Obstacles to commodity futures trading

Futures markets perform fundamental services in the organized distribution of certain agricultural and industrial products. They attempt to correlate world demand and supply and establish world prices and keep them uniform. Their regulatory purpose includes the ability to discount the impact on the market of forecasted supply and demand, and spread over a long period the burden of distribution of a short-period agricultural harvest.

The main obstacles to futures trading include foreign exchange, price and import controls, and direct government interventions on the market. Exchange regulations have the following four effects: they prevent or restrict transactions; they prevent arbitrage; they prevent imports protection against market cornering; and they prevent or impede exchange cover. To fulfil its task, a futures market must freely reflect the position of supply and demand, and the price of a commodity results precisely from the interaction of sellers and buyers. Obstacles are also created when the price of a commodity is regulated by the administration. Another way of regulating prices results from a limitation of the importer's profit margin. Import regulations are an obstacle to the free operation of futures markets, particularly in the case of a market dealing in an imported commodity. These markets cannot be opened unless import regulations are sufficiently flexible, to ensure that future sellers can back their sales with imports. Import regulations can also prevent a national of the country where they are in force from operating on a futures market for, in the case of purchase, he may be obliged to resell his contract, whereas in certain circumstances he might prefer actual delivery, which he cannot expect to obtain without an import licence.

One of the essential aims of a futures market, namely the quotation of a normal price for a given commodity at any moment, can obviously not be fulfilled if governments - whether the commodity is sold by a national board or stockpiled by the public authorities - are able to intervene on the market at certain times through bulk buying or bulk selling operations. These interventions interfere with the free operation of the law of supply and demand.

Problem Type:
F: Fuzzy exceptional problems
Date of last update
04.10.2020 – 22:48 CEST