Here are some crucial lessons for small entrepreneurs aiming for success in the commodity business. These insights will help you navigate the complexities of the market and build a strong foundation for your business.
Do not Consider Yourself a King of the Forest:
In the volatile world of commodity business, it’s crucial for entrepreneurs to maintain a realistic perspective. Despite any success they may have, it’s important not to overestimate their control over the market. A common mistake is for entrepreneurs to believe that the market will always conform to their desires, which can lead to disastrous outcomes. It’s essential for them to avoid becoming overconfident and assuming they are bigger than the market itself.
To navigate the risks and uncertainties of the commodity business, entrepreneurs should consider adopting the 80:20 rule. This rule suggests that 80% of an entrepreneur’s position should be hedged or closed, while the remaining 20% can be left open to capture potential market benefits. For instance, if an entrepreneur is trading 100 tons of a product, they should hedge 80 tons through commodity exchanges such as MCDX and MCX, and keep 20 tons in an open position to take advantage of any price increases. This approach aims to strike a balance between risk management and the opportunity to benefit from market movements.
Risks in the Commodity Business
In the commodity business, there are various risks that traders need to be mindful of in order to effectively manage them. These risks include political risk, currency risk (such as fluctuations of the Rupee against the US Dollar), counterparty risk, and even risks associated with events like the coronavirus pandemic.
To effectively spot and manage these risks, traders should stay well-informed about global events and market dynamics. This involves daily reading of newspapers and business publications such as the Economic Times and Business Line. Additionally, traders should conduct thorough studies of potential risks in their specific business and perform statistical analyses of supply and demand.
It’s also crucial to keep a close track of the supply and demand dynamics in the market. By monitoring these factors, traders can gain insights into whether the market will experience high or low levels of activity. This involves constantly monitoring and assessing the supply and demand for the particular commodity being traded.
Build Capacity to bear the Losses
In a commodity business, it’s crucial to evaluate your ability to withstand potential losses. For instance, if you have the capacity to absorb a loss of Rs 10 crore without putting your business in jeopardy, then it’s advisable to take risks only up to that amount. Understanding your risk tolerance is essential for making informed decisions in the commodity market.
Define Your Stop-Loss
As an entrepreneur, it’s crucial not to become overly attached to your stop-loss position. Holding onto a position in the hope of a market turnaround can lead to the risk of losing your entire investment. To prevent such a scenario, it’s essential for entrepreneurs to determine the amount of loss they can afford to bear.
One approach to mitigate risk is to “cut your cloth according to your requirement.” For instance, if you’ve purchased a product for Rs 100, it’s unwise to stubbornly hold onto it if the price drops to Rs 80 or Rs 70. In such a situation, it’s prudent to exit at the current price to minimize further losses.
Therefore, it’s advisable for entrepreneurs to establish a stop-loss strategy within their business operations to protect their capital and manage risk effectively.
Earn High Returns in a Low Margin Business
There’s a common misconception that commodity businesses yield low margins and offer minimal return on investment. While it’s true that making a large initial investment in a commodity business can result in low margins, the situation changes when turnover is factored in. By turning over your invested capital multiple times within a year, the overall return on investment can be quite impressive. For instance, if you initially invest Rs 1 lakh in a commodity business and manage to turn it over 10-12 times within a year, the return on investment would undoubtedly be substantial.
Build a Brand in Your Commodity Business
Over the past few years, there has been a significant shift in consumer behavior towards branded products in India, particularly in the edible oil and sugar segments. Previously, edible oil was not considered a branded product, but currently, 60%-70% of oil consumption in India falls under the branded segment. Similarly, numerous sugar brands have also emerged in the market.
This shift can be attributed to the increasing awareness and intelligence of consumers. As a result, there has been a noticeable transition in the consumer profile in India, with more individuals opting for branded products over non-branded ones. This trend underscores the growing importance of packaging and branding in India’s consumer market.
For businesses operating in commodity markets, there is an opportunity to capitalize on this trend by transforming their operations into recognizable brands. By embracing commoditized branding, businesses can position themselves for long-term success. This transformation requires a commitment to long-term investment in the business, ultimately enabling them to establish a distinct brand presence in the market.
Techniques of Branding
To build a strong brand, it’s essential to follow a series of techniques. These techniques include advertising, setting up distribution channels, educating consumers about your brand, and effective communication strategies. Branding offers numerous benefits such as creating a sustainable business model and adding value to your products in a competitive market.
When it comes to building a distribution network, it’s important to start at a manageable scale. Rather than attempting to establish a nationwide network from the outset, consider beginning at the district level and gradually expanding to the state and national levels. This phased approach can help you manage costs and optimize the efficiency of your distribution operations.
Benefits of Sugarcane Business
Sugarcane business offers a multitude of benefits that make it an attractive option for farmers. Compared to other crops like wheat, rice, and oilseeds, sugarcane provides the best returns. Moreover, sugarcane is a versatile commodity as every part of it can be processed and sold. The products derived from sugarcane juice include sugar, ethanol for blending with petroleum products, wine, and bagasse, which is used to fire the boiler and run the turbine due to its high calorific value.
Potential of Sugarcane Business in India
The sugarcane industry in India had been facing challenges in the past due to over-regulation by policymakers, which led to its deterioration. However, recent government initiatives have revitalized the industry, bringing benefits to both traders and farmers. One notable development is the government’s approval for the production of ethanol from sugarcane juice, a highly profitable product. This policy change has sent a positive signal for the industry’s future prospects.