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Derivatives are financial instrument whose characteristics and value depend upon the characteristics and value of an underlier, typically a commodity, bond, equity or currency. Examples of derivatives include forwards, futures, options and swap. Advanced investors sometimes purchase or sell derivatives to manage the risk associated with the underlying security, to protect against fluctuations in value, or to profit from periods of inactivity or decline. These techniques can be quite complicated and quite risky.
Commodities whose value is derived from the price of some underlying asset like securities, commodities, bullion, currency, interest level, stock market index or anything else are known as "Derivatives".
In simpler form, derivatives are financial security such as an option or future whose value is derived in part from the value and characteristics of another security, the underlying asset.
It is a generic term for a variety of financial instruments. Essentially, this means you buy a promise to convey ownership of the asset, rather than the asset itself. The legal terms of a contract are much more varied and flexible than the terms of property ownership. In fact, it's this flexibility that appeals to investors.
When a person invests in derivative, the underlying asset is usually a commodity, bond, stock, or currency. He speculates that the value derived from the underlying asset will increase or decrease by a certain amount within a certain fixed period of time. Futures and options are two commodity traded types of derivatives. An ‘options'contract gives the owner the right to buy or sell an asset at a set price on or before a given date. On the other hand, the owner of a futures contract is obligated to buy or sell the asset.
The other examples of derivatives are warrants and convertible bonds (similar to shares in that they are assets). But derivatives are usually contracts. Beyond this, the derivatives range is only limited by the imagination of investment banks. It is likely that any person who has funds invested, an insurance policy or a pension fund, which they are investing in, and exposed to, derivatives - wittingly or unwittingly.
Shares or bonds are financial assets where one can claim on another person or corporation; they will be usually being fairly standardised and governed by the property of securities laws in an appropriate country.
On the other hand, a contract is merely an agreement between two parties, where the contract details may not be standardised.
Derivatives securities or derivatives products are in real terms contracts rather than solid as it fairly sounds.
Forwards
A Forward contract is an agreement entered between two parties to buy or sell an asset at a future date for an agreed price. A Forward contract is not traded on an exchange.
Forward contracts are exactly known as OTC contracts which generally used by clearing houses for hedging and arbitrage purpose. Exchange has managerial role only for that.
Futures

A futures contract is an agreement between two parties to buy or sell a specified quantity and quality of asset at a certain time in future at a certain price agreed at the time of entering into the contract on the futures exchange.

Definition of future contracts
Future contracts is an agreement made and traded on the exchange between two parties to buy or sell a commodity at a particular time in the future for a pre-defined price. Since both the parties are unaware of each other, the exchange provides a mechanism to give the party assurance of honored contract. The exchange specifies standardized features of the contract. The risk to the holder is unlimited, and because the pay off pattern is symmetrical, the risk to the seller is unlimited as well.
Money lost and gained by each party on a futures contract are equal and opposite. In other words, futures trading is a zero-sum game. These are basically forward contracts, meaning they represent a pledge to make a certain transaction at a future date. The exchange of assets occurs on the date specified in the contract. These are regulated by overseeing agencies, and are guaranteed by clearinghouses. Hedgers often trade futures for the purpose of keeping price risk in check.
Future contracts are often used by commercial enterprises as ‘hedging tools' to reduce the risk of expected future purchases or sales of the underlying asset. If used to speculate, risk increases. So risk depends on the underlying instrument and the use of the future.
Advantages of Futures Contracts
• If price moves are favorable, the producer realizes the greatest return with this marketing alternative.
• No premium charge is associated with futures market contracts.
Disadvantages of Future Contracts
• Subject to margin calls
• Net price is subject to Basis change
Futures contracts are similar to Options. Both represent actions that occur in future. But Options are contract on the underlying futures contract where as futures are either to accept or deliver the actual physical commodity. To make a decision between using a futures contract or an options contract, producers need to evaluate both alternatives.
An Option
An Option is the right but not the obligation of the holder, to buy or sell the underlying asset by a certain date at a certain price. There are two types of options: CALL OPTION and PUT OPTION
Call Option
A call option is a contractual agreement, which gives the owner (holder) of the option, the right but not the obligation to purchase a stated quantity of the underlying asset (commodities, shares, indices, etc.) at a specified price (called the strike price), on the expiry date.
Put Option
A put option is a contractual agreement, which gives the owner (holder) of the put option, the right but not the obligation to sell a stated quantity of the underlying asset (commodities, shares, indices, etc.) at a specified price (called the strike price), on the expiry date.
Swap
A swap is an agreement between two parties to exchange sequences of cash flows for a set period of time. Usually, at the time the contract is initiated, at least one of these series of cash flows is determined by a random or uncertain variable, such as an interest rate, foreign exchange rate, equity price or commodity price. Conceptually, one may view a swap as either a portfolio of forward contracts, or as a long position in one bond coupled with a short position in another bond. This article will discuss the two most common and most basic types of swaps: the plain vanilla interest rate and currency swaps.

