Introduction to Commodities

Introduction to Commodities

A physical substance such as food, grains and metals, which is interchangeable with another product of the same type, and which investors buy or sell, usually through spot contracts. The price of the commodity is subject to supply and demand. Risk is actually the reason exchange trading of the basic agricultural products began.

Generally speaking, any tangible goods can be categorized as a commodity. A commodity is typically a bulk good such as gold, silver, and oil. A commodity may also be a bulk food product like grain, oats, corn, Tea, Lentil, Cardamom, and coffee. Traditionally, a commodity was merely a good, subject to sale or barter. Today however, a commodity can also represent an investment vehicle.

Example: A commodity is traded at the commodities spot exchange. The commodity exchange not only facilitates the trade, but also establishes and enforces rules and regulations pertaining to the trading process. Depending on its use and trading purpose, a commodity may come in two type’s cash commodity and spot commodity. A cash commodity is an actual commodity that is under a spot contract. A spot commodity, on the other hand, is one that is traded on a spot market, pending delivery.

Advantages

Access to larger number of buyers throughout the country: thus increasing not only his reach but also his bargaining power. The farmer wont be at the mercy of a few influential traders in the locality

Accurate, transparent, online information of prices: without risks of manipulation

Increased trade: The Spot Exchange will ensure assurance of a standard quality for the buyer. It will help generate interest for big players like Corporate, exporters, who would be interested more in the quality aspects.

Delivery assurance to buyers can attract bigger players into the market as there will be no counter party risk in the trading system. Possibility of huge volumes of trade can also be a positive factor for the large players

Better storage and handling system: will cut damage costs especially for perishable items.

Arbitrage opportunities: as farmers can benefit from trades in the same commodity on both the spot and the futures market.

Improved Technology: can help the farmer to expect that the deals would be completed and he will get his payments fast.