What is Commodity Trading?
Commodity trading is an important product (either agricultural or non-agricultural), which we can be exchanged or traded. In India, commodities are classified into two categories: soft commodities and hard commodities. Soft commodities consist of agricultural products, like sugar, wheat, rice, soybean, corn, etc. Whereas hard commodities are generally mined. For Example, minerals, oil, etc. are under the category of hard commodities.
Being a focal agrarian economy, satisfactory extension exists in India to commodity rural products. The start of agrarian item exchanging India can be followed back to 1875 when the Cotton Trade Association was set up in Bombay. In light of the items for homegrown utilization, future exchanging of products was suspended from 1952 onwards. Product exchanging proceeded again from 2002. As of now, exchanging rural products contains around 12% of the absolute wares exchange.
You can trade the commodities that contain livestock and meat, agricultural products, metals, and energy across the six commodity exchanges in India:
- 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 primarily focus on agricultural commodities trading out of the above six commodity exchanges.
The Forward Market Commission (FMC) was formed in the early 1950s for a regulatory framework for the commodities trading market in India. It was amalgamated with the Securities Exchange Board of India (SEBI) in September 2015 for providing a universal financial regulator in the market. Thereafter, the SEBI magnified the operational functionality of the commodity market through a cut down of measures, like introducing options contracts in commodities trading. Hence it allows stockbrokers and other categories of Foreign Institutional Investors (FII) to participate in commodity derivatives. And lastly, it allows NSE and BSE to introduce commodity derivatives on their trading platforms.
Understanding Trading in Agricultural Commodities
You can anytime start trading in agricultural commodities using a futures contract. However, this is simply an agreement to purchase or sell a specific quantity of a particular agricultural commodity at predetermined prices on a future date. You can also participate in the dynamics of agricultural commodities through Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs).
- Commodity trading helps in stabilizing the prices of agricultural products by acting as a link between future and spot prices. Future and spot prices hold a direct relationship. Hence hedging can help in eliminating the risks associated with unusual price fluctuations. Whereas they reduce the seasonal variations of prices for the benefit of farmers or producers because of stable prices.
- Commodity trading in agricultural products helps to create efficient hedging and speculation strategies. For example, if future price changes because of existing spot prices, they should formulate a logical hedging strategy. Whereas if changes in future prices impact the existing spot prices, they have to make an efficient speculation strategy. Thus, it allows for finding future prices based on current trends in the market.
- Trading in agricultural commodities can help appear at an accurate and market-oriented price of agricultural products. So this is very important as the Minimum Support Price (MSP) is fixed by the government and the wholesale prices allotted by farmers are not following the existing market patterns.
Trading in agricultural commodities provides retail and corporate an opportunity to change their portfolios. Hence trading in commodities has become as easy as trading in regular stocks and securities. So all you have to do is open a Demat Account and a Trading Account, and complete all the necessary formalities.
List of Top Trading Agricultural Commodities in India:
There are a total of 29 agriculture-based products that are traded across commodity exchanges.
- Gravy and sauces
- Cotton, fiber, and other raw materials
- Beer ingredients
- Fresh fruits, like apples and guava
- Pulses, like lentils and beans
- Snacks, like sugar confectionery, chocolates, candies, and biscuits
- Cereals, like corn, rice, and wheat
- Nuts, like almonds and groundnuts
- Different types of spices