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Commodity Markets

The gradual evolution of commodity market in India has been of great significance for our country's economic prosperity. In the Indian commodity market there are so many verities of products including agricultural products like rice, wheat, cattle etc; energy products like coal, petroleum, kerosene, gasoline; metals like copper, gold, silver, aluminum and many more. There are some delicate commodities also such as sugar, cocoa, and coffee, which is perishable, so cannot be put in stock for long time. The commodity futures exchanges were evolved in 1800 with the sole objective of meeting the demand of exchangeable contracts for trading agricultural commodities. Nowadays a wide range of agricultural products, energy products, delicate commodities and metals can be sold under standardized contracts on exchanges prevailing across the globe. Commodities have gained importance with the development of commodity futures indexes along with the mobilization of more resources in the commodity market.

Commodity Markets in India

Agriculture sector in India has always been a major field of government intervention since long back. Government tries to protect the interests of the poor Indian farmers by procuring crops at remunerative prices directly from the farmers without involving middlemen in between. This way Government maintains sufficient buffer stocks and at the same time provides the farmers safeguard against the fluctuating food crop prices. But government at the same time has restricted this traditional sector by fixing prices of crops at a particular level and also by imposing several other restrictions on export and import of agricultural commodities. All these restrictions prevented this sector to move out its traditional features. So according to many economists liberalization of this traditional agricultural sector could have been of great benefit to our economy. But questions will naturally come up about the maintenance of buffer stocks and provisions of remunerative prices to the farmers. In absence of government's intervention farmers will not be getting any prior information about the future markets of their products. Naturally a sudden price crash of food crops will have devastating effects on farmers. Here comes the significant role of futures market. If the buyers in the commodity market anticipate shortage of a particular crop in the coming season, future price of that crop will increase now and this will act as a signal to the farmers who will accordingly plan their seeding decisions for the next season. In the same way, an increase in future demand of food crops will be reflected in the today's price in futures market. In this way the system of futures market can be of great help to the Indian farmers preventing them from being directly exposed to the unexpected price changes all of a sudden. It also helps towards evolving a better cropping pattern in our country.

If the peasants are farming some crop now and are very much concerned that price will crash by the time the crop comes in, then if there is futures market, they will have the option to sell their products in it. Price in the future markets being fixed; by selling products in future markets they get rid of their worries about the about the unexpected price fall. This helps them to take the risk of innovations, by using new high yielding varieties of seeds, fertilizers and new techniques of cultivation. Futures Market will act as a smoothing agent between the present and future commodity market. If the price, which is going to prevail in future, is high compared to what is it now, then the arbitragers would like to buy the commodities now to sell those in future. The reverse process is also true. So the existence of a futures market is always good for any economy. It opens up a new opportunity to people to protect themselves from unexpected risks.

Source: http://www.business.headlinesindia.com/commodity/
 

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