Commodity futures market has grown a lot in the past few years and futures trading come into view as a viable option for having a great degree of assurance on the price. The transparency in the prices, low margin trading, and risk management made commodity futures a fine asset class in the Indian commodity market which offers a different investment approach, comparatively less volatile than equity and bonds. Basically, there are a lot of benefits of investing in commodities, which helping out investors and traders to gain from the price movements in the commodities price. It is the farmers who can gain most from trading in commodity futures. The futures market help farmers by providing the price clarity and organized marketplace. But, that’s not all! There are many benefits which you must know if you are a farmer and engaged in agricultural activities.
Benefits to Farmers from Commodity Futures Market
The primary benefit to farmers from the futures market is the protection in case prices fall below the cost of protection. The farmers who generally lose their capital to the middlemen can now benefit from the hedging facility on the futures market which will help those farmers in improving realization. Since India is an agricultural economy, the major concern of all farmers is the fluctuation in prices during the harvesting period.
For instance, a farmer who is harvesting soybean is exposed to the risk of fall in prices when his/her harvest comes out. But, while trading in the futures market, a farmer can lock in the price and sell the soybean contract today at the futures platform, in believing that it would help him/her in avoiding the risk of price fluctuations.
Sometimes, due to unavailability of storage facilities, the farmers rushed into selling during harvest time which forced them to settle in even low. But, by trading in the futures market, the farmers can store their produce in exchange designated facilities till the time their products get some reasonable returns.
Improves Bargaining Power
Generally, the farmers do not directly trade in the commodity futures market. But, what they do – is to take advantage of the price signals that are obtained on the futures market. Even the long duration futures contract helps them in assessing and taking agricultural and cropping decisions based on price signals.
So, technically, the farmers do not directly participate in the commodity futures market; instead, take the advantage of price signals from the futures market. Our farmers are getting benefits of price discovery and risk hedging, which leads to lesser volatility in spot prices. But, in a recent discovery, it was found that the farmers have little to do with the futures prices and one who is primarily participating in the commodity futures market is speculators.
By looking at the above benefits, one can actually measure the importance of commodity futures trading in the Indian commodity market. As a farmer, it is important for you to understand these benefits in order to make smart cropping decisions and make the most out of your trades.
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