Procurement of

commodities
BY:
MUHAMMAD AHMED KHAN
ALI HASSAN
USMAN ZAFAR
FATIMA AKRAM
TABLE OF CONTENT

01. INTRODUCTION 02. PRINCIPLE

MUHAMMAD AHMED KHAN COMMODITIES
MUHAMMAD AHMED KHAN

03. Why do 04. Price stabilization 05. The role of the

commodity prices schemes speculator
fluctuate
ALI HASSAN USMAN ZAFAR FATIMA AKRAM

2
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Introduction

Commodity-procurement
instruments are some- times used by
firms to secure commodities needed
for future production. These can be
categorized as forward purchasing
mechanisms, including forward
buys and forward contracting. Each
requires the buyer to project future
quantity requirements.

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MUHAMMAD AHMED
KHAN
PRINCIPLE OF COMMODITIES

ALUMINIUM COCOA

COFFEE COPPER

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MUHAMMAD AHMED
KHAN
PRINCIPLE OF COMMODITIES

COTTON SOYA BEANS

GAS OIL GOLD

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KHAN
PRINCIPLE OF COMMODITIES

GRAINS NICKEL

LEAD RUBBER

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MUHAMMAD AHMED
KHAN
“
Why commodity prices fluctuate

Reasons behind commodity price fluctuation

T he cause of commodity price fluctuations is rooted in the
development of a world market that is not yet adept in anticipating
global fluctuations in demand. Price fluctuations are being
exacerbated by the availability of information and the speed of
communication.
 

USMAN ZAFAR
The chart below provides a
preliminary analysis on dealing with
commodity risks

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“
The top of the chart depicts the way your customer buys
from you: Either they are buying on a fixed price basis or
a floating price basis (where such floating price is tied to
your price of raw material input). The left-hand side of the
chart depicts how you buy raw material from your
suppliers: Either you can fix your purchase price or you
are required to accept a floating price based on spot
commodity prices. Each quadrant of the chart has a
diagonal line that separates the response to price
fluctuations. The lighter portion to the upper right provides
the correct response assuming a low manufacturing yield
(we have arbitrarily chosen 50% to make the point) and
the lower left provides the solution if your manufacturing
yield is quite high (we have chosen 98% to illustrate).

USMAN ZAFAR
“
How to overcome price fluctuation
One may think that better information would reduce volatility, so
this result seems counterintuitive. When commodity markets
were more localized in nature, market participants had a much
better feel for demand levels. This proximity to supply and
demand factors allowed prices to follow more predictable
patterns. However, the fact remains that the global market has
been permanently opened, and this, in turn, has caused
tremendous volatility. The unpredictability of price levels has led
developing countries that understand their own long-term raw
material shortages to enter and exit markets as prices reach
certain levels.

USMAN ZAFAR
“This activity, while it has increased the frequency
of price movements, has decreased volatility in the
sense of dampening highs and lows. Thus, while
market participants see more frequent price
movements, the result is a certain level of price
stability (i.e., move movements but within a
narrower band), which lends itself well to hedging
activity. Commodity price fluctuations are not going
away anytime soon and volatility will likely increase
before settling down. The issue of dealing with raw
material cost volatility should not be ignored or
passively accepted. Managing inventory and raw
material price risk will be an important part of USMAN ZAFAR
“ 1. Price stabilization scheme
P rice Stabilization scheme
The “procurement costs” of materials constitute a
major component of total manufacturing costs. For
example, raw materials (steel, iron, aluminum, etc.)
represent 47% of the costs of an automobile. Prices of
such goods show significant fluctuations, often due to
seasonal patterns or supply-demand mismatches.
Flexible business models would allow firms to trade
commodities in forward and spot markets
simultaneously. Forward contracts are bilateral
agreements to purchase or sell a certain amount of a
commodity on a fixed future date at a predetermined ALI HASSAN
“ Price stabilization scheme
The purpose of the creation of the Price Stabilization scheme
to restrain the prices of commodities from the extreme price
volatility. The scheme is aimed to increase or decrease the
low or high prices of such selected commodities by
distributing or procuring the commodity to stabilize the price
in a range.
Such policies are adopted because of the high production
variation causing market prices to fluctuate substantially from
one production cycle to the next.

ALI HASSAN
OBJECTIVE
The primary objective of the Price Stabilization Scheme are as
follows:
1. Guaranteed prices and supply offered by forward contracts.
2. Secure the necessary raw materials (by reserving capacity in
advance)
3.  Maintain cost predictability (by fixing the per unit price at
the time the contract is signed)
4.  Guaranteed future cash flow to supplier until the contract
is terminated
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“
Price stabilization

Many primary markets are subject to extreme

fluctuations in price.  There are several methods of
intervention available to governments and agencies.

ALI HASSAN
“
Buffer stocks

Buffer stocks are stocks of produce which have not yet

been taken to market. They can help stabilize prices by
taking surplus output and putting it into a ‘store’, or,
with a bad harvest, stock is released from storage.
A target price can be achieved through intervention
buying and selling.

ALI HASSAN
“
Ceilings and floors

T he buffer stock managers are likely to

establish a price ceiling, above which
intervention selling will occur, and a price
floor, below which intervention buying will
take place.

ALI HASSAN
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“
Evaluation of buffer stocks

While buffer stocks can help stabilize price, there are

several disadvantages, including:
Additional costs to society, such as building costs, extra
storage, insurance and costs of managing the scheme.
Furthermore, some commodities cannot easily be stored
because they are perishable.
Critics argue that they distort the operation of free
markets and prevent the price mechanism working
effectively.
Finally, there is the potential problem of moral hazard,
which means that buffer stocks provide ALI HASSAN
an insurance against poor harvests and may encourage
“
SPECTACULAR
A speculator is someone who takes a chance
on losing a lot of money when there's a
prospect of making even more money. A
speculator might, for example, invest in a
risky stock in the hopes she can sell it
eventually at a profit.

FATIMA AKRAM
 TYPE OF SPECTULAR
Bulls Bears Lame Duck Stag
 A lame duck  Stags are a different
 Individuals classified  Bears are the
speculator is type of speculators in
as bulls mean they opposite of bulls
someone who finds which they expect to
are expecting the when it comes to
themselves in a profit on very short-
asset price to increase speculation in the
situation that is not term price changes in
in value. financial markets.
what they expected. new company stocks.
 They will purchase an  They expect the asset
 These traders suffer
price to decrease in  Stags will often be
asset with the unexpected losses
value and bet on their more careful than
expectation of selling due to a lack of
decline. others on this list
it back for a higher devising an effective regarding risk and
price later. trading strategy. profit.

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Thank you