Equity swaps are exchanges of cash flows in which at least one of the indices is an equity index. An equity index is a measure of the performance of an individual stock or a basket of stocks.

Commodity Swaps: Producers need to manage their exposure to fluctuations in the prices for their commodities. They are primarily concerned with fixing prices on contracts to sell their produce. A gold producer wants to hedge his losses attributable to a fall in the price of gold for his current gold inventory. A cattle farmer wants to hedge his exposure to changes in the price of his livestock.

End-users need to hedge the prices at which they can purchase these commodities. A university might want to lock in the price at which it purchases electricity to supply its air conditioning units for the upcoming summer months. An airline wants to lock in the price of the jet fuel it needs to purchase in order to satisfy the peak in seasonal demand for travel.

Speculators are funds or individual investors who can either buy or sell commodities by participating in the global commodities market. While many may argue that their involvement is fundamentally destabilizing, it is the liquidity they provide in normal markets that facilitates the business of the producer and of the end-user.

Why would speculators look at the commodities markets? Traditionally, they may have wanted a hedge against inflation. If the general price level is going up, it is probably attributable to increases in input prices. Or, speculators may see tremendous opportunity in commodity markets. Some analysts argue that commodity markets are more technically-driven or more likely to show a persistent trend.

The futures markets have been the traditional vehicles for participating in the commodities markets. Indeed, derivatives markets started in the commodities field.

Types of commodity swaps

There are two types of commodity swaps: fixed-floating or commodity-for-interest.

Fixed-floating swaps are just like the fixed-floating swaps in the interest rate swap market with the exception that both indices are commodity based indices.

General market indices in the commodities market with which many people would be familiar include the Goldman Sachs Commodities Index (GSCI) and the Commodities Research Board Index (CRB). These two indices place different weights on the various commodities so they will be used according to the swap agent's requirements.

Commodity-for-interest swaps are similar to the equity swap in which a total return on the commodity in question is exchanged for some money market rate (plus or minus a spread).

Valuing commodity swaps

In pricing commodity swaps, we can think of the swap as a strip of forwards each priced at inception with zero market value (in a present value sense). Thinking of a swap as a strip of at-the-money forwards is also a useful intuitive way of interpreting interest rate swaps or equity swaps.

Commodity swaps are characterized by some idiosyncratic peculiarities, though.

These include the following factors for which we must account (at a minimum):

1. The cost of hedging
2. The institutional structure of the particular commodity market in question
3. The liquidity of the underlying commodity market
4. Seasonality and its effects on the underlying commodity market
5. The variability of the futures bid/offer spread
6. Brokerage fees
7. Credit risk, capital costs and administrative costs

Some of these factors must be extended to the pricing and hedging of interest rate swaps, currency swaps and equity swaps as well. The idiosyncratic nature of the commodity markets refers more to the often limited number of participants in these markets (naturally begging questions of liquidity and market information), the unique factors driving these markets, the inter-relations with cognate markets and the individual participants in these markets.
Hedging
Hedging is the most common method of price risk management. It is the strategy of offsetting price risk that is inherent in a spot market by taking an equal but opposite position in the futures market. Futures markets are used as a mode by hedgers to protect their businesses from adverse price changes, which could dent the profitability of their business. Hedging benefits all participants who are involved in trading of commodities like farmers, processors, merchandisers, manufacturers, exporters, importers, etc. The following are 2 hypothetical illustrations of the benefits of hedging:
Hypothetical Illustration 1: A wheat miller enters into a contract to sell flour to a bread manufacturer four months from now. The price is agreed upon today though the flour would only be delivered after four months. The miller is worried about the rise in the price of wheat during the course of next four months. A rise in the price of wheat would result in losses on the contract to the miller. To safeguard against the risk of increasing prices of wheat, the miller buys wheat futures contracts that call for the delivery of wheat in four months time. After the expiry of four months, as feared by the miller, the price of wheat may have risen. The miller then purchases the wheat in the spot market at a higher price. However, since he has hedged in the futures market, he can now sell his contract in the futures market at a gain since there is an increase in the futures price as well. He thus offsets his purchase of wheat at a higher cost by selling the futures contract thereby protecting his profit on the sale of the flour. Thus, the wheat miller hedges against exposure to price risk.

