A Project on Commodity Trading

COMMODITY MARKETCommodity markets are markets where raw or primary products are exchanged. It covers physical product (food, metals, and electricity) markets but not the ways that services, including those of governments, nor investment nor debt, can be seen as a commodity.

HISTORY OF COMMODITY MARKET

y Modern Commodity Market have their roots in the trading of agricultural products. y Wheat and corn, cattle and pigs, were widely tradedusing standard instruments in the 19th century in theUnited States. y Historically, in ancient times Sumerian use of sheepor goats, or other peoples using pigs, rare seashells, orother items as commodity money, have tradedcontracts in the delivery of such items, to render tradeitself more smooth and predictable.

SIZE OF THE MARKETy The trading of commodities includes physical tradingof food items, Energy and Metals, etc. and trading ofderivatives. y In the five years up to 2007, the values of global physical exports of commodities increased by 17% while the notional value outstanding of commodity. OTC derivatives increased more than 500% andcommodity derivative trading on exchanges morethan 200%.

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Analysis of commodity indices in the global shipping trade

y Agricultural contracts trading grew by 32% in 2007, energy 29% and industrial metals by 30%. y Precious metals trading grew by 3%, with higher volume in New York being partially offset by declining volume in Tokyo. y OTC trading accounts for the majority of trading in gold and silver.

LIST OF TRADED COMMODITYy Agricultural (Grains, and Food and Fiber) y Livestock & Meat y Energy y Precious metals y Industrial metals

Agricultural ProductsCorn, Oats, Rough Rice, Soybeans, Rapeseed, Soybean Meal, Soybean Oil, Wheat, Cocoa, Coffee C, Cotton No.2, Sugar No.11, Sugar No.14.

Livestock and meatLean Hogs, Frozen Pork Bellies, Live Cattle, Feeder Cattle.

EnergyWTI Crude Oil, Brent Crude, Ethanol, Natural Gas, Heating Oil, Gulf Coast Gasoline, RBOB Gasoline, Propane, Uranium.

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Precious MetalGold,Platinum, Palladium, Silver.

Industrial MetalsCopper, Lead, Zinc, Tin, Aluminum, aluminum alloy, Nickel, aluminum alloy, Recycled steel.

COMMODITY EXCHANGESy Abuja Securities and Commodities Exchange y Bhatinda Om & Oil Exchange Bathinda y Brazilian Mercantile and Futures Exchange y Chicago Board of Trade y Chicago Mercantile Exchange y Commodity Exchange Bratislava, JSC y Dalian Commodity Exchange y Dubai Mercantile Exchange y Intercontinental Exchange y Minneapolis Grain Exchange y Multi Commodity Exchange y National Commodity and Derivatives Exchange y National Multi-Commodity Exchange of India Ltd y New York Mercantile Exchange y New York Board of Trade y London Metal Exchange y Winnipeg Commodity Exchange

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RECENT TRENDS IN COMMODITYMARKETy The 2008 global boom in commodity prices for everything from coal to corn was fueled by heated demand from the likes of China and India. y Speculation in forward markets. y Farmers are expected to face a sharp drop in crop prices as a result of bad rainfall. y Other commodities, such as steel, are also expected to fall due to lower demand

.Basics of Futures Trading

Perhaps the biggest advantage to trading futures contracts is the leverage provided by the exchange. However, controlling large contracts with relatively low amounts of capital can create high levels of volatility. As a result, many traders will argue that leverage is actually a disadvantage. Regardless of your opinion on leverage and margin requirements, it is important that you fully understand the concepts.

Before a customer can establish a position he is required to make a minimum good faith deposit, or margin, to assure the performance of his obligations. A margin deposit is, in essence, a performance bond, which is usually between 5% and 10% of the underlying contract value. A good faith deposit indicates the buyer or sellers willingness and capability to compensate the opposite party to a transaction

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Because margin requirements are low, hedgers are given the ability to lock in pricing of cash market goods without tying up a lot of capital. It would be counterproductive for a hedger who handles large quantities to put up 100% of the value of the hedged commodity. The exchange grants margin discounts to those that are deemed to be bonefied hedgers, due to the fact that the underlying cash position is seen as collateral to secure the capital risked in the futures market.

Low margins make speculation in the futures markets very attractive, without the advantage of leverage the rate of return on most commodities would be marginal. The exchanges are responsible for setting margin requirements, but brokerage firms have discretion to require higher deposits. Generally, the initial margin is sufficient to cover the maximum daily price fluctuations. It is not uncommon for margin requirements to fluctuate with the volatility of the market. A maintenance level is established below the initial margin, usually 75% of the initial margin. Once a trader's good faith deposit falls below this threshold additional funds must be deposited or positions must be liquidated. This is known as a margin call.

Orders There are several types of orders that can be placed. In order to maximize efficiency and profitability, traders must be comfortable in executing each of the following options.

Market Order: The purpose of a market order is to execute a trade immediately at the best possible price. Such orders give traders the ability to enter or exit a trade quickly, but do not guarantee a favorable price. This order should be used when time is more valuable than price.

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Limit Order: Limit orders are used to buy or sell at a specified price or better, and will only be filled at the state price or one that is more favorable. For a sell limit order better means higher, for buy limit orders better means lower. Stop Order: This type of order is usually placed to close a position; its name is derived from the fact that, if placed properly, it will stop loss should the market go against a traders position. Most traders chose to place a stop order at the time that they enter a position. By definition, a sell stop will be placed below the market while a buy stop will be placed above. All orders are day orders unless specified otherwise and are canceled at the end of the trading day. By entering the order GTC (good til canceled), the order will be working in each trading session until canceled by the trader.

Execution Many beginning traders are unaware of the mechanics of executing a futures trade. When you call your broker, an order ticket is completed and time stamped in order to keep accurate track of the time and specifics of each order. The broker then transmits the order to his firms trading desk located on the floor of the exchange either by a computerized trading platform or by phone. The order clerk then fills out an order card; time stamps it, and hands it to a runner who will take it directly to a broker in the pit. The pit broker will execute the order by open outcry and record the execution on the card before it is given back to the runner. The runner takes the executed order back to the desk where the order clerk time stamps the card one more time before the fill is reported to your broker

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THE FIELD

I.BACKGROUND OF THE INDUSTRY

THE NCDEX PLATFORMNational Commodity and Derivatives Exchange Ltd (NCDEX) is a technology driven commodity exchange. It is a public limited company registered under the Companies Act, 1956 with the Registrar of Companies, Maharashtra in Mumbai on April 23, 2003. It has an independent Board of Directors and professionals not having any vested interest in commodity markets. It has been launched to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency.

NCDEX is regulated by Forward Markets Commission in respect of futures trading in commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations, which impinge on its working. It is located in Mumbai and offers facilities to its members in about 91 cities throughout India at the moment.NCDEX currently facilitates trading of ten commodities - gold, silver, soy bean, soy bean oil, rapeseed-mustard seed, expeller rapeseed-mustard seed oil, and RBD palmolein, crude Palm oil and cotton, Medium and long staple varieties, At subsequent phases trading in more commodities would be facilitated.

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STRUCTURE OF NCDEXNCDEX has been formed with the following objectives: y To create a world class commodity exchange platform for the market participants. y To bring professionalism and transparency into commodity trading. y To inculcate best international practices like de. Modularization, technology platforms, low cost y Solutions and information dissemination without noise etc. into the trade. y To provide nationwide reach and consistent offering. y To bring together the entities that the market can trust

PROMOTERSNCDEX is promoted by a consortium of institutions. These include the ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). NCDEX is the only commodity exchange in the country promoted by national level institutions. This unique parentage enables it to offer a variety of benefits which are currently in short supply in the commodity markets. The four institutional promoters of NCDEX are prominent players in their respective fields and bring with them institution building experience, trust, nationwide reach, technology and risk management skills.

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GOVERNANCENCDEX is run by an independent Board of Directors. Promoters do not participate in the day to day activities of the exchange. The directors are appointed in accordance with the provisions of the Articles of Association of the company. The board is responsible for managing and regulating all the operations of the exchange and commodities transactions. It formulates the rules and regulations related to the operations of the exchange. Board appoints an executive committee and other committees for the purpose of managing activities of the exchange. The executive committee consists of Managing Director of the exchange who would be acting as the Chief Executive of the exchange, and also other members appointed by the board.

