commodity market project

COMMODITY MARKET IN INDIA

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EXECUTIVE SUMMARY

Different web based literature has been studied to understand which

are the major players of commodity markets in the world? And what

is their way of operation? Which are the major commodity exchanges

in India? What is their modus operandi?

While we were surveying various web site we came to know the

whole commodity market and the exchange takes place in this market

is broadly classify into two principle categories that is agriculture and

non-agriculture commodity market.

The first session deals with the significance of commodity market. As

commodity market is the place where 2 parties agree to buy and sell a

specified and standardized quantity of a commodity at a certain time

of future at a price agreed upon at the time of agreement agreed upon

irrespective of availing future price. Following the significance of

commodity market is the history of the commodity market. The root

of commodity market is traced from Japan where Japanese merchants

used to store rice in ware houses and later on they have issued „Rice

tickets‟. And as the time passes rice tickets are started to accepted as

a currency.

Patterns of exchange that was prevailing in the market which was

auction and the pattern that is currently prevailing in the market which


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is future is discussed. Major international and national players are

described.

Various national and international markets and their features in brief

are described. The perspective of commodity market in which active

and passive mode of commodity market, volatility, liquidity of

commodity market and their relation with economy are discussed.

Benefits of future commodity markets to agriculturists, farmers are

discussed in brief along with price discovery, price risk management,

import-export competitiveness, improved product quality-market

transparency etc. are discussed. The attractive features of commodity

market, various instruments those are available in the market are

listed.

Participants of the commodity market those are hedgers, speculators

and arbitrators their power and limitations, functioning etc. are

described in brief.

A complete working and delivery process of commodity market

including various stages are clearly mentioned with the use of flow

chart. Spot trade and future trade are also explained well.

At the end unresolved issues of commodity market and future

prospect of commodity market is written down.


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Whole commodity market is divided into two broad categories those

are agriculture commodities and non-agriculture commodities.

Agriculture commodities include wheat, rice, pulses, cereals, edible

oils, ground nut etc. Non- agriculture commodities includes crude oil,

nonferrous metals like gold, silver, nickel, copper etc.

We have mainly focused upon the commodity groundnut. What are

the essential features of groundnut as a crop and as a commodity?

This session would broadly deal with groundnut as a commodity, its

cropping pattern, production, major markets and its significance as a

commodity traded in exchange


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CHAPTER 1

INTRODUCTION

A commodity is defined as anything other than the monetary unit which can

be traded. It may be a tangible product or intangible service. The commodity

market is a geographical location where the seller and buyer meet to transfer the

ownership of goods from the seller to buyer through negotiation at mutually

agreed value. For functioning of commodity market the important elements are

commodity, buyer and seller. The commodity market may be organized or

unorganized depending upon the aggregation of the buyer and seller at certain

geographical location and at a certain given time. With the development of

various means of communication, development of storage system, better means

of transportation and the advanced form of payment has broadened the

definition of the commodity market.

Commodity is divided in various categories based on the source of

production like agro and non agri. Non agro commodity is again divided among

metals and energy. Metals are divided into precious such as steel, copper etc.

Based on the storability factor, like perishable items include vegetables, fruits

and milk and non-perishable items include metals or semi perishable like

cereals and pulses. Market exits for almost all the commodities all over the

world. Commodity market is an important constituent of the financial markets

of any country. It is important to develop a vibrant, active and liquid commodity

market. This would help investors hedge their commodity risk, take speculative

positions in commodities and exploit arbitrage opportunities in the market.


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DEFINITION

A PHYSICAL OR VIRTUAL MARKETPLACE FOR BUYING, SELLING

AND TRADING RAW OR PRIMARY PRODUCTS.FOR INVESTORS'

PURPOSES THERE ARE CURRENTLY ABOUT 50 MAJOR COMMODITY

MARKETS WORLDWIDE THAT FACILITATE INVESTMENT TRADE IN

NEARLY 100 PRIMARY COMMODITIES.

COMMODITIES ARE SPLIT INTO TWO TYPES:HARD AND SOFT

COMMODITIES. HARD COMMODITIES ARE TYPICALLY NATURAL

RESOURCES THAT MUST BE MINED OR EXTRACTED

(GOLD,RUBBER,OIL,ETC), WHEREAS SOFT COMMODITIES ARE

AGRICULTURAL PRODUCTS OR LIVESTOCK

(CORN,WHEAT,COFFEE,SUGAR,SOYABEAN,PORK,ETC.)