Hypothetical Illustration 2: A farmer plans to harvest Guarseed crop in the month of November. But in the harvesting season (November), the Guarseed prices usually decline due to excess supply in the market. This usually forces the farmer, who requires income for the next subsequent harvesting season, o sell his harvest at a discount. The farmer has two options to counter this risk he is exposed due to price fluctuations:
Option A: Store the Guarseed, which has been harvested for a few months and subsequently sell the Guarseed when the prices increase (in the non-harvest season). But, this would not be possible if the farmer requires the proceeds from the sale of his harvest to finance the next crop season. Also, the farmer would require adequate storage space and would require following preservation techniques to ensure that the stored harvest would not be destroyed due to infestation.

Option B: Alternatively, the farmer can hedge himself by selling November Guarseed Futures contract in the month of September. Any decline in the spot prices in the month of November would result in decline in the futures prices, which he has already sold at a higher price. Upon harvest, the farmer would offset his futures transaction by buying Guarseed November futures contract and simultaneously sell his Guarseed crop harvest in the physical market. This ensures that the farmer is protected against any decline in the prices in the physical market.

Hypothetical Illustration 3: An automobile manufacturer purchases huge quantities of steel as raw material for automobile production. The automobile manufacturer enters into a contractual agreement to export automobiles 3 months hence to dealers in East European market. This presupposes that the contractual obligation has been fixed at the time of signing the contractual agreement for exports. The automobile manufacturer is now exposed to risk in the form of increasing steel prices. In order to hedge against price risk, the automobile manufacturer can buy Steel futures contracts, which would mature 3 months hence. In case of increasing or decreasing steel prices, the automobile manufacturer is protected. Let us analyse the different scenarios:
Scenario 1: Increasing Steel Prices
If steel prices increase, this would result in increase in the value of the Futures contracts, which the automobile manufacturer has bought. Hence, he makes profit in the futures transaction. But the automobile manufacturer needs to buy Steel in the physical market to meet his export obligation. This means that he faces a corresponding loss in the physical market. But this loss is offset by his gains in the futures market. Finally, at the time of purchasing steel in the physical market, the automobile manufacturer can square off his position in the futures market by selling the Steel Futures contract, for which he has an open position.
Scenario 2: Decreasing Steel Prices
If steel prices decrease, this would result in decrease in the value of the Futures contracts, which the automobile manufacturer has bought. Hence, he makes losses in the futures transaction. But the automobile manufacturer needs to buy Steel in the physical market to meet his export obligation. This means that he faces a corresponding gain in the physical market. The loss in the futures market is offset by his gains in the physical market. Finally, at the time of purchasing steel in the physical market, the automobile manufacturer can square off his position in the futures market by selling the Steel Futures contract, for which he has an open position. This results in a perfect hedge to lock the profits and protect from increase or decrease in raw material prices. This also provides the added advantage of Just In Time Inventory management for the automobile manufacturer.

Warehouse
A warehouse is a commercial building for storage of goods. Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They are usually large plain buildings in industrial areas of cities and towns. They come equipped with loading docks to load and unload trucks; or sometimes are loaded directly from railways, airports, or seaports. They also often have cranes and forklifts for moving goods, which are usually placed on ISO standard pallets loaded into pallet racks.

Some warehouses are completely automated, with no workers working inside. The pallets and product are moved with a system of automated conveyors and automated storage and retrieval machines coordinated by programmable logic controllers and computers running logistics automation software. These systems are often installed in refrigerated warehouses where temperatures are kept very cold to keep the product from spoiling, and also where land is expensive, as automated storage systems can use vertical space efficiently. These high-bay storage areas are often more than 10 meters high, with some over 20 meters high.

The direction and tracking of materials in the warehouse is coordinated by the WMS, or Warehouse Management System, a database driven computer program. The WMS is used by logistics personnel to improve the efficiency of the warehouse by directing put ways and to maintain accurate inventory by recording warehouse transactions.

