To start with the basics, commodity trading is all about buying and selling various raw materials and derivative products. These commodities cover a broad spectrum, i.e., from agricultural goods to natural resources.
These commodities are divided into four board categories:
- Metal
- energy
- livestock and meat, and
- agricultural products
It is said that commodities are one of the essential ways to diversify investors' portfolios beyond just traditional securities.
Commodities Market Basics:
When we talk about commodities market basics, well it can be broadly classified into two main categories i.e. commodities market basics.
- Hard Commodities
- Soft Commodities
Hard Commodities:
These types of commodities are mined or extracted from the earth and it is essential for manufacturing and energy industries.
E.g. Crude oil
Gold
Natural gas
Soft Commodities:
These types of commodities include agriculture and livestock products that are grown or harvested and are important in food production and textiles.
E.g. Wheat
Coffee
Cotton etc.
Types of Commodities:
Now let’s look at the types of commodities in detail to understand it better.
Metals
Commodities in metals include gold, silver, platinum and copper. During times of market volatility or bear markets, many investors invest in precious metal like gold due to its status of holding reliable value. To hedge against the high inflation or currency devaluation investors tend to do this as well.
In the past few years, the dominant narrative in these commodities has revolved around the tech sector's demand for rare earth elements, in addition to the conventional trade in metal for value storage and industrial production. Certain elements, such as dysprosium, erbium, europium, gadolinium, and holmium, are utilized in speakers, electric car motors, and smartphones. Gallium, another element, is commonly present in semiconductors and LEDs, while tantalum and niobium are essential in the manufacture of capacitors and resistors.
Without these metals, it's hard to envision how many advanced products would have been miniaturised.
Essential metals such as lithium, cobalt, and nickel, which are crucial components in batteries, are experiencing high demand for storing renewable energy. There exists considerable competition for access to such critical metals.
E.g. European, American and Chinese companies have sourced some of these metals in several African countries (including Congo), which raises ethical and political questions about who benefits from the trade, especially while mining some of these metals creates problems for ecological as well as social problems for humans.
Energy
Energy products are crude oil, heating oil, natural gas, and gasoline. Global economic activities and reduced oil production from conventional oil wells worldwide have caused increases in oil prices throughout history because demand for energy-based products has increased as the supplies of oil decreased simultaneously.
Investors who are interested in exposure to the energy sector must be aware of how economic recessions, OPEC-enforced production shifts, and advances in alternative energy sources—wind power, solar energy, and biofuels, for example—all have a huge impact on the market prices for energy commodities.
That's not to say that the trade in oil has been going away: In 1998, daily oil production around the world was 73.6 million barrels a day, whereas in 25 years the figure soared to 93.9 million barrels per day.
Livestock and Meat
Livestock refers to the domesticated animals reared on farms for purposes such as food, work, and beyond. The propagation and culling of these creatures fuel the commerce in meat, milk, dairy, animal derivatives utilized in industrial and domestic products, leather, and wool. In essence, livestock as a commodity is primarily esteemed for its meat. Farm animals are also livestock assets of agricultural commodity markets, extensively affecting world food supplies.
The most frequently exchanged meats encompass beef, pork, lamb, and poultry like chicken and turkey. The meat market is global, and agreements concerning tariffs and international relations help define how trade occurs in the meat sector. The supply chain of meat products encompasses animal breeding, slaughtering, processing, and distribution. Good logistics can enhance quality and safety; market prices and availability might vary based on logistics.
That's a result of global growth in incomes and populations. Asia and the Middle East have growing livestock trade to meet domestic demand, even though their local production can't be enough to keep up. In the last few years, demand for imports in many Asian countries with middle- and high-income standards has increased due to the consumption of more animal products in diets. International agreements have been crucial in setting special provisions for meat in these agreements to enhance trade opportunities and establish new trade arrangements. The provision of beef, pork, poultry, and sheep meat is projected to increase by 5.9%, 13.1%, 17.8%, and 15.7% respectively from the present time until 2030.
(Source: Fortune Business Insights)
One of the widely noted trends in the livestock trade is the rising preference for poultry as opposed to other sources of protein. There are several reasons for this shift, but too stand out: Poultry is a less expensive source of meat globally, and white meat is considered a healthier alternative and easier to cook. By 2030, poultry is projected to account for 41% of sources of meat protein.
Meanwhile, the livestock commodities sector has been exposed to increasing sustainability and environmental accountability demands.
Consumers are becoming more interested in knowing, for example, the industry's carbon footprint and seek protein from sources that farm more sustainably.