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CHAPTER 2

EVALUATION OF COMMODITY MARKET IN INDIA

The history of organized commodity derivatives in India goes back to the

nineteenth century when Cotton Trade Association started futures trading in

1875, about a decade after they started in Chicago. Over the time derivatives

market developed in several commodities in India. Bombay Cotton Trade

Association Ltd., set up in 1875, was the first organized futures market.

Bombay Cotton Exchange Ltd. was established in 1893 following the

widespread discontent amongst leading cotton mill owners and merchants over

functioning of Bombay Cotton Trade Association. The Futures trading in

oilseeds started in 1900 with the establishment of the Gujarati Vyapari Mandali,

which carried on futures trading in groundnut, castor seed and cotton. Futures'

trading in wheat was existent at several places in Punjab and Uttar Pradesh. But

the most notable futures exchange for wheat was chamber of commerce at

Hapur set up in 1913. Futures trading in bullion began in Mumbai in 1920.

Calcutta Hessian Exchange Ltd. was established in 1919 for futures trading in

raw jute and jute goods. But organized futures trading in raw jute began only in

1927 with the establishment of East Indian Jute Association Ltd. These two

associations amalgamated in 1945 to form the East India Jute & Hessian Ltd. to

conduct organized trading in both Raw Jute and Jute goods. Forward Contracts

(Regulation) Act was enacted in 1952 and the Forwards Markets Commission

(FMC) was established in 1953 under the Ministry of Consumer Affairs and

Public Distribution. In due course, several other exchanges were created in the

country to trade in diverse commodities.


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However many feared that derivatives fuelled unnecessary speculation and were

detrimental to the healthy functioning of the market for the underlying

commodities, resulting in to banning of commodity options trading and cash

settlement of commodities futures after independence in 1952. The parliament

passed the Forward Contracts (Regulation) Act, 1952, which regulated contracts

in Commodities all over the India. The act prohibited options trading in Goods

along with cash settlement of forward trades, rendering a crushing blow to the

commodity derivatives market. Under the act only those

associations/exchanges, which are granted reorganization from the Government,

are allowed to organize forward trading in regulated commodities. The act

envisages three tire regulations:

Exchange which organizes forward trading in commodities can

regulate trading on day-to-day basis;

Forward Markets Commission provides regulatory oversight

under the powers delegated to it by the central Government.

The Central Government- Department of Consumer Affairs,

Ministry of Consumer Affairs, Food and Public Distribution- is the

ultimate regulatory authority. After Liberalization and Globalization in

1990, the Government set up a committee (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 Forward Markets Commission, and certain

amendments to Forward Contracts (Regulation) Act 1952, particularly

allowing option trading in goods and registration of brokers with Forward

Markets Commission. The Government accepted most of these

recommendations and futures‟ trading was permitted in all recommended


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commodities. It is timely decision since internationally the commodity

cycle is on upswing and the next decade being touched as the decade of

Commodities. Commodity exchange in India plays an important role

where the prices of any commodity are not fixed, in an organized way.


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CHAPTER 3

PARTICIPANTS IN COMMODITY MARKET

Participants who trade in the derivatives market can be classified under the

following three broad categories:

Hedgers

Speculators

Arbitrageurs


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HEDGERS

A Hedger can be Farmers, manufacturers, importers and exporter. A hedger

buys or sells in the futures market to secure the future price of a commodity

intended to be sold at a later date in the cash market. This helps protect against

price risks.

The holders of the long position in futures contracts (buyers of the

commodity), are trying to secure as low a price as possible. The short holders of

the contract (sellers of the commodity) will want to secure as high a price as

possible. The commodity contract, however, provides a definite price certainty

for both parties, which reduces the risks associated with price volatility. By

means of futures contracts, Hedging can also be used as a means to lock in an

acceptable price margin between the cost of the raw material and the retail cost

of the final product sold.

Someone going long in a securities future contract now can hedge against

rising equity prices in three months. If at the time of the contract's expiration the

equity price has risen, the investor's contract can be closed out at the higher

price. The opposite could happen as well: a hedger could go short in a contract

today to hedge against declining stock prices in the future.


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SPECULATORS

Other commodity market participants, however, do not aim to minimize risk

but rather to benefit from the inherently risky nature of the commodity market.

These are the speculators, and they aim to profit from the very price change that

hedgers are protecting themselves against. A hedger would want to minimize

their risk no matter what they're investing in, while speculators want to increase

their risk and therefore maximize their profits. In the commodity market, a

speculator buying a contract low in order to sell high in the future would most

likely be buying that contract from a hedge selling a contract low in anticipation

of declining prices in the future.