Apart from the executive committee the board has constitute committee like Membership committee, Audit Committee, Risk Committee, Nomination Committee, Compensation Committee and Business Strategy Committee, which, help the Board in policy formulation.

EXCHANGE MEMBERSHIPMembership of NCDEX is open to any person, association of persons, partnerships, cooperative societies, companies etc. that fulfills the eligibility criteria set by the exchange. All the members of the exchange have to register themselves with the competent authority before commencing their operations. The members of NCDEX fall into two categories, trading cum Clearing Members (TCM) and Professional Clearing Members (PCM)

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TRADING CUM CLEARING MEMBERS (TCMS)NCDEX invites applications for Trading cum Clearing Members (TCMs) from persons who fulfill the specified eligibility criteria for trading in commodities. The TCM membership entitles the members to trade and clear, both for themselves and/ or on behalf of their clients. Applicants accepted for admission as TCM are required to pay the required fees/ deposits and also maintain net worth as given in Table

Table Fee/ deposit structure and net worth requirement: TCMparticulars Interest free cash security deposit Collateral security deposit Annual subscription charges Advance minimum transaction charges Net worth requirement Rupees( in lakh) 15.00 15.00 0.50 0.50 50.00

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PROFESSIONAL CLEARING MEMBERS (PCM)NCDEX also invites applications for Professional Clearing Membership (PCMs) from persons who fulfill the specified eligibility criteria for trading in commodities. The PCM membership entitles the members to clear trades executed through Trading cum Clearing Members (TCMs), both for themselves and/ or on behalf of their clients. Applicants accepted for admission as PCMs are required to pay the following fee/ deposits and also maintain net worth as given in Table

Table 3.2 Fee/ deposit structure and net worth requirement: PCM

particulars Interest free cash security deposit Collateral security deposit Annual subscription charges Advance minimum transaction charges Net worth requirement

Rupees( in lakh) 25.00 25.00 1.00 1.00 5000.00

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CAPITAL REQUIREMENTSNCDEX has specified capital requirements for its members. On approval as a member of NCDEX, the member has to deposit Base Minimum Capital (BMC) with the exchange. Base Minimum Capital comprises of the following: 1. Interest free cash security deposit 2. Collateral security deposit All Members have to comply with the security deposit requirement before the activation of their trading terminal Cash: This can be deposited by issuing a cheque/ demand draft payable at Mumbai in favour of National Commodity & Derivatives Exchange Limited.

Bank guarantee: Bank guarantee in favour of NCDEX as per the specified format from approved banks. The minimum term of the bank guarantee should be 12 months.

Fixed deposit receipt: Fixed deposit receipts (FDRs) issued by approved banks are accepted. The FDR should be issued for a minimum period of 36 months from any of the approved banks.

Government of India securities: National Securities Clearing Corporation Limited (NSCCL) is the approved custodian for acceptance of Government of India securities. The securities are valued on a daily basis and a haircut of 25% is levied.

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Members are required to maintain minimum level of security deposit i.e. Rs.15 Lakh in case of TCM and Rs.25 Lakh in case of PCM at any point of time. If the security deposit falls below the minimum required level, NCDEX may initiate suitable action including withdrawal of trading facilities as given below:

If the security deposit shortage is equal to or greater than Rs. 5 Lakh, the trading facility would be withdrawn with immediate effect.

If the security deposit shortage is less than Rs.5 Lakh the member would be given one calendar weeks' time to replenish the shortages and if the same is not done within the specified time the trading facility would be withdrawn.

Members who wish to increase their limit can do so by bringing in additional capital in the form of cash, bank guarantee, fixed deposit receipts or Government of India securities.

THE NCDEX SYSTEMAs we saw in the first chapter, every market transaction consists of three components: Trading clearing Settlement This section provides a brief overview of how transactions happen on the NCDEX's market.

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TRADINGThe trading system on the NCDEX provides a fully automated screen. Based trading for futures on commodities on a nationwide basis as well as an online monitoring and surveillance mechanism. It supports an order driven market and provides complete transparency of trading operations. The trade timings of the NCDEX are 10.00 a.m. to 4.00 p.m. After hours trading has also been proposed for implementation at a later stage.

The NCDEX system supports an order driven market, where orders match automatically. Order matching is essentially on the basis of commodity, its price, time and quantity. All quantity fields are in units and price in rupees. The exchange specifies the unit of trading and the delivery unit for futures contracts on various commodities. The exchange notifies the regular lot size and tick size for each of the contracts traded from time to time. When any order enters the trading system, it is an active order. It tries to find a match on the other side of the book. If it finds a match, a trade is generated. If it does not find a match, the order becomes passive and gets queued in the respective outstanding order book in the system. Time stamping is done for each trade and provides the possibility for a complete audit trail if required.

NCDEX trades commodity futures contracts having one Month, two Month and three month expiry cycles. All contracts expire on the 20th of the expiry month. Thus a January expiration contract would expire on the 20th of January and a February expiry contract would cease trading on the 20th of February. If the 20th of the expiry month is a trading holiday, the contracts shall expire on the previous trading day. New contracts will be introduced on the trading day following the expiry of the near month contract.

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CLEARINGNational Securities Clearing Corporation Limited (NSCCL) undertakes clearing of trades executed on the NCDEX. The settlement guarantee fund is maintained and managed by NCDEX. Only clearing members including professional clearing members (PCMs) only are entitled to clear and settle contracts through the clearing house. At NCDEX, after the trading hours on the expiry date, based on the available information, the matching for deliveries takes place firstly, on the basis of locations and then randomly, keeping in view the factors such as available capacity of the vault/ warehouse, commodities already deposited and dematerialized and offered for delivery etc., Matching done by this process is binding on the clearing members. After completion of the matching process, clearing members are informed of the deliverable/ receivable positions and the unmatched positions. Unmatched positions have to be settled in cash. The cash settlement is only for the incremental gain/ loss as determined on the basis of final settlement price.

SETTLEMENTFutures contracts have two types of settlements, the MTM settlement which happens on a continuous basis at the end of each day, and the final settlement which happens on the last trading day of the futures contract. On the NCDEX, daily MTM settlement and final MTM settlement in respect of admitted deals in futures contracts are cash settled by debiting/ crediting the clearing accounts of CMs with the respective clearing bank. All positions of a CM, either brought forward, created during the day or closed out during the day, are market to market

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at the daily settlement price or the final settlement price at the close of trading hours on a day. On the date of expiry, the final settlement price is the spot price on the expiry day. The Responsibility of settlement is on a trading cum clearing member for all trades done on his own account and his client's trades. A professional clearing member is responsible for settling all the participants trades which he has confirmed to the exchange.

On the expiry date of a futures contract, members submit delivery information through delivery request window on the trader workstations provided by NCDEX for all open positions for a commodity for all constituents individually. NCDEX on receipt of such information matches the information and arrives at a delivery position for a member for a commodity.

The seller intending to make delivery takes the commodities to the designated warehouse. These commodities have to be assayed by the exchange specified assayer. The commodities have to meet the contract specifications with allowed variances. If the commodities meet the specifications, the warehouse accepts them. Warehouse then ensures that the receipts get updatedin the depository system giving a credit in the depositor's electronic account. The seller then gives the invoice to his clearing member, who would courier the same to the buyer's clearing member. On an appointed date, the buyer goes to the warehouse and takes physical possession of the commodities.

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COMMODITIES TRADED ON THE NCDEXPLATFORM In December 2003, the National Commodity and Derivatives Exchange Ltd (NCDEX) launched futures trading in nine major commodities. To begin with contracts in gold, silver, cotton, soybean, soya oil, rape/ mustard seed, rapeseed oil, crude palm oil and RBD palmolein are being offered.

We have a brief look at the various commodities that trade on the NCDEX and look at some commodity specific issues. The commodity markets can be classified as markets trading the following types of commodities.

