- A commodity market is a market that trades in primary rather than manufactured products. Soft commodities are agricultural products such as wheat, coffee, cocoa and sugar. Hard commodities are mined, such as gold and oil
- Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management
- There is a huge difference in the trading volume of commodities and the actual value of the commodities in physical form — this is because of hedging undertaken by several participants
Benefits/Need for Commodity Trading
- Transparency and Fair Price Discovery
- Hedging
- No Insider Trading
- Seasonality Patterns
- No Counter party Risk (since there are Clearing Houses)
- Decrease the risk of cartelization