The dictionary defines commodities as 'Something useful that can be turned to commercial or other advantage’. Commodities refer to things which in day-to-day life, we simply take for granted like the wheat in our bread, the cotton in our clothes, the gold in our ornaments, the petrol in our cars and so on. However, what many don't know, is that these very ordinary items are also one of the finest investment avenues available.

The term 'commodity' includes all kinds of goods. FCRA defines 'goods' as 'every kind of movable property other than actionable claims, money and securities'. Futures' trading is organized in such goods or commodities as are permitted by the Central Government. At present, all goods and products of agricultural (including plantation), mineral and fossil origin is allowed for futures trading under the auspices of the commodity exchanges recognized under the FCRA. The national commodity exchanges have been recognized by the Central Government for organizing trading in all permissible commodities which include precious (gold and silver) and non-ferrous metals; cereals and pulses; raw jute and jute goods; sugar, gur, potatoes, coffee, rubber and spices, etc.    
 

Commodity Futures are contracts to buy specific quantity of a particular commodity at a future date. It is similar to the Index futures and Stock futures but the underlying happens to be commodities instead of Stocks and Indices.
  

Hedgers   

No counter party risks. 

Higher Leverage: Get high exposures for the margin provided. 

Prices are pegged to international markets of NYMEX, CBOT, CME, LME etc. 

Portfolio diversification: An investor can now diversify his portfolio by investing in commodities markets. 

Arbitrage opportunities: Take the advantage of price spreads, calendar spreads and Inter exchange spreads. 

Hedgers: Hedgers enter into commodity contracts to be assured access to a commodity, or the ability to sell it, at a guaranteed price. They use futures to protect themselves against unanticipated fluctuations in the commodity's price.   

Speculators: Speculators are participants who wish to bet on future movements in the price of an asset. Individuals, willing to absorb risk, trade in commodity futures as speculators. Speculating in commodity futures is not for people who are averse to risk. Unforeseen forces like weather can affect supply and demand, and send commodity prices up or down very rapidly. As a result of this leveraged speculative position, they increase the potential for large gains as well as large losses.  

Arbitrageur: A type of investor who attempts to profit from price inefficiencies in the market by making simultaneous trades that offset each other and capture risk-free profits. Arbitrageurs constitute a group of participants who lock themselves in a risk-less profit by simultaneously entering into transactions in two or more contracts.
  

Natural Factors: Soil and climatic conditions, natural calamities etc.

Government Policies - e.g. EXIM Policies like tariff rates, minimum support prices.

Annual production, consumption and carry-over quantity of stocks.

Economic policies and conditions:

Interest Rates - e.g. hike in federal rates bring down the dollar, thereby increasing lucrative-ness of investment in precious metals. 

Inflation - commodity investment acts as a hedge against inflation.

Substitution – a commodity which is a substitute of another commodity may affect the price of the later

Political Situation.

Consumer Preferences
   

Supply – Worlds leading producer of 17 Agri Commodities

Demand – Worlds , major market of Bullion, Foodgrains, Edible oils, Fibers, Spicies and plantation crops.

GDP Driver – Predominantly an AGRARIAN Economy

Captive Market – Agro products produced and consumed locally

Width and Spread – Over 30 major markets and 5500 Mandies

Waiting to Explode – Value of production around Rs. 3,00,000 crore and expected futures market potential around Rs. 30,00,000 crore.
 

Just as SEBI regulates the stock exchanges, commodity exchanges are regulated by the Forwards Market Commission (FMC), which comes under the purview of the Ministry of Food, Agriculture and Public Distribution. 

Multi-Commodity Exchange of India Ltd, Mumbai (MCX).

National Commodity and Derivatives Exchange of India, Mumbai (NCDEX).

National Multi Commodity Exchange, Ahemdabad (NMCE). 

How risky are these markets compared to stock & bond markets? 
 
Commodity prices are generally less volatile than the stocks and this has been statistically proven. Therefore it's relatively safer to trade in commodities. Also the regulatory authorities ensure through continuous vigil that the commodity prices are market-driven and free from manipulations. However all investments are subject to market risk and depend on the individual’s decision.    
  

Is delivery of commodities available? Is it compulsory?
  
Yes, but its not compulsory, buyers and sellers intending to take/give delivery should express their intention to the exchange. The exchange will match delivery randomly and assign it accordingly.   

Are options also allowed in commodity derivatives? 
  
No. Options in goods are presently prohibited under Section 19 of the Forward Contracts (Regulation) Act, 1952. No exchange or person can organize or enter into or make or perform options in goods. However the market expects the government to permit options trading in commodities soon.