Commodity markets are similar to stock market trading of(shares, securities, debentures, bonds). However, commoditiesare actual physical goods such as corn, silver, gold, crude oil, and so on. Futures are commodity contracts that are traded on a futures exchange. Futures contracts have expanded beyond commodities to include futures contracts on financial markets such as foreign currencies, interest rates, and so on.

What is Commodity Markets?

• Commodity markets involve trading i.e., buying and selling of various commodities and their derivative products.
• A commodity is any raw material or primary agricultural product that can be bought or sold, such as wheat, gold, or crude oil.
• Commodities can be used to diversify your asset portfolio if you trade them.
• Physical trading and derivatives trading in commodity markets can include spot prices, forwards, futures, and options on futures.
• For centuries, farmers have used a simple form of derivative trading in the commodity market to manage price risk.
• Because of hedging by several participants, there is a significant difference between the trading volume of commodities and the actual value of commodities in physical form.
• The regulator, SEBI, currently allows futures trading in over 120 commodities.

Types of Commodities

• Commodities are classified into two types: hard and soft.
• The term ‘hard commodities’ refers to those that must be extracted from the earth.
  • Metals and minerals such as gold, silver, copper, and others fall into this category. Crude oil is also classified as a hard commodity.
• Soft commodity refers to food grains, edible oil, meat, and livestock.

List of commodities traded

• Edible oilseeds – Mustard seed, Cottonseed, Soybean oil, etc.
• Foodgrains – Wheat, Gram, Bajra, Maize, etc.
• Metals – Gold, Silver, Copper, Zinc, etc
• Spices – Turmeric, Pepper, Jeera, etc.
• Fibers – Cotton, Jute, etc.
• Others – Sugar, Gur, Rubber, Natural Gas, Crude Oil, etc.

Gold, Crude oil, Silver, Copper, Natural Gas, Lead, Soy Oil, Zinc, Soybean, and Castor seed are the prominently traded commodities.

Commodity Exchanges

• A commodity exchange is a regulated market where commodities are traded.
• Traders may elect to trade in Futures contracts rather than take physical delivery of commodities.
• A futures contract is an agreement to buy or sell a predefined quantity of a commodity at a predetermined price and within a specified time frame.
• Forward trading in commodities is currently conducted by six national exchanges:
  • Multi Commodity Exchange (MCX), Mumbai
  • National Commodity and Derivatives Exchange (NCDEX), Mumbai
  • National Multi Commodity Exchange (NMCE), Ahmedabad
  • Indian Commodity Exchange (ICEX), Mumbai
  • ACE Derivatives and Commodity Exchange, Mumbai
  • Universal Commodity Exchange (UCX), Navi Mumbai
• Furthermore, the Commission has approved 11 commodity-specific exchanges for trading in various commodities under the Forward Contracts (Regulation) Act, 1952.

Commodity Markets – Regulation & Reforms

• While the FMC (Forward Markets Commission) has regulated commodity markets since 1952, it was widely regarded as lacking the authority to control wild price fluctuations and other irregularities.
• As a result, in 2015, FMC merged with SEBI (with the reputation of being superior in terms of surveillance, risk-monitoring and enforcement mechanisms, and a more robust regulatory body for the sector).
• Following that, SEBI implemented several reform measures, such as:
  • allowing stockbrokers to deal in commodity derivatives (common broking businesses for equities and commodities);
  • allowing the NSE and BSE to begin commodity trading;
  • allowing FPIs to participate in commodity derivatives contracts traded on stock exchanges subject to certain conditions;
  • allowing Category III Alternative Investment Funds (AIFs) to trade in commodity markets.
• According to experts, India's commodity trading market is on the verge of transformation, with numerous changes occurring in related areas such as infrastructure, logistics, electronic warehousing, transportation, and so on.

Commodity Markets – Benefits

• Diversification - Commodity returns have a low correlation to other asset returns. Commodities, as an individual asset class, can be used to diversify your investment portfolio.
• Commodities are considered a good inflation hedge because their prices tend to rise during periods of high inflation. This contributes to the preservation of purchasing power parity.
• Protection against event risk - Supply disruptions during a natural disaster, an economic crisis, or a war could cause commodity prices to rise.
  • Commodity trading, on the other hand, may help you protect against loss by leveraging strategically on price swings.

Conclusion

Commodity trading plays an important role in price discovery, where multiple buyers and sellers interact to determine the best price for the product. Trading in 'commodity futures' in a variety of commodities is available on Indian commodity exchanges.