COMMODITIES

In economics, a commodity is a marketable item produced to satisfy wants or

needs.[1] Economic commodities comprise goods and services.[2]
The term commodity is specifically used for an economic good or service when the
demand for it has no qualitative differentiation across a market.[3] In other words, a
commodity good or service has full or partial but substantial fungibility; that is, the
market treats its instances as equivalent or nearly so with no regard to who
produced them. As the saying goes, "From the taste of wheat, it is not possible to
tell who produced it, a Russian serf, a French peasant or an English capitalist."[4]
Petroleum and copper are other examples of such commodities,[5] their supply and
demand being a part of one universal market. Items such as stereo systems, on the
other hand, have many aspects of product differentiation, such as the brand, the
user interface and the perceived quality. The demand for one type of stereo may be
much larger than demand for another.
In contrast, one of the characteristics of a commodity good is that its price is
determined as a function of its market as a whole. Well-established physical
commodities have actively traded spot and derivative markets. Generally, these are
basic resources and agricultural products such as iron ore, crude oil, coal, salt,
sugar, tea, coffee beans, soybeans, aluminum, copper, rice, wheat, gold, silver,
palladium, and platinum. Soft commodities are goods that are grown, while hard
commodities are ones that are extracted through mining.
There is another important class of energy commodities which includes electricity,
gas, coal and oil. Electricity has the particular characteristic that it is usually
uneconomical to store; hence, electricity must be consumed as soon as it is
produced.
Commoditization occurs as a goods or services market loses differentiation across
its supply base, often by the diffusion of the intellectual capital necessary to
acquire or produce it efficiently. As such, goods that formerly carried premium
margins for market participants have become commodities, such as generic
pharmaceuticals and DRAM chips. An article in The New York Times also
discusses multivitamin supplements as an example of commoditization; a 50 mg

tablet of calcium is of equal value to a consumer no matter what company

produces and markets it, and as such, multivitamins are now sold in bulk and are
available at any supermarket with little brand differentiation.[6] Following this
trend, nanomaterials are emerging from carrying premium profit margins for
market participants to a status of commodification.[7]

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.[1] Investors access
about 50 major commodity markets worldwide with purely financial transactions
increasingly outnumbering physical trades in which goods are delivered. Futures
contracts are the oldest way of investing in commodities. Futures are secured by
physical assets.[2] 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.[3]
A financial derivative is a financial instrument whose value is derived from a
commodity termed an underlier.[2] Derivatives are either exchange-traded or overthe-counter (OTC). An increasing number of derivatives are traded via clearing
houses some with Central Counterparty Clearing, which provide clearing and
settlement services on a futures exchange, as well as off-exchange in the OTC
market.

Which are the major commodity exchanges

in India?
There are 24 commodity exchanges in India. There are three national level
commodity exchanges to trade in all permitted commodities. They are:
Multi Commodity Exchange of India Ltd, Mumbai (MCX)
MCX is an independent and de-mutualised multi commodity exchange. MCX

features amongst the world's top three bullion exchanges and top four energy
exchanges. Its key shareholders are Financial Technologies (I) Ltd., State Bank of
India and it's associates, National Bank for Agriculture and Rural Development
(NABARD), National Stock Exchange of India Ltd. (NSE), Fid Fund (Mauritius)
Ltd. - an affiliate of Fidelity International, Corporation Bank, Union Bank of India,
Canara Bank, Bank of India, Bank of Baroda, HDFC Bank and SBI Life Insurance
Co. Ltd.
National Commodity and Derivative Exchange, Mumbai (NCDEX)
A consortium of institutions promotes NCDEX. These include the ICICI Bank
Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank
for Agriculture and Rural Development (NABARD) and National Stock Exchange
of India Limited (NSE).
National Multi Commodity Exchange of India Ltd, Ahmedabad (NMCE)
It is the first de-mutualised electronic multi-commodity Exchange of India. Some
of its key promoters are Central Warehousing Corporation (CWC), National
Agricultural Co Operative Marketing Federation of India Limited (NAFED),
Gujarat Agro Industries Corporation Limited (GAIC) and Punjab National Bank
(PNB).