Factors influencing the prices of commodities in futures market

Commodity trading is not a new phenomenon in India; it has a long history from the olden days. Bombay cotton Trade association, India‘s first organized trading in commodities which was stated in 1875.India had a vibrant futures market in commodities till 1960,then it was discontinued due to war, natural calamities and the consequent shortages. In 2002, Indian Government approved for futures trading in commodities, commodities futures exchange re-emerged. National Commodity and Derivatives Exchange Ltd (NCDEX), Multi commodity exchange (MCX) and National Multi commodity exchange (NMCE) formed for commodities futures trading respectively.MCX is India’s leading and largest commodity exchange in India which has market share of 83 % in India s commodity trading. The primary benefits from commodity futures markets are informed production, storage and processing decision. The essence of price discovery function is to establish a reference price from which the spot market can be derived and hinges on whether new information is reflected first in changed futures prices or in changed cash prices. The futures price serves as the market’s expectation of subsequent spot price (Black .1976).

Commodities are considered as separate asset class. Commodity derivatives are a very useful tool to obtain economic exposure to commodity asset. Commodity futures are one of the derivatives contract. A derivative is a product whose value is derived from the value of one or more underlying variables or assets in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. Commodity futures contract helps to gain exposure to commodity price. A futures contract is a contract to buy or sell a pre-determined amount of certain standardized commodity at a pre-determined futures date at a pre-agreed price.

Factors influencing the prices of commodities in futures market

Metals &Energy prices

a) Supply side influence:

•          Data- daily / weekly warehouse stocks data
•      Supply disruptions- miners’ strike, natural calamities
•      Government policies by key producing nation

b) Demand side influence:

•        Key economic data from G-7 countries: co-relation with USD
•        Government policies by key consuming nation
•        Geo-political climate

Agri commodity prices

• Supply and demand
• Peak Harvesting and arrival season.
• Spot market sentiments
• Monsoon fluctuations
• Fluctuation in production / consumption
• Incidence of pest and diseases
• Export / Import
• Government policies (subsidy, market intervention, change in duties)
• Crop failure/bumper production in foreign/domestic market.