Commodity finance is a term which was out of circulation nearly a decade ago. This has now changed as markets revive. Commodity prices are constantly on the rise, especially when emerging markets scale their living standards coupled with exploding population. The likely focus in this decade is on protein-providing livestock and grains for feeding these farm animals.
The Great Financial crisis of 2008-9 is seen as a watershed year for growth, especially in the emerging markets. The aftermath of the crisis is that global growth was weak and demand was low. This resulted in keeping commodities in the ‘penalty boxes,’ according to research studies. However, with a revival of the economic conditions, the trends have begun in favour of commodities. Nearly a decade after the crisis, the tipping point for commodities appears on the horizon, on the back of demand for them, exceeding the supply and thereby driving price upward. The ring of brightness with this rise is the fact that the demand is being made by emerging markets.
As with every economic metric demographics play an important role in this demand upsurge for emerging markets. The reason for the specific market segment demand is that emerging market is seeing an upsurge in their population levels and a simultaneous increase in the living standards as well. The demography growth is inverted in developed countries and there is no demand for the commodity as there is stagnation in terms of consumption in such market regions. The average age of the population here is in the senior age group as well. On the other hand, there is a spurt in the growth of the working demography in most of the emerging economies.
Literature review reveals that countries such as China, India and its neighbouring countries are in the throes of developed at unprecedented rates. These are driving the growth at 6 percent in comparison to the 0.5 percent noted in developed nations.
The demand for consuming has meant that there is an upsurge in financing commodities in order to service the demand from these economies. As more population begins the peak consumption years in these emerging markets, there is an associated shift towards higher living standards. The richer the people get their investments in lifestyle products such as cars, homes, gadgets and home appliances are on an increase. A critical factor of development in this scenario is the demand for high protein food items. This has resulted in higher consumption of commodities.
Focus shifts to other commodities
The year thus far has already seen schemes helping two key sectors – industrial metals as well as oil – peak in the past months. Now, with drastic changes in the diets of these emerging market consumers, the focus has been on wheat, soy, and corn. Additionally, the use of soybeans as a source of protein for cattle feed has also maximized the consumption of this grain, especially in the emerging markets.
Researchers admit that commodity consumption is at its historic peak and largely in the areas of natural gas, oil, copper and agricultural products. Financing schemes by private and public financial institutions have played a critical role in this growth.