Small businesses have to rely on profitable operations because they usually don't have financing to cover large losses. An effective marketing plan specifies the profit margins that the company requires and the means to attain them. An evaluation of the marketing plan looks at whether the plan forecasts the required profit margins and specifies a realistic strategy to meet them.
Commodities are not necessarily readily available where the demand lies. Cocoa for example, used by Swiss chocolate manufacturers, is grown only under the Tropics, in Africa, South America and increasingly in South-East Asia.
The role of the commodity trader is therefore to bring the supply of cocoa in Africa and the demand for it in Europe together. They do so by organizing the commodity supply chain between places of supply and places of demand and managing the attendant risks.
Finally, traders also play an important role in processing raw materials. As such, commodity traders are transformers: Traders do so by organizing the shipment of commodities from A to B and managing the attendant risks: Just as crude oil requires refining and blending in order to be suitable for modern vehicles, soybeans for example are crushed to extract the useful vegetable oil and the meal that can be fed to livestock.
The fundamental concepts of backwardation and contango Commodity traders pay great attention to the price curve. Significant differences in price levels over different time spans can offer physical traders arbitrage opportunities. Two particular configurations stand out: Depending on the situation, traders will have to adopt different strategies.
Not only do they have to buy financial instruments to hedge against adverse price variations that could wipe out margins or worse, but they can also adapt their operations to seize profit opportunities, for example by storing crude oil if the contango is sufficient to offset storage costs over the period.
Backwardation Backwardation, or normal backwardation, describes a situation in which the spot or cash price of a commodity is higher than the forward price, i. In many cases, the development of a backwardation is associated with supply shortage, for example if there is a disruption in the supply chain, such as unplanned refinery closures for oil products in a tight market.
Price differentials for perishable goods between near and far delivery are typically in normal backwardation.
Contango Contango is the opposite of backwardation and describes a situation in which the future price of a commodity is higher than its current spot price.
A contango is normal for a non-perishable commodity that has a cost of carry e. Technical vs fundamental analysis Commodity traders -just like any other financial trader- rely on two different approaches when it comes to taking positions in a particular market.
Given that Swiss commodity trading companies focus on physical trading and therefore have longer time horizons than "paper" traders, fundamental analysis plays a particularly important role and requires the fundamental analyst to know his particular market intimately.
In practice however, many market players use technical analysis in conjunction with fundamental analysis to determine their trading strategy, especially when trading on their own accounts. Fundamental analysis is a method of forecasting the future price movements of a commodity based on economic, political, environmental and other relevant factors that will affect the basic supply and demand of whatever underlies the commodity or financial instrument.
Technical analysis is a method of predicting short term price movements and future market trends by studying charts of past market action which take into account commodity price, trading volume and, where applicable, open interest.
This step often requires commodity traders to have agents in the areas of production, particularly in the case of rare commodities or speciality products such as coffee or cocoa. Purchase and sale operations usually involve financing the transactions, organizing the transport and managing the associated risks.
Transport and shipping Typically by ship: Ships can be chartered or shipping can be done using container lines. Storage and market structure Traders transform commodities in time by storing them — purchasing them now and keeping them for future sale or delivery.
Therefore they own or operate storage facilities, tanks and the like, sometimes going as far as chartering ships for floating storage. This is determined by market structure: Importantly, no single trader is ever capable of storing a substantive share of the deliverable supply and so market manipulations are nearly impossible.
Processing Traders can transform commodities in form by processing them: To this end, traders employ inspection companies which assess and test cargos at ports, for example to determine compliance with phytosanitary standards. In parallel, certification organisations are increasingly called upon to verify that commodities comply with e.
Trade financing Traders are usually highly leveraged as a result of the low margin and high volume nature of the business and often rely on banks to provide the funding necessary to strike deals.
Given the specificities of the various commodity markets and their different risk profiles, trade finance specialists and traders tend to work closely together. In many ways, providers of trade finance are amongst the trader's most important stakeholders.
Commodity trading Commodity traders engage in two types of trade:Aug 17, · Profit Is Nice. Margins Are Even Better. By Geri Stengel. 5 min read. Try QuickBooks Free. a business planning, cost management and profitability consultant.
To improve the profitability of low-margin products or business segments, you might cut costs, raise prices or even drop the product or service. 5/5(1). Tips for Calculating Your Gross Margin If it feels like ages since you took Accounting , here's a detailed refresher on how understanding gross margins can help you make the right business.
Strategies for Low-Margin Environments. December 4, Although it is easier to strategize about protecting profitability when times are good, a sound risk management plan applies to all margin environments, and is especially important when the outlook is bad.
In business accounting, margin refers to the difference between revenue and expenses, where businesses typically track their gross profit margins, operating margins and net profit margins. Margin is the difference between a product's sales price and the business’s cost of acquiring and maintaining the product prior to sale.
Without having an adequate gross profit margin, a. Commodity semiconductors is a brutal low margin business. They are not an engineering value add organization. They are a bottom feeder tech company, operating in the most brutal commodity business.