INTRODUCTION

Like financial markets which deals with money and shares, the commodity markets deal with trading of ‘commodities’ like metals, raw material commodities like cotton, pulses etc. In fact the commodity market is the foremost form of market which was structured more of a barter of commodity exchanges – usually dissimilar products – which later on got one leg as money as time progressed. The contemporary commodity market is as sophisticated as its stock market counterpart, with the only distinction being commodities, instead of stocks, traded. 

The commodity market is absolutely essential to understand how the prices get influenced by many of factors ranging from monsoon predictions to political decisions. The commodity market acts as the barometer of how the markets perceive these factors, which in turn will impact the demand-supply dynamics, thereby influencing the futures prices. This leads to a market driven price discovery mechanism. 

A farmer, for example, will be highly interested to ‘lock in’ prices for his harvest of pulses next crop season due in 3 months. Hence, he would ‘sell’ an estimated quantity, say 100 kilograms (kg.) of

his future produce at future rate of Rs. 80 per kg, thereby assuring himself of a fixed price. A wholesaler into pulses will similarly like to have a committed purchase price, and would enter into the ‘buy’ leg at Rs. 80 per kg. Assume after 3 months, the contract closes out at 81 per kg. That means the farmer has lost Rs 1 per kg whereas the wholesaler has gained by Re 1 per kg. Of course, the contracts are settled in cash – rarely there is actual physical delivery of the commodities involved.