1. Agricultural products 2. Precious metal 3. Other metals 4. Energy

AGRICULTURAL COMMODITIESThe NCDEX offers futures trading in the following agricultural commodities. Refined soy oil, mustard seed, expeller mustard oil, RBD palmolein, crude palm oil, medium staple cotton and long staple cotton. Of these we study cotton in detail and have a quick look at the others

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COTTONCotton accounts for 75% of the fibre consumption in spinning mills in India and 58% of the total fibre consumption of its textile industry (by volume). At the average price of Rs.45/ kg, over 17 million bales (average annual consumption, 1 bale = 170 kg) of raw cotton trade in the country. The market size of raw cotton in India is over Rs.130 billion. The average monthly fluctuation in prices of cotton traded across India has been at around 4.5% during the last three years. The maximum fluctuation has been as high as 11%. Historically, cotton prices in India have been fluctuating in the range of 3-6% on a monthly basis.

Cotton is among the most important nonfood crops. It occupies a significant position, both from agricultural and manufacturing sectors' points of view. It is the major source of a basic human need, Clothing, apart from other fibred sources like jute, silk and synthetic. Today, cotton occupies a significant position in the Indian economy on all fronts as a commodity that forms a means of livelihood to over millions of cotton cultivating farmers at the primary agricultural sector. It is also a source of direct employment to over 35 million people in the secondary manufacturing textile industry that contributes to 14% of the country's industrial production, 27.30% of the country's export earnings and 4% of its GDP.

CRUDE PALM OILAnnual edible oil trade in India is worth over Rs.440 billion, with the share of CPO being nearly 20% (Rs.80-90 billion). The country is over. Dependent on CPO imports to the extent of over 50% of its annual vegetable oil imports. There is a close inter linkage between the various vegetable oils produced, traded and

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consumed across the world. The average monthly fluctuation in prices of imported CPO traded at Kandla (one of the major importing ports in Gujarat) has been at 9.7% during the past two and a half years, the maximum monthly fluctuation being as high as 25% during the period.

Palm oil is extracted from the mature fresh fruit bunches (FFBs) of oil palm plantations. One hectare of oil palm yields approximately 20 FFBs, which when crushed yields 6 tons of oil (including the kernel oil, which is used both for edible and industrial purposes). Crude palm oil (CPO), crude palmolein, RBD (refined, bleached, deodorized) palm oil, RBD palmolein and crude palm kernel oil (CPKO) are the various forms of palm oil traded in the market

RBD PALMOLEINThe RBD (refined, bleached and deodorized) palmolein is the derivative of crude palm oil (CPO), which is obtained from the crushing of Fresh Fruit-bunches (FFBs) harvested from oil palm plantations. When CPO is subjected to refinement, RBD palm oil and fatty acids are obtained. Fractionation of RBD palm oil yields RBD palmolein along with stearin, which is a white solid at room temperature. While Oil is a stable derivative saturated fat, solid at room temperature), Olein is relatively unstable (unsaturated fat, liquid at room temperature, but low cholesterol). The whole quantity of CPO that is produced and used for human consumption is in the form of RBD palmolein. Cropping of growth patterns of CPO has been already covered.

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SOY OILSoy oil is among the major sources of edible oils in India. Of the annual edible oil trade worth over Rs.440 billion in the country, soy oils share is over 20.21% at Rs.90.92 billion in terms of value. Being an agricultural commodity, which is often subjected to various production and market related uncertainties, soy oil prices traded across the world are highly volatile in nature.

The average fluctuation in spot prices of refined soy oil traded at Mumbai has been at 6.6% during the past two and a half years, the maximum monthly fluctuation being as high as 17% during the period. Historically, soy oil prices in the major spot markets across the country have been fluctuating in the range of 4.5.8.5%. This offers immense opportunity for the investors to profitably deploy their funds in this sector apart from those actually associated with the value chain of the commodity, which could use soy oil futures contract as the most effective hedging tool to minimize price risk in the market. Soy oil is the derivative of soybean. On crushing mature beans, 18% oil and 78.80% meal is obtained. While the oil is mainly used for human consumption, meal serves as the main source of protein in animal feeds. Soy oil is the leading vegetable oil traded in the international markets, next only to palm. Palm and soy oils together constitute around 68% of global edible oil export trade volume, with soy oil constituting 22.85%. It accounts for nearly 25% of the world's total oils and fats production. Increasing price competitiveness, and aggressive cultivation and promotion from the major producing nations have given way to widespread soy oil growth both in terms of production as well as consumption.

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RAPESEED OILRapeseed (also called mustard or canola) oil is the third largest edible oil produced in the world, after soy and palm oils. On crushing rapeseed, oil and meal are obtained. The average oil recovery from the seed is about 33%. The remaining is obtained as oil cake/ meal, which is rich in proteins and is used as an ingredient in animal feed. Mustard oil, which is known for its pungency, is traditionally the most favoured oils in the major production tracts world over.

SOYBEANThe market size of the popularly known miracle bean in India is over Rs.5000 crore. With an annual production of 5.0.5.4 million tons, soybean constitutes nearly 25% of the country's total oilseed production. The average monthly fluctuation in prices of soybean traded at one of the active soybean spot market at Indore (Madhya Pradesh) has been at 10.07% during the past two years, the maximum monthly fluctuation being as high as 24.30% during the period. Historically, soybean prices in the major spot markets across the country have been fluctuating in the range of 5.9%. Soybean is the single largest oilseed produced in the world. The commodity has been commercially exploited for its utility as edible oil and animal feed. On crushing mature beans, around 18% oil could be obtained; the rest being the oil cake/ meal, which forms the primesource of protein in animal feeds.

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RAPESEEDRapeseed/ Mustard is one of the major sources of oil and meal to India. It supplies over 1.5 million tons of oil (15.18% of India's annual edible oil requirement) and 3.3.2 million tons of oil meal, the major protein source in animal feeds. The average monthly fluctuation in prices of rapeseed traded at one of the active rapeseed spot market at Jaipur (Rajasthan) has been at 9.8% during the past two years (July 2001 to July 2003), the maximum monthly fluctuation being as high as 23.4% during the period. Rapeseed/ Mustard/ Canola is a traditionally important oilseed. China, Canada and India are the major producers of this commodity. The other major producers are Germany, France, Australia, Pakistan and Poland. The commodity has been commercially exploited in the form of seeds, oil (seed to oil recovery is 39.40%) and meal.

PRECIOUS METALS GOLDFor centuries, gold has meant wealth, prestige, and power, and its rarity and natural beauty have made it precious to men and women alike. Owning gold has long been a safeguard against disaster. Many times when paper money has failed, men have turned to gold as the one true source of monetary wealth. Today is no different. While there have been fluctuations in every market and decided downturns in some, the expectation are that gold will hold its own. There is a limited amount of gold in the world, so investing in gold is still a good way to plan for the future. Gold is homogeneous, indestructible and fungible. These attributes set gold apart from other commodities and financial assets and tend to make its returns insensitive to business cycle fluctuations. Gold is still bought (and sold) by different people for a wide variety of reasons. as a use in jewelry, for industrial applications, as an investment and so on.

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DEMANDThe Consumer demand for gold is more than 3400 tons per year making it whopping $40 billion worth. More than 80% of the gold consumed is in the form of jewellery, which is generally predominated by women. The Indian demand to the tune of 800 tons per year is making it the largest market for gold followed by USA, Middle East and China. About 80% of the Physical gold is consumed in the form of jewellery while bars and coins occupy not higher than 10% of the gold consumed. If we include jewellery ownership, then India is the largest repository of gold in terms of total gold within the national boundaries.

Regarding pattern of demand, there are no authentic estimates, the available evidence shows that about 80% is for jewellery fabrication for domestic demand, and 15% is for investor demand (which is relatively elastic to gold-prices, real estate prices, financial markets, tax policies, etc.). Barely 5% is for industrial uses. The demand for gold jewellery is rooted in societal preference for a variety of reasons. religious, ritualistic, a preferred form of wealth for women, and as a hedge against inflation. It will be difficult to prioritize them but it may be reasonable to conclude that it is a combined effect, and to treat any major part as exclusively a store of value or hedging instrument would be unrealistic. It would not be realistic to assume that it is only the affluent that creates demand for gold. There is reason to believe that a part of investment demand for gold assets is out of black money.

