Global commodity trading now takes place on a growing platform of modern, transparent commodity exchanges across all time zones. Using agreed frameworks of rules and regulations and standard contract designs we now see a wide range of commodities traded between end users and primary producers. The result is that it is now much easier to buy and sell across the range of basic commodities from orange juice to gold bullion, from crude oil to coffee beans.

While some of the major commodities like coffee and crude oil have been traded for a number of years, we are now seeing in modern commodity markets the strong innovation theme leading to new futures contracts being traded. One area where new product development has made a notable change is in the trading of carbon emission permits. Given the growing global concern about the serious long term impact to the environment from greenhouse gases, it is likely we will see continued growth in the market for trading carbon emission permits.

Looking ahead we are likely to see further growth in commodity markets which price environmental externalities, with exiting developments in plastics, emissions and water. Commodity trading activity is basically the buying and selling of futures contracts covering an array of commodities. So you may see commercial end users using commodity futures contracts to protect themselves from sudden price spikes, while the palladium or sugar producer will hedge their future sales and avoid losses on dips in the price.

Producers and end users play a relatively small role in the commodity markets compared to speculators or traders who move in and out of the markets trying to make profits, and provide the liquidity. A futures contract represents a specific type of contract either to buy or sell a specified quantity of a commodity at a price determined by supply and demand at time of contract, at an agreed date in the future.

In recent years the volume of electronic trading has increased significantly as we see various exchanges merging to achieve efficiency and greater synergy. Across the globe, traders are active either on the floor of exchanges, called open outcry, or as is increasingly more likely now, via an electronically traded platform open 24 hours.

Small retail speculators are now able to commit small amounts of capital to these global commodity markets due to ease of online access and use of real time data and online trading software availability. Some traders will prefer to focus on fundamentals like demand and supply of basic commodities to decide when to trade, while others tend to follow the price action of a commodity irrespective of sector, on the basis that technically analysis suggests it is offering significant opportunities for making profits.

With the opening up of the emerging market economies such as Brazil, Russia, India and China (or BRIC countries), we are likely to see a continuation of the growth in commodity markets in these nations. For example, Dalian Commodity Exchange in China has ambitious plans to develop beyond its current specialism in agricultural commodities, and move to industrial metals and more. While in the Middle East, Dubai is a growing financial centre and the Dubai Gold and Commodities Exchange has an interesting product range including WTI light, sweet crude oil, steel, plastics, gold and silver and the Indian Rupee.

While the world economy has suffered some serious shocks following the credit crunch and slowing rate of growth, with a number of companies and even some countries getting into serious financial difficulties, commodities as an asset class would appear relatively unimpaired. Despite the short term difficulties, the global economy will continue to rely on key commodities such as crude oil, steel and copper, as well as basic softs like sugar, cotton and coffee, not to mention grains such as wheat, corn and rice. For this reason we can expect commodity markets to see through these problems and for commodity trading as an activity to continue to be at the centre of world trade and finance.

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