Unlike the hedger, the speculator does not actually seek to own the

commodity in question. Rather, he or she will enter the market seeking profits

by offsetting rising and declining prices through the buying and selling of

contracts.


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ARBITRAGERS

A central idea in modern economics is the law of one price. This states that

in a competitive market, if two assets are equivalent from the point of view of

risk and return, they should sell at the same price. If the price of the same asset

is different in two markets, there will be operators who will buy in the market

where the asset sells cheap and sell in the market where it is costly. This activity

termed as arbitrage, involves the simultaneous purchase and sale of the same or

essentially similar security in two different markets for advantageously different

prices. The buying cheap and selling expensive continues till prices in the two

markets reach equilibrium. Hence, arbitrage helps to equalize prices and restore

market efficiency.

Since the cash and futures price tend to move in the same direction as they

both react to the same supply/demand factors, the difference between the

underlying price and futures price is called as basis. Basis is more stable and

predictable than the movement of the prices of the underlying or the Futures

price. Thus, arbitrageur would predict the basis and accordingly take positions

in the cash and future markets.


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CHAPTER 4

STRUCTURE OF INDIAN COMMODITY MARKET


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Commodity trading in India is regulated by the Forward Markets Commission

(FMC) headquartered at Mumbai, it is a regulatory authority which is overseen

by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. It

is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act,

1952.

NMCE (NATIONAL MULTI COMMODITY EXCHANGE OF

INDIA LTD.)

NMCE is the first demutualised electronic commodity exchange of India

granted the National exchange on Govt. of India and operational since 26th

Nov, 2002.

Promoters of NMCE are, Central warehousing corporation (CWC), National

Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat

Agro-Industries Corporation Limited (GAICL), Gujarat state agricultural

Marketing Board (GSAMB), National Institute of Agricultural Marketing

(NIAM) and Neptune Overseas Ltd. (NOL). Main equity holders are PNB.

The Head Office of NMCE is located in Ahmedabad. There are various

commodity trades on NMCE Platform including Agro and non-agro

commodities.

NCDEX (NATIONAL COMMODITY & DERIVATIVE

EXCHANGE LTD.)


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NCDEX is a public limited co. incorporated on April 2003 under the

Companies Act 1956, It obtained its certificate for commencement of Business

on May 9, 2003. It commenced its operational on Dec 15, 2003.

Promoters shareholders are: Life Insurance Corporation of India (LIC),

National Bank for Agriculture and Rural Development (NABARD) and

National Stock Exchange of India (NSE) other shareholder of NCDEX are:

Canara Bank, CRISIL limited, Goldman Sachs, Intercontinental Exchange

(ICE), Indian farmers fertilizer corporation Ltd (IFFCO) and Punjab National

Bank (PNB).

NCDEX is located in Mumbai and currently facilitates trading in 57

commodities mainly in Agro product.

MCX (MULTI COMMODITY EXCHANGE OF INDIA LTD.)

Headquartered in Mumbai, MCX is a demutualised nation wide electronic

commodity future exchange. Set up by Financial Technologies (India) Ltd.

permanent recognition from government of India for facilitating online trading,

clearing and settlement operations for future market across the country. The

exchange started operation in Nov, 2003.

MCX equity partners include, NYSE Euronext,, State Bank of India and its

associated, NABARD NSE, SBI Life Insurance Co. Ltd. , Bank of India, Bank

of Baroda, Union Bank of India, Corporation Bank, Canara Bank, HDFC Bank,

etc.

MCX is well known for bullion and metal trading platform.

ICEX (INDIAN COMMODITY EXCHANGE LTD.)

ICEX is latest commodity exchange of India Started Function from 27 Nov,

09. It is jointly promote by Indiabulls Financial Services Ltd. and MMTC Ltd.


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and has Indian Potash Ltd. KRIBHCO and IFC among others, as its partners

having its head office located at Gurgaon (Haryana).

