While most of us are unaware, practically all goods begin as commodities. Do you ever consider the ingredients in the cup of coffee you seek each morning? How about the gasoline you use each week to fill up your tank?
The commodity is a term that refers to a primary product or raw material that is utilised to manufacture all of the goods and services that we require in our daily lives. Commodities make up a sizable portion of the financial market. That is because producers and manufacturers rely on them.
Price of Spot vs Futures
Commodities are exchanged on exchanges through futures contracts. These contracts bind the holder to purchase or sell a commodity at a specified price on a future delivery date. Contrary to popular belief, not all futures contracts are identical. Indeed, their specifics vary according to the commodity being traded. 3
When a commodity’s market price is reported in the media, its market futures price is frequently. The futures price is distinct from the spot price, or cash price, which is the commodity’s current price. 4 For instance, if an oil refiner purchases 10,000 barrels from an oil producer for $50 per barrel, the spot price is $50 per barrel. At any point in time, the future price can be greater or less than the spot price.
Numerous traders speculate on future price fluctuations using commodities futures. They usually do not engage in physical commodity trading. That is because it is impractical to purchase barrels of crude oil or bushels of wheat. These investors conduct market analysis and chart patterns to predict future supply and demand. They then take long or short futures positions based on the direction in which supply and demand drive prices. 5
Speculators are separate from hedgers, frequently end-users looking to safeguard their commodity interests through the sale or purchase of futures contracts. If farmers believe soybean prices will decline over the next six months, they can hedge their harvests by selling soybean futures today. Hedgers and speculators combined account for a sizable portion of the purchasing and selling interest in commodities futures, making them key players in influencing commodity prices from day to day.
Because commodities are exchanged on markets, a single person or entity does not determine their prices. Indeed, each day, various economic factors and catalysts influence and alter their prices.
Commodity prices, like equities prices, are primarily driven by market forces of supply and demand.
Petroleum and natural gas are classified as energy commodities. 2 For instance, if the oil supply grows, the price of a barrel of oil lowers. On the other hand, if oil demand grows (as it frequently does during the summer), the price climbs.
The weather substantially impacts crop-related or agricultural commodity prices, particularly in the short term. If the weather has an effect on supply in a particular region, it directly affects the price of that commodity. Corn, soybeans, and wheat are examples of commodities under this group. Soft commodities include cotton, coffee, and rice.
Due to its usage in the manufacture of jewellery and other goods, gold is one of the most actively traded commodities. However, it is also regarded as a worthwhile long-term investment. Silver and copper are other metals-related commodities.
Another type of commodity is livestock. Live animals such as hogs and cattle are included in this category. Unlike manufactured goods and services, commodities are the byproducts of primary economic activities such as drilling, agriculture, and mining. Commodities are traded similarly to stocks. The objective of share trading is to ascertain actual commodity prices, make profit speculations, and estimate cost risk. This form of trading stretches back several years, with Amsterdam’s stock exchange setting the standard for commodities trading.
Commodity Market in India
India’s two largest commodity exchanges are the National Commodity and Derivatives Exchange and the Multi Commodity Exchange. Commodity trading occurs on a variety of exchanges.
What are the contestants’ given names?
You must be aware of the participants if you wish to comprehend how India’s commodity prices are determined. These parties’ activity determines market prices. There are two basic types:
Hedgers – Hedgers are firms or industries that urgently require a large number of raw materials. They must acquire things at a somewhat constant price. For instance, steel is necessary for the construction business. Industries can commit to future purchases to hedge against price fluctuations, ensuring that future steel demands are met at the current price. As a result, a pattern of predictable pricing emerges, which manufacturers and industries prefer since it enables more effective planning of future operations.
Speculators – In India, speculators are persons who lack an actual demand for an item. They are retail investors seeking to profit from price fluctuations. They typically participate in commodity trading, which comprises the acquisition of low-cost commodities and the subsequent sale as prices rise.
Commodity prices vary similarly to stock market prices. Online commodity trading, like online stock trading, has swept across India. The following are the primary factors that affect commodity prices:
Demand and Supply Factors
Based on trader behaviour, the principles of demand and supply influence commodity prices. When buyers outnumber sellers, the price of a commodity increases, and vice versa.
Other factors, such as the weather, may affect demand and supply. For example, if the weather is cold, the cost of heating may increase. Hence, the demand for natural gas as a commodity is high, driving up its price.
A country’s politics and economy influence the commodities market’s price volatility. Political and economic instability in one or more OPEC (Organization of Petroleum Exporting Countries) member countries, for example, could affect crude oil prices, given this commodity is produced in large quantities in these countries.
In commodity trading, traders speculate on whether a commodity will be profitable or not. This results in fluctuations in the prices of certain commodities.
This article should give you a good idea about who sets the price for commodities.