In this resource rich country of ours, struggles for access to these resources and feuds arising out of them is as old as history itself. From silk to cotton, from tea to tobacco, rulers have come and gone, rebellions have arisen and died, everything to be able to gain access to commodities and make money from them.
In today's democratic India, commodities drive industries, provide livelihood to farmers and laborers and earn our country valuable foreign exchange when exported.
Commodities are any goods that are homogeneous and hence replaceable by any other goods of the same kind/grade. For example, Darjeeling tea of grade 3 is same irrespective where you buy it from. Just as share certificates can be traded in equity markets, commodities can be traded in commodity markets called the MCX trading. Commodities are mostly bought and sold in what we call a futures transaction.
What is MCX?
MCX stands for the Multi Commodity Exchange. MCX trading is the exchange for trading commodities; just like how BSE is for trading stocks of companies. You can trade gold, silver and other precious metals along with agricultural commodities like cotton, coffee etc. The MCX trading provides secure and transparent trade mechanisms, and works in conformity with the regulatory framework.
A futures transaction involves a trader buying a set of goods at a predetermined price, at a predetermined date. For example, buying wheat before the harvest has happened for the year. Say you buy 10 quintals of wheat for Rs 50000 to be paid after 6 months. In the interim, as per how the wheat market fluctuates, the price for wheat may go down or up. Say the favourable weather conditions for wheat remain then the price will go up, say the global demand for wheat goes down since everyone is adapting to maize then the price will go down. Basis this, the trader will make a profit or a loss when he sells this wheat.
Think about it this way…
Mr. Khan has entered into a futures transaction with Mr. Singh to buy 100 tons of coal from him 6 months from now at Rs 10 lacs. Since then the government has passed a directive that from now on all industrial machinery and railways will run on clean fuels. Due to this, the prices of coal have crashed, and it is now available at Rs 7000 per ton. What would you advise Mr. Khan to do?
a. Sell off his futures contract at Rs. 7000 per ton
b. Hold onto his futures contract
Types of Commodities
Agri-based (Edible oils, Pulses, Grains, etc.)
Energy (Crude oil, Natural gas, etc.)
Base metals (Copper, Steel, Aluminium, Steel, etc.)
Precious metals (Gold, Silver, etc.)
Investment options in Commodity Markets
Futures market (both delivery and cash transactions)
Commodity based Mutual Funds and Exchange-traded Funds
The popular commodity exchanges in India are National Commodity and Derivative Exchange (NCDEX), Multi Commodity Exchange of India (MCX), etc
Get latest Research reports of commodity market
Benefits to the Producers
Farmers and laborers who live wretched lives produce the most important commodities in India, in the most remote areas. Having no access to the outside world, they sell their produce to the local traders at oppressive prices. The MCX Trading's biggest boon is that they help these producers get better prices for their produce. With an organized MCX Trading market and terminals everywhere, the producers now know what the market prices for their commodities are and hence have better negotiating power with the middleman. With the MCX Trading, it is now more profitable to produce commodities.
The Instability in Commodity Market
Commodities depend on such external factors as the vagaries of the monsoons, Government policy and technological advancement. While these lead to irregularities on the supply side, the demand stays relatively inelastic unless new markets are discovered.
Thus, given the short-term nature of the Futures market and high price volatility, commodities should at best be a small portion of your portfolio. It is also important that one trades in commodities that he understands as there are just so many factors impacting its price.
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