Why to do Physical Trading in commodities?

Commodities which we basically divide between agricultural and non-agricultural group lays the foundation to venture into allied activities. In India non-agricultural commodities are mostly imported and therefore trading within India does not give much room. Again, India being an agricultural power house with a diverse set of agricultural commodities, scope of trading will always be available. KCTL facilitates in guiding corporate/traders in physical trades under its various sub heads.

Agricultural commodity trading can be started, basically in two steps -

• Procurement based trading
• Warehousing support for agri commodities

Procurement of commodities can be done in three ways -

Physical procurement

• Based on arbitrage opportunity
• As a raw material supplier
• Procure, store and sell in physical

Procurement-based on arbitrage opportunity

As per arbitrage opportunity agri commodities can be traded/procured like:

• Futures to Futures
• Futures to Spot
• Spot to Futures

Limitations

• Opportunities are limited (return)
• Commodities are seasonal in nature
• Commodities shelf life

Since commodities are seasonal in nature and also weather and monsoon plays an important role along with 3-4 months of storability, the final output (produce) can always be a vagary of such factors. Thus it reduces the ROI. However that doesn’t mean scope is unavailable. Scope is there but it’s a limited one and a full-fledged sustainable business vertical can’t be created only for this.

Procurement - as a raw material supplier

• Select few commodities to start with out of many like Chilli, Turmeric, Cardamom
• Funding based linkages to be established with growers since quality of the produce plays a key role
• Crops are seasonal in nature therefore three crops covering whole year to be selected
• Business model based on backward linkages will be sustainable

Limitations

• Limited players
• Information shortage

The above limitations can be converted into merits also based on pulling all expertise together.

Procure, store and sell in physical

• Acting like a physical trading company
• Specialization around few commodities to start with
• Own warehousing and funding will give some cushion
• Import and export of commodities

Limitations

Warehousing in itself is not a profitable business unless and until collateral management is linked to it.

Summary

In the commodities segment, futures trading help in mitigating the price risk. However this is only one part of the entire cycle under commodities trade. Traders encounter volatility due to various market forces at play. Understanding the backward and forward market linkages in the commodities business can help you tide over the vagaries.