Commodity Basics: What are Commodities and Commodity Futures?

A commodity can be defined as a class of goods for which there is a demand and which is supplied without qualitative differentiation across states, regions or countries. They are of uniform quality and produced in large quantum. Commodities are marketable that are fully or partly fungible.  

Storable & Non Storable Commodities: 

Commodities are mainly of two types – Storable and not storable. Commodities are consumed and produced continuously, they are also produced seasonally (agricultural commodities) and there are noticeable price variations within seasonally produced commodities. Few of them are even produced periodically. Agricultural commodities are produced seasonally. This implies that there are specific months where a particular crop is planted or sown, and similarly harvested or taken out of the fields during specific months. Example, Soybean is sown in summer season and harvested during November-December.  

The prices of most of the basic necessities of our life are determined by the commodities be it agricultural commodities like corn, oats and wheat, or metal commodities like gold, silver, or copper. Energy commodities like crude oil, gasoline and heating oil also play an important part and so are the soft’ commodities like orange juice, coffee, sugar and lumber. Quite often the futures market is being coined for the commodities market, and it becomes all the more important to understand the nature of the market, because the products it contains are very essential components of our daily life. 

Cash & Futures Markets: 

Agricultural Commodity markets can be bifurcated into spot or cash market and futures market. A cash or spot market is a wholesale market where buyers and sellers agree at a certain price and the transactions get closed within a day/few days/few weeks. A futures market involves trading futures contracts for the purpose of predicting the spot price level in forthcoming day/days/weeks or even months. Here it is important to understand that futures are actually deriving their values, from underlying demand and supply dynamics of the spot markets. 

One example can be – if spot demand of soybean starts improving, futures contract prices for soybean shall always tend to move upwards. Futures trading in India occur mainly through commodity exchanges where trading is carried in standardized contracts, i.e. the lot size, price ticks etc. and quantity is specified by the exchanges. 

Keep browsing the Agripedia and Commodity sectionsto get further insights on commodities and commodity futures/ futures trading