Commodity Exchange to stabilize volatility of agro-

productWali-ul-Maroof Matin

Member, CARES

Philosophy first

• Capitalism or Market Economy• Laissez Faire vs Regulated

Competition • Price Fixation vs Price Discovery

Philosophy first

Committee of Action for Research, extension and Services, July 2012

Define Commodity and Commodity Exchange• A Commodity is a product which has a commercial value. It

can be produced, bought, sold and consumed.

• A commodities exchange is an exchange, just like any Stock Exchange where various commodities and derivatives products are traded. Most Commodity Exchanges across the world trade in agricultural products and other raw materials

• To be traded on an Exchange must meet certain specification regarding self life, quality standard, demand and supply and some more.

Committee of Action for Research, Extension and Services, July 2012

Time dimension of markets

Committee of Action for Research, Extension and Services, July 2012

History: market is a natural development• First organized futures market Osaka Rice

Exchange – 1730 • First organized futures trading in US, Chicago

Board of Trade – 1848• Standardized Futures Contract in US – 1865• The Chicago Butter and Egg Exchange – 1898.

This Exchange evolved into Chicago Mercantile Exchange in 1919. The number one now.

History: market is a natural development

Committee of Action for Research, extension and Services, July 2012

Some important Commodity Futures ExchangesExchange Main Products

Chicago Board of Trade (CBOT) Wheat, Corn, Soybean, Soy Oil, Mini Gold, Mini Silver, Live Cattle, Pork Belly, Ethanol

New York Board of Trade (NYBOT) Sugar, Cotton, Coffee, Cocoa, Orange Juice, Ethanol

New York Mercantile Exchange (NYMEX) Light Sweet Crude Oil, Gasoline, Heating Oil, Gold, Silver, Platinum, Palladium, Copper, Electricity

Intercontinental Exchange Brent crude, light sweet crude, gasoline, Natural Gas, Coal, Electricity

Bursa Malaysia Berhard Crude Palm Oil, RBD palmolein

Dubai Gold & Commodity Exchange (DGCEX)

Gold, Silver, Steel, Freight rates, Cotton

Multi Commodity Exchange, India Gold, Silver, Energy, Agricultural Products

Committee of Action for Research, Extension and Services, July 2012

Trading in Commodity Futures is almost similar to trading in

stocks• Trading in Commodities and that in stocks

both require you to research the stock or commodity that you plan to trade in and in both cases you need to have the capital to invest.

• In both cases, the Exchanges help to mitigate risks of trading as they stand as surety for the trades that take place via their Systems

Committee of Action for Research, Extension and Services, July 2012

Farmers & Farmer Cooperatives

(Hedgers)

Investors(Speculators)

Traders(Arbitrageurs)

Public Warehouses

Private Sector Warehousing Companies

Warehouse Receipt System

Commodity Exchange

Spot Markets

Testing & Certifying Companies

Logistics Companies

Storage & Transport RequirementsQuality Certification Requirements

Lending Agencies

USERS SUPPORT AGENCIES

Commodity Information

info

The Ecosystem

Committee of Action for Research, extension and Services, July 2012

Benefits of Commodity Futures trading

• Balanced investment portfolio management• Transparent and fair price discovery• Platform for risk management• Helps to improve cropping patterns• Assures hedgers fixed prices• Inventory management• Replace minimum support prices as a mean of

hedging• Means of implementing food security• Security against default• Standardization of commodities

Committee of Action for Research, extension and Services, July 2012

Inverse relation between commodity and stock prices• Raw material form a key element. The

increase in raw material cost increases overall input costs and weights down the earning for most companies. This adversely impacts the share price of the company.

SteelConstruction

Committee of Action for Research, Extension and Services, July 2012

Players in Commodity Exchange

Committee of Action for Research, Extension and Services, July 2012

Farmers’ risks

• Production risk– Adverse weather– Pest

• Price Risk– Domestic Demand Shock– Too much of production– Manipulation by middlemen

Committee of Action for Research, extension and Services, July 2012

Price & Sowing Decisions

Committee of Action for Research, extension and Services, July 2012

Trading and Settlement

SELLER BUYER

Unmatched orders pending in the system

Bank 1 Bank 21 1

2 2

3 3Matching Engine

4

EXCHANGE

5 5

6 6

Committee of Action for Research, extension and Services, July 2012

Delivery Mechanism

Open short and long positions not marked for delivery will be settled at

the due date rate

WarehouseSELLER BUYER

Unmatched orders pending in the system

1 5

3 3

Matching for delivery

EXCHANGE

2 5

Intent Willingness3 3

77

4

54

Default X% on due date rate

6

Committee of Action for Research, extension and Services, July 2012

SEC’s ( Regulator) roles:

Approve, and regulate ExchangesOversee the risk managementPromote the business as wholeBring manipulation attempts to justice

Committee of Action for Research, Extension and Services, July 2012

Committee of Action for Research, Extension and Services, July 2012

Thanks for your patience

Committee of Action for Research, extension and Services, July 2012