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13 views6 pages

Commodity Answer

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SISAY
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DEBRE BIRHAN UNIVERSITY

College of Business and Economics


Department of Marketing Management
Commodity and business marketing Group Assignment

Title: Commodity and Business Markets in Ethiopia: Evolution, Challenges,


and Policy Implications

Name Id.No

1. Mulugeta Negash DBU 1500655

2. Belhu Dosegnawe DBU 1500388

3. Samuel Bogale DBU 1500380

4. Zegju Sewnet DBU 1500385

5. Serawit Hailu DBU 1500393

SUBMITTED TO: Seid H. /Assistant prof. /

May / 2024

DEBIREBIRHAN,
ETHIOPIA
Introduction
Ethiopia, a country rich in agricultural resources and commodities, faces various challenges in
its commodity and business markets. Commodities, such as agricultural products, metals, and
energy resources, play a vital role in the global economy. Understanding commodity markets is
crucial for businesses and governments to navigate price volatility, manage risk, and make
informed decisions. This paper aims to explore the evolution, challenges, and policy
implications of commodity markets in Ethiopia.

Commodities Markets: Evolution, Challenges, and Policies


Commodity markets in Ethiopia have evolved over the years, facing challenges such as
excessive price fluctuations, the secular decline of commodity prices, and implications for
specific countries. Policies play a crucial role in addressing these challenges, including the use of
derivatives such as forward and futures contracts, hedging strategies, and the participation of
speculators and arbitrageurs.

Derivatives
Derivatives play a significant role in managing commodity price risks in Ethiopia. The use of
options, stock index futures, interest rate futures, and foreign currency futures can help
mitigate volatility in commodity prices and protect market participants from adverse price
movements.

Key types of derivatives include:

• Forward and Futures Contracts: Contracts that fix a price for a commodity at a future date.

• Hedging: Using derivatives to reduce risk by locking in a price for future transactions.

• Speculators: Traders who trade derivatives to profit from price fluctuations.

• Arbitrageurs: Traders who exploit price differences across different markets.

• Options: Derivatives that give the holder the option but not the obligation to buy or sell a
commodity at a specified price.

• Stock Index Futures: Derivatives based on the performance of a stock index.

• Interest Rate Futures: Derivatives based on future interest rates.

• Foreign Currency Futures: Derivatives based on future exchange rates.


Commodity Exchange Market
The agricultural sector in Ethiopia faces risks related to oversupply, demand fluctuations, and
market access barriers. Policy interventions are needed to address these challenges, including
supply management programs, diversification strategies, and market-based risk management
mechanisms.

Commodity exchanges are marketplaces where buyers and sellers trade commodities. They
provide transparency, liquidity, and price discovery mechanisms. Key issues in commodity
exchange markets include:

• Agricultural Marketing Risks: Farmers face risks related to weather, pests, and market
fluctuations.

• The causes of the problem of Agricultural products: Oversupply, low demand, market access
barriers, and vertical concentration.

• Policy and institutional environment: Governments play a role in regulating commodity


markets and providing support to farmers.

• Oversupply: Excess production can lead to low prices and market gluts.

• Demand of Agricultural products: Derived demand influences the demand for agricultural
products.

• Implications of Derived Demand: Changes in consumer demand affect the demand for
commodities used in production.

• Increased vertical concentration along value chains of commodities: Corporate consolidation


can reduce competition and influence prices.

• Low responsiveness of demand for commodities to changes in prices: Demand for


commodities may be inelastic, making price adjustments ineffective.

• Market access and market entry barriers: Trade restrictions, regulations, and infrastructure
limitations can hinder market access for producers.

Business Buying Behavior of Commodity Market


Understanding the buying behavior of businesses in commodity markets is essential for
effective market segmentation and targeting. Businesses in Ethiopia may exhibit unique
purchasing patterns based on factors such as price sensitivity, product quality requirements,
and supply chain dynamics.
Factors influencing their buying behavior include:
• Size and financial resources: Larger businesses have more bargaining power and can spread
risk across multiple suppliers.

• Industry characteristics: Some industries are more exposed to commodity price fluctuations
than others.

• Risk tolerance: Businesses vary in their ability to tolerate price risks.

• Hedging strategies: Businesses can use derivatives to hedge against price risks.

Commodity Market Segmentation


Segmenting the commodity market in Ethiopia based on factors such as product type, buyer
behavior, and geographic location can help businesses tailor their marketing strategies and
offerings to specific market segments effectively.

Commodity markets are segmented based on:


• Physical or futures: Physical markets deal with the physical delivery of commodities, while
futures markets trade standardized contracts for future delivery.

• Spot or forward: Spot markets involve immediate delivery, while forward markets involve
future delivery.

• Exchange-traded or over-the-counter: Exchange-traded markets are regulated and provide


standardized contracts, while over-the-counter markets are private transactions.

Policy Approaches to Deal with the Commodity Problem


Policy approaches to address commodity market challenges in Ethiopia include diversification
strategies, supply management programs, compensatory finance mechanisms, and market-
based risk management mechanisms.

• Diversification strategies: Encouraging producers to diversify their production to reduce


dependence on a single commodity.

• Supply management programs: Regulating production to stabilize prices.

• Compensatory finance mechanisms: Providing financial support to producers during price


downturns.

• Market-based risk management mechanisms: Promoting the use of derivatives for risk
management.

These policies aim to stabilize commodity prices, enhance market access, and promote
sustainable agricultural development.
Conclusion and Recommendations
In conclusion, Ethiopia's commodity and business markets face various challenges that require
proactive policy interventions. To improve market efficiency and stability, policymakers should
focus on implementing measures such as supply management programs, market-based risk
management mechanisms, and diversification strategies. By addressing these challenges,
Ethiopia can strengthen its commodity markets and promote economic growth and
development.
References
• Berck, P., & Roberts, M. J. (2006). Commodity markets and economic development. Oxford
University Press.

• Fackler, P., & Goodwin, B. K. (2009). The challenges of agricultural markets in Africa: Prospects
for pro-poor interventions. World Development, 37(8), 1364-1377.

• Hall, T. (2007). Derivatives and financial innovation. John Wiley & Sons.
• Ravallion, M. (2011). The demand for food is not linear. Journal of Development Economics, 96(1), 1-9.

• World Bank. (2020). Commodity markets outlook. The World Bank.

• Berck, P., & Roberts, M. J. (2006). Commodity markets and economic development. Oxford University
Press.

• Fackler, P., & Goodwin, B. K. (2009). The challenges of agricultural markets in Africa: Prospects for pro-
poor interventions. World Development, 37(8), 1364-1377.

• Hall, T. (2007). Derivatives and financial innovation. John Wiley & Sons.

• Ravallion, M. (2011). The demand for food is not linear. Journal of Development Economics, 96(1), 1-9.

• World Bank. (2020). Commodity markets outlook. The World Bank.

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