27. Who benefits from dealing in commodity futures and how?

Commodity futures are beneficial to a large section of the society, be it farmer, businessmen, industrialist, importer, exporter, consumer.

If you are an investor, commodities futures represent a good form of investment because of the following reasons.

• Diversification The returns from commodities market are free from the direct influence of the equity and debt market, which means that they are capable of being used as effective hedging instruments providing better diversification.

• Less Manipulations Commodities markets, as they are governed by international price movements are less prone to rigging or price manipulations by individuals.

• High Leverage The margins in the commodity futures market are less that the F & O section of the equity market.

If you are an importer or an exporter, commodities futures can help you in the following ways…

• Hedge against price fluctuations Wide fluctuations in the price of import or export products can directly affect your bottom-line as the price at which you import/export is fixed before-hand. Commodity futures help you to procure or sell the commodities at a price decided months before the actual transaction, thereby ironing out any fluctuation in prices that happen subsequently.

If you are a producer of a commodity, futures can help you as follows :

• Lock-in price for your produce If you are a farmer there is every chance 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.

• Assured demand Any glut in the market can make you wait unendingly for a buyer. Selling commodity futures contract can give you assured demand at the time of harvest.

• Increase in holding power You can store the underlying commodity in exchange approved warehouse and sell in the futures to realize the future value of the commodity.

If you are a large scale consumer of a product, here is how this market can help you :

• Control your cost If you are an industrialist, the raw material cost dictates the final price of your output. Any sudden rise in the price of raw materials can compel you to pass on the hike to your customers and make your products unattractive in the market. By buying commodity futures, you can fix the price of your raw material.

• 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.

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