Commodities Pricing Management - Assignment Example

Commodities Pricing Management Introduction: The evolution of humankind has seen developments in all spheres of activities. These developments, while improving the quality of life have increased the complexities in all spheres of human life. Gone are the simple ways of doing anything and in are the techniques that make any activity sophisticated. So too with the marketing of commodities and yet have there been changes that have effected the marketing of commodities that a commodities manager needs to look beyond the direction in which the market is headed is a matter that can be decided by looking at the changes that have occurred and the effect that it has had on the marketing of commodities. Commodities: The market place has become complex. Supply and demand is not the only criterion that impact on a market. No longer are customer wants satisfied easily and this has led to market strategies that take into consideration the dynamic nature of customer behavior and their perception of product value. This has had an impact on the interpretation of different terms used in describing the market place and the activities that take place in it. The first aspect that needs to be clarified is the exact meaning of a commodity. Commodities are mass produced items that have a value because of their mass consumer demand. This mass demand on the product means that a commodity irrespective of the producer needs to have a uniform quality and by this provides the means for the customer to switch from one source of supply to another, without apparently feeling the difference. Table salt looks the same tastes the same irrespective of the source of supply. (Livingstone, D.A. What Part Do Commodities Play in the Market and in Our Shopping?). Market Segmentation: The changes in the customer behavior have led to segmentation of the market. This means that different segments of the market may behave in a different manner. Let us take the example of a commodity like table salt. There are segments of the market that create a demand for the plain old table salt. There are market segments for who the plain old table salt is just not attractive and they would prefer and be willing to pay more for salt that has value added to it either in its physical form or in its impact on the health aspects. This may be salt in a form that does not absorb moisture and make it easier to sprinkle or it may be by iodized salt for health reasons. This aspect of the change in the commodities market has given scope for the market strategy of catering to these market segment needs by providing value addition at a cost and thereby differentiating the commodity for the different market segments. Branding: Business enterprises that have a perceived image value among the customers in the markets have gone one step further and branded the differentiated commodities so that they sell on the brand identity and the business enterprises can increase the price to the customer because of the perceived enhanced value. (Branding Of Commodities: Hidden Issues And Perspectives). The Undifferentiated Commodity: So commodities in the market can be differentiated. In business, however the term commodity means the old undifferentiated commodity. In other words the salt as a commodity is salt that has not been differentiated by value addition either in its physical properties or by the addition of any other content value to it. In addition some commodities do not give scope for value addition. There is no way in which value can be added to gold. Twenty four carat gold is a pure as it can get and addition of any other metal to it only reduces its value and there is no scope for value addition. Sugar, like salt is a commodity of everyday use, but unlike salt provides minimum scope for differentiation. At the most it may be made more pure or cleaner by the removal production impurities. Addition of health value is not a simple matter with sugar and so it presents itself as a difficult commodity for differentiation, as there is no real perceived value and the differentiation may be considered more of a gimmick of old wine in a new attractive bottle. This is the reason that those business enterprises that have attempted to differentiate and brand sugar have run into difficulties with the product. (Pitfalls of brand marketing). An analysis of the market for gold and sugar provide scope for ascertaining whether a commodity manager need only bother about the demand and supply aspect of a commodity and thereby the future direction of the market or whether he needs to be capable of gauging the impact of any other factors that could impact the market. Sugar as a Commodity: Sugar, as a sweetening agent has been a part of the diet of human beings for a very long time and gained in prominence among the commodities. Sugar is a commodity that displays all the characteristics of a commodity as well as the complicated trading patterns that the world is seeing today. The commodity manager for sugar has to deal not just with the vagaries of the production of sugar, but with a number of other factors that have an impact on the sugar market. There have been divergent factors that have affected the supply and demand position of sugar. On the demand side health consciousness has reduced the use of sugar. This is because of the growing belief that the use of sugar contributes to obesity and the negative impact on sugar consumption due to the higher incidence of diabetes as a result of the modern life styles. Alternative sweetening agents without the adverse health aspects have come into the market and are attracting growing segments of the market. Politics is another factor in the sugar market and puts constraints on the free availability of sugar from all its