Commodity riskinvolves the uncertainties of the futuremarket valuesand the size of the futureIncome, caused due to unfavorable price fluctuation merchandise II like cereals,pulses, oil seeds etc. Various risks associated with agricultural the goods are:
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Price risk: Emerging risk due to unfavorable movements in world prices, exchange rates, the basis between local and world prices. This is often referred to as price risk
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Quantity risk arises when product availability changes
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Cost (input) risk arises when changes in the price of commodities have a negative impact on the costs of the business
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Political risk arises when compliance or regulation affects the price or availability of commodities
Market players exposed to commodity risk are:
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Producers, plantation companies and mining companies, who are primarily producers, often face price risk, input price risk, or cost and quantity risk
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Co-operatives, traders and draft ants who are primarily buyers are exposed to price risk between the period of buying and selling within the country (normally at the port) to an exporter.
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A similar risk is associated with exporters between buying at the port and selling in the destination market.
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Exporters also face political risks associated with export licensing or currency conversion.
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Governments in various countries face price and quantity risks associated with tax revenues. This usually happens when tax rates rise as commodity prices rise (typical case of metals and energy exports). These types of risks also arise in the case where support or other payments depend on the level of commodity prices.
The commodity basis is simply the difference between a local spot price and the relevant futures contract price for a specific period of time. You can define the commodity base for a specific commodity base as:
Base = Spot price – Forward price
OrCash priceis the spot price of a specific commodity at a given location, whileFutures priceis the relevant futures price for that commodity. Example if Indore’s spot price is Rs. 7300 /qtl and NCDEX July soybeans are trading at Rs. 7332 /qtl then the base will be -32. It should be noted that the basic supply of commodities is an important tool for producers and agribusinesses to make decisions about production, forward pricing, hedging and storage.
To better understand the risk / management of raw material risks, the commodity/agripedia sections.