The most important value provided by the commodity exchanges: “Advantage against competitors”
06 October 201315 min reading
Competition in the wheat market increases each passing day. Providing competitive advantage in this competition is important for each producer and company. Advantage against the competitor is the most important value provided by the commodity exchanges for the producers and companies! Price expectations and the demand of the market can be seen clearly thanks to the commodity exchanges. The changes in futures transactions can give an idea on what kind of a route will be followed for the future. Besides, it is an important insurance mechanism for producers and companies. You can ensure insurance against price changes by selling your future product to the commodity market at the present.
Wheat is the largest and most important input in milling. Thus the slightest change or movement on wheat reflects on the production processes and costs of the millers. That is why it is quite important for millers to follow all developments about wheat closely and minimize the risks in their own production processes. Developments about production, consumption and trade and the commodity exchanges or in other words wheat markets shaped those developments form the processes that should be followed by the millers. However; today the importance of the following both commodity exchanges and processes about the commodities hasn’t been understood completely yet. Although major flour producers in the world make huge amounts of gain by following these processes, most of the producers are not aware of these processes.
We made an interview on commodity exchanges and markets with Futures and Commodity Market Specialist Zafer ERGEZEN who has been writing reviews about commodity exchanges on Miller Magazine since September. Saying; “If you want to be more integrated to the global markets in the wheat-related sector and have advantage in the competition, commodity exchanges are one of the important tools that open this door.”, ERGEZEN explained the importance of commodity exchanges, why the developments in the market and exchanges should be followed closely and what types of gains this follow provides to the companies for our readers.
Mr. Ergezen, you have been writing information and review papers about commodity markets on Miller Magazine since September 2013. Then, what are commodity markets and why they are important?
Commodity markets are conventionally defined as changing hands of an essential product. Lots of commodities change hands in the world each year. Many products from the food we eat to the clothes we wear, from the cars we drive to the beverages we drink are one of these changing situations. Commodity markets grew so much in time that the need of providing specific rules and obligations emerged.
Commodity exchanges were established in order to ensure that these products change hands in a healthy market. Commodity exchanges are the places where the products with standard quality and amount are purchased and sold instant or futures within the contracts that are legally protected. Wherever you are in the world, you have an indicator price for the product with particular quality and amount. Thus good exchange between the countries increases and new opportunities for the producers emerge. A factory or a mill can have access to the product that is the cheapest and/or with the highest quality in a short time by watching the prices in the world exchanges.
As a result, commodity exchanges have become an indicator that is taken as basis by both the buyers and the sellers in terms of price and quality in a world where competition increases. If the wheat sold in your country is expensive, you know where you can get wheat cheaper. Or you know whether it is expensive in your country… however; commodity exchanges do not have a mission to realize the indicator and standard operations within a legal structure. It is also an important tool in order to hedge the activities of the producers and factories. Thanks to the futures and derivative products, risk management can now be done healthier. Thus, the companies using commodity exchanges as tool can both have price advantage and minimize their risks. As a result, they are one step ahead in the increasing competition today.
How do the world commodity exchanges (wheat markets) function? Which players direct the market and how they do that?
Commodity exchanges operate on the basis of supply and demand equilibrium. Wheat markets rely on the same basis. Supply and demand amounts are determined with the help of production and consumption dynamic.
Importer and exporter countries separate from each other according to this basic dynamic. A standard quality and amount is determined for each product. Each product that can be sold on commodity exchanges is controlled one by one. Also, the contracts in the commodity exchanges are arranged as exercisable in the legal nature. Shortly the transactions in the commodity exchanges are taken into a standard and more legal frame. You can find a product in the spot market or make futures transactions. Mostly there is no physically changing hand situation.
Most of the purchased contracts change hands before the due date or closed. With this feature, they are quite open for the speculative transactions. The increase in the amount of the transactions of many investment banks and investment funds can be explained with this fact. While countries are important actors of the commodity markets, investments and companies have an important role on commodity exchanges. Wheat market is very important especially for the developing and underdeveloped countries. Because, the basic need of those countries relies on wheat-based products. Thus, it is worth saying that wheat market has higher volumes and more controlled than other commodity markets. Within this frame; future expectations form the basic factor that determines the direction of the wheat market.
