PL Global Impex

How Does Agricultural Commodity Trading Work

Introduction

For about 58 percent of India’s population, agriculture is their main source of income. The contribution of Indian agricultural products to the global food trade is growing year after year. Farmers in India now have access to a plethora of resources and government programs to help them realize their ambitions. However, farmers profit as a result of this, and they produce high-quality goods that are sold in Indian markets and exported to other countries. Agriculture in India is steadily improving thanks to technological advancements.

Agricultural Commodities

If you have any idea what agricultural commodities are? If not, we are all here to remove any doubts you might have by providing you with a complete overview of agriculture commodities in India.

Agriculture resources are primarily daily food and animals raised on farms by farmers. Consumers consume grain, dairy, livestock, and other agricultural products all over the world in India. People use agricultural goods as a source of food as well as an industrial field.

Regulator for commodities trading:

In the early 1950s, the Forward Market Commission (FMC) was established to have a regulatory structure for India’s commodities trading market. In September 2015, it merged with the Securities Exchange Board of India (SEBI) to create a single market financial regulator. Following that, the SEBI improved the operational functionality of the commodity market via a slew of steps, including enabling stockbrokers and certain groups of Foreign Institutional Investors (FII) to come to terms in commodity derivatives, enabling the NSE and BSE to launch commodity derivative products on their trading platforms, and so on.

What Does a Commodity Exchange Mean and How Does It Work?

Commodity markets function similarly to other markets; they may be physical or virtual locations where we can trade commodities. The commodity market, on the other hand, is defined by strict regulations and laws. Commodity exchanges are legal bodies that facilitate commodity trading and trade.

A commodity exchange is an organization, corporation, or other legal entity that provides a structured marketplace for commodity trading. Moreover, there are several commodity exchanges around the world that specialize in specific commodities.

India’s commodity trading exchanges include the following:

Commodities, such as livestock and meat, agricultural products, metals, and oil trade on six commodity exchanges in the country:

– Multi Commodity Exchange of India Limited (MCX)

– National Commodity & Derivatives Exchange Limited (NCDEX)

– National Multi-Commodity Exchange (NMCE)

– Indian Commodity Exchange (ICEX)

– Ace Derivatives and Commodity Exchange Limited (ACEX)

– Universal Commodity Exchange (UCX)

The NCDEX and NCME are the two commodity exchanges that specialize in agricultural commodities trading.

How to trade agro commodities

We can trade commodities in one of two ways:

  • Trading on the spot market indicates that when a deal is struck, the items are instantly exchanged for cash or other products. The price is determined by current market rates, and distribution takes place immediately or within a few days.
  • Trading the setting of a fates contract; implies that as opposed to trading items, the purchaser and dealer share an agreement that ties them to trade an item at a specific cost on a particular date later on.
  • Agricultural options, namely CFDs, are a type of derivatives trading. The differentiation is when you buy an options contract for a commodity like barley, you charge a ‘options premium.’
Factors affecting the price of a commodity
  • In most cases, demand dynamics are a major factor in deciding Agri commodity prices. Usually, demand for agricultural goods is more scatter. Though demand moves prices in the short term, supply has a long-term effect on the price of agricultural commodities.
  • Supply trends play an important role in deciding Agri commodity prices. The majority of goods have concentrated supply patterns. India, for example, dominates the supply of mentha and castor. Suppliers from Indonesia and Malaysia, from the other hand, dominate the palm oil market.
  • Futures trading in some agricultural products is often restricted by governments. In India, this is very popular. Governments have intervened in the past, banning futures trading in politically sensitive agricultural commodities. Similarly, policymakers keep a close eye on the creation of open interest in agricultural resources if it has the potential to influence the price.
  • Trade and transportation infrastructure influence the pricing of agricultural products. The supply of most agricultural products is concentrated among a few farmers. As a result, the provision of high-quality transportation and trade networks is crucial to ensure that supplies arrive on schedule and at a reasonable price.
  • Warehousing facilities have a major impact on Agri commodity prices. Since they have a shorter shelf life, the majority of agri commodities are soft commodities. Hard commodities such as zinc, copper, and nickel, on the other hand, have a very long shelf life. The standard of warehousing services becomes increasingly important in order to facilitate the movement of agricultural commodities.
  • Climate and external attacks, last but not least, have a major effect on Agri supply and prices. The majority of India’s agricultural crops are Kharif crops, which are heavily reliant on monsoons. The reliance on rain renders these agri commodity prices highly vulnerable in the absence good distribution of irrigation facilities.

Agricultural Hedging

Hedging strategies provide opportunities for farms that do not grow their own crops, as the effects of a good or bad growing season can spread into the cattle industry. If there is a poor corn harvest, cornmeal prices may rise, increasing the cost of cattle farming.

How Does It Work?

While hedging may appear to be a complex process, it is an effective strategy for turning a profit even during difficult times. When establishing a position, it must always have a balance with an opposing transaction. This means that if a farmer purchases a futures contract during their first position, they must afterward sell it in their 2nd spot. The second transaction happens when the farmer sells their crop in the money markets because we don’t require the hedging price safety any longer and can close it out.

Conclusion

Agricultural commodities trade through various platforms keeping in mind the various factors affecting the price.

Supply and demand and also, other wide range of factors influence the prices of agricultural commodities. Trading agri futures needs a thorough understanding of these concepts.

PL Global Pte Ltd has earned a reputation as one of the most dependable trading companies.

Our approach is to manage the process of commodities that we trade from origin to destination through a complete combination of the global supply chains. Processing, warehousing, and logistical facilities are among our assets.

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