Rural India continues to absorb more than 70% of the gold consumed in India and it has its own role to fuel the barter economy of the agriculture community. The yellow metal used to play an important role in marriage and religious festivals in India. In the Hindu, Jain and Sikh community, where women did not inherit landed

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property whereas gold and silver jewellery was, and still is, a major component of the gifts given to a woman at the time of marriage. The changeover hands of gold at the time of marriage are from few grams to kgs. The gold also occupies a significant position in the temple system where gold is used to prepare idol and devotees offer gold in the temple. These temples are run in trust and gold with the trust rarely comes into re-circulation. The existing social and cultural system continues to cause net gold buyer market and the government policies have to take note of the root cause of gold demand, which lies in the social and cultural system of India. The annual consumption of gold, which was estimated at 65 tons in 1982, has increased to more than 700 tons in late 90s. Although it is likely that, with prosperity and enlightenment, there may be deceleration in demand, particularly in urban areas, it would be made good by growing demand on account of prosperity in rural areas. In the near future, therefore, the annual demand will continue to be over 600 tons per year.

SUPPLYIndian gold holding, which are predominantly private, is estimated to be in the range of 10000- 13000 tons. One fourth of world gold production is consumed in India and more than 60% of Indian consumption is met through imports. The domestic production of the gold is very limited which is around 9 tons in 2002 resulting more dependence on imported gold. The availability of recycled gold is price sensitive and as such the dominance of the gold supply through import is in existence. The fabricated old gold scraps is price elastic and was estimated to be near 450 tons in 2002. It rose almost more than 40% compared to the previous year because of rise in gold price by more than 15%. The demand- Supply for gold in India can be summed up thus:

Demand for gold has an autonomous character. Supply follows demand.

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Demand exhibits income elasticity, particularly in the rural and semi-urban areas. Price differential creates import demand, particularly illegal import prior to the commencement of liberalization in 1990.

SILVERThe dictionary describes it as a white metallic element, sonorous, ductile, very malleable and capable of high degree of polish. It also has the highest thermal and electrical conductivity of any substance. Silver is somewhat harder than gold and is second only to gold in malleability and ductility. Silver remains one of the most prominent candidates in the metals complex as far as futures' trading is concerned. Thanks to its unique volatility, silver has remained a hot favorite speculative vehicle for the small time traders. Though futures trading were banned in India since late sixties, parallel futures markets are still very active in Delhi and Indore.

Speculative interest in the white metal is so intense that it is believed that combined volume of Indian punters represent almost 40 percent of volume traded at New York Commodity Exchange. Delhi, Rajasthan, MP and UP are the active pockets for the silver futures. Until recently, Rajkot and Mathura were conducting futures but now players have diverted toward comex trade. Most of the world's silver is mined in the US, Australia, Mexico, Peru, and Canada. Cash markets remain highly unorganized in the silver and impurity and excessive speculation remain key issue for the trade. Taking cue from gold, government of India is planning to introduce hallmarking in silver which is likely to address quality and credibility of Indian silverware and jeweler industry. The unique properties of silver restrict its substitution in most applications.

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DEMANDDemand for silver is built on three main pillars; industrial and decorative uses, photography andjewelry & silverware. Together, these three categories represent more than 95 percent of annual silver consumption. In recent years, the main world demand for silver is no longer monetary, but industrial. With the growing use of silver in photography and electronics, industrial demand for silver accounts for roughly 85% of the total demand for silver. Jewelry and silverware is the second largest component, with more demand from the flatware industry than from the jewelry industry in recent years. India, the largest consumer of silver, is gearing up to start hallmarking of the white precious metal by April. India annually consumes around 4,000 tons of silver with the rural areas accounting for the bulk of the sales. India's demand for silver increased by 177 per cent over the past 10 years as compared to 517 tons in 1991. According to GFMS, India has emerged as the third largest industrial user of silver in the world after the US and Japan.

SUPPLYThe supply of silver is based on two facts, mine production and recycled silver scraps. Mine production is surprisingly the largest component of silver supply. It normally accounts for a little less than 2/3 rd of the total (last year was slightly higher at 68%). Fifteen countries produce roughly 94 percent of the worlds silver from mines. The most notable producers are Mexico, Peru, the United States, Canada and Australia. Mexico, the largest producer of silver from mines. Peru is the worlds second largest producer of silver. Silver is often mined as a byproduct of other base metal operations, which accounts for roughly four-fifths of the mined

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silver supply produced annually. Known reserves, or actual mine capacity, is evenly split along the lines of production. The mine production is not the sole source. Others being scrap, disinvestments, government sales and producers hedging. Scrap is the silver that returns to the market whenrecovered from existing manufactured goods or waste. Old scrap normally makes up around a fifth of supply. Scrap supply increased marginally last year up by 1.2%. The other major source of silver is from refining, or scraps recycling. Because silver is used in the photography industry, as well as by the chemical industry, the silver used in solvents and the like can be removed from the waste and recycled. The United States recycles the most silver in the world, accounting for roughly 43.6 million ounces. Japan is the second largest producer of silver from scrap and recycling, accounting for roughly 27.8 million troy ounces in 1997. In the United States and Japan, three-quarters of all the recycled silver comes from the photographic scrap, mainly in the form of spent fixer solutions and old X-ray films.

THE STUDYI.OBJECTIVES OF THE STUDYPRIMARY OBJ ECT IVE 1) To underst and realist ically t he pat t ern of fluct uat ions o f pr ice indices of t wo agricult ural co mmodit ies and t he fact ors behind t hat

SECO NDARY OBJ ECT IVE

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2) To study the operation of commodity trading in india and assess its importance 3) To provide a trend analysis of the current MCX & NCDEX indices

II. SCOPE OF THE STUDYOrganized commodity derivatives in India started as early as 1875, barely about a decade after they started in Chicago. However, many feared that derivatives fuelled unnecessary speculation and were detrimental to the healthy functioning of the markets for the underlying commodities. As a result, after independence, commodity options trading and cash settlement of commodity futures were banned in 1952. A further blow came in 1960s when, following several years of severe draughts that forced many farmers to default on forward contracts (and even caused some suicides), forward trading was banned in many commodities considered primary or essential. Consequently, the commodities derivative markets dismantled and remained dormant for about four decades until the new millennium when the Government, in a complete change in policy, started actively encouraging the commodity derivatives market. Since 2002, the commodities futures market in India has experienced an unprecedented boom in terms of the number of modern exchanges, number of commodities allowed for derivatives trading as well as the value of futures trading in commodities, which might cross the $ 1 Trillion mark in 2006. However, there are several impediments to be overcome and issues to be decided for sustainable development of the market. This paper attempts to answer questions such as: How do price indices fluctuate so easily and how to understand them? Is this progress sustainable and what are the obstacles that need urgent attention if the market is to realize its full potential? Why are commodity derivatives important and what could other emerging economies learn from the Indian mistakes and experience?

III. RESEARCH METHODOLOGY

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DEFINITION

Research is an organized, systematic, data-based, critical, scientific inquiry into a specific problem that needs a solution. Scientific research has the goal of solving problems and establishing a step-by-step logical, organized, and rigorous method to identify problems, gathers data, analyses the data, and draw valid conclusions there from.

1. TYPE OF RESEARCH USED

The research undertaken in this problem is descriptive in nature. Descriptive study attempts to obtain a complete and accurate descriptive of situation, formal design is required to ensure that the description covers all phases desired. Precise statement at problem indicates what than be designed provides for collection of this information under the study. 2. NEED OF T HE ST UDY The emp ir ical analys is shows t hat cycles in eco no mic act ivit y ar e majo r det er minant s o f t he short -run behavior o f shipping fre ight rat es in t he year 1850 and Wo r ld War I. Co nsist ent wit h t he econo mic t heor y, t her e is a st r ik ing asymmet r y bet ween t he peaks and t roughs of shipping cycles. However, t here is a clo se t iming relat io nship bet ween t he upper t urning po int s o f t he bus iness cycle, co mmodit y pr ices and freight rat es which is part icular ly shown in t he peak years 1875,1889,1900,1912. So t his st udy on co mmodit y indices and pr ices, t o an ext ent would not only help us in underst anding t he eco no my o f t he co unt r y, t he growt h dr iving co mmodit ies favor ing EXIM t rade but also fo r bet t er under st and ing t he fr eight market changes and behavior for t he fut ure.

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3. SOURCES OF DATA The data was collected through 1. Secondary data.

