If you want to buy daily required food and non-food items, where do you shop it from?

Yes the obvious answer is either a supermarket or a grocery store. 

But If I tell you that, there exists a stock market of these commodities where the commodities are traded like shares, will you believe my sentence?

You may wonder about this, but you dont have any other option than believing my sentence as this is an absolute truth. And the market where these commodities are traded is called as Commodities Market.

Lets understand more about this market.

Meaning of Commodities market

You must have got little grip on meaning of commodities market. Yes, it is a physical or a virtual place where buying, selling and trading raw or primary products takes place. Commodities market is same as equity market the only difference is that instead of buying or selling of shares, commodities are traded here. For investors purposes there are currently about 50 major commodity markets worldwide that facilitate investment trade in nearly 100 primary commodities.

Now you may think that how old these commodity markets are?  As per the records they have been traced back to the 17 th century when rice futures were traded in Japan.

So throughout this article you are reading the word commodities, commodities and commodities. You must be wondering, what exactly comes in the category of commodities.

These commodities can be majorly classified into the following:

• Precious Metals. Gold, Silver, Platinum, etc.
• Other Metals:  Nickel, Aluminum, Copper, etc.
• Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds, etc.
• Soft Commodities:  Coffee, Cocoa, Sugar, etc.
• Live-Stock: Live Cattle, Pork Bellies, etc.
• Energy: Crude Oil, Natural Gas, Gasoline, etc.

Lets look at the different segments in the commodities market.

There are two major segments of the commodities market. They are Over-the-counter (OTC) market and Exchange-traded market. Les understand each one of them now

Characteristics of Over-The-Counter (OTC) Market

Over The Counter or most commonly called OTC market is the one which has no formal structure of trading and the trading between the parties is done on bilateral understanding.

As this market lacks formal structure, it is also referred to as Customized Market. In terms of commodity trading, OTC represents spot trading of commodities. The trades which takes place over in these markets is delivery based and as it is unregulated there can be a counter-party risk in terms of disclosure of information between the parties.

Characteristics of  Exchange-Traded market

This market is also known as derivatives market. And in this market place commodities are traded over the exchange. It is a standardized and regulated market. Thus exchange acts as an intermediary to all commodity transactions, and takes initial margin from both sides of the trade to act as a guarantee.

Why there is a need for the exchange-traded commodity derivatives market?

• With Exchange based platform the reach becomes wider which off-course leads to greater participation.
• Also for the small participants like wholesaler doesnt have to depend upon the local demand and supply chain as through exchange he is gets a large no of participants associated with demand and supply function.
• Another advantage is to the other participants like speculators, arbitragers who can study the price patterns through various softwares like technical analysis and deal in the most efficient price.

Determinant factors of commodity prices

This market is highly volatile and there are different factors which affect the commodity prices. Some of these factors are discussed below:

• Demand And Supply: Its well known fact that when a demand for a commodity is higher than the supply, its price increases, and vice versa. There  always exists some kind of imbalance between the two when it comes to commodities, which results in constantly fluctuating prices.
• Weather conditions: As we know the majority of commodities traded in the world markets are agricultural goods, and the production of these goods depends on the weather conditions. If sudden changes in climatic conditions happens like inadequate rainfall or droughts, might affect the availability of agricultural goods in the world market, causing scarcity and pushing commodity prices upwards.
• Economic and political conditions: This is also another major factor as the prices of commodities are influenced by the economic and political conditions of the countries that are producing and consuming them.

Government policies also influences the commodity prices, for e.g, If Indian government increases import duty on oil, then price will increase proportionately.

There are other factors like inflation, seasonal variations, currency movements etc. which are majorly responsible for price fluctuations in the commodity market

Participants in commodity market

These market participants are divided into hedgers, speculators and arbitrageurs.

Hedging in simple language means the reduction of risk. Consequently any investor who is looking at reducing his risk is known as Hedger. In the market hedgers take the position that is opposite to the risk he is otherwise exposed to. For e.g.  A Corn farmer will hedge by selling corn futures, since it is exposed to the risk of falling corn prices.

These are the in vestors who speculate on the direction of the futures prices for making profit. They hypothesize expected price movements and take positions accordingly. Thus trading in an commodity futures market is an investment option.

They are the traders who attempts to profit from, pricing inefficiencies in the commodities market.  Arbitrage in a way involves simultaneously sale and purchase of the same commodities in different markets. Usually such transactions are risk free.

Major Commodity Exchanges

Lets now look at the worlds major commodity exchanges

This was the first commodity exchange established in the world in the year 1848. It is one of the leading exchanges in the world for trading in future and options. In the beginning CBOT dealt in agricultural commodities. Futures contract in CBOT evolved over a period of time to facilitate trading in non-storable agricultural commodities and nonagricultural products like Gold and Silver.

New York Mercantile Exchange known as NYMEX

It is the worlds biggest exchange for trading in physical commodity futures. It is a primary trading forum for energy products and precious and metals. The exchange has been in existence for 132 years and performs trades through two divisions – The NYMEX division which deals in energy and Platinum and the COMEX division which deals in all other metals.

London Metal Exchange known as LME

The primary focus of LME is in providing a market for participants from the non-ferrous base metals, related industry to safe guard against risk due to movement in base metal prices and also arrive at a price that sets the bench mark globally. The exchange trades 24 hours a day. And future contracts run on a daily basis for a period of three months unlike other commodity markets that are primarily based on monthly prompt dates.

What is the history of commodities markets in India?

Being agricultural country India has a long history of commodity trading. Right from the years when India was ruled by foreign countries, it had a thriving futures market for commodities such as gold, silver, cotton, edible oils, etc. But later in mid-1960s, due to natural calamities like droughts and scarcity and government policies futures trading in most commodities was banned. However in recent years Commodities trading was restarted. In some cases futures markets are localized for specific commodities like for example, Kerala being the spice city has an exchange for Pepper, Mumbai the economical capital is a center for gold and so on.

In general, India has six national commodity exchanges namely:

Recent Developments in the commodities market

The way shares are traded in the stock market, Indian government has also allowed, national stock exchanges like the Multi Commodity Exchange (MCX) to come forward and deal the commodity derivatives in an electronic format.

With these exchanges trading is carried out on order driven and screen based trading system. These exchanges are regulated by the Forward Markets Commission (FMC) .