Commodity Trading - 1

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					Agriculture Commodity
   Understanding Trade Flows
   The Profit Imperative
   Choosing the Location
   Transaction Cost Budget
   Risks
   Price Determination
   Buying Decision : Farmer or Trader ?
   The Other End : Commodity Marketing
                    Prof. Rushen Chahal
     Understanding Trade Flows
   Demand and Supply
   Producing and Consuming Months

   Business Environment of Producing and
    Consuming Areas

   Organizational ‘Fit’ in the Environment
                       Prof. Rushen Chahal
Understanding demand
   What products the consumer buy, in what
    volume and price range
   What characteristics must the product have
    (composition, quality, packaging)?
   What transport and distribution system will
    deliver the product in the form, cost range,
    and time frame required?
   What processing technology is required to
    meet these standards?

                     Prof. Rushen Chahal
Understanding the supply
   What supplies are needed to serve this
    market (volume, quality, price)?
   What methods of procurement are
    required to meet these supply

                  Prof. Rushen Chahal
External Environment –
Demand of commodity

   Consumer Analysis
        - Market Segmentation
        - Consumer Needs
        - Purchasing process
        - Market research
   Analysis of Competition
        - Market Structure
        - Basis of Competition
        - Institutional Constraints

                         Prof. Rushen Chahal
Internal Environment –
Marketing and Buying
   Internal Environment - Marketing Plan
          - Pricing
          - Distribution
          - Promotion

   Internal Environment – Buying
          - Quantity
          - Quality
          - Cost
          - Time
          - Method

   External Environment – supply of commodity

                             Prof. Rushen Chahal
External environment - supply
   What is commodity production in the area?
        - Area under crop (A)
        - Yield of the crop (Y)
   Gross production (P) = A*Y
   What is net availability (NP) = P – K
   Where K includes:
        - on farm consumption
        - fresh consumption
        - competitors’ purchases
        - post harvest losses

                       Prof. Rushen Chahal
External environment - supply
   If demand is more than net availability?

   Alternative strategies?

       - Increase the area under crop
       - Increase the yield of the crop

                   Prof. Rushen Chahal
External environment - supply
   How to increase the area under the crop?
   Alternative strategies
    - substitution effect within crops
    - possibility of expansion of arable land
   Instruments:
        - Higher price of the crop to make the
    crop more remunerative than other crops
        - Availability of economic resources
                     Prof. Rushen Chahal
External environment - supply
   How to increase the yield?
    - We have to understand the reason for
    current low yield
    - Present use of agro-chemical input
    - Barriers to increase the use of agro-
    chemical inputs?
    - Limited channels for distribution of inputs
    - Lack of financing institutions
    - Lack of knowledge
                      Prof. Rushen Chahal
External environment - supply
   What was the total production pattern?
       - Production levels in the past?
       - Degree of Variability?
       - Causes of Variability?
   What is the usage pattern of the area planted?
       - Variation in area?
       - Area economically arable but uncultivated?
       - Productivity of new land?
       - Extent and feasibility of crop shifting?

                       Prof. Rushen Chahal
External environment - supply
   What is the yield?
       - Variability in yield?
       - Causes?
       - Extent of usage of agrochemicals and improved
       - Barriers to increased usage of inputs?
   How profitable is the crop?
       - Profitability relative to alternative crops?
       - Cost structure relative to alternative crops?
       - Perceived risk?

                      Prof. Rushen Chahal
External environment - supply
   Is there competition in trading among similar
         - Number of competitors?
         - Size of their needs?
         - Their procurement methods?
   What are the probable crop losses?
         - From rodents, insects, handling, storage?
         - Measures to reduce losses?
         - Adequacy of on and off-farm services and
         storage facilities?

                        Prof. Rushen Chahal
External environment - supply
   How does handling and transport affect quality?
       - Personnel adequately trained?
       - Availability and quality of transport?
       - Quality loss due to delayed transport?

   How does storage affect quality?
       - Type of facilities available and required?
       - Quality of facilities?
       - Nutritional deterioration?

                        Prof. Rushen Chahal
External environment - supply
   What is the seasonable harvesting pattern?
        - Period of harvest?
        - Effect of seed on timing?
        - Effect of planting on timing?
        - Costs and benefits of changing the
        harvesting pattern?
   What facilities are required by the seasonal
        - Storage capacity for peak inventory?

                     Prof. Rushen Chahal
External environment - supply
   When and for how long will the supply
    be available?
       - Agronomic testing period?
       - Planting to harvest period?
       - Farmer financing during start-up
       - Pattern of life-cycle yield of
    perennial crops?
                  Prof. Rushen Chahal
External environment - supply
   How do logistical services affect commodity costs?
       - Existing transport charges?
       - Contribution of transport to prices?
   How does governmental involvement affect
    commodity costs?
       - Price supports?
       - Import or service subsidies?
   Should spot prices be used?
       - Prevailing spot prices?
       - Variability during and across years?
       - Competitors’ buying practices?

                       Prof. Rushen Chahal
External environment - supply
   What are the number, size and location of the
    operators in the structure of the existing
        - Number of producers, transporters, and
        - Implications for organization and control
        of the system?
        - Percentage of crop handled by each?

                     Prof. Rushen Chahal