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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 COMMODITY
y 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.
Energy
WTI Crude Oil, Brent Crude, Ethanol, Natural Gas,
Heating Oil, Gulf Coast
Gasoline, RBOB Gasoline, Propane, Uranium.
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Precious Metal
Gold,Platinum, Palladium, Silver.
Industrial Metals
Copper, Lead, Zinc, Tin, Aluminum, aluminum alloy, Nickel, aluminum
alloy, Recycled steel.
COMMODITY EXCHANGES
y Abuja Securities and Commodities Exchange
y Bhatinda Om & Oil Exchange Bathinda
y BrazilianMercantile and Futures Exchange
y Chicago Board ofTrade
y ChicagoMercantile Exchange
y Commodity Exchange Bratislava, JSC
y Dalian Commodity Exchange
y DubaiMercantile 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 YorkMercantile Exchange
y New York Board ofTrade
y LondonMetal Exchange
y Winnipeg Commodity Exchange
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RECENT TRENDS IN COMMODITYMARKET
y 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 TradingPerhaps 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 cashposition 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 atthe 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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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 inMumbai on
April 23, 2003. It has an independent Board ofDirectors 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 awide 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 NCDEX
NCDEX has been formed with the following objectives:
y
To create a world class commodity exchange platform for the marketparticipants.
y To bring professionalism and transparency into commodity trading.
y To inculcate best international practices like de. Modularization, technologyplatforms, 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
PROMOTERS
NCDEX 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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GOVERNANCE
NCDEX is run by an independent Board ofDirectors. 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 MEMBERSHIP
Membership 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 ClearingMembers (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: TCM
particulars Rupees( in lakh)
Interest free cash security deposit 15.00
Collateral security deposit 15.00
Annual subscription charges 0.50
Advance minimum transaction charges 0.50
Net worth requirement 50.00
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PROFESSIONAL CLEARING MEMBERS (PCM)
NCDEX also invites applications forProfessional ClearingMembership (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 ClearingMembers (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 Rupees( in lakh)
Interest free cash security deposit 25.00
Collateral security deposit 25.00
Annual subscription charges 1.00
Advance minimum transaction charges 1.00
Net worth requirement 5000.00
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CAPITAL REQUIREMENTS
NCDEX has specified capital requirements for its members. On approval as amember 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 theactivation 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 ofTCM and Rs.25 Lakh in case ofPCM at any point of time. If the
security deposit falls below the minimum required level, NCDEX may initiatesuitable 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 SYSTEM
As 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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TRADING
The 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. Theexchange 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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CLEARING
National 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 andoffered 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.
SETTLEMENT
Futures 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 tradeswhich 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 metals4. Energy
AGRICULTURAL COMMODITIES
The 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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COTTON
Cotton 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, 1bale = 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 OIL
Annual 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 PALMOLEIN
The RB
D(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 OIL
Soy 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 OIL
Rapeseed (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.
SOYBEAN
The 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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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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DEMAND
Demand 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 consumesaround 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.
SUPPLY
The 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 ofsupply. 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 STUDY
I.OBJ
ECTIVES OF TH
E STUDY
PRIMARY OBJECTIVE
1) To understand realistically the pattern of fluctuations of price indices
of two agricultural commodities and the factors behind that
SECONDARY OBJECTIVE
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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 STUDY
Organized 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.
H
owever, there are several impediments to be overcome and issues to be decided for sustainabledevelopment 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 bedesigned provides for collection of this information under the study.
2. NEED OF THE STUDY
The empirical analysis shows that cycles in economic activity are major
determinants of the short-run behavior of shipping freight rates in the year 1850
and World War I. Consistent with the economic theory, there is a striking
asymmetry between the peaks and troughs of shipping cycles. However, there is
a close timing relationship between the upper turning points of the business
cycle, commodity prices and freight rates which is particularly shown in the
peak years 1875,1889,1900,1912. So this study on commo dit y in dic es and
pr ic es, to an extent would no t only help us in understandin g the economy o f the
country, the growth driving commodities favoring EXIM trade but also for
bet ter understand in g the fr eig ht market changes and be havio r fo r the fu ture.
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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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3) To understand realistically the pattern of f luctuations of price
indices of two agricultural commodities and the factors behind that
SUGAR
A 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 Sugar
y White, refined sugar
y Caster sugar
y Icing sugar
y Icing mixture
y Brown sugar
y Dark brown sugar
y Raw sugar
y Golden demerara
y Golden syrup
y Treacle
y Molasses
y Caramel
Decoration and specialty sugars
Majority 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 India
In India the major sugar cane producing areas are Andhra Pradesh, Assam, Bihar, Gujarat,
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FACTORS INFLUENCING SUGAR MARKETS
y Price
y Refinery activity
yConsumer income
y Candy and confectionery sales
y Changing eating habits
y Sugars use in new technologies, such as ethanol production for automobile fuel.