SECONDARY DATA Company records, magazines, journals and websites were made use to collect secondary data regarding indices, operations of commodity market and growth patterns

A) STATISTICAL TOOLS: The statistical tools that were used for the study is as follows: 1. Weighted Average and 2. Technical analysis

WEIGHTED AVERAGE: The weighted average stands for the relative importance of the different items. The formula for comparing weighted mean is XW =? Xw/w X is the variables values i.e., X1, X2..Xn. W represents the weights attached to values.

TECHNICAL ANALYSIS:

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It is important to note that the Technical Analysis Overview provided does not attempt to be a comprehensive treatment of Charting or Technical Analysis methods. There are numerous, wellwritten books on Chart Interpretation and Technical Analysis. Brief and simplistic reviews of some basic charting concepts are provided for reference or to stimulate further study. Please contact your broker for a recommended reading list on Charting and Technical Analysis.

Technical Analysis makes the assumption that history repeats itself. Any trading method or system that works well on a broad sample of historical data may have validity when applied to future trading environments. One should keep in mind that the markets are dynamic. The forces that motivate price movement are dynamic, and the participants are dynamic. Therefore any system which has performed well on past historic data may decline in value as the evolving dynamics of the markets change over time. The assumption is made that trading results can be improved when trading skills are improved. This requires practice! Surely any time spent learning to trade on past historical data will not be wasted when it comes to preparing to trade for the future.

B)LIMITATIONS OF THE STUDY

1) The research holds validity for the particular period only. 2) The research is extended to particular commodities only.

ANALYSIS AND INTERPRETATION OF DATA 31Analysis of commodity indices in the global shipping trade

3)

To understand realistically the pattern of fluctuations of price

indices of two agricultural commodities and the factors behind that

SUGARA sweet white (or brownish yellow) crystalline substance, of a sandy or granular consistency, obtained by crystallizing the evaporated juice of certain plants, as the sugar cane, sorghum, beet root, sugar maple, etc. It is used for seasoning and preserving many kinds of food and drink. Ordinary sugar is essentially sucrose.

Varieties of Sugary y y y y y y y y y y y

White, refined sugar Caster sugar Icing sugar Icing mixture Brown sugar Dark brown sugar Raw sugar Golden demerara Golden syrup Treacle Molasses Caramel

Decoration and specialty sugarsMajority of the sugarcane produced in India is of the following hybrid varieties: S Sinense, S. Barberi, CO-213, CO 223, CO 312, CO 313, CO 419, CO 1148, CO 740 and COS 767

Sugar producing areas in IndiaIn India the major sugar cane producing areas are Andhra Pradesh, Assam, Bihar, Gujarat,

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Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa, Punjab, Rajasthan, Tamilnadu, Uttar Pradesh and West Bengal.

INDIAS SUGAR AND SUGARCANE PRODUCTION400 350 300 250 200 cane in million tons 150 100 50 0 Sugar in million tons

SUGAR PRICES IN DELHI MARKET

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sugar price in rupees / metric tons25000

20000

15000 sugar price in rupees / metric tons

10000

5000

0 jan'06 july'06 Jan'07 july'07 jan'08 july'08 jan'09

FACTORS INFLUENCING SUGAR MARKETSy y y y y y

Price Refinery activity Consumer income Candy and confectionery sales Changing eating habits Sugars use in new technologies, such as ethanol production for automobile fuel.

IMPORTANT WORLD SUGAR MARKETSy

Brazil

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y y y y y y y

Australia U.S Cuba Philippines China Bangladesh Iran

INTERNATIONAL TRADEOver the past fifty years, especially, the international trade in sugar has changed dramatically. Since it is either imported or exported by every country on earth, sugar has become an integral component of the economic relationships among nations. Because of that unique position, the trade in sugar has both reflected-and been affected by-a wide range of divergent forces, including global politics, health consciousness, the emergence of developing nations as suppliers and consumers, and many others.

Perhaps the greatest change in the international sugar trade has been the trend toward price stabilization. Historically at the mercy of everything from war to weather, the price of sugar has always been extremely volatile. The International Sugar Trade contains the most essential and up-to-date information currently available. It includes numerous tables and graphs describing production, consumption, and trade for nearly every country.

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U.S cents / Kg

SUGAR PRICES 2005

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Technical analysis Jan- Mar: SupportA horizontal floor where interest in buying a commodity is strong enough to overcome the pressure to sell. Therefore a decrease in price is reversed and prices rise once again. Typically, support can be identified on a chart by a previous set of lows

Apr Jun: ResistanceA horizontal ceiling where the pressure to sell is greater than the pressure to buy. Therefore, an increase in price is reversed and prices revert downward. Typically resistance can be located on a chart by a previous set of high

July - Sep SupportA horizontal floor where interest in buying a commodity is strong enough to overcome the pressure to sell. Therefore a decrease in price is reversed and prices rise once again. Typically, support can be identified on a chart by a previous set of lows

Oct Dec IncliningThe inclining channel is a formation with parallel price barriers along both the price ceiling and floor. Unlike the sideways channel the inclining channel has an increase in both the price ceiling and price floor.

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SUGAR PRICES 2006

Technical analysis Jan- Mar: Breakaway GapsOccur when prices gap higher or lower out of a congestion pattern in the direction of the prevailing trend

Apr Jun: Measuring or Running GapsDifficult to identify, but usually occur at the midpoint in a price rally or decline.

July Sep Falling or DecliningThis formation occurs when the slope of price bar highs and lows join at a point forming an declining wedge. The slope of both lines is down with the upper line being steeper than the lower one. To trade this formation, place an order on a break up and out of the wedge or a sell order on a break down and out the wedge. Falling wedges, with a prior uptrend, are anticipated to break up and out, rather than down and out

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Oct Dec Triple BottomAnticipates a change in trend from down to up.

SUGAR PRICES 2007

Jan- Mar: DecliningThe declining channel is a formation with parallel price barriers along both the price ceiling and floor. Unlike the sideways channel the declining channel has a decrease in both the price ceiling and price floor.

Apr Jun: Ascending TriangleA formation in which the slope of price highs and lows come together at a point outlining the pattern of a Right Triangle. The hypotenuse in an Ascending Triangle should be sloping from lower to higher and from left to right. To trade this formation, place a buy order on a break up and out of the triangle or a sell order on a break down and out of the triangle. Ascending triangles, with a prior downtrend, are anticipated to break down and out, rather than up and out.

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July Sep PennantsSimilar to a Symmetrical Triangle but generally stubbier or not as elongated.A formation in which the slope of price bar highs and lows are converging to a point so as to outline the pattern in a symmetrical triangle. To trade this formation, you can place orders at both the break up and out of the pennant and break down and out of the pennant.

Oct Dec Triple BottomAnticipates a change in trend from down to up

SUGAR PRICES 2008

Jan- Mar: Measuring or Running GapsDifficult to identify, but usually occur at the midpoint in a price rally or decline.

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Apr Jun: PennantsSimilar to a Symmetrical Triangle but generally stubbier or not as elongated.A formation in which the slope of price bar highs and lows are converging to a point so as to outline the pattern in a symmetrical triangle. To trade this formation, you can place orders at both the break up and out of the pennant and break down and out of the pennant.

July Sep Descending TriangleA formation in which the slope of price highs and lows come together at a point outlining the pattern of a Right Triangle. The hypotenuse in an Descending Triangle should be sloping from higher to lower and left to right. To trade this formation, place a buy order on a break up and out of the triangle or a sell order on a breakdown and out of the triangle. Descending triangles, with a prior uptrend, are anticipated to break up and out, rather than down and out.

Oct Dec DecliningThe declining channel is a formation with parallel price barriers along both the price ceiling and floor. Unlike the sideways channel the declining channel has a decrease in both the price ceiling and price floor.

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SUGAR PRICES 2009

Jan- Mar: Horizontal or SidewaysA horizontal or sideways is a formation that features both resistance and support. Support forms the low price bar, while resistance provides the price ceiling

Apr Jun:ResistanceA horizontal ceiling where the pressure to sell is greater than the pressure to buy. Therefore, an increase in price is reversed and prices revert downward. Typically resistance can be located on a chart by a previous set of high

July Sep Ascending TriangleA formation in which the slope of price highs and lows come together at a point outlining the pattern of a Right Triangle. The hypotenuse in an Ascending Triangle should be sloping from lower to higher and from left to right. To trade this formation, place a buy order on a break up and out of the triangle or a sell order on a break down and out of the triangle. Ascending triangles, with a prior downtrend, are anticipated to break down and out, rather than up and out.