For a warehouse to function efficiently, the facility must be properly slotted. Effective slotting addresses which storage medium a product will be picked from (pallet rack or carton flow), and how they will be picked (pick-to-light, pick-to-voice or pick-to-paper). With a proper slotting plan, a warehouse can improve its inventory rotation requirements-- such as FIFO (First In First Out) and LIFO (Last In First Out )-- control labor costs and increase productivity. (1)

Traditional warehousing has been declining since the last decades of the 20th century with the gradual introduction of Just In Time (JIT) techniques designed to improve the return on investment of a business by reducing in-process inventory. The JIT system promotes the delivery of product directly from the factory to the retail merchant, or from parts manufacturers directly to a large scale factory such as an automobile assembly plant, without the use of warehouses. However, with the gradual implementation of offshore outsourcing and off shoring in about the same time period, the distance between the manufacturer and the retailer (or the parts manufacturer and the industrial plant) grew considerably in many domains, necessitating at least one warehouse per country or per region in any typical supply chain for a given range of products.

Recent developments in marketing have also led to the development of warehouse-style retail stores with extremely high ceilings where decorative shelving is replaced by tall heavy duty industrial racks, with the items ready for sale being placed in the bottom parts of the racks and the crated or palletized and wrapped inventory items being usually placed in the top parts. In this way the same building is used both as a retail store and a warehouse.

Modern warehouses are also used at large by exporters/manufacturers as a point of developing retail outlets in a particular region or country. This concept reduces the end cost of the product to the consumer and thus enhance the production sale ratio. Warehousing is an age old concept which can be used as sharp tool by original manufacturers to reach out directly to consumers leaving aside or bypassing importers or any other middle agencies or person.
Fundamental Analysis
WHAT IS FUNDAMENTAL ANALYSIS?
Fundamental analysis is the study of the factors that affect supply and demand of any particular asset class. Gathering and interpreting information pertaining to demand and supply of commodities is important in understanding commodity price behavior. To gain a better understanding of the demand-supply dynamics, we need to know the laws of demand and supply and how these factors affect the final price. General economic principle says demand and supply determine price. This is true for the commodity market too. But factors affecting demand and supply are diverse and independent, having different origin. Therefore, prices of commodity fluctuate so often that it becomes difficult to determine the exact price at a particular point of time. Since commodity price, for which futures trading are done, is volatile and changes on real-time basis, it is important for traders of futures market to know where price is likely to head sometime down the line. Traders, speculators, hedgers all anticipate price movements and take appropriate position in the market.
Fundamental analysis of any commodity involves knowing the following facts:
 Production and consumption
 Import and export
 Distance between consuming centre and producing centre
 Cost of transportation
 Means of transportation
 Usual trade practice
 Cultivation period
 Impact of weather and technology on crop cultivation
 Scope and potential of production and consumption for a particular commodity and its rivalry with other similar
kind of commodity that may be, in turn, a near substitute for it
 Value chain of the commodity and influence of stakeholders at different levels in value chain
 Taxation, such as sales tax, import tax, export tax, custom duty, octopi
 Import and export regulations
 Inflation
 Foreign currency exchange rate
 Government interference
 Presence of organized institutions
 Groups and their influence on trading community pertaining to particular commodity
Technical Analysis
Technical analysis involves using quasi-statistical techniques and formal statistics to identify the trend and pattern of time series data. Usually price data is put on chart and inference is made out based on some principles that are called indicators. Technical Analysis involves forecasting of future financial price movements based on the study of the behaviour of historical price movements. Technical analysis does not result in absolute predictions about the future. Instead, it helps anticipating what is "likely" to happen to prices over time. A wide variety of charts and tools are used to show price over time.
Technical analysis is based on patterns of historical price movement. Combining fundamental and technical analysis will give us a better understanding of the market forces that are affecting the price movements in financial markets.
Technical analyst uses following information for charting purpose.
 Open, High, Low and Closing price
 Open Interest
 Volume

A few indicators are listed below that a technical analyst often uses in analysis:
 Trend lines
 Support and Resistance
 Moving Average
 Divergence
 RSI
 Oscillators
 Moving Average Convergence Divergence
 Fibonacci Retracement
 Elliot wave pattern
 Candlestick chart pattern
 There are mainly three types of chart, which is popular amongst analyst.
 Candlestick
 Bar Chart
 Line Chart
TYPES OF CHARTS
LINE CHART
These are simple charts showing the closing prices of each period and connecting them as a single line.

