Vince Bellino ’14, Financial Editor
A commodity is a physical good that can be bought and sold through a financial exchange using a variety of alternative investment vehicles. A futures contract is one of the most commonly used financial instruments to trade commodities. It is a contractual agreement between two parties to buy and sell goods such as coffee or crude oil at a pre-determined price on a future date. One of the key drivers of price fluctuations throughout the financial markets is the law of supply and demand. So, why would price fluctuations on the Chicago Mercantile Exchange affect you? Well, the price at which Dunkin’ Donuts charges their customers is highly correlated with the price of coffee futures that trade on a daily basis. If there is a drought in South America in a region where coffee beans grow, consumers may experience an increase in the price of their morning coffee. Given the lack of supply, the price of coffee futures could begin to appreciate, thus increasing productions costs for Dunkin’ Donuts.
With the most recent turmoil in Syria, crude oil futures were trading around $108 per barrel. On average, crude typically trades around $100 per barrel. This inevitably caused a substantial increase in prices for consumers at the gas pump or for the airlines. How do companies mitigate the risk of such volatile price fluctuations so consumers don’t pay $4 for a cup of coffee that on average costs $1.38? In essence, they will purchase coffee futures contracts to ensure a specific purchasing price at a future date, regardless of any economic or natural disasters.
An airline will typically purchase crude oil futures to hedge against the risk of war or a lack of oil supply in the Middle East. If the price of crude oil increases; traveling will become more expensive. This may cause the airline industry to see an increase in costs and decrease in revenues across the sector. Commodities will always be essential to the global economy and indirectly affect the next cup of coffee you drink.
Coffee drinking statistics. (2013, September 8). Retrieved from http://www.statisticbrain.com/coffee-drinking-statistics/
Commodities:coffee. (2013, September 8). Retrieved fromhttp://www.investopedia.com/university/commodities/commodities2.asp
Futures contract. (2013, September 8). Retrieved from http://www.investopedia.com/terms/f/futurescontract.asp
Light sweet crude oil (wti) futures. (2013, September 8). Retrieved from http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude.html
Mark, S. (2013). Crude Advances as Obama Seeks Support on Syria. Bloomberg, Retrieved from http://www.bloomberg.com/news/2013-09-03/wti-crude-fluctuates-after-israeli-missile-test.html