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Oct Dec Head and Shoulders BottomAnticipates a rise in prices on a break above the Neckline

CONCLUSION

Despite the economic recession world over, sugar consumption growth was less impacted and remained positive. The supply-demand disequilibrium has been caused essentially by the strident slippage in Indian production, exacerbated by the decline in EU and other Asian countries. The correction after surging surplus for two years in a row has come as good relief to sugar producers world over. Such tightness in supply is sure to be witnessed during 2009-10 as well. Brazils share in world export is expected to overshoot the half way mark to 53% this year as against 29% a decade ago.

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New York raw sugar futures as on 20th November 2009

Delivery month Jan 2010 Mar 2010 May 2010 July 2010 Mar 2011 Mar 2012

Close price US c/lb 22.20 22.74 21.86 20.43 19.33 16.63

World production is now expected to be 4.274 mln tons lower than world consumption as against 3.626 mln tons projected in November. Consequently, the statistical outlook for the market till the end of the season in September 2009 remains constructive and supportive to the market values. The ISO puts world export availability for 2008/09 at 49.608 mln tons raw value, as against 46.25 mln tons in the previous crop cycle Smaller output in importing countries and in India, in particular, is expected to trigger additional import demand which is expected to reach 49.621 mln tons, up 3.673 mln tons

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WHEATWheat is a cereal grain that belongs to the grass family of the genus Triticum. A dry, one seeded fruit named kernel is obtained from this spiky grass like grain, which is ground to make flour and is consumed throughout the world as one of the most important staple food. It is the second largest cereal grain consumed on earth and that is why it is widely cultivated in more than 30000 varieties. Wheat is important especially for making breads and other bakery products as it has got the maximum number of glutens as compared to any other grain. This crop is also grown as a forage crop for the livestock

OverviewWheat is a very important edible cereal grain crop. As already mentioned, it is the second largest grain crop consumed after rice. The cultivation of wheat has its own advantages like it has a very good yield per unit area, has a relatively short growing duration period and the production of wheat is comparatively easier than the other grain crops as it grows well in the temperate regions. That is why it serves as a very good cash crop and proves its dominance in the world commerce. Gluten, which is a primary constituent in raised bread, is found in wheat and that is why most of the bakery products are made from wheat only. The world production of wheat figures over 585 million tons annually. The largest producer of wheat in the world is the European Union followed by China, India and United States of America. The total wheat production of the world is slightly concentrated is clear from the fact that these four producers contribute to around 60% of the total production. The consumption of wheat in the world is a huge 580 million tons but is successfully kept satisfied with an equally high production figures. Consumption has been constantly increasing during the last 10 years with the increase in population, and alarmingly, the consumption is prepared to shoot up further and is expected to reach up to 775 million tons in 2020. Wheat is consumed all through the globe and the leading countries in this list are European Union, China

45


y y y y

India Russia United States of America Pakistan

The above list makes it clear that the largest producers of wheat in the world are also the largest consumers of the world, which means, most of the wheat production is consumed at the place of production. The export market of wheat is getting competitive with the new entrants like India into it and the export figures hover around 200 million tons. The major exporting countries of this crop are: y y y y y

United States of America Australia Canada European Union Argentina

The imports of wheat are done by the countries, which have a high domestic demand and a fluctuating production level. That is why the countries shuffle in the list of highest wheat importing countries. The world import figures sum up to 100 million tons and are currently done by more than 100 countries. The major countries arey y y y y y y y y y

European Union China Egypt Japan Brazil Mexico Indonesia Algeria Philippines Iraq

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Cultivation patternWheat was one of the first crops that were cultivated in the world thanks to its adaptability to wider range of climatic conditions and soils making it a very easy to produce crop in that time when man didnt even know the basics of living. Wheat requires a cooler weather and a good level of moisture in the early plantation period and once the grain is formed, it needs a warmer weather to dry up. That is why the best-suited climate needed for the wheat crop to prosper is the temperate climate. In USA, the wheat seeds are sown in the months of September and October. After February, when the snow in those areas starts to melt, the wheat crop starts to shoot up and during summers it is left to develop and finally it is harvested in the months of June, July and September. In India, wheat is cultivated as a Rabi crop and it is planted in the month of October. It is harvested in the months April and May.

Wheat producing countriesThe world production of wheat sums up to over 585 million tons annually. As mentioned above, the production of wheat is slightly concentrated in the hands of a few countries as the top four producers of the world contribute around 60% of the worlds total production. The productionwise list of the major producers of wheat is given belowy y y y y y y y y y y

European Union China India United States of America Russia Canada Australia Pakistan Turkey Argentina Iran

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The largest producer of wheat in the world is European Union that contributes to around 1/4th share to the worlds total production. As it is said that the demand of wheat increases with the increase in population, the nations having the largest population in the world i.e. China and India stand at the 2nd and 3rd position in the largest wheat producing nations list in order to satisfy the domestic consumption demand. These two countries contribute 14 % and 12% respectively in the worlds total production. India has shown a high rise in production of wheat after the green revolution and taken a lead from USA in recent times. Wheat is produced on approximately 2.5 million square kilometers of the world. The maximum area in the total cultivated area of wheat is constituted by India at around 13%. The other major countries that have a significant impact on the total area contributed for wheat production arey y y y y y y

European Union Russia China USA Australia Canada Kazakhstan

Production of wheat in India The following areas in India are the major wheat producing areas in the country and contribute to around 92% of the total production in the countryy y y y y y y

Uttar Pradesh Haryana Punjab Rajasthan Madhya Pradesh Gujarat Bihar

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India produces around 75 million tons of wheat every year and stands at the third position in the list of the major wheat producers in the world. India also stands at the top in the world in terms of area covered in production of wheat. Uttar Pradesh is the leading producer state in India followed by Punjab and Haryana. Wheat occupies a major share of 35% production in the total production of crops cultivated and 65% of total cropped area in the country. This share in production and area covered of the crop has increased since independence and is also constantly rising. The yield of wheat in kilograms per hectare has also risen significantly from 522 kg/ha in 1950/51 to 1620kg/ha in 1998/99

Indian wheat marketIndia is the third largest producer of the wheat crop. It has been successfully fulfilling its large domestic consumption demand in the past few years and has been exporting the surpluses to give the major exporters of the world a good competition. India produces an average of 75 million tons wheat each year but the production of this crop is generally fluctuating due to the uncertainty of the rainfall. The state of Uttar Pradesh leads the production in the country. For self-consumption purposes, the farmers retain around 48% of their production and hence it is not entered into the total production figures of the country. Indian wheat is generally medium hard bread wheat. It is a staple food of this country. That is why almost all of the wheat produced is consumed. India holds the third position in the major wheat consumers list after European Union and China consuming around 72 million tons of wheat. The demand-supply flows with in the country are largely interfered by the government of the country so as to make sure that the grain supplies be stable and prices do not get affected. With the introduction of the new technologies in the agricultural sector, there has been a constant increase in the productivity of wheat produced and hence there has been a growth in the surplus level of the country and consequently a rising trend in the wheat export. World market sees a dependable supplier of wheat in the form of India. The major exporters of the world namely US and Australia have lost their share in the worlds export with the coming of India in the exporting scenario. The export figures of India in 2003-04 were 5 million tons.

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The major importers of Indian wheat are the southeastern Asian countries and the gulf countries. India was an importer of wheat in the 90s as it the domestic demand was too high but now this situation has been overcame and overturned.

Market influencing factorsy y y y y y y

Weather conditions Government policies and regulations Prices fluctuations of the competitive and substitute products Season of harvesting and peak season Technological improvements Crop size World demand for wheat

Varieties of WheatThe three principal types of wheat used in modern food production are:y

Triticumvulgare - it provides the bulk of the wheat used to produce flour for bread making and for cakes and biscuits (cookies).

y

Triticum durum - Durum is the hardest of all wheat. Its density, combined with its high protein content and gluten strength, make durum the wheat of choice for producing premium pasta products

y

Triticumcompactum

The basics of wheat economicsWhen supplies of a commodity are excessive, prices decline. When demand for the commodity increases, so does the price. Typically, companies invest from 5% to 7% of their gross revenues to product promotion. Individually, wheat farmers have little impact on demand, but putting all the heads together can make a significant difference in product demand and market price. And that leads to the ultimate goal of the improved income for wheat producers.

