Commodities are agreements to buy and sell virtually anything except, for some reason, onions. The primary commodities that are traded are oil, gold and agricultural products. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed upon price on a specific date.

Commodities futures, or futures contracts, are an agreement to buy or sell a commodity at a specific date in the future at a specific price. Just like the price of bananas at the grocery store, the prices of commodities can change on a weekly or even daily basis. If the price goes up, the buyer of the futures contract makes money, because he gets the product at the lower, agreed-upon price and can now sell it at the higher, market price. If the price goes down, the seller makes money, because he can buy the commodity at the lower market price, and sell it to the buyer at the higher, agreed-upon price.

Of course, if commodities traders had to actually deliver the product, very few people would do it. Instead, they can fulfill the contract by delivering proof that the product is at the warehouse, by paying the cash difference, or by providing another contract at the market price.

Futures contracts perform two important functions: price discovery and hedging of price risk in a commodity . In international bourses traders can also use financial instruments like call and put options, not yet allowed in India. Futures contracts are useful for the producer because he can get an idea of the price likely to prevail and thereby help them quote a realistic price and hedge risk.

Rather than providing a down payment, the margin required to buy or sell a futures contract is solely a deposit of good faith money that can be collected to cover losses that you may incur in the course of futures trading. Minimum margin requirements for a particular futures contract at a particular time are set by the exchange on which the contract is traded. Exchanges continuously monitor market conditions and risks, and as necessary, increase or decrease the margin requirements.

Commodity trading impacts the economy by making public the analysts forecasts of future prices of the most important market goods. For example, one of the most widely watched commodities is oil. The price of oil changes daily, which has an impact on every good and service produced in the U.S economy. As traders take into account all information regarding oil supply and demand, as well as geopolitical considerations, this affects oil prices. It is these assumptions behind oil prices that affect the economy so significantly.

Presently, future trading is permitted in 41 commodities, viz pepper (domestic and international), turmeric, guar., castor seed, hessian, jute, sacking, cotton, potato, castor oil (international), soya bean (oil and cake), kapas, RBD palmalein, sugar and tea. There are 18 commodity exchanges in India. Futures trading in wheat and rice is banned .But government is examining futures trading in onion, rubber, chillies, linseed, gram and bullion.

Most unofficial exchanges have operated for decades and built up a reputation for integrity and liquidity. Some unofficial markets trade 20-30 times the volume of official exchanges. Usually located close to the official exchange, they offer not only futures but also option contracts. Transaction costs are low, which attracts speculators and small hedgers.

This is a misconception. The world sugar market is located in London, which does not produce any sugar. An exchange needs to be located at the trading hub to get volumes. With modern online exchanges, the location is anyway of little importance.

In theory yes. But physical delivery requires stringent application of unanimously approve quality standards by the exchange and a large and credible warehousing system to ensure buyers are not cheated. Indian commodity exchanges have yet to accomplish this.

Forward markets commission under food and consumer affairs ministry acts as a regulator. FMC decides on the introduction of new commodities, and allowing exchanges to increase product portfolio. However it lacks both powers and expertise to ensure that commodity exchanges are transparent and well managed. Lack of credibility of management, price manipulation and out of books deals are important reasons for industry's poor image.

Commodity exchanges are only successful when the quantities of a commodity being traded are sufficient large, and there is a genuine need for price discovery and risk management. Unfortunately .in India most commodities lack one of the two. India's share of world trade is too small (as in coffee and pepper) to generate sufficiently large volumes. Or domestic trade is driven by prices on international bourses like Chicago, London and Kuala Lumpur as in case of editable oils or sugar. Traders do not need local commodity exchanges when future prices are determined internationally.

Instead of a large nation-wide commodity market, India has isolated regional commodity markets. In parallel with underlying cash markets. In parallel with underlying cash markets, Indian commodity futures too are dispersed and fragmented, with separate trading commodities in different regions and with little contact with one another. The exchanges have acknowledged they need new technologies, and modern and transparent methods of doing business. But management often has difficulties.