and vegetables will go a long way to ensuring food security.
Speaking of raw materials, let’s talk about commodity markets. A commodity in simple terms is an essential product (agricultural or non-agricultural) that can be exchanged or traded. So we take producers of commodities and the consumers of these commodities, put them together in a centralized and liquid marketplace and that’s the commodity market.
Commodity markets basically function in the same way that markets do however it has strict regulations and rules. The exchange or trade of commodities can be dated as far back as the start of human civilization where newly formed clans and kingdoms would exchange or barter with each other for food, precious items and the likes.
Commodities can be traded on the spot or physical markets (also known as cash markets) where commodities are exchanged between buyers and sellers for immediate delivery. These trades can also be made in the form of a future contract which basically means that the parties involved in the trade exchange have a contract that obligates them to buy or sell a specific commodity on a specific date in the future at a particular price.
A market can not exist just because there are trading products and a regulatory mechanism. All markets require participants and the quality of these participants play a huge role in the success of the market. In commodity markets, there are two main participants that play key roles; speculators and hedgers. The main difference between the two is hinged on the basis of the positions they take up in the market and how their actions affect the overall market situation.
Speculators are those people that enter the market and earn by predicting the direction of movement in the market. Based on their estimations, they sign future contracts. Speculators enter the market for short term profits and their profits or losses depend directly on their market estimations. Hedgers include people who enter the market with the goal to obtain physical possession of the commodities. Their main aim for entering into futures contracts is to save themselves from market volatility and inflation effects. They enter into contracts for the delivery of goods at a later date, at a price agreed upon today.
Technology has made it possible for individuals all over the world to gain access to commodities from all corners of the globe. Commodity markets and the trades involved are a vital part of the delivery of commodities to consumers worldwide. This has created new possibilities in the provision of a wider scope of choice in consumer goods, and in the reduction of food insecurity across the globe.
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As long as the human species exists on planet earth there will always be a demand for food. In a world where over 800 million people still suffer from hunger, one of the principal aims of food production and agricultural commodity trade must be to improve nutrition quantitatively and qualitatively. On a global scale, the impact of the agricultural industry is huge. The current world population of 7.6 billion is expected to reach 8.6 billion in 2030, 9.8 billion in 2050 and 11.2 billion in 2100, according to a report by the United Nations and agricultural commodities and commodity markets will play an even bigger role in the fight for food security in the decades ahead.
Sources
https://population.un.org/wpp/publications/files/wpp2017_keyfindings.pdf
