Agricultural Commodities Trading in India: Complete Guide

What Is Agricultural Commodities Trading? (Soft vs. Hard Commodities)

Agricultural commodities trading is defined as the trading of contracts involving agricultural and cultivated commodities. Such commodities are called soft commodities, as they are cultivated rather than mined from the Earth.

Examples of soft commodities include wheat, rice, cotton, sugar, coffee, spices, and oil seeds. The prices of such commodities tend to fluctuate depending on the weather condition, crop production, seasonality, and government regulations.

On the other hand, hard commodities are commodities that are natural resources and are mined and extracted from the Earth. Hard commodities include gold, silver, crude oil, and natural gas.

The majority of traders in India trade agricultural commodities futures, not physical delivery. Futures involve setting up the terms of a contract for buying or selling of the commodity on a certain date in the future.

How to Trade in Agricultural Commodities in India

To begin agri commodity trading in India, investors need to follow the prescribed regulatory process.

1. Choose a SEBI-Registered Broker

Open an account with a broker authorised to provide commodity trading services on recognised exchanges.

2. Complete the KYC Process

Submit documents such as PAN, Aadhaar, address proof, bank details, and other required information to complete verification.

3. Open a Trading Account

Once verification is complete, the broker activates the commodity trading account that provides access to eligible commodity contracts.

4. Add Trading Funds

Deposit the required margin into the trading account before placing commodity orders.

5. Select an Agricultural Commodity

Choose the commodity you want to trade after reviewing contract specifications such as expiry date, lot size, and margin requirement.

6. Place a Buy or Sell Order

Log in to the trading platform and place your order based on your market view. Orders are executed according to exchange rules.

7. Monitor and Close the Position

Track price movements and close the position before expiry or follow the applicable settlement process for the contract.

Factors That Influence Agricultural Commodity Prices

Several factors affect the prices of agricultural commodities in India.

• Weather: The rain, drought, floods, and temperature affect the production of crops.
• Government Policies: MSP, restriction on exports, import, procurement policy etc., may affect commodity prices.
• Supply & Demand: Increase in domestic consumption, exports, and production may affect the price of commodities.
• Currency Movement: It affects the prices of commodities through the exchange rates.
• Diseases & Attacks: Diseases in the crop and pest attacks affect the supply of commodities in the market.
• Storage & Transport: Storage cost and transport charges may influence the prices of commodities.
• Market Sentiment: Expectation about production, weather, and economics is one reason for the price movement

Top Agro Commodities Traded in India

India trades a wide range of agricultural commodities across recognised commodity exchanges.

1.Cotton

Cotton is widely traded because of its importance to the textile industry and export market.

2. Soybean

Soybean is an important oilseed crop used for edible oil production, animal feed, and industrial applications.

3. Guar Seed

Guar seed has uses for industries such as food processing, textile manufacturing, and oil exploration.

4. Rice

Rice is an important food crop of India. It is used extensively both at home and for export purposes.

5. Sugar

The prices of sugar depend on factors such as sugarcane production, government policies, and export requirements.

6. Spices

Some of the commodities that find active trading are turmeric, coriander, and cardamom.

7. Wheat

Wheat continues to be an important agricultural commodity due to its extensive use and procurement schemes of the government.

Advantages of Agricultural Commodities Trading

Market participants get a chance to invest in the commodity market by controlling price changes through the trading of agricultural commodities.

• Portfolio Diversification: Agricultural commodities give investors exposure to another type of investment aside from stocks and other investments. 
• Price Discovery: Exchange-based futures contracts reveal the price changes in the commodity market due to the law of supply and demand. 
• Hedging Possibilities: Farmers, traders, and companies get a chance to hedge themselves against the effects of price changes in the commodities market. 
• Wide Variety of Commodities: Investors have the option to pick from different types of agricultural commodities depending on their market interests.
• Regulated Trading Environment: Agricultural commodity trading takes place on recognised exchanges under the applicable regulatory framework.
• High Market Participation: Commodities such as cotton, soybean, spices, and wheat attract participation from different market participants, supporting active trading.

Risks of Agricultural Commodities Trading

Like other market-linked investments, agro commodity trading also involves certain risks.

• Weather changes may affect crop production and commodity prices.
• Government policy changes can influence agricultural markets.
• Commodity prices may fluctuate because of changes in domestic and global demand.
• Leverage in futures trading can increase both gains and losses.
• There may be unexpected circumstances like pest attack that may influence the price in the market.
   

Numerical Example: Trading an Agri-Commodity Futures Contract

An explanation of how an agricommodity futures trade is conducted is provided below.

• An investor purchases one contract for trading in cotton futures at ₹7,000 per unit after putting in the necessary margin. 
• After a few days, the price of the contract becomes ₹7,250 per unit.
• The price difference is ₹250 per unit.
• If the trader closes the position at the higher price, the gain is calculated according to the contract specifications and the applicable lot size.

If the market moves in the opposite direction, the trader may incur a loss based on the same price movement.
 

Conclusion

Trading of agricultural commodities offers opportunities to trade on commodity markets using contracts that involve commodities like cotton, wheat, soybean, sugar, and spices. It would be useful for investors to get information about the operations of the commodity exchanges, price influencing factors, and risk factors in order to learn more about agri-commodity trading. It is essential for traders to know about contract specifications, margins, and risks in commodity futures.