IMPORTANT WORLD SUGAR MARKETS
y Brazil
0
5000
10000
15000
20000
25000
jan'06 july'06 Jan'07 july'07 jan'08 july'08 jan'09
sugar priceinrupees / metrictons
sugar price inrupees / metric
tons
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y Australia
y U.S
y Cuba
y Philippines
y China
y Bangladesh
y Iran
INTERNATIONAL TRADE
Over 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 SugarTrade 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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SUGAR PRICES 2005
S cents / Kg
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SUGAR PRICES 2006
Technical analysis
Jan- Mar:
Breakaway Gaps
Occur when prices gap higher or lower out of a congestion pattern in the direction of the
prevailing trend
Apr Jun:
Measuring or Running Gaps
Difficult to identify, but usually occur at the midpoint in a price rally or decline.
July Sep
Falling or Declining
This 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 Bottom
Anticipates a change in trend from down to up.
SUGAR PRICES 2007
Jan- Mar:
Declining
The 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 Triangle
A 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
Pennants
Similar 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 Bottom
Anticipates a change in trend from down to up
SUGAR PRICES 2008
Jan- Mar:
Measuring or Running Gaps
Difficult to identify, but usually occur at the midpoint in a price rally or decline.
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WHEAT
Wheat 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
Overview
Wheat 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
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y India
y Russia
y United States of America
y 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 United States of America
y Australia
y Canada
y European Union
y 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 are
y European Union
y China
y Egypt
y Japan
y Brazil
y Mexico
y Indonesia
y Algeria
y Philippines
y Iraq
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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 are
y European Union
y Russia
y China
y USA
y Australia
y Canada
y 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 country
y UttarPradesh
y Haryana
y Punjab
y Rajasthan
y Madhya Pradesh
y Gujarat
y 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. UttarPradesh 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 market
India 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 UttarPradesh 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.T
he major exporters of the world namely USand 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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WHEAT PRICES 2007
Technical analysis
Jan- Mar:
Horizontal or Sideways
A 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:
Resistance
A 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-Symmetrical
A 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.T
o trade this formation, place a buy order on abreak up and out of the triangle or a sell order on a break down and out of the triangle
Oct Dec
Ascending Triangle
A 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
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Technical analysis
Jan- Mar:
Rising or Inclining
This 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:
Symmetrical
A 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
Pennants
Similar 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 Flag
A 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
number2 point
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Apr Jun:
Measuring or Running Gaps
Difficult to identify, but usually occur at the midpoint in a price rally or decline.
July Sep
Descending Triangle
A 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 Top
Anticipates 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 number2 point.
Global Scenario
y The world wheat production in the recent years has been observed to be hoveringbetween 560-580 million tons a year.
y 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 fourlargest producers account for around 58% of the total global production.
y World wheat consumption is consistently growing with growth in population, as it is oneof the major staple foods across the world. The major consuming countries of wheat areEU, China, India, Russia, USA and Pakistan.
y Around 16-19% of the world wheat production is traded annually between countries. Theannual 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.
y Major importing countries that tops in the figures are European Union, China, Egypt,Japan, Brazil and European Union. Other importing nations areMexico, Indonesia,Algeria, Philippines, and Iraq. However the import amount varies year to year dependingupon the domestic production.
CONCLUSION
India 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 milliontons of wheat a year, which is about 35% of India's total food grain production of 210-
212 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 UttarPradesh, Punjab,
Haryana, Madhya Pradesh, Rajasthan and Bihar. Which together account for around 93%
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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
Introduction
The 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,
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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 Policy
After 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 allrecommended 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
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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 acommodity 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 usedfor 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.T
here aretwo 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, futurestrading 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 Exchanges
To 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-wideMulti-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 ofMCX are Financial
Technologies (India) Ltd., State Bank of India, NABARD, NSE, HDFC Bank, State Bank of
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(PNB), CRISILLimited (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 ofD
irectors andprofessionals 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, ExpellerMustard Oil, Gold, Guar gum, Guar
Seeds, Gur, Jeera, Jute sacking bags,Mild Steel Ingot, Mulberry Green Cocoons, Pepper,
Rapeseed - Mustard Seed ,Raw Jute, RBDPalmolein, Refined Soy Oil, Rice, Rubber, Sesame
Seeds, Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (BlackMatpe), Wheat, Yellow Peas,
Yellow Red Maize & Yellow Soybean Meal. At subsequent phases trading in more commodities
would be facilitated.
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Booming Business: US$ 1 Trillion and Beyond
Since 2002 when the first national level commodity derivatives exchange started, the exchanges
have conducted brisk business in commodities futures trading. In the last three years, there has
been a great revival of the commodities futures trading in India, both in terms of the number of
commodities allowed for futures trading as well as the value of trading. While in year 2000,
futures trading were allowed in only 8 commodities, the number jumped to 80 commodities in
June 2004. The value of trading in local currency saw a quantum jump from about INR 350
billion in 2001-02 to INR 1.3 Trillion in 2003-04. The data in Exhibit-3 indicates that the value
of commodity derivatives in India could cross the US$ 1 Trillion mark in 2006. The market
regulator Forward Markets Commission (FMC) disseminates fortnightly trading data for each of
the 3 national & 21 regional exchanges that have been set up in recent years to carry on the
futures trading in commodities in the country. Exhibit-3 presents comparative trading data for
three fortnightly periods inMarch, June and September 2008 and brings up some interesting
facts.
