Global Commodities

The prices of essential commodities are rising. They are rising because they have become very essential not only for human consumption and sustenance but also for future trading. Commodities market is as big as or even bigger than the stock or securities market.

Commodities:Essential commodities, bullion, Precious metal, Ferrous Metals, Non Ferrous Metals, Oil and oil seeds, natural gas etc are all commodities that are dealt with in the global and domestic markets.

Essential commodities: Pulses, Sugar, Grain, Wheat, Rice, Maize, Chillies, Spices, Potatoes etc

Other commodities: Cashew kernels, Cotton and cotton seeds, Menthal, Ram Chips etc

Bullion: Gold and silver

Ferrous Metals:Iron, Steel, Steel ingots, Steel flats, Steel rods etc

Non- Ferrous Metals: Aluminum, Copper, Lead, Zinc, Nickel etc.

Oil and Oil seeds: Castor, Coconut, Sesame, Mustard, Soya, Ground nut etc.

Energy: Natural gas, Liquefied Natural Gas, Condensed Natural Gas and other natural gas commodities, electricity and other fuels.

Commodities and farmers: The commodities market initially was started as a measure of helping the farmers. Farming in India is an unorganized sector and the farmer, in spite of the hard work put in, does not get reasonable price for the produce. To add to his misery he does not have knowledge of the prevailing prices and he does not have the storage capacity to wait for a good price. Transportation is another problem for the farmers. Spot market for commodities was developed to help the farmer sell the produce at the field itself. But now commodity market has taken a different shape altogether and it has become a game between hedgers and speculators. There are intermediaries at multiple levels and there is a wide gap between farm gate price and consumer price. There is virtual monopoly of traders and pricing is less transparent.

Trend of global Commodities: Commodity market has become a major investment area in the present situation. Many investors turn to futures market as an alternative investment for risk capital. Globally the total investment in commodities in the last financial year was 24 billion dollars and this year it is estimated to increase by 25 percent. There are many factors like weather, global demand and supply, government policies, international political conditions and equations between countries etc., that determine the prices and the turnovers of the commodities.

In 1960 when the country was facing war on one side and natural disasters on the other side, the Government of India banned future trading in essential commodities. This was the Government's way of restraining the prices. However, in 2003 with the establishment of National Commodity Exchange, the ban was lifted and at the same time the government could regulate trade in essential commodities. However, even today there is ban on future trade in Wheat, Rice, Black gram (Urad Dal) and Red gram (Arhar dal).

Commodity exchanges in India: There are some commodity exchanges in India-

  • Multi commodity exchange of India (Mumbai)
  • National Board of Trade (Indore)
  • National commodity and Derivatives exchange (Ahmedabad).

The Forward Markets Commission is the controlling agency for all these commodity exchanges in India. All the transactions in the forward markets are governed by the Forward Contract Regulation Act of 1952.

Impact on economies: The development of commodities market, particularly exports, has a positive impact on the economies. Within developing countries there are two groups- oil exporting countries and non oil exporting countries of Sub-Saharan Africa. While Oil constitutes 50 percent of merchandise exports of the oil exporting countries, non oil primary products constitute 80 percent of exports of the non oil exporting countries. Hence price volatility in commodity markets affects these countries very much.

Disadvantages of commodity markets: Globally commodity markets are criticized for their part in indulging in speculation and thus increasing the prices. Another major criticism is that the farm gate price is very low when compared to the price paid by the consumer. Small producers have no say in the market and traders dominate. That is why future trading is banned in food grains.

Advantages of commodity markets:

  • The commodity markets try to integrate the fragmented rural markets.
  • Multiple commodities can be procured at one centre.
  • Efficient spot price can be discovered and disseminated.
  • The bargaining power of the farmers would be increased.
  • Transportation and warehousing facilities would be increased.
  • There would be guarantees for trade and also payments.

Considering all these advantages, economic experts say that if the farmer and the consumer are to be benefited then future trading and spot trading in the rural commodity markets should be encouraged.