Business and Law Commodity Trading Models

It is inevitable to come across people discussing what to supply in order to make some money. The truth of the matter is that there are many opportunities at different scales in different product lines.

One needs to invest time to understand what the market offers. One way is to look around yourself. You start with yourself, your family or your local community, for example, and see what is used or demanded regularly.

You can also look far afield in other communities, other towns or cities, regions, businesses, industries and so on. Some of the products that are in regular demand include food, consumables, medical supplies, fuel, motor vehicles or spares, stationery, school uniforms, agro-produce, construction materials and many others. You can also look at input or other requirements by industry and these are quite varied. One can also look at what miners or farmers want for example chemicals, etc.

I have been told that a business that offers a solution is likely to be sustainable. So you can always look at what is in short supply and target supplying that product. For example when people lack or complain about something that could present a business opportunity. In other words one can look at supplying what can make people happy.

There are people who are always watching or following tenders to look for supply opportunities. Tenders are usually advertised by, for example companies, non-governmental organisations or the Government and its arms.

Commodity trading models

Having identified what to supply there are different models a business person can pursue in order to supply the market. Even reading books on business will give some insights into the models explained below.

Retailing

Retailers buy goods from wholesalers or manufacturers and sell them to the final consumer. They are usually closer to the consumer markets. Retailers are in various forms from large retail shops, small to medium ones, tuckshops, local market places and others. Capital requirements vary with the size of the operation. In fact capital can be the one factor to determine size.

With knowledge of the demand market one can see what to supply as a retailer. There is need for capital and a place to operate from, amongst other things. I know of one business person who frequents areas such as Siyaso, down town “tuckshops”, Magaba, Mbare Musika vegetables market, industrial areas, and home industries in Harare to get “a feel of the market”.

Wholesaling

Wholesalers buy from the producers /manufacturers and sell to retailers or at times to the final consumer. Wholesalers trade in large volumes. They buy bulk, break the quantities and sell in relatives small quantities usually bigger than what a single final consumer would buy. They require large space and significant working capital though this depends with the nature of product and the scale at which one operates. Working capital is usually the main constraint. The transaction cycle or turn-around time for wholesalers is normally short so they can turn their money many times. Depending on the product traded many wholesalers buy local or foreign suppliers or both.

Commodity broking

These players, who are known by other names such as merchants or middlemen, do not produce the goods. They know where to source the goods (supply side) and where to sell them (demand side). They play the market. They study trends, opportunities and threats, etc. There are also commodity brokers who are always looking for tenders to supply. They bid, if successful supply, and at times make money in the process. However, tenders can be competitive and require large working capital.

Manufacturing

These players produce the goods using factors of production such as land, machinery, natural resources, labour, raw materials, electricity and others. They rent or operate from their own premises. Investment in manufacturing is long term. Manufacturers drive the economy. They can create employment opportunities for many people, conserve foreign currency through import substitution or even export of goods.

Capital requirements are usually high due to machinery and working capital requirements. Risks and implications of business failure can be significant. However, if the business is successful it can be so rewarding. There are opportunities for growth, to influence input cost or selling price.

Financing commodity trading

Funding for commodity trading can be through methods such as using own savings, supplier credit, customer deposits, borrowings (bank loans, order finance, overdrafts, advances by family or friends, borrowings from high net worth individuals, foreign loans, etc), profit sharing arrangements, sale of redundant assets, etc.

This article is simplified, for general information only and does not constitute full professional advice.

Godknows Hofisi, LLB(UNISA), B.Acc(UZ), CA(Z), MBA(EBS,UK) is a legal practitioner / conveyancer, chartered accountant, corporate rescue practitioner, and consultant in deal structuring and tax. He writes in his personal capacity. He can be contacted on +263 772 246 900.

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