Sr. no Name of the exchange 16 Mar 08
to 31 Mar 0816 Jun 08
to 30 Jun 0816 Sep 08
to 30 Sep 08
1 Multi-Commodity Exchange of
India Limited, Mumbai
$m4,603.69 $m5123.76 $m11,042.25
2 NationalMulti-CommodityExchange of India Limited,
$m235.74 $m143.34 $m 106.85
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67 Analysis of commodity indices in the global shipping trade
y Gold - 4,082.15
y Silver - 3,869.36
y Crude oil - l3, 380.13
y Chana (chick peas) - 2,100.15
y Urad (BlackLegume) - 624.71
y Soy oil - 478.28
y Gur (Jaggery: cane sugar) - 369.72
y Guar Gum - 345.08
y Tur (Lentils) - 329.35
UNRESOLVED ISSUES AND FUTURE PROSPECTS
Even though the commodity derivatives market has made good progress in the last few years, the
real issues facing the future of the market have not been resolved. Agreed, the number of
commodities allowed for derivative trading have increased, the volume and the value of business
has zoomed, but the objectives of setting up commodity derivative exchanges may not be
achieved and the growth rates witnessed may not be sustainable unless these real issues are
sorted out as soon as possible. Some of the main unresolved issues are discussed below.
a. Commodity Options: Trading in commodity options contracts has been banned since 1952.
The market for commodity derivatives cannot be called complete without the presence of this
Important derivative. Both futures and options are necessary for the healthy growth of the
market.
While futures contracts help a participant (say a farmer) to hedge against downside price
movements, it does not allow him to reap the benefits of an increase in prices. No doubt there is
an immediate need to bring about the necessary legal and regulatory changes to introduce
commodity options trading in the country. The matter is said to be under the active consideration
of the Government and the options trading may be introduced in the near future.
b. The Warehousing and Standardization: For commodity derivatives market to work
efficiently, it is necessary to have a sophisticated, cost-effective, reliable and convenient
warehousing system in the country. The Habibullah (2003) task force admitted, A sophisticated
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warehousing industry has yet to come about. Further, independent labs or quality testing centers
should be set up in each region to certify the quality, grade and quantity of commodities so that
they are appropriately standardized and there are no shocks waiting for the ultimate buyer who
takes the physical delivery. Warehouses also need to be conveniently located.
Central Warehousing Corporation of India (CWC: www.fieo.com) is operating 500 Warehouses
across the country with a storage capacity of 10.4 million tons. This is obviously not adequate for
a vast country. To resolve the problem, a GraminBhandaranYojana (Rural Warehousing Plan)
has been introduced to construct new and expand the existing rural godowns. Large scale
privatization of state warehouses is also being examined.
c. Cash versus Physical Settlement: It is probably due to the inefficiencies in the present
warehousing system that only about 1% to 5% of the total commodity derivatives trades in the
country are settled in physical delivery.T
herefore the warehousing problem obviously has to behandled on a war footing, as a good delivery system is the backbone of any commodity trade. A
particularly difficult problem in cash settlement of commodity derivative contracts is that at
present, under the Forward Contracts (Regulation) Act 1952, cash settlement of outstanding
contracts at maturity is not allowed. In other words, all outstanding contracts at maturity should
be settled in physical delivery. To avoid this, participants square off their positions before
maturity. So, in practice, most contracts are settled in cash but before maturity. There is a need
to modify the law to bring it closer to the widespread practice and save the participants from
unnecessary hassles.
d. The Regulator: As the market activity pick-up and the volumes rise, the market will definitely
need a strong and independent regular; similar to the Securities and Exchange Board of India
(SEBI) that regulates the securities markets. Unlike SEBI which is an independent body, the
Forwards Markets Commission (FMC) is under the Department of Consumer Affairs (Ministry
of Consumer Affairs, Food and Public Distribution) and depends on it for funds. It is imperative
that the Government should grant more powers to the FMC to ensure an orderly development of
the commodity markets. The SEBI and FMC also need to work closely with each other due to the
inter-relationship between the two markets.
e.Lack of Economy of Scale: There are too many (3 national level and 21 regional) commodity
exchanges. Though over 80 commodities are allowed for derivatives trading, in practice
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Charts:
y www.barcharts.com
y www.chartsrus.com
y www.mongabay.com
y www.djindexes.com
y Dow Jones Industrial Average Historical Prices / Charts
Trend and other information:
y www.crnindia.com
y www.indiamart.com
y www.ncdex.com
y www.fmc.gov.in
BOOKS
y Futures, options and swaps by Robert W. Kolb.
y Derivative markets in India 2003 edited by Susan Thomas.
y Options, futures and other derivatives by John Hull.
y Thomas Susan (2003): Agricultural Commodity Markets in India; Policy Issues for
Growth,Indira Gandhi Institute forDevelopment Research, Mumbai.
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