WHAT IS A COMMODITY?

Commodity refers to any good that possesses a physical attribute. The word
commodity comes from
the French word commodit, which is used to refer to an object of utility, that
offers some conve
nience or useful service. It is a thing of value, with uniform quality, produced n
large quantities by
many different producers. The commodity can be produced by different
producers, but will still be
considered equivalent. By this definition, any physical substance, like pepper or
aluminium, which is
interchangeable with another product of the same type, is a commodity.
Commodities are frequently
used as inputs in the production of other goods or services. They are the basic
good used in commerce
that is interchangeable with other commodities of the same type, so that even
though the quality of
a given commodity may be at variance slightly, it is effectively uniform across
producers.
The Forward Contracts Regulation Act (An act passed in India in 1952 to provide
for the regu
lation of certain matters relating to forward contracts, the prohibition of options
in goods and for
matters connected therewith) defines goods as every kind of movable property
other than actionable
claims, money and securities. Anything which is supplied across markets without
any product dif
ferentiation, and for which there exists demand, is a commodity. Crude is a
commodity, and it has
one price around the world, that pncc being determined daily based on global
supply and demand.
Cement, on the other hand, is differentiated through branding, and is not a
commodity. In general,

better grades of cement will sell for more.

By the same logic, paintings are not commodities, because each painting is
distinctive. Com
modities, by definition,, are uniform so that one part serves the same purpose as
any other, as in a
kilogram of gold, where one is as good as another. h makes little difference to
those buying it which
kilogram they receive. It is worth mentioning here that there will be some
differences on account of
shipping costs, differences in composition, exchange rates of currencies, and so
forth, so that gold
will sell at different prices at different times and places. In this context, grading
of the commodity
is helpful. A basis grade also known as par grade or contract grade is fixed to
define the minimum
accepted standard that a deliverable commodity must meet in order to be
suitable for trading. So,
crude may be graded according to the amount of hydrogen or sulphur present in
it.

A commodity is an economic good, tradable good, product or article of

commerce; something for
which there is an established market where the commodity can be bought and
sold in commercial
transactions between willing buyers and sellers. One of the important
characteristics of a commodity
is that its price is determined as a function of its market as a whole. So a
commodity is understood
to mean a good that has the following properties:
. Is usually produced and/or sold by many different producers
. Is uniform in quality between producers that produce and sell it

. Is traded at a price resulting from its demand and supply

Commodities can include a wide array of diverse products, as shown in Table 1:

All commodities are fungible, but not all commodities are created the same.
Generally speaking, investors break commodities down into two categories: soW
and Thard.
Soft Commodities
Soft commodities are typically grown, while hard commodities are typically
mined or extracted. Orange juice,
corn, wheat, lean hogs, coffee, sugar and cocoa beans are all examples of sofr
commodities.
Many soft commodities are subject to spoilage, which can create huge volatility
in the short term: if youre sitting
on 30,000 pounds of cocoa beans and the price drops, you might have to dump
them onto the market whether
you wantto or not On the flip side, a well-timed, narrow investment in a soft
commodity can yield phenomenal
gains if you buy in at just the right time.
Producers are often large players in the softs market Farmers, for instance,
regularly hedge their crops by

selling futures contracts and locking in prices. This demand, combined with the
natural growing cycle of many of
these commodities, can create a natural seasonality in prices, which investors
must consider as theyre looking
into the space. Additionally, weather plays a huge role in the softs market
impacting yields and making
predicting supply especially difficult

Soft Commodities
Adzu Ici Beans
Barley
Canola
Cocoa
Coffee
Corn
Cotton
Lean Hogs
Live Caille
Oats
Orange Juice
Rice
Rubber
Soybean Meal
Soybean Oil
Sugar
Wool

Hard Commodities
HarOE commodities are typically mined from the grouna ortalcen from other
natural resources, e.g., gold, oil,
aluminum. In many cases, initial products are refined into further commodities,
as oil is refined into gasoline.
Because harcr commodities are easierto handle than mosrsofts, and because
they are more integrated into
the industrial process, most investors focus on these products. Thats changing,
to an extent, as former softs
like corn and sugar are transformed into ethanol-based energy products, but still,
hard commodities dominate
the marketplace. For instance, literally trillions of dollars of oil futures trade
hands each year

Hard Commodities
Aluminum
Copper
Crude Oil
Gas Oil
Gold
Heating Oil
Lead
Natural Gas
Nickel
Palladium
Platinum
Silver
Tin
Unleaded Gasoline
Zinc
Emerging Commodities
Beyond those listed above, there is an entire class of goods that most of us
consider commodities, but for
whatever reason, have no liquid futures market These include things like coal,
timber and iron.

There are also emerging commodities like wind, solar, water, water rights and
pollution rights, which many
expect to develop into booming markets in five-b years. There are serious
investors who believe that these
function in a similar fashion to other commodities, and that they deserve a place
in a commodities portfolio. For
now, investors can only access these commodities by buying stock in companies
that operate in these fields.

Cereals and Pulses

Bajra

Barley

Chana

Chana 1 MT/2 MT

Maize - Feed/Industrial Grade

Wheat

Fibres

V-797 kapas

Shankar kapas

29 mm Cotton

Guar Complex

Guar Seed 2MT

Guar Seed 10 MT

Guar Gum

Plantation Products

Rubber

Others

Potato

Oil and Oil seeds

Castor seeds

Castor seeds 1 MT/2 MT

Cotton seed oilcake

Soy Bean

Soy Bean 2MT

Refined soy oil

Mustard Seed

Mustard Seed 2 MT

Crude Palm Oil

Sugar M

Sugar S

Gur

Soft

Spices

Pepper

Turmeric

JEERA

Chilli

Coriander

Metals

Steel long Commercial

Steel

Copper

Precious Metals

Gold

Gold (100 gms)

Gold Hedge

Gold Hedge (100 gms)

Silver

Silver Hedge

Silver Hedge 5 Kgs

OptIons Contracts
Another interesting derivatives contract is the option. which grants the buyer or
the holder of the
option the right (without an obligation) to buy or sell an underlying asset, at a
predetermined strike
price, on or by the maturity date. On the other hand, the seller or the writer of
the option is under
an obligation to perform the contract (buy or sell). The underlying asset for an
exchange-traded
options contract is the corresponding futures contract. Depending on the
contract, the option can
be an option to buy or an option to sell. Option to buy is the right to exercise into
a long futures
position at the corresponding strike price, while option to sell is the right to
cxcrcisc into a short
futures positon at the corresponding strikc pricc. Somc options cxpirc worthlcss.
But if thc option

is exercised, the investors profit will be the difference between the then-current
value of the asset
and the strike price. The price at which you have the right to buy or sell is called
the strike price
or the exercise price.
Unlike other types of derivatives, options do have an initial cost: the premium.
Put n simple
terms, the options premium is similar to an insurance premium. The longer the
coverage period
(i.e., the time to maturity), or the greater the risk, the higher the premium will
be. The value of the
premium changes until the option expires, or is exercised. The cxpiry date is the
date and time after
which an option may no longer be exercised.

Commodity Options
Thc commodity option s a contract n which thc seller of the option agrees to
pay thc buyer thc
difference between the commoditys market price and thc agreed strike price if
the market price s
more favourable than the strike price of the underlying commodity. The option
protects against price
fluctuations above or below a pie-agreed level.