How do futures contracts work in the commodities market?

In the commodities market, futures contracts are agreements to buy or sell a specific commodity at a predetermined price and date in the future. These contracts allow buyers and sellers to lock in a price for a particular commodity, which can be beneficial for managing price risks and uncertainty.

For example, a farmer may sell a futures contract for a specific quantity of wheat that they will harvest in the future. This allows the farmer to lock in a price for their wheat before it is harvested, reducing their exposure to price fluctuations in the wheat market. Conversely, a bakery may buy a futures contract for a specific quantity of wheat, allowing them to lock in a price for their future wheat purchases and reducing their exposure to price fluctuations as well.

Futures contracts are traded on exchanges, such as the Multi Commodity Exchange (MCX) in India, and they have standard specifications for the quantity and quality of the commodity being traded. These contracts can be bought and sold by traders, speculators, and hedgers, and they can be settled in cash or by physical delivery of the underlying commodity.

It is important to note that trading futures contracts involves a significant amount of risk and requires careful consideration of market conditions and individual risk tolerance.