What is the Commodity Market in India?

A commodity market is a place where one trades all types of commodities extracted from the earth-from cattle to gold, oil to orange, and manufactures goods like baked goods, gasoline, and high-priced designer jewelry. The commodity market in India has a critical role in the economy for both consumers and companies. Commodities usually fall into two categories: hard and soft commodities. 

Gold, rubber, and oil are considered hard commodities since they require mining or extraction from natural resources. Conversely, agricultural products and livestock such as corn, wheat, coffee, sugar, soybeans, and pork are considered soft commodities. Commodities can also be traded directly in spot markets or through financial contracts dealing with their current or future prices. This blog focuses on commodity market meaning and how it works. Alongside, the factors determining the commodity prices and how to trade in this market.

Types of Commodities

India, being geographically diversified with various economic activities, possesses a wide range of agricultural and non-agricultural commodities. These can be broadly categorized into two categories, each playing an important role in the country's economic scenario:
 

• Agricultural commodities: Agricultural commodities include the produce of India's rich soil and farming effort. This category is inclusive of all staple grains, oilseeds, spices, and pulses. Examples are wheat and rice for staples, soybean, and cotton for cash crops, and sugar for sweetness. Prices for such agricultural commodities show wild fluctuation due to inclement weather, crop yield variability, and governmental policies influencing market trends.
   
• Non-agricultural commodities: Non-agricultural commodities would be allied to industry and energy. You will find crude oil in this category, along with other precious metals like gold and silver, and other industrial fittings such as rubber and jute. The prices depend more or less on geopolitical factors and changes in demand emanating from the marketplace itself. 

These different categories of commodities are traded in the commodity market in India, reflecting the diverse economies and resource availability in the country.

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How Commodity Markets Work?

The principle of demand and supply governs everything in the commodity market. Equilibrium is reached when the quantity demanded is equal to the quantity supplied. Commodity trading goes through four broad stages, discussed below, in a cycle. 

Stage 1: Primary Stage

The beginning is through primary production, which includes farming, animal husbandry, and mining. Primary producers bring their produce to the market for sale. 

Stage 2: Secondary Stage

In the secondary production stage, the raw materials are manufactured into finished goods. For example, cotton is refined to yarn or cloth while wheat is to flour and rice to rice powder. 

Stage 3: Distribution Stage

The final products have to be distributed to the ultimate consumers of the goods. This stage involves traders, wholesalers, and retailers who ensure that the goods reach the public. 

Stage 4: Consumption Stage

In the final stage of consumption, the commodities are put to use by individuals and businesses, or further processed for meeting needs in current consumption or for use in future production. The commodity market cycle thus comes to an end here.

How to Trade in the Commodity Market?

Commodity trading in India is available online and off-line primarily through four exchanges, which are- 

• Multi Commodity Exchange- MCX
• Indian Commodity Exchange- ICEX
• National Commodity and Derivatives Exchange- NCDEX
• National Multi Commodity Exchange of India Ltd- NMCE 

CDMRD under the umbrella of SEBI is the regulator of these exchanges, which was merged with the Forward Market Commission in 2015. 

Commodity markets facilitate trade in both tangible goods and their derived contracts. Institutional investors and brokers trade physical goods, purchasing products to resell items in the retail market. However, the trading of derivative contracts can easily be carried out online, saving much hassle in terms of convenience. 

Investors can participate in commodity trading through futures or options contracts: 

• Futures Contracts: An agreement to sell or buy a certain amount of a commodity with a predetermined price at a future date. The seller and the buyer agree upon a price in advance, and it is either traded on an exchange - what is called exchange-traded - or between parties-what is called over-the-counter. Futures trading allows producers to hedge against price variability and speculation to take advantage of market movements.
   
• Options Contracts: Options trading entails the right to buy or sell a commodity under the given conditions without making compulsory transactions. In other words, options trading allows trading in commodities by giving the trader freedom to buy or sell the option at a fixed price. This allows the flexibility to profit from the market movement without actually committing to the transaction. 

Since these contracts provide the facility of trading at a given price, hence traders can hedge risk and speculate on any market movement in the commodity market.

Factors Determining Commodity Prices

The cost of a commodity is affected by various factors. Each of these factors plays a significant role in determining how much consumers will pay for the product. Here are the elements that influence the pricing of a commodity:

• Supply and Demand in the Market: Commodity prices are driven predominantly by factors of the quantity of a good wanted and how much of it is available. Where demand increases, so do the prices, especially in situations where there is uncertainty in other investment areas, increasing the buying of commodities as a safer option.
   
• Global Scenario: Events globally also impact local prices for primary products. Political turmoil in oil-exporting countries raises the prices of crude oil, which in turn affects both export and domestic prices.
   
• External Factors: Every change in the conditions of production of a primary product affects its price. If it becomes more expensive to produce or extract a product, then its price tends to rise accordingly.

Relationship Between Stock Market and Commodity Market

Commodity prices always tend to rise during periods of inflation, whereas the price of stocks and bonds usually recede. For instance, if the level of inflation is high, then commodity prices tend to rise; as a result, governments increase domestic lending rates. 

The increased cost of borrowing discourages buying stocks, thus reducing stock prices. Simultaneously, bonds with a fixed coupon rate become less desirable, decreasing demand for them and therefore pushing down the price of bonds. 

Certain investment options become far more attractive, with items like precious metals yielding more satisfactory returns during such inflationary times. This is essentially how commodity markets highlight the inverse relationship between stock and bond markets, pushing the values of investments from classes.

Key Things to Note About Commodity Trading in India

The following are the important things to keep in mind while doing commodity trading: 

• Commodity prices depend on a great number of aspects. Similar to investing in stocks, it is highly important that commodity trading be fully prepared with an understanding of the different factors involved and how to handle them before the initiation of such investment.
• Commodity trading is performed on higher leverage but is highly risky due to frequent fluctuations in the market. For this, one must be vigilant about the market.
• If an investor is new to the commodity market, then they can take advice from a commodity market expert. They can help investors learn how trading goes on, and review various market fluctuations, to upgrade their method of trading.
   

Conclusion

Commodity market in India plays an important role in shaping the country’s economic landscape, offering opportunities for both producers and investors. The market operates on fundamental economic principles like supply and demand, and the trading process spans from primary production to consumption. By using a stock market app, investors can sharpen their trading skills. This application will give them essential information and real-time status, thus enabling the investor to make sound decisions on the commodity exchange.