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The Type Of Financial Market, Often Lesser Talked About In Public Space Partially Due To The Heightened Risk.

Most of us are aware of the stock trading market, and some other types of financial markets, like bond markets, and derivatives markets. These financial markets are important to a country’s stability and involvement in the global economy. Financial markets provide a place where participants like investors and debtors, regardless of their size, will receive fair and proper treatment. It gives opportunities for businesses and organizations to raise capital based on their capabilities in the future.

So the commodity market is one such marketplace for buying, selling, and trading raw materials or primary products. Commodities are often split into two broad categories: hard and soft commodities. Hard commodities include natural resources that can be mined or extracted such as precious metals like gold, silver, plutonium, rubber, and oil, whereas soft commodities are agricultural products or livestock such as cotton, corn, wheat, coffee, sugar, soybeans,  milk products, etc.

This specific market was created for such resources because their price change is unpredictable and value,  unascertainable. As in ancient human history, these items were at the center of simple trading called The Barter System. Commodities markets allow the producers, dealers, and consumers of commodity products to gain access to them in a centralized and liquid marketplace.

There are thousands of commodity exchanges all over the world. Organized trading on an exchange started in 1848 with the establishment of the Chicago Board of Trade (CBOT) in the United States. This market has been existing in India in some deregulated form or another for decades. India has six major commodities exchanges barring several small regional exchanges. Two more were added after BSE and NSE started trading in commodities. Multi Commodity Exchange (MCX) is the largest commodity trading market in India with almost 70% of the total trades, since 2003, National Commodity and Derivative Exchange (NCDEX) has started picking up pace and is currently the largest commodity trading market in India in terms of volume.

The perception about the commodities markets changed as the scale grew larger and the value of goods/commodities traded multiplied manifolds. This was after the exchange market started creating a form because until then only over-the-counter (OTC) or physical markets were used. This led to the birth of the derivative and speculative aspect of the market which is a commodities futures market wherein the price of items that are to be delivered at a given future time is already identified and sealed today. Derivatives markets involve forwards, futures, and options. It generated the interest of speculators, investors, and arbitrageurs, who played an important role in the future hedging of production and consumption. For several years, trading in commodities was limited to these professional traders, due to the time, money, and expertise it required. But, recently with the technological revolution, the ease of trading in commodities has become simpler and quicker.

This was followed by traders of minor influence investing in commodities, such as precious metals, primarily gold and silver, which have a reputation of being a good hedge against inflation. Hence, a lot of financial advisors started recommending it as a way to broaden the set of commodities as an alternative asset class to help them diversify their portfolios. And based on much research a trend was observed, that the prices of commodities tend to move in opposition to stocks. So, some investors also suggest these highly speculative commodities during periods of market volatility to fence the losses.

Following are some commodities that are traded (ETC) and the category they come in –

In MCX –

• Bullion: Gold, Silver

• Base Metals: Aluminum, Brass, Copper, Lead, Nickel, Zinc

• Energy: Crude oil, Natural gas

• Agri commodities: Black pepper, Cardamom, Castor seed, Cotton, Crude palm oil, Mentha oil, Palmolein, Rubber

In NCDEX –

• Cereals and pulses: Barley, Chana, Maize Kharif/south, Maize rabi, Wheat, Moong, Paddy (basmati)

• Fibers: Kappa’s, Cotton, Guar seed, Guar gum

• Oil and Oilseeds: Castor seed, Cottonseed oil cake, Soybean, Refined soy oil, Mustard seed, Crude palm oil

• Soft: Sugar

• Spices: Pepper, Turmeric, Jeera, Coriander

Significance In Indian Economy

Unbeknownst to the majority population, the Daily Average Turnover (DAT) volume of trades in commodities exchanges is into thousands of crore rupees. Even though it did decrease by up to 30% last year due to the Covid pandemic, it regained its peaks and continues to reach record highs.

Now India is still an agrarian-based country, and while it’s developing at a great place in the other manufacturing and service sectors, it has to be noted that this classification of a country is based on the percentage of the population engaged/employed in that sector. Hence, it’s not a surprise that apart from precious elements, the most volume of trades in a type of commodity is agriculture-based.

But even with the long history behind India’s trade in commodities, our exchanges and markets are still quite underdeveloped in comparison to other countries trading this much volume. The major reason is the extensive government intervention in the agriculture sector. As the production and distribution of several agricultural commodities are still governed by the state and futures trading has only been selectively introduced with stringent regulatory controls.

One can easily defend the government’s move here, given the high number of poor farmers and laborers/workers involved in the process, and if left to the capitalists to control the price discovery, the end consumer could have to bear the burden. Hence the government tries to play safely on both counts. But if in the long run, we want the futures market to flourish then market forces must be allowed to play their role rather than trying to control the prices themselves.

Commodity markets are also significant for increasing exports to other countries which in turn helps us gain foreign currency and a socio-economic standing between other countries. And by hedging the price risk of their proposed purchase, the exporters use the futures market to gain profits based on several statistics and research based on the physical market.

The fact remains that just like the independence given to other financial sector markets, has to be given to the commodity and futures markets up to some extent with intensive research on its repercussions and governments’ way to handle them appropriately with no losing side. With exchange rates lower than ever, investors and traders are ever-growing in numbers, but for a worldwide appeal, India needs to come up with a plan in the next decade to refine the system which works independently of extreme government control.