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WHEAT PRICES 2007

Technical analysis Jan- Mar: Horizontal or SidewaysA horizontal or sideways is a formation that features both resistance and support. Support forms the low price bar, while resistance provides the price ceiling

Apr Jun: ResistanceA horizontal ceiling where the pressure to sell is greater than the pressure to buy. Therefore, an increase in price is reversed and prices revert downward. Typically resistance can be located on a chart by a previous set of high

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July Sep Non-SymmetricalA formation in which the slope of price highs and lows are converging to a point so as to outline the pattern in a non- symmetrical triangle. To trade this formation, place a buy order on a break up and out of the triangle or a sell order on a break down and out of the triangle

Oct Dec Ascending TriangleA formation in which the slope of price highs and lows come together at a point outlining the pattern of a Right Triangle. The hypotenuse in an Ascending Triangle should be sloping from lower to higher and from left to right. To trade this formation, place a buy order on a break up and out of the triangle or a sell order on a break down and out of the triangle. Ascending triangles, with a prior downtrend, are anticipated to break down and out, rather than up and out.

WHEAT PRICES 2008

52


Technical analysis Jan- Mar: Rising or IncliningThis formation occurs when the slope of price bar highs and lows join at a point forming an inclining wedge. The slope of both lines is up with the lower line being steeper than the higher one. To trade this formation, place an order on a break up and out of the wedge or a sell order on a break down and out the wedge. Rising wedges, with a prior downtrend are anticipated to break down and out, rather than up and out

Apr Jun: SymmetricalA formation in which the slope of price highs and lows are converging to a point so as to outline the pattern in a symmetrical triangle. To trade this formation place a buy order on a break up and out of the triangle or a sell order on a break down and out of the triangle.

July Sep PennantsSimilar to a Symmetrical Triangle but generally stubbier or not as elongated.A formation in which the slope of price bar highs and lows are converging to a point so as to outline the pattern in a symmetrical triangle. To trade this formation, you can place orders at both the break up and out of the pennant and break down and out of the pennant.

Oct Dec

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Bull FlagA formation consisting of a small number of price bars where the slope of price bar highs and lows are parallel and declining. Bull Flags are identified by their characteristic pattern and by the context of the prior trend. In the case of a Bull Flag the trend leading to the formation of the Bull Flag is up. To trade this formation, place orders on the break up and break down points, leaving your unfilled order as your stop loss

WHEAT PRICES 2009

Technical analysis Jan- Mar: 1-2-3 (A-B-C) Bottom Anticipates a change in trend from down to up on a break above the number 2 point

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Apr Jun: Measuring or Running GapsDifficult to identify, but usually occur at the midpoint in a price rally or decline.

July Sep Descending TriangleA formation in which the slope of price highs and lows come together at a point outlining the pattern of a Right Triangle. The hypotenuse in an Descending Triangle should be sloping from higher to lower and left to right. To trade this formation, place a buy order on a break up and out of the triangle or a sell order on a break down and out of the triangle. Descending triangles, with a prior uptrend, are anticipated to break up and out, rather than down and out

Oct Dec Triple TopAnticipates a change in trend from up to down

WHEAT PRICES 2010

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Jan- Apr:1-2-3 (A-B-C) Top Anticipates a change in trend from up to down on a break below the number 2 point.

Global Scenarioy

The world wheat production in the recent years has been observed to be hovering between 560-580 million tons a year. The biggest cultivators of wheat are EU-25, China, India, America, Russia, Australia, Canada, Pakistan, Turkey and Argentina. India, EU-25, China, India and US, the four largest producers account for around 58% of the total global production. World wheat consumption is consistently growing with growth in population, as it is one of the major staple foods across the world. The major consuming countries of wheat are EU, China, India, Russia, USA and Pakistan. Around 16-19% of the world wheat production is traded annually between countries. The annual world trade in wheat is to the extent of 102-106 million tons. America, Australia, Canada, EU-25 and Argentina are the five largest exporters of wheat in the world. Major importing countries that tops in the figures are European Union, China, Egypt, Japan, Brazil and European Union. Other importing nations are Mexico, Indonesia, Algeria, Philippines, and Iraq. However the import amount varies year to year depending upon the domestic production.

y

y

y

y

CONCLUSIONIndia has the largest area in the world under wheat. However, in terms of production, we are only the third largest behind EU-25 and China. India produces about 65-75 million tons of wheat a year, which is about 35% of India's total food grain production of 210212 million tons. Since wheat and rice are grown in separate seasons, they do not compete for area. The major wheat producing states of India are Uttar Pradesh, Punjab, Haryana, Madhya Pradesh, Rajasthan and Bihar. Which together account for around 93% Analysis of commodity indices in the global shipping trade

56

of total production. Wheat is sown during November to January and harvested during March to April. The wheat-marketing season in India is assumed to begin from April every year. Indian wheat is largely soft/medium hard, medium protein, bread wheat. India also produces around 1.5 million tons of durum wheat, mostly in central and western India, which is not segregated and marketed separately .Government, announces Minimum Support Prices (MSP), which is the minimum price at which procurement has to be carried. The total procurement of wheat by Government agencies ranges from 8 to 20 million tons, accounting for only 15-20% of the total production. The support price operation and the Public Distribution Systems (PDS) play a significant role in maintaining reasonable and stable food grain prices in the country for both the producers and consumers. India consumes around 70-72 million tons of wheat a year. Most domestic wheat consumption is in the form of homemade chapatti or rotis using custom milled Atta, although usage of branded packaged atta marketed by large companies is increasing in cities. There are around 200 large flourmills in India, with a milling capacity of around 15 million tons. India exported around 7 million tons subsidized by Govt in 2007-08, as a result of surplus stock. However, current Govt. policies are not in favour of exports. Southeast Asia and Gulf countries are major importers of Indian wheat.

2) To study the operation of commodity trading in india and assess its importance

IntroductionThe Indian economy is witnessing a mini revolution in commodity derivatives and risk management. Commodity options trading and cash settlement of commodity futures had been banned since 1952 and until 2002 commodity derivatives market was virtually non-existent,

57


except some negligible activity on an OTC basis. Now in September 2005, the country has 3 national level electronic exchanges and 21 regional exchanges for trading commodity derivatives. As many as eighty (80) commodities have been allowed for derivatives trading. The value of trading has been booming and is likely to cross the $ 1 Trillion mark in 2006 and, if all goes well, seems to be set to touch $5 Trillion in a few years.

Chequred HistoryThe history of organized commodity derivatives in India goes back to the nineteenth century when the Cotton Trade Association started futures trading in 1875, barely about a decade after the commodity derivatives started in Chicago. Over time the derivatives market developed in several other commodities in India. Following cotton, derivatives trading started in oilseeds in Bombay (1900), raw jute and jute goods in Calcutta (1912), wheat in Hapur (1913) and in Bullion in Bombay (1920).

However, many feared that derivatives fuelled unnecessary speculation in essential commodities, and were detrimental to the healthy functioning of the markets for the underlying commodities, and hence to the farmers. With a view to restricting speculative activity in cotton market, the Government of Bombay prohibited options business in cotton in 1939. Later in 1943, forward trading was prohibited in oilseeds and some other commodities including food-grains, spices, vegetable oils, sugar and cloth.

After Independence, the Parliament passed Forward Contracts (Regulation) Act, 1952 which regulated forward contracts in commodities all over India. The Act applies to goods, which are defined as any movable property other than security, currency and actionable claims. The Act prohibited options trading in goods along with cash settlements of forward trades, rendering a crushing blow to the commodity derivatives market.

Under the Act, only those associations/exchanges, which are granted recognition by the Government, are allowed to organize forward trading in regulated commodities. The Act envisages three-tier regulation: (i) The Exchange which organizes forward trading in commodities can regulate trading on a day-to-day basis; (ii) the Forward Markets Commission

58


provides regulatory oversight under the powers delegated to it by the central Government, and (iii) the Central Government - Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution - is the ultimate regulatory authority.