Agricultural Products
Agricultural commodities - one of the categories of commodities that include:
- Corn
- Soybeans
- Wheat
- Rice
- Cocoa
- Coffee
- Cotton and
- Sugar
Population growth and limited agricultural supplies could bring returns to investors interested in the farm sector through higher prices for agricultural commodities.
Over the past decades, there has been a drastic change in the agricultural sector as it concerns technological change, environmental concerns, and changes in the dynamics of market and policy.
Here are the main changes shaping the sector:
Climate change:
This is vital for any discussion on the future of this sector. Shifts in weather patterns, heightened frequency of severe weather incidents, and shifting climate zones have already impacted crop production, pest and disease trends, and agricultural methods.
Consumer shifts:
Organic and local food trends have brought a change in consumer preference. In turn, these shifts changed the kind of farming used, what is farmed, and the way farmed products are marketed and distributed.
Genetic modification and biotechnology:
In the past, the decision regarding genetically modified organisms and biotechnology has been contentious and revolutionary. With advances in biological sciences being applied to agriculture, varieties of crops are developed to be resistant to pests and diseases and also environmental stresses.
However, they also raise debates regarding health and environmental effects.
Globalisation:
The worldwide expansion of agricultural commerce implies that scarcely any farming communities globally aren't contributing to the international market. This brings increased competition, changes crop choice, and shifts supply chains around the globe. Trade policies and agreements also have significantly changed the nature of markets and farm management.
Government policies and subsidies:
Subsidies, support programs and regulations by government interventions have affected farming practices, crop choices and the viability of different agricultural sectors.
Sustainable farming:
The availability of beef, pork, chicken, and lamb is projected to increase by 5.9%, 13.1%, 17.8%, and 15.7% respectively over the period leading to 2030
There has been a growing emphasis on sustainable farming because of climate change and the ecological effects of large factory farming.
This entails an inclination toward organic farming, integrated pest management, and conservation agriculture, all of which ensure that environmental degradation from agriculture is minimal.
The technological aspect:
The adoption of technology within agriculture has produced enormous changes in the whole sector. GPS systems, Internet of Things devices, drones, automatic machinery, and even big data analytics have revolutionised how farming is practised, making more efficient practices and yields manifold.
Urban growth and alterations in land utilization:
The growth of urban regions and modifications in land utilization have diminished the quantity of land accessible for farming in certain areas, necessitating farming techniques that can enhance productivity per acre.
How to trade commodities?
Commodity market trading is straightforward and is similar to stock tradition. Here are a few simple steps to follow:
Step 1: Select a Broker
Select a commodity trading broker. There are several commodity brokers in India, which give entry to the commodity exchanges such as MCX or NCDEX. Ensure that he is reliable and charges a decent commission.
Step 2: Open a Trading Account
After selecting your broker, open a commodity trading account. This is nothing different than opening a stock trading account. You may need to go through the KY or Know Your Customer process which entails presenting identification and address proof.
Step 3: Fund Your Account
Make a deposit once your account is ready. This overall depends on the commodity that you wish to trade and also depends on the requirement of the broker.
Step 4: Analyse the Market
Technical analysis is the type that may involve checking price charts and trends, while fundamental analysis deals with factors such as supply and demand. It will therefore assist in making a good decision regarding either buying or selling.
Step 5: Start Trading
Make transactions through selling or buying of futures contracts. This entails an agreement to sell a given commodity at a definite date in the future as per the agreed price and value. You can also earn profits by guessing fluctuating prices.
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FAQs
- What are commodities, and why should I invest in them?
Ans: These commodities are the primary products or raw materials like metals, energy sources, agricultural products and livestock. Investing in commodities will further diversify your portfolio, thus guarding you against an inflation hedge and exposing yourself to the world's trends in the market. It will help you bring an equilibrium of the risk factors associated with conventional investment instruments like stocks and bonds.
- What is the difference between hard and soft commodities?
Ans: Hard commodities refer to primary goods extracted from natural resources. Some examples include -gold, crude oil, and natural gas -these are industrials required by the industries to make goods like manufacturers and energy. Soft commodity includes the produce of agricultural activities, for example, wheat and cotton and the produce in the livestock industries like coffee, such an activity is required both by the food and textile industry.
Conclusion:
Commodity trading is another way to invest beyond stocks and bonds. It is all about getting the pulse of the market. Be it metals, energy, livestock or agriculture and making decisions from that knowledge.
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