What Is the Key to Success in Commodity Trading? (2024)

Introduction: In the world of commodity trading, trust is a valuable yet often elusive commodity. It can be both expensive and cheap, depending on how it is earned and maintained. Many traders have experienced the highs and lows of trust in their business dealings, and it's a topic worth exploring. Let's delve into the concept of trust in commodity trading through a real-life story and discover why having the right documentation is crucial.

The Cost of Trust: Trust can be costly or inexpensive, and here's why. Let's consider a scenario involving a trader we'll call "A." A had attempted a particular business venture multiple times, with each attempt ending in failure. After several setbacks, A was ready to give up on the venture altogether.

Then, during a family reunion, A learned about a distant relative who was involved in a related business. This relative assured A that they could successfully execute the venture. They showed A some documents and presented their experience confidently. Without much due diligence, A placed their trust in this relative, even though it came at the cost of strained relationships and burnt bridges with previous business partners.

Both parties embarked on the venture together, driving six hours to meet a supplier who claimed to have the commodities. However, upon closer inspection and discussions during the meeting, it became apparent that the relative had no prior experience in this business. This venture was their first attempt. The supplier's credibility also came into question. When the truth was laid bare, A found themselves in a precarious situation.

The Need for Verification: This scenario highlights a fundamental lesson: trust in commodity trading can be expensive, especially when it's misplaced. Blindly relying on relationships or gut feelings can lead to significant financial and personal costs. So, what should you do to ensure trust in commodity trading?

Verification through Documentation: One of the most critical aspects of trust in commodity trading is proper documentation. Here are key documents that can prove the authenticity of a commodity transaction:

1. Purchase Order (PO): Outlining transaction details.
2. Sales Contract: A legally binding agreement.
3. Invoice: Documenting financial aspects.
4. Bill of Lading (B/L): Acknowledging shipment.
5. Certificate of Origin: Certifying commodity origin.
6. Inspection Certificates: Confirming quality and quantity.
7. Customs Declarations: Facilitating customs clearance.
8. Certificates of Analysis (CoA): Detailing commodity composition.
9. Payment Records: Evidence of financial transactions.
10. Cargo Insurance: Protecting commodities during transit.
11. Warehouse Receipts: Validating stored commodities.
12. Delivery Receipts: Confirming receipt by the buyer.
13. Third-Party Certifications: Verifying adherence to standards.

Conclusion: In the world of commodity trading, trust can be a valuable asset or a costly liability. Blindly trusting without proper verification can lead to unfavorable outcomes. It's essential to prioritize trust but also validate it through thorough documentation and due diligence. Remember, in commodity trading, it's not about feelings or hunches; it's about verifiable evidence and reliable processes.

Trust wisely, but verify even wiser.