If you are an investor, commodity futures offers the following benefits:
- High leverage: You can take a position in a particular commodity by paying only a fraction of that value as margin. Moreover, the margins in the commodity futures market are lower than equity futures and options.
- Less manipulation: Governed by international price movements, commodity markets are less prone to rigging or price manipulation.
- Diversification: Commodity prices are prone to supply-demand dynamics, weather conditions, geo-political tensions and natural disasters. Accordingly, commodities are an independent asset class, and can prove to be an effective means of diversification in one’s investment portfolio.
If you are an importer or exporter, you benefit in the following ways:
- Hedge against price fluctuations: In today’s highly volatile scenario, wide fluctuations in prices of import and export products can directly affect your bottom-line. Commodity futures helps you to procure or sell commodities at a price decided months before the actual transaction, thereby ironing out any price changes that happen subsequently.
If you are a producer of a commodity, futures can help you in the following ways:
- Lock-in price for your produce: If you are a farmer, there is a possibility that the price of your produce may come down drastically at the time of harvest. By taking positions in commodity futures, you can effectively lock-in the price at which you wish to sell your produce at harvest time.
- Assured demand: Any glut in the physical market could mean an endless wait for a buyer. Selling commodity futures contracts can give you assured demand at the time of harvest.
If you are a large-scale consumer of a product, here is how this market can help you:
- Control your costs: If you are an industrialist, the raw material cost dictates the final price of your output. Any sudden rise in the raw material cost can compel you to pass on the hike to your customers, making your products unattractive in the market. On the other hand, if you are unable to pass on the costs, your margins and profitability will be hit. Through commodity futures, you can lock-in the price of your raw materials.
- Ensure continuous supply: Any shortfall in the supply of raw materials can stall your production and make you default on your sale obligations. You can avoid this risk by buying a commodity futures contract by which you are assured of supply of a fixed quantity of materials at a pre-decided price at the appointed time.