The already shaken commodity derivatives market got a crushing blow when in 1960s, following several years of severe draughts that forced many farmers to default on forward contracts (and even caused some suicides), forward trading was banned in many commodities considered primary or essential. As a result, commodities derivative markets dismantled and went underground where to some extent they continued as OTC contracts at negligible volumes. Much later, in 1970s and 1980s the Government relaxed forward trading rules for some commodities, but the market could never regain the lost volumes.

Change in Government PolicyAfter the Indian economy embarked upon the process of liberalization and globalization in 1990, the Government set up a Committee in 1993 to examine the role of futures trading. The Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17 commodity groups. It also recommended strengthening of the Forward Markets Commission, and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing options trading in goods and registration of brokers with Forward Markets Commission. The Government accepted most of these recommendations and futures trading were permitted in all recommended commodities.

Commodity futures trading in India remained in a state of hibernation for nearly four decades, mainly due to doubts about the benefits of derivatives. Finally a realization that derivatives do perform a role in risk management led the government to change its stance. The policy changes favoring commodity derivatives were also facilitated by the enhanced role assigned to free market forces under the new liberalization policy of the Government. Indeed, it was a timely

59


decision too, since internationally the commodity cycle is on the upswing and the next decade is being touted as the decade of commodities.

Why are Commodity Derivatives Required?India is among the top-5 producers of most of the commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% to the GDP of the Indian economy. It employees around 57% of the labor force on a total of 163 million hectares of land. Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major center for trading of commodity derivatives. It is unfortunate that the policies of FMC during the most of 1950s to 1980s suppressed the very markets it was supposed to encourage and nurture to grow with times. It was a mistake other emerging economies of the world would want to avoid. However, it is not in India alone that derivatives were suspected of creating too much speculation that would be to the detriment of the healthy growth of the markets and the farmers. Such suspicions might normally arise due to a misunderstanding of the characteristics and role of derivative product.

It is important to understand why commodity derivatives are required and the role they can play in risk management. It is common knowledge that prices of commodities, metals, shares and currencies fluctuate over time. The possibility of adverse price changes in future creates risk for businesses. Derivatives are used to reduce or eliminate price risk arising from unforeseen price changes. A derivative is a financial contract whose price depends on, or is derived from, the price of another asset.

Two important derivatives are futures and options. (i) Commodity Futures Contracts: A futures contract is an agreement for buying or selling a

commodity for a predetermined delivery price at a specific future time. Futures are standardized contracts that are traded on organized futures exchanges that ensure performance of the contracts and thus remove the default risk. The commodity futures have existed since the Chicago Board

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of Trade (CBOT, www.cbot.com) was established in 1848 to bring farmers and merchants together. The major function of futures markets is to transfer price risk from hedgers to speculators. For example, suppose a farmer is expecting his crop of wheat to be ready in two months time, but is worried that the price of wheat may decline in this period. In order to minimize his risk, he can enter into a futures contract to sell his crop in two months time at a price determined now. This way he is able to hedge his risk arising from a possible adverse change in the price of his commodity.

(ii)

Commodity Options contracts: Like futures, options are also financial instruments used

for hedging and speculation. The commodity option holder has the right, but not the obligation, to buy (or sell) a specific quantity of a commodity at a specified price on or before a specified date. Option contracts involve two parties the seller of the option writes the option in favour of the buyer (holder) who pays a certain premium to the seller as a price for the option. There are two types of commodity options: a call option gives the holder a right to buy a commodity at an agreed price, while a put option gives the holder a right to sell a commodity at an agreed price on or before a specified date (called expiry date). The option holder will exercise the option only if it is beneficial to him; otherwise he will let the option lapse. For example, suppose a farmer buys a put option to sell 100 Quintals of wheat at a price of $25 per quintal and pays a premium of $0.5 per quintal (or a total of $50). If the price of wheat declines to say $20 before expiry, the farmer will exercise his option and sell his wheat at the agreed price of $25 per quintal. However, if the market price of wheat increases to say $30 per quintal, it would be advantageous for the farmer to sell it directly in the open market at the spot price, rather than exercise his option to sell at $25 per quintal.

Futures and options trading therefore helps in hedging the price risk and also provide investment opportunity to speculators who are willing to assume risk for a possible return. Further, futures trading and the ensuing discovery of price can help farmers in deciding which crops to grow. They can also help in building a competitive edge and enable businesses to smoothen their earnings because non-hedging of the risk would increase the volatility of their quarterly earnings. Thus futures and options markets perform important functions that can not be ignored in modern

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business environment. At the same time, it is true that too much speculative activity in essential commodities would destabilize the markets and therefore, these markets are normally regulated as per the laws of the country.

Modern Commodity ExchangesTo make up for the loss of growth and development during the four decades of restrictive government policies, FMC and the Government encouraged setting up of the commodity exchanges using the most modern systems and practices in the world. Some of the main regulatory measures imposed by the FMC include daily mark to market system of margins, creation of trade guarantee fund, back-office computerization for the existing single commodity Exchanges, online trading for the new Exchanges, demutualization for the new Exchanges, and one-third representation of independent Directors on the Boards of existing Exchanges etc. Responding positively to the favourable policy changes, several Nation-wide Multi-Commodity Exchanges (NMCE) have been set up since 2002, using modern practices such as electronic trading and clearing. Selected Information about the two most important commodity exchanges in India [Multi-Commodity Exchange of India Limited (MCX), and National Multi-Commodity & Derivatives Exchange of India Limited (NCDEX)] is given in Exhibit-1 and Exhibit-2.

MULTI-COMMODITY EXCHANGE OF INDIA LIMITED (MCX)MCX an independent and de-mutualized multi commodity exchange has permanent recognition from Government of India for facilitating online trading, clearing and settlement operations for commodity futures markets across the country. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, NABARD, NSE, HDFC Bank, State Bank of

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Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank Of India, Bank Of Baroda, Canara Bank, Corporation Bank. Headquartered in Mumbai, MCX is led by an expert management team with deep domain knowledge of the commodity futures markets. Through the integration of dedicated resources, robust technology and scalable infrastructure, since inception MCX has recorded many first to its credit.

Inaugurated in November 2003 by ShriMukeshAmbani, Chairman & Managing Director, Reliance Industries Ltd, MCX offers futures trading in the following commodity categories: Agro Commodities, Bullion, Metals- Ferrous & Non-ferrous, Pulses, Oils & Oilseeds, Energy, Plantations, Spices and other soft commodities. MCX has built strategic alliances with some of the largest players in commodities eco-system, namely, Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors' Association of India, Pulses Importers Association, ShetkariSanghatana, United Planters Association of India and India Pepper and Spice Trade Association.

Today MCX is offering spectacular growth opportunities and advantages to a large cross section of the participants including Producers / Processors, Traders, Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives, Industry Associations, amongst others MCX being nation-wide commodity exchange, offering multiple commodities for trading with wide reach and penetration and robust infrastructure, is well placed to tap this vast potential.

National Commodity & Derivatives Exchange Limited (NCDEX)National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed online multi commodity exchange promoted by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). Punjab National Bank

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(PNB), CRISIL Limited (formerly the Credit Rating Information Services of India Limited), Indian Farmers Fertilizer Cooperative Limited (IFFCO) and Canara Bank by subscribing to the equity shares have joined the initial promoters as shareholders of the Exchange. NCDEX is the only commodity exchange in the country promoted by national level institutions. This unique parentage enables it to offer a bouquet of benefits, which are currently in short supply in the commodity markets. The institutional promoters of NCDEX are prominent players in their respective fields and bring with them institutional building experience, trust, nationwide reach, technology and risk management skills . NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It has commenced its operations on December 15, 2003. NCDEX is a nation-level, technology driven de-mutualized on-line commodity exchange with an independent Board of Directors and professionals not having any vested interest in commodity markets. It is committed to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. NCDEX is regulated by Forward Market Commission in respect of futures trading in commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations, which impinge on its working

. NCDEX is located in Mumbai and offers facilities to its members in more than 390 centers throughout India. The reach will gradually be expanded to more centers. NCDEX currently facilitates trading of thirty six commodities - Cashew, Castor Seed, Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry Green Cocoons, Pepper, Rapeseed - Mustard Seed ,Raw Jute, RBD Palmolein, Refined Soy Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow Soybean Meal. At subsequent phases trading in more commodities w

A Project on Commodity Trading

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