OTHER REGIONAL EXCHANGES

1. Bhatinda Om & Oil Exchange Ltd., Batinda.

Gur

2. The Bombay Commodity Exchange Ltd.Mumbai

RBD Pamolein, Groundnut Oil, Sunflower Oil, CottonSeed, Safflower, Groundnut, Castor oil-Int’l, Castorseed, Cottonseed oil, Sesamum oil, Sesamum OilCake, Safflower, OilCake, Rice Bran, Rice Bran Oil, Rice Bran OilCake, Safflower Oil, Crude Palm Oil

3. The Rajkot Seeds oil & Bullion Merchants` Association Ltd

Groundnut Oil, Castorseed

4. The Meerut Agro Commodities Exchange Co. Ltd., Meerut

Gur

5. The Spices and Oilseeds Exchange Ltd.

Turmeric

6. Ahmedabad Commodity Exchange Ltd.

CottonSeed Castorseed

7. Vijay Beopar Chamber Ltd.,Muzaffarnagar

Gur Mustard Seed

8. India Pepper & Spice Trade Association.Kochi

Pepper Domestic-MG1 Pepper Domestic-500g/l Black Pepper Int’l-MLS ASTA Black Pepper Int’l-VB ASTA Black pepper Int’l FAQ Pepper 550 G/L Rubber RSS4

9. Rajdhani Oils and Oilseeds Exchange Ltd. Delhi

Gur Rapeseed/Mustardseed

10. National Board of Trade. Indore.

Rapeseed/Mustardseed Rapeseed/Mustardseed Oil Rapeseed/Mustardseed oil-Cake Soy bean


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Soy Meal Soy Oil Crude Palm Oil

11. The Chamber Of Commerce.,Hapur


12. The East India Cotton Association Mumbai.

Indian Cotton

13. The Central India Commercial Exchange Ltd, Gwaliar


14. The East India Jute & Hessian Exchange Ltd,

Hessian Sacking

15. First Commodity Exchange of India Ltd, Kochi

Copra Coconut oil Copra cake

16. Bikaner Commodity Exchange Ltd.,Bikaner

Rapeseed/Mustardseed Rapeseed/Mustardseed Oil Rapeseed/Mustardseed oil-Cake Guarseed Gram GuarGum

17. Esugarindia Limited. Sugar Grade – M Sugar Grade – S

18. National Multi Commodity Exchange of India Limited.

Gur RBD Pamolein Groundnut Oil Sunflower Oil Rapeseed/Mustardseed Rapeseed/Mustardseed Oil Rapeseed/Mustardseed oil-Cake Soy bean Soy Oil Copra CottonSeed Safflower Groundnut Sugar Sacking Coffee-Robusta Cherry AB Coconut oil


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Castorseed Castor-oil Groundnut oilCack Cottonseed oil Sesamum (Til or Jiljili) Sesamum oil Sesamum OilCake Safflower OilCake Rice Bran Oil Safflower Oil Sanflower OilCake Sunflower Seed Pepper Crude Palm Oil Guarseed CastorOil Cake Cottonseed – Oilcake Aluminium Ingots Nickel Vanaspati Soybean Oilcake Rubber Copper Zinc Lead Tin Linseed Linseed Oil Linseed Oilcake Coconut Oilcake Gram Gold Silver Rice Wheat Cardamom Kilo – Gold Masoor Urad Tur / Arhar Moong Rapeseed – 42


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Raw Jute Coffee-Arabica Plantation A

19. Surendranagar Cotton oil & Oilseeds Association Ltd,

Kapas CottonSeed Cottonbales

20. Multi Commodity Exchange of India Ltd.

Gur RBD Pamolein Groundnut Oil Rapeseed/Mustardseed Oil Pepper Domestic-MG1 Soy bean Kapas Soy Meal CottonSeed Turmeric Castorseed Castor-oil Crude Palm Oil Guarseed Cottonseed – Oilcake Nickel Rubber Copper Tin Gram Sugar Grade – M Sugar Grade – S Gold Silver Gold-M Rice Wheat Ref Soya oil – Indore Urad Tur / Arhar GuarGum Castorseed-5 Silver-M Steel – Flat Steel – Long Yellow Peas


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Long Staple Cotton Medium Stapple Cotton Castorseed – Disa Mustard Seed Guarseed Bandhani Gold – HNI Silver – HNI Red Chilly Maize Guar Gum Bandhani CASHEW KERNEL W320 Basmati Rice Jeera Mustard Seed Jaipur Crude Oil Sarbati Rice Sesame Seed ( Natural 99.1) Cotton Long Kadi Cotton Med Abohar Cotton Short Staple Steel Long Bhavnagar Mentha Oil