BAR CHART
The bar chart is one of the most popular types of charts used in technical analysis. It shows the intra-day movements of the market. Each bar represents one period showing the Open, High Low and Close for the day. The vertical bar drawn connects the high and the low of the contract during the day and thus represents the “range” of movement of the price during the day.

THE TREND LINE
The trend line is the simplest of all technical tools available and is the most up- to- date indicator by including the most recent price action and giving a clear path for the market to follow. It can be applied to any type of chart, whether it is a line chart, bar chart or a candlestick chart. Some basic rules on trend line applications:
a) Trend lines should touch at least two points (highs or lows) and possibly be confirmed by a third point.
b) The breaking of a trend line is the best signal that the market has changed direction.
c) The longer the trend line stays intact and the more times the trend line is tested, it signifies the strength of the underlying trend
The steepness of a trend line has a major significance. The trend line being too steep is generally not a favorable sign. It can indicate that the trend is rising too fast and cannot be held at the increasing rate. If the trend line is flat, the uptrend or downtrend is generally thought to be weak with the general uncertainty of a trend less market.
The 45-degree line is the most preferred. It is generally felt that the market is in balance with price and time rising and falling together. A trend line close to the above 45 degree angle signifies a more stable trend where prices are moving at the desirable / best speed.

SUPPORT AND RESISTANCE LEVELS
Support and Resistance Levels are price levels at which movement should stop and reverse direction. The Support level acts as a floor whereas the Resistance level acts as a ceiling to future price movements.
Support - A price level below the current market price, at which buying interest should be able to overcome selling pressure and thus keep the price from going any lower.
Resistance - A price level above the current market price, at which selling pressure should be strong enough to overcome buying pressure and thus keep the price from going any higher.
When a stock price reaches a support/resistance level. It can either act as a reversal point: in other words, when a stock price drops to a support level, it will go back up. On the other hand, the levels may reverse roles once they are penetrated. For example, when the market price falls below a support level, that former support level will then become a resistance level when the market later trades back up to that level.

CANDLESTICK CHARTS
Method of drawing stock (or commodity) charts which originated in Japan. Requires the presence of Open, High, Low and Close price data to be drawn. There are two basic types of candles, the white body and the black body. As with regular bar charts, a vertical line is used to indicate the periods (normally daily) high to low. When prices close higher than they opened a white rectangle is drawn on top of the high-low line. A down day is drawn in black. The combination of several candles results in patterns, which give insight into future price activity.

PATTERNS IN CANDLESTICK CHARTING
Doji

BULLISH HARAMI
This formation acts a warning to the Bears, on an impending change of trend. If the next day closes higher, then this will confirm a change of trend. It is a bullish signal where the first day is a long black candlestick and the second day is a white candlestick where the body is completely engulfed by the black body of the first day

BEARISH HARAMI
This pattern signals reversal of the uptrend. The first day is a long white candlestick The second day2nd day is a black candlestick where the body is completely engulfed by the white body of the first day The sudden change displayed by the second day’s small black candle indicates a change of trend. Bulls may be satisfied with the indication of lower prices in the following days

THE POINT AND FIGURE CHART
The point & figure (P&F) chart is a less frequently used by chartists. This chart plots day-to-day increases and declines in price Increases are represented by a rising stack of "X"s, while decreases are represented by a declining stack of "O"s. This type of chart was traditionally used for intraday charting (a stock chart for just one day), mainly because it can be long and tedious to create a P&F chart manually over a longer period of time.
The idea behind P&F charts is that they help you to focus on the most important trends while filtering out the less significant price movements

Popular Charting Patterns
Head & Shoulders : This is a chart formation resembling an “M” in which a stock’s price –
• rises to a peak and then declines, again,
• rises above the former peak and declines, followed by
• a final rise which is more than the second peak and declines.

The first and third peaks are shoulders, and the second peak forms the head. This pattern is considered a very bearish indicator.
Double Bottom: This pattern resembles a "W" and occurs when a stock price drops to a similar price level twice within a few weeks or months. When the price passes the highest point in the handle, it indicates the time to buy in a perfect double bottom; the second decline should normally go slightly lower than the first decline. The middle point of the "W" should not go into new high ground. This is a very bullish indicator.