Domestic basic report that can affect the wheat markets is published every month. These reports are published by U.S. Department of Agriculture (USDA), the United Nations Food and Agriculture Organization (FAO) and the International Grain Commission (IGC). The reason of analyzing the estimations of these three institutions in my articles on Miller Magazine becomes clear. Even though there are speculative movements; long-term trend is always shaped according to the basic economic dynamics and expectations. Thus it is important to understand the expectations rather than short-term variables while making transactions on the commodity exchange. However more import thing is to identify the developments that will change the expectations. That is why we are trying to help the producers in wheat and flour market within the frame of expectations and developments with our articles on Miller Magazine.
Why it is necessary to follow world commodity market on wheat basis? What kinds of advantages are provided for the millers by following the world wheat markets?
Turkey is an important agriculture force in its own region. Wheat production and consumption is quite high compared to many other countries but it is a self-sufficient country. Within this frame; it is useful to say that Turkey has a very important position in the wheat market particularly.
However, it is seen that commodity exchanges are not effective with the same degree. The reason of it is that the importance of commodity exchanges hasn’t been understood clearly yet. I mentioned about this subject for the response of your question above. Competition in the wheat market increases each passing day. Providing competitive advantage in this competition is important for each producer and company. Advantage against the competitor is the most important value provided by the commodity exchanges for the producers and companies! Price expectations and the demand of the market can be seen clearly thanks to the commodity exchanges.
The changes in futures transactions can give an idea on what kind of a route will be followed for the future. As I mentioned before, the most important qualification of commodity exchanges is that it is an indicator for commodity price. Besides, it is an important insurance mechanism for producers and companies. It is seen as an important instrument used for protecting from the changes in wheat price. You can ensure insurance against price changes by selling your future product to the commodity market at the present. This feature of commodity exchanges have become one of the most used tools today. When it is considered from this perspective, it has two fundamental benefits: price expectations and protecting from the risk. If you do not have an idea on the next month price of the product you sell today, your gain may change, or vice versa. Together with this; seeing and interpreting the difference between the price of the wheat you buy in the domestic market and the price in the abroad would provide advantage. Today, many millers have noticed that and started to follow commodity exchanges. They should see that as a part of their own activities. It is important to see the whole picture just like in every trade field. Commodity exchanges are where the whole picture is seen for the wheat markets. You see the price expectations and the demand there. If you want to be more integrated to the global markets in the wheat-related sector and have advantage in the competition, commodity exchanges are one of the important tools that open this door.
What size companies should follow the markets closely? Or what kind of production and trade do these companies make? For instance; is it necessary for the companies operating only for the domestic market in terms of purchase and sell to follow the world market?
We are living in a more global world now. The effect of an incident in Japan can be felt in Turkey. Thus, the answer of the question “who should follow” is very easy! If a company wants to maintain its existence, it must follow the commodity exchanges closely. Whether you are a small-scale company or a large-scale, it is not possible to fight in this sector for a long period without following the international markets and commodity exchanges. The change experienced lately necessitates it much more. Not only the producers and companies, but also governmental institutions and market makers should keep pace with this change. Domestic commodity exchanges and statistical reports should also be developed. Providing these would be guide for the entire sector including large and small-scale companies. However; we see that it is not easy. Thus, the easiest way for the companies to keep themselves updated and keep up with the competition is following the commodity exchanges. It should be known that the prices are not formed only by the domestic balances even if there is a trade circle that makes only domestic purchase and sale. And I would like to remind again that the trade that is done without knowing the expectations about the price and international prices relies on chance. We saw that many large companies had to withdraw from the market in the past.
The transactions made by these companies actually were the wrong decisions arising from the lack of information. Shortly; in a global economy, the dynamics in the sector of the company are of vital importance for the company operation, not the trade realized by the company. For achieving that; small or large, companies from all sizes should be aware of the international commodity exchanges now. If you see the effect of a development in China on commodity price and how much it change the expectations for the future, you also see how much it provides advantage in the competition.
How and according to what should especially the millers follow the markets? How can benefit from the information they get about production and prices?