production sources. This puts pressure on the supply side of the sugar market. The opening up of the markets around the world as a part of globalization has led to an increased number countries from the emerging developing world presenting themselves both as suppliers of sugar and consumers of sugar. This has added to the complexity of the sugar market with the commodity manager not just having to keep track of the previous supply and demand sources, but the new sources of supply and demand as a result of the collapsing trade barriers. One of the most significant changes that have been seen is the price of sugar is no longer as volatile as it was and presents a more stable picture. This stability in the prices of sugar does offer a commodity manager the opportunity to increase profit margins, but at the same time it needs the commodity manager not just to keep an eye on the future direction of the market, but also be capable of assessing the complexities in the changed sugar market due to the new divergent forces that have come into play. ( Hannah, A.C and Spence, D. (1997). The International Sugar Trade) . Gold as a Commodity: There are varied opinions as to whether gold is a commodity. This is because some believe that the prices of gold need only be looked upon as a variance in the supply and demand position. Others do take the position that gold is not just a commodity as various factors affect the price of gold. However let us first look at the supply and demand position of gold before going into the analysis of the factors of supply and demand have an impact on the prices of gold. Gold is not evenly distributed in the various regions of the world and South Africa holds nearly fifty percent of the gold that still remains underground and therefore is a major player in the gold market. Commercially viable gold mines are limited and this leads to supply lacking elasticity. Estimates are that this underground gold amounts to only forty percent of the gold available above the ground around the world. Gold above the ground is estimated to be to the tune of between 1,20,000 tons to 1, 40,000 tons. Nearly one fourth of this gold is held by the central banks of various countries and the major part of the rest is in the form of personally held jewelry and the rest in the form of coins or bullion with individuals. (How much gold is there?). Gold presents a profile that is not similar to a usual product. The supply being inelastic should lead to increase in prices, when the supply does not cope with the demand and yet this is not so. That is because there are a number of other factors that come into play. These factors may be listed as sales by governments of their central bank reserves, scrap sales, gold loans, forward sales and hedging. With so much more gold available above the ground than what can be produced from the mines, the holdings and those that hold the gold have a significant role to play in the supply and prices of gold. (Eeden, van Paul. (2003). Gold, a commodity?). These external factors have a large role to play in the gold market and this makes it more difficult for a commodity manager with an eye on just the future supply and demand position of gold. Gold in the form of jewelry is one of the largest stocks of gold. However the middle class that does hold a large stake of this does not speculate with this holding especially in the developing world. That is because historically gold has more value than currency and the importance of the individual in society is measured by the gold that is possessed by the individual in the form of jewelry and so they are averse to converting it to currency even for profit. Yet, this does present a potential risk for the commodity manager as the holdings are large and should there be a change in perception, this large holding of gold above the ground can play a decisive factor in the price of gold, especially when an opportunity for large taking of profits presents itself. (Menon, P.S. (2003). The yellow attraction. Gold: Act in time to make the most of price spurt). Risks that a Commodity Manager Faces: The commodity manager no longer has a simple job of keeping track of the future aspects of supply and demand from the simple point of view of production and consumption of a commodity. Changes in the physical market as well as other factors for example like politics, changing life styles and speculation could have a major impact on the supply and demand of a commodity. The brief look through these aspects from the point of view of gold and sugar as commodities presents the fact that the capability demands of a commodity manager have become more than just analyzing the future production and consumption data to see the direction that the market is likely to take. Conclusion: The brief study of the factors that play in the markets of commodities like sugar and gold clearly indicate that commodity marketing does not mean just knowing the direction in which the market is headed, but rather a more demanding task of taking many more aspects into consideration. List of References Branding Of Commodities: Hidden Issues And Perspectives. India Infoline.com. Nov 27, 2005. . Eeden, van Paul. Gold, a commodity? .2003. KITCO. Nov 27, 2005,. . Hannah, A.C and Spence, D. The International Sugar Trade. (1997). Description. Wiley. Nov. 27, 2005, . How much gold is there? Nov. 27, 2005. http://www.galmarley.com/framesets/fs_commodity_essentials_faqs.htm. Livingstone, D.A. What Part Do Commodities Play in the Market and in Our Shopping? Ezine articles. Nov 27, 2005. . Menon, P.S. The yellow attraction. Gold: Act in time to make the most of price spurt. 2003. Managing Your Money. The Week. Nov 27, 2005. . Pitfalls of brand marketing. 2005. from Business Line. THE HINDU. Nov 27, 2005, . Read More