Commodity exchanges: Functions, Roles, Objectives & Types

Functions

1. Providing a Market Place:

A commodity exchange provides a convenient place where the members can meet at fixed hours and transact busi­ness in a commodity according to a certain well established rules and regulations. This type of facility is very important for trading in such com­modities as are produced in abundance and cover a very wide field as far as trading therein is con­cerned.

2. Regulating Trading:

As organised markets commodity exchanges establish and enforce rules and regulations with a view to facilitating trade on sound lines. The rules define the duties of mem­bers and lay down methods for business transac­tion.

3. Collecting and Disseminating Market In­formation:

The buyers and sellers on the commod­ity exchange enter into deals for settlement in fu­ture after making an assessment the trends of price and the prospects of a rise or fall in prices of a com­modity. The commodity exchange acts as an asso­ciation of these traders collecting the necessary in­formation and the relevant statistical data and pub­lishing it for the benefit of traders all over the country.

4. Grading of Commodities:

Commodities which are traded on the commodity exchanges have, to be graded according to quality. In this manner, the dealers can quickly enter into agree­ments for the purchase and sale of commodities by description.

5. Settling Disputes through Arbitration:

The commodity exchange provides machinery for the arbitration of trade disputes.

Roles

While performing these functions the com­modity exchanges render a variety of valuable serv­ices to the producers, consumers, traders and oth­ers in the community.

The most important of such services are as follows:

1. The exchanges provide a ready and continu­ous market for the purchase and sale of commodi­ties. The producer is enabled to be independent of the middlemen.
2. By providing hedging facilities, the com­modity exchanges reduce the effect of fluctuations in price.
3. The commodity exchanges provide the pro­ducers an opportunity to transfer their risk to the professional risk-bearers.
4. By providing continuity in the trading of commodities, the commodity exchanges induce bankers and financiers to lend against commodi­ties.
5. The commodity exchanges provide facilities and opportunities for arbitrating and thus equalize the price levels of commodities at various centres.

Objectives

The organised market represents a public or­ganisation consisting of buyers, sellers, producers, traders and dealers dealing in one or more com­modities which constitute the articles of trade in the market. The exchange for commodity is a private as­sociation of dealers and is not for making money or profit or for fixing prices.

Its objectives are to provide an open platform for the interaction of free play of the forces of demand and supply. It only registers the prices reflecting the forces of de­mand and supply. Buying and selling, trading practices and ac­tual working of the organised market are governed by a code of rules and regulations and these can ensure fair dealings, fair prices and equity.

Nature

Nature of Commodity Exchanges:

1. Best facilities available for close and continuous contact between total demand and total supply both present and potential.
2. All businesses are governed by rules and regulations and these rules are strictly enforced by the exchange authorities.
3. Usually the exchange enjoys internal au­tonomy and it is self-regulated, self-administered and self-disciplined autonomous body. At present, almost in all organised markets there are special legislations to control the activities of these organ­ised markets.
4. There is free competition of buyers and sell­ers. The forward markets for commodities and se­curities are also known as two-way auction mar­kets. Open public outcry gives offers and bids by sellers and buyers. They also use finger signals to declare their prices and amounts.
5. Every forward market has a clearing house organisation to facilitate clearing of all dealings and their settlement. The clearing house guarantees payment of dues and taking and giving of delivery of commodities or securities during the settlement period.
6. An organised market acts as a clearing house of market information, i.e., collection of all facts and figures and regular publicity of all relevant sta­tistical information which helps the traders to esti­mate and forecast price trends, changes in demand and supply. Constant price quotation services en­able people to make their purchases and sales with certainty and confidence.
7. The speculative trader is a necessary and vi­tal part of any broad and stable commodity or se­curities market. Speculation is an integral part of market mechanism whether in stock exchange or in commodity exchange.

Types

Types of Commodities in the market, available for trading are categorised into the following classes, based on their inherent nature:

Hard commodities:

Precious metals – Gold, platinum, copper, silver, etc.

Energy – Crude oil, Natural gas, gasoline, etc.

Soft commodities :

Agriculture – Soybeans, wheat, rice, coffee, corn, salt, etc.

Livestock and meat – Live cattle, pork, feeder cattle, etc.

As of 2019, some examples of commodities in the market that were most commonly traded in major commodity exchanges in India included crude oil and silver. While crude oil acts as one of the most important energy sources required for virtually every industry, silver is one of the most precious metals other than gold with a steady demand.

As crude oil is not domestically available in abundance, almost 82% of it is imported from OPEC and Middle Eastern countries. Similarly, silver is traded in extensive quantities from countries such as Mexico, Peru, etc.