The most important market for the millers is wheat market naturally. Understanding the expectations in the wheat market and following their effect on the prices are important for all of the players in the sector. Announced estimation reports are the most important determinant on the formation of price expectations. The most basic result of these reports is that they give the expectations for supply and demand (production and consumption). Thus, both the spot and futures prices emerge.
The thing that millers should pay attention to at this point is to follow the commodity exchange product proper for the futures they make production. Besides, it shouldn’t be forgotten that the products in the commodity exchanges are subjected to a certain standard. On the other hand; there are products with different qualities in the real wheat transactions. Thus, commodity exchanges are just guides. They give information about the prices but do not tell the price. That is why the distinction between the commercial transactions and real commodity exchanges should be done carefully.
As I stated before, there are three monthly reports that are important for the wheat market. If you include my articles on Miller Magazine, it would be four! (Ergezen laughs here.) It is possible to understand the price dynamics in the commodity exchanges by following these reports closely. But another important point is the developments in the wheat sector. For instance; the importance of the developments in Egypt for the wheat market should be known. With this, a projection for the course of the prices can be formed. Egypt is the world’s largest wheat importer. The increase or decrease in the wheat purchases of this country affects the prices in the wheat market directly. Monthly reports tell you that Egypt is the world’s largest wheat importer; they provide you the possibility of making predictions as a result of the daily developments.
Besides; it should be reminded that not only the change compared to the previous year, but also the change compared to the previous estimations is an important variable. The decrease in the production estimations compared to the previous month can bring increase in the prices. To sum up; sector news together with production and consumption expectations are the best friends of the miller. Understanding the production and consumption expectations and projecting that how the sector news will change these expectations bring the competitive advantage.
Lastly, could you make a short evaluation about the course of world wheat market throughout 2013 in general?
Compared to the last season, the great increase in wheat yield caused a decreasing trend in wheat prices starting from June. When we look at the last 10-year period; we see that there is a breakpoint for the wheat price in June. We experienced this breakpoint as price decrease. When we look at today, the estimations about the production still continue to be the most important factor on the wheat market.
While the continuation of the high wheat production estimations increases the selling pressure, the unexpected increase in wheat stocks cause this trend to strengthen. We watched the efforts of December futures wheat price to find support between the increase expectation in world wheat production and high stock concerns in November. However; despite all these negative estimations and concerns, wheat prices continue to stay over 640 cent/bushel level. Its main reason is that the wheat demand that continues strongly. Especially the incident that Egypt started wheat purchases again caused the prices in Black Sea and European Region to increase. On the other hand, China is moving towards to be the largest importer in the wheat market for the first time.
However; the strengthening of the demand just caused the wheat prices to stabilize. In order to start an upward price trend, a more balanced production level is needed. But a change like that is not expected in the short term for now. Developments related with global wheat demand will come to the forefront more in that period. Thus the purchases by China and Egypt will determine how long the demand side would stay strong. 630-35 cent/bushel level can be seen as a critical reference point for December futures wheat price. Being a support and resistance point for many times, this level also draws attention as the level that is passed by the four-year increasing trend line.
Mr. Ergezen, what would you like to finally add about the subject?
To sum up; it is seen that the wheat price in Turkey has a similar course with the wheat price in the commodity exchanges. Shortly, the importance of the commodity exchanges within the subjects we mentioned becomes prominent. Together with the inclusion of commodity exchanges follow-up into the purchase and marketing process, price and profit efficiency will also be provided. It can be an important tool in market and customer selection. It shouldn’t be forgotten that not only as a price indicator, it can also be used as a risk management tool. Especially the usage of the commodity exchanges by the companies, which have foreign purchase or sales activities, as a risk management tool would provide a great advantage for themselves.
Thus; the price risk is hedged into the fast decreases and increases in wheat prices by being minimized. Due to the sector that has become a global market as of today; ensuring the stability by the companies depends on the situation that they understand the international dynamics. When it is considered that there are 200 countries in the world; it is not possible to know and understand all the dynamics. Commodity exchanges emerge in order to help at that point. Following the production and consumption estimations with the help of sector reports makes commodity exchanges important tools combined with industry news. Our readers can address their questions to you whenever they would like to. Increase of the information and competency of our companies would be not only the gain of the companies, but also the gain of the entire sector and market. I would be happy if I contributed to the wheat and flour sector and milling industry thanks to you.
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