Introduction to Commodity Market:
A commodity market is a place for buying and selling commodities. Commodities are items or products that can be exchanged on any global market. Commodity markets exist for a wide range of raw resources, ranging from agricultural and non-agricultural commodities.
Examples of Commodities:
Some of the common and precious commodities include gold, wheat, silver, steel, oil, crude oil, coffee, diamonds, metals, platinum, and the list goes on. Commodity trading is ideal for individuals looking to diversify their portfolios since these assets frequently aid with hyperinflation.
Commodity Market in India:
The Indian commodity market is worth Rs. 92.23 lakh crore. If this statistic piques your interest, then there are a lot more interesting facts about commodity markets and the benefits of commodity trading. Commodity trading is the purchasing and selling of raw materials such as metals. In general, there are two types of commodities markets: One is agricultural and the other is non-agricultural commodities.
Two types of Commodities:
There are two types of commodity markets which are the hard commodity market and soft commodity market.
Hard commodities are those that are demanded in the area of supply chain management. These should be mined and removed manually from the ground or the sea. They have minimal resources and are the most vulnerable to both economic and geopolitical events. Valuable products such as gold, silver, platinum, copper, and other similar commodities are examples. The procedure used to retrieve these accounts for the majority of the pricing.
Soft commodities are primarily agricultural or livestock commodities. In contrast to hard commodities, they are created rather than mined or extracted. They have practically infinite reserves and are impacted by weather or natural events rather than geopolitical factors. Some examples of soft commodities include sugar, corn, wheat, barley, etc.
Commodity Market Participants:
The commodities market is comprised of two participants:
Speculators, like hedgers, drive the commodities market. Speculators continually monitor commodity prices to anticipate future price fluctuations. For instance, if they believe the price will rise, they will buy commodity derivatives contracts, and when the price rises, they will be able to sell the agreements indicated above at a premium cost. Similarly, if prices are expected to decline, they would sell the products and repurchase them at cheaper prices.
Hedgers are often producers and manufacturers who use the commodities futures market to hedge against risk. For example, if a producer anticipates price swings during the harvesting of crops, he might hedge his stake. He will enter into a contract to shield himself against the risk. If the crop price falls in the market, the farmer can make up the difference by booking gains in the future market. Similarly, if crop prices rise during harvesting, the producer may suffer a loss at the potential price, which he might offset by selling his product for a higher price in the current market.
4 Popular Trading Exchanges in India:
- National Commodity and Derivative Exchange (NCDEX)
- Indian Commodity Exchange (ICEX)
- Multi Commodity Exchange of India (MCX)
- National Multi Commodity Exchange of India (NMCE)
Key Benefits of trading in a commodity market:
One should invest in commodities for a variety of reasons. For starters, commodities trading profits from inflation. In an economy, the prices of raw resources and commodities rise, allowing merchants to book gains. You may also protect your investments by hedging your commodity investments against a falling currency.
Traders can also profit from unpredictable geopolitical situations like wars and mass starvation. On these occasions, the supply of commodities is reduced, and you may benefit greatly from the consequent shortages.
When compared to the profits on equities and bonds, the performance of the commodities market is inverse. As a result, investing a tiny portion of your money in the commodities market benefits many people.
Some particular things are stable in terms of economic and capital market conditions, whilst some commodities remain unstable in terms of economic and capital market situations.
As agricultural prices of commodities have become increasingly volatile in recent years, predictability of future price trends is critical for optimizing investment portfolios and avoiding risks. Here, advanced AI/ML systems with self-learning capabilities shine as a valuable tool for dealing with difficult price forecasting tasks.
Oil production is a prime example of a volatile commodity. Due to substantial swings in supply, mining challenges, or economic situations, its price does not remain consistent. Shareholders engage in such commodities to benefit even when the market is turbulent, and they take a position either long or short based on their forecast of the market. It will assist them in achieving a high return on investment even if stock prices are declining. This allows them to compensate for decreased or negative earnings produced mostly by the capital sector.
However, the drawback of commodity trading is that commodity trades only seek to accrue financial profit, but stock and bond markets payout regularly through coupon payments and dividend coupons.
To earn big profits in the commodities market, however, actual knowledge is necessary. Anyone can trade commodities on any recognised commodity market by registering with a commodities broker.
Major types of commodities traded in India:
- Agri commodities include cardamom, pepper, seed, cotton, rubber
- The energy is natural gas and crude oil
- Bullion includes gold, silver, platinum
- Base Metals Cereals and pulses include chana, barley, maize, rice, and wheat, paddy.
- Spices include turmeric, jeera, coriander
- Fibres include cotton, guar seed
Difficulties in Price Forecasting:
Many companies are experiencing difficulties estimating gasoline price spreads and crack spreads for a range of items. This was impeding the company’s production and refinery planning. Furthermore, when oil prices and volatility increased, company strategy and supply chains suffered. As a result, the oil industry needed a dedicated manufacturing environment as well as price forecasting systems.
This majorly happens since price forecasting has always been a tedious process, and predicting agricultural and non-agricultural commodities puts extra pressure since there are a lot of uncertainties associated with them. There are limitless advantages to using Artificial Intelligence and Machine learning-based price forecasting.
Overcome Price Volatility:
Market volatility refers to a product’s price variations. To calculate the price volatility, consider a day-to-day percentage variation in the price of a product or service.
These variations might be imperceptible. However, in the long run, price volatility is an important element in price evaluation since it indicates the amount of pricing uncertainty and helps firms to more precisely estimate prices. Furthermore, machine learning algorithms can track price volatility at any period.
When applying machine learning, one can acquire a good understanding of how industry pricing changes over a year. This leads to a last, more subtle advantage.
For example, if a supplier frequently raises their rates in October, Then, one may need to plan ahead of time to stock up on specific items in September, avoiding the approaching hike, saving money, and increasing your overall profit margin.
Due to this challenging situation, we have found a solution for you. Say hello to PriceVision, your one-stop destination for commodity price forecasting. Through advanced technology such as artificial intelligence and machine learning, PriceVision forecasts accurate forecasts for commodities. Want to know more about price forecasting, check out https://pricevision.ai/blog/ to know more.