What is Commodity Market, and How Does it Work? – Introduction to commodity market – A commodity market is a market where commodities are bought and sold. Commodities are goods or products that can be traded in any market in the world. Commodity markets exist for all kinds of raw materials, from wheat to steel to oil to coffee, and other physical goods such as gold, diamonds, other precious metals, silver, platinum, and other minerals.
Commodity markets are typically divided into two broad categories:
Physical commodity markets trade things like raw materials and agricultural products; the futures market trades contracts to deliver the underlying commodities at a specified price on an agreed-upon date.
A commodity market is where tradable goods are bought and sold. Raw materials or primary agricultural products are these goods. Commodities are differentiated from manufactured goods produced in factories using manufacturing processes and service industries.
Examples of Commodities:
Some common and precious commodities include gold, wheat, silver, steel, oil, crude oil, coffee, diamonds, metals, platinum, and so on. Commodity trading is ideal for individuals who wish to diversify their portfolios as these assets often aid in hyperinflation.
Commodity Market in India:
Indian commodity market is Rs. 92.23 lakh crore. If this statistic piques your interest, there are even more interesting facts about the commodity markets and the benefits of commodity trading. Commodity trading is the buying and selling of raw materials, such as metals. In general, there are two types of commodity markets: one is agricultural, and the other is a non-agricultural commodity.
Two types of objects:
There are two types of commodity markets: hard commodity and soft commodity.
Hard commodities are those which are demanded in the field of supply chain management. These must be mined and removed manually from land or sea. They have minimal resources and are most vulnerable to economic and geopolitical events. Valuable products such as gold, silver, platinum, copper, and other similar items are examples—the process used to retrieve these accounts for most pricing.
Soft commodities are mainly agricultural or livestock commodities. Unlike hard objects, they are created rather than mined or extracted. Therefore, they have infinite reserves and are influenced by weather or natural events rather than by geopolitical factors. Some soft commodities include sugar, corn, wheat, barley, etc.
Commodity market participants:
The commodity market consists of two participants:
Speculators, such as hedgers, drive the commodity market. It constantly monitors commodity prices to predict future price movements. For example, if they believe the price will rise, they will buy commodity derivatives contracts, and when the price rises, they will be able to sell the above agreements at a premium price. Similarly, if prices are expected to drop, they will sell the products and repurchase them at cheaper prices.
Hedgers are often producers and producers who use the commodity futures market to hedge against risk. For example, if a producer anticipates price fluctuations during the harvesting of crops, he can hedge his stake. He will enter into a contract to protect himself from risk. If the crop price falls in the market, the farmer can make up the difference by booking profit in the future market. Similarly, if prices rise during the harvest period, the producer may suffer a price loss, which he can compensate for by selling his product at a higher price in the current market.
4 Popular Trading Exchanges in India:
- National Commodity and Derivative Exchange (NCDEX)
- Indian Commodity Exchange (ICEX)
- Multi Commodity Exchange of India (MCX)
- National Multi Commodity Exchange of India (NMCE)
Key Benefits of Trading in the Commodity Market:
One should invest in commodities for various reasons. For starters, commodity trading benefits from inflation. In an economy, raw resources and commodities prices rise, allowing traders to book profits. You can also protect your investments by hedging your commodity investments against a falling currency.
Traders can also benefit from unpredictable geopolitical situations such as war and mass starvation. On these occasions, the supply of commodities becomes short, and you can profit significantly from the resulting shortage.
When returns on equities and bonds are compared, the performance of the commodity market is inverse. As a result, many people benefit from investing a small portion of their money in the commodity market.
Certain commodities are stable in terms of economic and capital market conditions, while certain commodities remain volatile in terms of economic and capital market conditions.
As agricultural commodity prices have become increasingly volatile in recent years, forecasting future price trends is essential to optimize investment portfolios and avoid risk. Here, advanced AI/ML systems with self-learning capabilities shine as a valuable tool to tackle complex price forecasting tasks.
An example of a volatile commodity is oil production. Its price remains unchanged due to extreme fluctuations in supply, mining challenges, or economic conditions. Shareholders engage in such commodities for profit even when the market is turbulent, and they take long or short positions depending on their market forecast. This will help them to get a higher return on investment even when the stock prices are falling. In addition, this allows them to compensate for the decreased or negative income produced mainly through the capital sector.
However, the drawback of commodity trading is that commodity trades only seek to earn financial profits, but the stock and bond markets regularly pay through coupon payments and dividend coupons.
However, actual knowledge is essential to make big profits in the commodity market. One can trade commodities in any recognized commodity market by registering with a commodity broker.
Major types of goods traded in India:
- Agricultural commodities include cardamom, pepper, seeds, cotton, rubber
- Energy is natural gas and crude oil
- Bullion includes gold, silver, platinum
- Base metals Cereals and pulses include gram, barley, maize, rice, wheat, and paddy.
- Spices include turmeric, cumin, coriander
- Fibers include cotton, guar seed
Difficulties in Price Forecasting:
Many companies are facing difficulties estimating gasoline prices’ spread and crack spread for various commodities. This was disrupting the company’s production and refinery plans. In addition, when oil prices and volatility increased, the company’s strategy and supply chain were affected. As a result, the oil industry needed a dedicated manufacturing environment and a price forecasting system.
This is mainly because price forecasting has always been a difficult process. Forecasting agricultural and non-agricultural commodities puts additional pressure on them as many uncertainties are associated with them. There are unlimited advantages to using Artificial Intelligence and Machine Learning-based price prediction.
Overcome price volatility:
Market volatility refers to the price variation of a product. To calculate the price volatility, consider the percentage variation in the price of a product or service daily.
These variations may be imperceptible. However, in the long run, price volatility is an essential element in price valuation because it indicates the amount of pricing uncertainty and helps firms to estimate prices more accurately. Furthermore, machine learning algorithms can track price volatility over any period.
While applying machine learning, one can understand how industry pricing changes over a year. This leads to a final, more subtle benefit.
For example, suppose a supplier raises its rates frequently in October. In that case, however, one may need to plan to stock up on specific items in September to avoid impending hikes, save money and increase their overall income. To increase profit margin.