Commodities market essentially represents another kind of organised market just
like the stock market and the debt market. However, commodities market, because
of its unique nature lends to the benefits of a wide spectrum of people like investors,
importers, exporters, producers, corporate etc.,
If you are an importer or an exporter, commodities futures can help you in the following
way: Hedge against price fluctuations – If you are an exporter of a particular commodity,
the price at which you export is generally decided before-hand and so any fluctuation
in your procurement prices affect your bottom-line substantially. Similarly an importer
also suffers due to variations in the local commodity prices. Commodity futures
help you to procure or sell the commodities at a price decided months before the
actual transaction, thereby ironing out any change in prices that happen subsequently.
If you are a producer of a commodity, futures can help you as follows:
- Lock-in the price for your produce If you are a farmer, there is every
chance that the price of your produce may come down drastically at the time of harvest.
By taking positions in commodity futures you can effectively lock-in the price at
which you wish to sell your produce
- Assured demand Any glut in the market can make you wait unendingly
for a buyer.
Selling commodity futures contract can give you assured demand at the time of harvest.
If you are a large scale consumer of a product, here is how this market can help
- Control your cost If you are an industrialist, the raw material cost
may dictate the final price of your output. Any sudden rise in the price of raw
materials can compel you to pass on the hike to your customers and make your products
unattractive in the market. By buying commodity futures, you can fix the price of
your raw material.
- Ensure continuous supply Any shortfall in the supply of raw materials
can stall your production and make you default on your sale obligations. You can
avoid this risk by buying a commodity futures contract by which you are assured
of supply of a fixed quantity of materials at a pre-decided price at the appointed