Let’s talk about raw materials; With Enron’s most recent situation, it’s important to understand how things work. A commodity is anything useful, especially a transportable agricultural product or mining product. This comes from the Latin word “commoditas” which more or less means advantage, convenience. So what is a commodity? Well, we consider gold, silver, wheat, corn, pork belly, coffee, etc., all commodities. If you look in the back of the WSJ or Investors Business Daily, you’ll see a list of all the commodities that are traded on the commodity exchange. To be sure, Enron made some mistakes, but let’s not rush to judge all commodity markets.
Commodity trading works best when there is a stable trading instrument. Sometimes the trading instrument is actually the commodity. If you were to look at most of the countries in the world today, you would find that there are three basic instruments of trade; money, such as currency, precious metals and gems, drugs; such as cocaine, opium, and weapons such as grenade launchers, RPGs, bullets, machine guns, weapons of mass destruction, tanks, and surface-to-air handheld rockets. Yes, this may have horrible human rights problems, but we are discussing this from a theoretical point of view, without condemning the obvious problems of humanity.
Many countries without a stabilized currency are trading arms and drugs. Even human sex slaves and other unfortunate means; a transvestite, which cannot be argued. Commodity trade in cultural products is necessary to stabilize prices and feed the world and to assist in planning and allocating funds for future needs. If a farmer cannot earn an honest living farming a field, microeconomics tells us that he will eventually leave the market. When there is a need for a product such as corn, sugar, oil, etc. and that need is so important to the people who buy it that they will be willing to pay a certain price up front for it, so that they can guarantee that they will get it. For example, Kellogg’s needs sugar to meet the needs of its customers who will buy tart pops. If they don’t get the sugar, they can’t make the cakes. Everyone loves tart pops, but if Kellogg has sugar, then they can’t make tart pops to sell at Wal-Mart. Due to commodity markets, Kelloggs is able to buy in advance and at a known price before harvesting the sugar needed to produce my Brown Sugar Cinnamon Pop Tarts. Think about it.