Moving Averages
The moving average is probably the simplest, and most versatile indicator in technical analysis. It can be used with the price (high, close, etc) and can also be applied to other indicators, helping to smooth out volatility. As the name implies, the Moving Average is the average of a given amount of data. For example, a 9-day average of closing prices is calculated by adding the last 9 closes and dividing by 9. The result is noted on a chart. The next day the same calculations are performed with the new result being connected (using a solid or dotted line) to the previous day’s. And so forth. Variations of the Simple Moving Average are the Weighted and Exponential moving averages.

Bollinger Bands
Trading bands can be plotted above and below a simple moving average of a particular asset’s prices over a continuous period of time. The standard deviation of closing prices for a period equal to the moving average employed is used to determine the bandwidth. This causes the bands to tighten in quiet markets and loosen in volatile markets. The bands can be used to determine overbought and oversold levels, locate reversal areas, project targets for market moves, and determine appropriate stop levels. As a general guideline, when prices are in the lower band, we can look for buying opportunities and selling opportunities when the price activity is in the upper band.

RSI - Relative Strength Index
This indicator is often used to identify price tops and bottoms by keying on specific levels (usually "30" and "70") on the RSI chart, which is scaled from 0-100. It can also help in detecting support and resistance levels. It may be noted that failure swings above 70 or below 30 can warn of coming reversals. Divergence between the RSI and price is often a useful reversal indicator
The formula for calculating the RSI is:
• RSI=100-(100/1-RS)
• RS= average of x day’s up closes divided by average of x day’s down closes

MACD (Moving Average Convergence / Divergence)
The MACD is used to determine overbought or oversold conditions in the market. Written for stocks and stock indices, MACD can be used for commodities as well. The MACD line is the difference between the long and short exponential moving averages of the chosen item. The signal line is an exponential moving average of the MACD line. Signals are generated by the relationship of the two lines. As with RSI and Stochastic, divergences between the MACD and prices may indicate an upcoming trend reversal.

Elliott Wave
Elliott wave theory goes beyond traditional charting techniques by providing an overall view of market movement that helps explain why and where certain chart patterns develop. The three major aspects of wave analysis are pattern, time and ratio. The basic Elliott pattern consists of a 5 wave up trend followed by a three-wave correction. Each "leg" of a wave in turn consists of smaller waves. Elliott waves can be used to successfully define where the market currently is in relation to "the big picture".

Market Price

LAW OF DEMAND
The key components of this economic theory are consumer behaviour, and how individual consumer responses are reflected in the market place. Understanding what factors have affected demand in the past will help to develop expectations about demand in the future and the impact on market price.
Thus, demand is a relationship between price and quantity, with all other factors remaining constant. Demand is represented graphically as a downward sloping curve with price on the vertical axis and quantity on the horizontal axis.

Generally the relationship between price and quantity is negative. This means that the higher is the price level the lower will be the quantity demanded and, conversely, the lower the price the higher will be the quantity demanded. Market demand is the sum of the demands of all individuals within the marketplace. Market demand will be affected by other variables in addition to price, such as various value added services including handling, packaging, location, quality control, and financing. Thus the demand for an agricultural commodity is typically derived from the demand for a finished product.
Ultimately the market value for any good or service is determined by its value to the consumer. It is important to understand that a free market economy is driven not by producers but by consumers. Higher prices can lead to higher profits, which provide you with the incentive and the means to expand production of those goods and services that consumers value the most. On the other hand, when consumers are unwilling to buy what is offered at the current price, the seller will have to lower the price ultimately resulting in lower profits. Losses reduce the producer’s incentive to produce things that have weak demand, which will ultimately force production cuts as farmers lose more and more money.
This is the discipline of the marketplace. Those who produce things that consumers are willing and able to buy are rewarded. Those who produce things that consumers don’t want or can’t buy are penalized. Farmers must produce for the markets. They cannot expect to find or create a profitable market for whatever they choose to produce.

