Commodity. It is the physical items that investors buy in exchange for another product of the same value. It means that the items can be seen and touched. The exchange takes place in the future markets.
Cereals, fruits, energy, meat, beverages, seafood, Dairy products, agricultural raw materials, metals and livestock.
Speculation is buying something that is high in risk with the expectation that increases in price will lead to benefits but there may be a drop in price which would mean a loss. It is different from investment in that investment involves accepting very low risks. Risks in speculation are very high.
Deregulation of global commodity markets. It means no interference by the government in the commodity market, hence creativity and innovation in the market is encouraged. By deregulating food commodity market, US government would allow for innovation of better products in the market that suit the farmers hence encourage farming hence growth in output.
A. staples. Foods that make the most significant part of a certain societys diet
b. Hoarding. Buying in large quantities and failing to sell products to create shortage and hike prices
C. subsidize. Pay a producer some money to cover some costs and enable them to sell at a cheaper price
d. Subprime mortgage crisis. It is a situation where banks lend money to risky customers who failed to pay for the mortgages. The value of real estate fell hence selling the houses which were securities could not recover the loans.
E. pension fund. An arrangement where employer and employee contribute to a pool of funds which provides income for employees after retirement.
f. Hedge fund. A fund where investors bring their capital together so that a specialist can invest in a complex portfolio of securities which generates high amounts of income. The securities invested in are both local and international.
6. A.Hedging. This is an investment that is meant to cushion against any potential losses that may be possible. An example is where a farmer promises an investor that all farm products will be sold to the investor at a certain price, regardless of the prices prevailing in the market.
b. Deregulation of the commodity market. The government does not interfere in the trade activities in the commodity market. The US deregulated trade in food commodity market to encourage creativity in hedging that would entice farmers to increase production and supply more food in the market.
c. the UN experts explain that many acres are being used to produce food for biofuels instead of food for local consumption, and Chinese have shifted to eating of meat and climate change has also affected the production of food (Vidal). The impact is increased demand for food and reduced supply of food for consumption hence higher prices.
D. the author believes that the speculation in food commodity market is behind the price rise of food products. This is where farmers are selling their produce in advance to investors at a higher price. This is through hedging that encourages farmers to produce more to profit. The prices that investors sell food products in the market is higher considering that they buy from farmers at a higher price. Also, use of food in biofuels is a reason for the high prices (Vidal).
E. it started in the year 2006 when investors sought to invest their funds in sectors that are safe, and food commodity market was thought to be one of such markets.
F. the price of chocolate peaked because a hedge fund in London bought a significant stock of cocoa in the market creating a shortage in the market (Vidal). The shortage meant that cocoa would cost more and price of chocolate, which requires cocoa as input went up.
7. a. The bubble in the reading is the rapid increase in the price of food in the market where many of the consumers cannot afford, meaning that the price rise is not related to any increase in demand for food.
B. there is a problem in the increasing speculation on food commodities. Private farmers who are not controlled by large companies can increase production motivated by high prices, and increase supply, cause a decline in prices and then lead to a financial crisis as the price of commodity assets fall (Leahy).
c. The US deregulated the food commodity market to encourage food production. The results were increased investment in the food securities. Banks and other investors have invested heavily in the market causing distortions.
D. food commodity market became a hot ticker in 2008 as investors sought more secure places to invest their funds. This is as after the real estate market had failed the investors because of many lost funds in the financial crisis.
E. the price spike in the food market was a result of the famine in Russia and increased consumption of food by India and China (Leahy). This meant the reduced global supply of food and increased demand fuelling increase in prices.
f. the companies sought to have wheat export banned so that they would sell it at a higher price locally in Russia, without having them to be penalized for breach of the contracts made with China and Indian buyers.
G. the food export ban by Russian government made it illegal to implement the contracts, hence the contracts were void. The companies would thus not be fined for breach of the contracts (Leahy).
8. a. Natural gas is the most volatile of the three commodities. This is because it has several high and low points as per the charts presented. Natural gas has witnessed the greatest volatility considering that its price changed by the greatest proportion as compared to the other commodities in the selected period. Its price changed from $100 to over $460 in the period.
b. In Feb 1996, price per pound of poultry was $55.57 while the estimate for 2011 was $84.86. The change in price is thus 52.71%, meaning that there was an average change in the price of 3.513% change in the price of poultry. If there is a 3.513% change in the price, the new price of poultry per pound will be $87.84.
=12.5% change in the price of oil in the last 15 years.
The graph does not support the claim that the oil prices are relatively stable. The price of gas increased up to $465 in mid-2005, representing a 161% change in the price. This is a prove that the prices are not stable.
300/140*100=214.29% change in price.
I agree with position 2. Commodity prices are highly volatile considering the huge change in prices over time. There is a need to have a body that can regulate the prices of the major commodities such as gas and poultry. The reason is that these prices influence the decision of the investors and also harm the consumers because they cannot accurately forecast their consumption and this hurts their standards of living.
If the trend continued in 2012, the Price of cocoa beans would be 3750 as shown below
Finding the July 2011 value
The value will be $2500
Finding value for Feb 2003
Feb-2003 = $2150
Leahy, Stephen. "Rampant Speculation Inflated Food Price Bubble | Inter Press Service." Inter Press Service | News and Views from the Global South, 2011, www.ipsnews.net/2011/01/rampant-speculation-inflated-food-price-bubble/.
Vidal, John. "Food Speculation: AFood Speculation: 'People Die from Hunger While Banks Make a Killing on Food'." The Guardian, 31 May 2017, www.theguardian.com/global-development/2011/jan/23/food-speculation-banks-hunger-poverty.
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