Commodities-I
What are commodities?
Commodities refer to raw materials or physical goods that can be bought and sold. These items such as grains, metals and oil are traded in bulk on the commodity exchange. Whether commodities are “soft” like orange juice or “hard” like metals, they are all part of our everyday lives.
Types of Commodities
Commodities are classified to facilitate easy price differentiation and to promote market studies and expediency in trading.
Grains
Rice, wheat, oats, corn, soybean, and other agricultural products are bought and sold on exchanges. The exchanges deal in futures and options contracts on these commodities as well as a number of sub- products like soya bean oil. Every product has a distinct tick and a set contract size.
Grain prices are susceptible to changes in climatic and economic conditions
Livestock
Commodity futures on live cattle, lean hogs and pork bellies and certain derivatives are traded on commodity exchanges.
The prices of livestock are determined by end-user requirements, price of animal feed as well as factors that have a bearing on how many animals are reared and traded like infections and weather conditions.
Softs
Coffee, cocoa, cotton, sugar, and orange juice are all considered 'soft' commodities that are usually traded on the CSCE (Coffee, Sugar and Cocoa Exchange). Frozen orange concentrate and not oranges are traded.
Metals
Industrial metals include copper, lead, tin, steel, zinc, nickel and aluminium and are utilized particularly for construction purposes. Precious metals, like gold, silver and platinum are primarily used for designing jewellery.
Economic and political factors influence metal prices.
Energies
Considered to the single most dynamic area, energies cover a wide range of products designed to supply heat and electricity to run households and business establishments. Commonly found Commodities under this category are natural gas, coal, crude oil, gasoline, heating oil, propane and uranium.
Every Commodities possesses a unique 'tick' (minimal price variation, fixed by commodity exchanges) and a specified contract quantity that a futures contract deals in. For instance, the amount in the case of crude oil is fixed at 1,000 barrels whereas that for wheat is 5,000 bushels.
Energies are a crucial indicator of developing global trends and are majorly affected by disruptions in supplies by producing countries. Energies are strongly influenced by the U.S. dollar as crude is valued in dollars.
Financials
Financial Commodities cover foreign currencies, stock indexes, and Treasury securities.
Many dealers do not deal in the product itself but trade in Commodities future or options. Hence, financial commodities are usually listed on the same exchanges.
Trading in Commodities
Commodities trading is ruled by the laws of demand and supply. Prices are fixed based on predictions about the likely yearly produce and its estimated demand.
Speculators trade on commodities with options and futures contracts or buy and sell on spot markets.
In spot markets, commodities are right away exchanged for full cash payment.
Options on future contracts are agreements to buy or sell a commodity for an agreed-upon price at a specified future date.
Exchanges generally trade on commodities future. Commodities futures are a financial agreement to deal in a particular commodity at a particular price at a future specified date. For instance, a farmer growing cocoa beans sells a future contract on cocoa beans several months before harvest in order to secure a firm price for his crop. A chocolate manufacturer purchases the futures contract, and guarantees the payment of the pre-determined price on delivery. Thus, contracts futures benefit both parties as the farmer is protected from a fall in price and the manufacturer from a price rise.
Commodities trading done in the form of futures or options carries an element of risk and uncertainty.
Investing in Commodities
The commodities market is driven by the worldwide economic boom. The entry of developing nations in the global economic scenario has opened up a world of opportunities. Although one-third of the world’s population are way below the normal economic standards, many of them are moving towards urbanization. To meet their requirements, a considerable investment is essential to make available proper accommodation, infrastructural facilities, transportation, water, drainage, and industrial units. This surge in production triggers an increased demand for every single commodity.
The prices of commodities are governed by the prevailing economic environment and are subject to fluctuate significantly. It is advisable to take the services of a financial advisor while investing in commodities.
Commodities trading is a high-risk but potentially lucrative field. The world of commodities holds challenging opportunities for those who are game for it.
