Trading in Agri Commodities: A Beginner’s Guide
Trading in volatile stock markets can be risky. There is no sure short way to know if you’ll be making a profit on a particular trade. Given the volatile nature of the stock and bond markets, traders often turn to the commodity market for a smoother experience.
Commodity trading can be an excellent way for an investor to diversify their investment portfolio. Prices of commodities are negatively correlated to those of stocks. This factor makes them an excellent hedge against inflation and market fluctuations.
Agri commodities are a great trading option if you are seeking high returns for your long-term financial goals. They are considered to be soft commodities and can be traded via future contracts.
Now, let us discuss the basics of trading in Agri commodities in India.
A Brief Overview of Agri Commodity Trading in India
Agricultural commodities include produce from staple crops and livestock raised on farms/grasslands. Some of the most frequently traded agri commodities in India are wheat, rice, soyabean, corn, dry fruits, spices, oilseeds, rubber, cotton and jute.
One can trade agri-commodities via various methods, such as futures contracts as well as Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs). To carry out trading of agri commodities, traders speculate future prices of the commodities and take bets using instruments like futures and options.
Being an agriculture-based economy, India possesses enormous scope for agri commodity trade. The Agri commodity trade in India began in 1875 after the formation of the Cotton Trade Association in Bombay. However, futures trading was suspended in 1952 due to a shortage of goods for domestic use.
The modern Agri commodity trade took inception in 2002. Further in 2017, SEBI (Security & Exchanges Board of India) permitted regular Demat accounts to be used for commodity trading.
The Forwards Market Commission (FMC) was established in the 1950s. It is the main regulatory body which oversees the Agri commodity trade in India. However, in September 2015, it merged with SEBI to implement a single authority to monitor the markets. SEBI has implemented a few reforms to increase trading activities since then:
- Allowing brokers to take part in the commodity trade.
- Introducing options trading in commodities.
- Introducing commodity trading on National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
- Allowing Foreign Institutional Investors to invest in the commodity market.
How to Trade in Agri Commodities?
The simplest way to trade Agri commodities in India is via futures contracts at any of the six authorised exchanges. However, you would require a Demat account to begin trading. After your account is registered and the commodity segment is activated, you can deposit an initial margin and start trading in agri commodities. We recommend carrying out thorough research before you begin trading in the commodity market.
You can deposit the initial margin via your broker and buy a futures contract. This is a contract which obliges both parties to trade the commodity at a fixed price on a pre-set future date.
Agri commodity trading is susceptible to market risks. Hence, one should analyse the markets and various factors wisely before making an investment. One way to reduce this risk is by implementing strategies like stop loss incorporation.
In India, brokers provide high-leverage facilities for commodity trading. This means you do not have to pay the entire amount upfront and only need to deposit an initial margin while entering a commodity contract of choice. The remaining amount becomes due at contract expiry..
Agri Commodities Traded in India
There are a few commodity exchanges in India that are authorised for Agri trading. They are listed below.
- Multi Commodity Exchange of India Limited (MCX)
- National Multi-Commodity Exchange (NMCE)
- National Commodity and Derivatives Exchange Limited (NCDEX)
- Indian Commodity Exchange (ICEX)
- Universal Commodity Exchange (UCX)
- Ace Derivatives and Commodity Exchange Limited (ACEX)
Out of these six listed exchanges, two of them focus mainly on agricultural commodities. They are National Multi-Commodity Exchange (NMCE) and National Commodity and Derivatives Exchange (NCDEX).
Agri commodity trading only takes place for some agricultural resources and comprises about 12% of the commodity trade. There are 29 products which are traded on commodity exchanges. A few of the most frequently traded agri commodities are listed below:
- Cotton and fibres
- Pulses such as lentils and beans
- Various kinds of spices
- Fresh fruits such as apples and grapes
NCDEX launched Agridex in 2020, which is India’s first agri trading index. It comprises ten commodities, including soybean, mustard and chana among many others.
Benefits of Agri Commodity Trading
A trader who possesses sound knowledge of how supply and demand work can thrive in the agri commodity trading market. Since the margins on Agri commodities are high, the returns can be higher. Trading in Agri commodities has many more benefits, which are listed below:
- As a link between future and spot market prices, commodity trading helps stabilise the price of agricultural goods. Moreover, since future and spot prices have a positive correlation, hedging helps reduce risks associated with extreme price fluctuations.
- Trading in agri commodities is helpful in determining the exact market price for them. This is crucial since there may be disparities between wholesale prices and the Minimum Support Price (MSP) set by the government.
- It helps in developing effective hedging and speculation strategies. For example, if there is a variation in future prices, you can formulate a hedging strategy from current spot prices. if future prices affect the spot prices, you can create a speculation strategy. one can thereby predict future prices based on the existing market conditions.
Trading of agri commodities provides additional portfolio diversification for investors. The process of trading has become simplified over time
Agri commodity trading is an excellent choice for seasoned investors with a high-risk tolerance. It is essential to manage risks as a few wrong bets could cost an investor his/her entire life savings. One can use risk-controlling strategies like stop-losses to prevent this from happening.
One must also be able to analyse the various factors such as market trends, supply and demand, and seasonality before trading in Agri commodities.
Frequently Asked Questions
Can I trade Agri commodities online in India?
Yes, SEBI permits online Agri commodity trading for selected products. There are around 29 Agri products that you can trade such as cotton, fresh fruits, guar complex, beer ingredients, pulses, etc.
What are some significant factors which affect Agri commodity prices?
Agriculture is heavily dependent upon seasons. Hence, the season and weather are two significant factors that affect the supply and demand of agricultural goods.
What are the prerequisites for Agri commodity trading?
To trade in Agri commodities, one requires a Demat account with a SEBI-authorised broker. Also, you must deposit an initial margin in a commodity to begin trading.
What are Agricultural Produce Market Committees in India?
Agricultural Produce Market Committees are licensed marketing boards set up in various parts of a state by the respective State Government. All farmers have to bring their produce to Mandis and sell them via auctions. Wholesale and retail traders have to participate in these auctions as they cannot purchase goods directly through farmers.