LAW OF SUPPLY

Supply is another important component of fundamental commodity market analysis. An understanding of the factors affecting supply in the past will help with the development of supply expectations in the future and the impact upon market price.
The law of supply can be approached from two different contexts. The first is that it represents the sum total of production plus carryover stocks. The other context for supply describes the behaviour of producers. The total supply is the sum of the individual quantities of product that each farmer brings to the market. Market supply is represented by an upward sloping curve with price on the vertical axis and quantity on the horizontal axis (figure 2)

An increase in price in most instances will result in farmers wanting to increase the quantity of a given product they will bring to the market, therefore the relationship between the price and supply is positive. Market supply will be affected by other variables in addition to the price. Factors that have been identified as important in determining supply behaviour include; the number of firms producing the product, technology, the price of inputs, the price of other commodities which could be produced, and the weather. Lower prices are the market’s signal to farmers that they have produced too much of something or that it is something consumers do not want.

HOW SUPPLY AND DEMAND DETERMINE PRICES OF COMMODITIES
The interaction of supply and demand determines price. An exchange of goods or services will occur whenever buyers and sellers can agree on a price. When an exchange occurs, the agreed upon price is called the "equilibrium price" This can be graphically illustrated as follows: (Figure 3)

Supply and demand are said to be in balance or “equilibrium” when both buyers and sellers are willing to exchange the quantity "Q" at the price "P". At any price below P, the quantity demanded is greater than the quantity supplied. In this situation consumers would be anxious to acquire the commodity, which the producer is unwilling to supply resulting in a product shortage. Consumers would have to pay a higher price in order to get the product they want; while producers would demand a higher price in order to bring more products on to the market. The end result is a rise in prices to the point P, where supply and demand is once again in balance.
Conversely, if prices rise above P, there would be surplus quantity and the market would be in surplus - too much supply relative to demand. Producers would have to lower their prices in order to clear the market of excess supplies. Consumers would be induced by the lower prices to increase their purchases. Prices will fall until supply and demand are again in equilibrium at point P.
When either demand or supply changes, the equilibrium price will change. For example, good weather normally increases the supply of pulses and grains, with more products being made available over a range of prices. With no increase in the quantity of product demanded, there will be movement along the demand curve to a new equilibrium price in order to clear the excess supplies off the market. Consumers will buy more but only at a lower price
Likewise a shift in demand due to changing consumer preferences will also influence the market price.
With no reduction in supply, the effect on price results from a movement along the supply curve to a lower equilibrium price where supply and demand is once again in balance.
Changes in supply and demand can be short run or long run in nature. Weather tends to influence market prices generally in the short run. Similarly, other factors include changes in consumer preferences, technology, etc.
More and more use of technology results in reducing the costs of production on a per unit basis, which in turn results in shift of the supply curve rapidly. At the same time if total demand does not increase sufficiently to absorb the excess goods produced at lower costs, the long run impact of technology on the market place will be to lower prices. The rapidly shifting supply curve coupled with a slower moving demand curve has generally contributed to lower prices for agricultural output when compared to prices for industrial products.
Fundamental Analysis
WHAT IS FUNDAMENTAL ANALYSIS?
Fundamental analysis is the study of the factors that affect supply and demand of any particular asset class. Gathering and interpreting information pertaining to demand and supply of commodities is important in understanding commodity price behaviour. To gain a better understanding of the demand-supply dynamics, we need to know the laws of demand and supply and how these factors affect the final price. General economic principle says demand and supply determine price. This is true for the commodity market too. But factors affecting demand and supply are diverse and independent, having different origin. Therefore, prices of commodity fluctuate so often that it becomes difficult to determine the exact price at a particular point of time. Since commodity price, for which futures trading is done, is volatile and changes on real-time basis, it is important for traders of futures market to know where price is likely to head sometime down the line. Traders, speculators, hedgers all anticipate price movements and take appropriate position in the market.
Fundamental analysis of any commodity involves knowing the following facts:
 Production and consumption
 Import and export
 Distance between consuming centre and producing centre
 Cost of transportation
 Means of transportation
 Usual trade practice
 Cultivation period
 Impact of weather and technology on crop cultivation
 Scope and potential of production and consumption for a particular commodity and its rivalry with other similar
kind of commodity that may be, in turn, a near substitute for it
 Value chain of the commodity and influence of stakeholders at different levels in value chain
 Taxation, such as sales tax, import tax, export tax, custom duty, octroi
 Import and export regulations
 Inflation
 Foreign currency exchange rate
 Government interference
 Presence of organized institutions
 Groups and their influence on trading community pertaining to particular commodity
LAW OF DEMAND
The key components of this economic theory are consumer behaviour, and how individual consumer responses are reflected in the market place. Understanding what factors have affected demand in the past will help to develop expectations about demand in the future and the impact on market price.
Thus, demand is a relationship between price and quantity, with all other factors remaining constant. Demand is represented graphically as a downward sloping curve with price on the vertical axis and quantity on the horizontal axis.

Generally the relationship between price and quantity is negative. This means that the higher is the price level the lower will be the quantity demanded and, conversely, the lower the price the higher will be the quantity demanded. Market demand is the sum of the demands of all individuals within the marketplace. Market demand will be affected by other variables in addition to price, such as various value added services including handling, packaging, location, quality control, and financing. Thus the demand for an agricultural commodity is typically derived from the demand for a finished product.
Ultimately the market value for any good or service is determined by its value to the consumer. It is important to understand that a free market economy is driven not by producers but by consumers. Higher prices can lead to higher profits, which provide you with the incentive and the means to expand production of those goods and services that consumers value the most. On the other hand, when consumers are unwilling to buy what is offered at the current price, the seller will have to lower the price ultimately resulting in lower profits. Losses reduce the producer’s incentive to produce things that have weak demand, which will ultimately force production cuts as farmers lose more and more money.
This is the discipline of the marketplace. Those who produce things that consumers are willing and able to buy are rewarded. Those who produce things that consumers don’t want or can’t buy are penalized. Farmers must produce for the markets. They cannot expect to find or create a profitable market for whatever they choose to produce.
LAW OF SUPPLY
Supply is another important component of fundamental commodity market analysis. An understanding of the factors affecting supply in the past will help with the development of supply expectations in the future and the impact upon market price.
The law of supply can be approached from two different contexts. The first is that it represents the sum total of production plus carryover stocks. The other context for supply describes the behaviour of producers. The total supply is the sum of the individual quantities of product that each farmer brings to the market. Market supply is represented by an upward sloping curve with price on the vertical axis and quantity on the horizontal axis (figure 2)

An increase in price in most instances will result in farmers wanting to increase the quantity of a given product they will bring to the market, therefore the relationship between the price and supply is positive. Market supply will be affected by other variables in addition to the price. Factors that have been identified as important in determining supply behaviour include; the number of firms producing the product, technology, the price of inputs, the price of other commodities which could be produced, and the weather. Lower prices are the market’s signal to farmers that they have produced too much of something or that it is something consumers do not want.

HOW SUPPLY AND DEMAND DETERMINE PRICES OF COMMODITIES
The interaction of supply and demand determines price. An exchange of goods or services will occur whenever buyers and sellers can agree on a price. When an exchange occurs, the agreed upon price is called the "equilibrium price" This can be graphically illustrated as follows: (Figure 3)

Supply and demand are said to be in balance or “equilibrium” when both buyers and sellers are willing to exchange the quantity "Q" at the price "P". At any price below P, the quantity demanded is greater than the quantity supplied. In this situation consumers would be anxious to acquire the commodity, which the producer is unwilling to supply resulting in a product shortage. Consumers would have to pay a higher price in order to get the product they want; while producers would demand a higher price in order to bring more products on to the market. The end result is a rise in prices to the point P, where supply and demand is once again in balance.
Conversely, if prices rise above P, there would be surplus quantity and the market would be in surplus - too much supply relative to demand. Producers would have to lower their prices in order to clear the market of excess supplies. Consumers would be induced by the lower prices to increase their purchases. Prices will fall until supply and demand are again in equilibrium at point P.
When either demand or supply changes, the equilibrium price will change. For example, good weather normally increases the supply of pulses and grains, with more products being made available over a range of prices. With no increase in the quantity of product demanded, there will be movement along the demand curve to a new equilibrium price in order to clear the excess supplies off the market. Consumers will buy more but only at a lower price
Likewise a shift in demand due to changing consumer preferences will also influence the market price.
With no reduction in supply, the effect on price results from a movement along the supply curve to a lower equilibrium price where supply and demand is once again in balance.
Changes in supply and demand can be short run or long run in nature. Weather tends to influence market prices generally in the short run. Similarly, other factors include changes in consumer preferences, technology, etc.
More and more use of technology results in reducing the costs of production on a per unit basis, which in turn results in shift of the supply curve rapidly. At the same time if total demand does not increase sufficiently to absorb the excess goods produced at lower costs, the long run impact of technology on the market place will be to lower prices. The rapidly shifting supply curve coupled with a slower moving demand curve has generally contributed to lower prices for agricultural output when compared to prices for industrial products.

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