21. National Commodity & Derivatives Exchange Ltd.

S06 L S Cotton Ahmedabad J34 M S Cotton Bhatinda Crude Palm oil – Kandla RBD P’Olein – Kakinada EXP R/M oil – Jaipur Rape/Mustard seed – Jaipur Ref Soya oil – Indore Soy bean – Indore Pure Gold – Mumbai Pure Silver – New Delhi Pure Gold – Mumbai – 1 Kg Pure Silver – New Delhi – 30 Kg (Mega) Rubber – Kottayam Pepper – Kochi Gram(Chana) – New Delhi Guarseed – Jodhpur Jute (B twill-665 Gms) – Kollata Turmeric – Nizamabad Castorseed – Disa Raw Jute – Kolkata


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GuarGum – Jodhpur Sugar M Grade – Muzaffarnagar Urad – Mumbai Sugar S Grade – Vashi Yellow Peas – Mumbai Wheat – New Delhi SMQ Soy Meal – Indore SONA995MUM CHANDIDEL CottonKadi CottonAbohar Gur-chaku – Muzaffarnagar Yellow Red Maize – Nizamabad Grade A Raw Rice Delhi Grade A Parboiled Rice Delhi Common Raw Rice Delhi Common Parboiled Rice Delhi Mulberry Raw Silk Mulberry Green Cocoons Jeera Unjha Chilli (Paala) Guntur Mild Steel Ingots – Ghaziabad Cashews W-320-Kollam Whitish Sesame Seed – Rajkot Cotton Seed Oilcake – Akola Lemon Tur – Mumbai Maharashtra Lal Tur – Akola Arabica Coffee – Hassan Robusta Coffee – Kushalnagar

22. Haryana Commodities Ltd., Hissar

Rapeseed/Mustardseed Rapeseed/Mustardseed Oil

23. The Bullion Association Limited

24. e-Commodities Ltd


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CHAPTER 5

INTERNATIONAL COMMODITY EXCHANGES

Futures’ trading is a result of solution to a problem related to the

maintenance of a year round supply of commodities/ products that are

seasonal as is the case of agricultural produce. The United States, Japan,

United Kingdom, Brazil, Australia, Singapore are homes to leading

commodity futures exchanges in the world.

THE NEW YORK MERCANTILE EXCHANGE (NYMEX)

The New York Mercantile Exchange is the world’s biggest exchange for

trading in physical commodity futures. The exchange is in existence since last

132 years and performs trades trough two divisions, the NYMEX division,

which deals in energy and platinum and the COMEX division, which trades in

all the other metals.

Commodities traded: Light sweet crude oil, Natural Gas, Heating Oil,

Gasoline, RBOB Gasoline, Electricity Propane, Gold, Silver, Copper,

Aluminium, Platinum, Palladium, etc.

LONDON METAL EXCHANGE

The London Metal Exchange (LME) is the world’s premier non-ferrous

market, with highly liquid contracts. The exchange was formed in 1877 as a

direct consequence of the industrial revolution witnessed in the 19th

century

Commodities traded:- Aluminium, Copper, Nickel, Lead, Tin, Zinc,

Aluminium Alloy, North American Special Aluminium Alloy (NASAAC),

Polypropylene, Linear Low Density Polyethylene, etc.


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THE CHICAGO BOARD OF TRADE

The first commodity exchange established in the world was the Chicago

Board of Trade (CBOT) during 1848 by group of Chicago merchants who were

keen to establish a central market place for trade. Presently, the Chicago Board

of Trade is one of the leading exchanges in the world for trading futures and

options. More than 50 contracts on futures and options are being offered by

CBOT currently through open outcry and/or electronically.

Commodities Traded: - Corn, Soybean, Oil, Soybean meal, Wheat, Oats,

Ethanol, Rough Rice, Gold, and Silver etc.

TOKYO COMMODITY EXCHANGE (TOCOM)

The Tokyo Commodity Exchange (TOCOM) is the second largest

commodity futures exchange in the world. It trades in to metals and energy

contracts. It has made rapid advancement in commodity trading globally since

its inception 20 years back. TOCOM’s recent tie up with the MCX to explore

cooperation and business opportunities is seen as one of the steps towards

providing platform for futures price discovery in Asia for Asian players in

Crude Oil since the demand-supply situation in U.S. that drives NYMEX is

different from demand-supply situation in Asia

Commodities traded: - Gasoline, Kerosene, Crude Oil, Gold, Silver,

Platinum, Aluminum, Rubber, etc


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CHICAGO MERCANTILE EXCHANGE

The Chicago Mercantile Exchange (CME) is the largest futures exchange in

the US and the largest futures clearing house in the world for futures and

options trading. Formed in 1898 primarily to trade in Agricultural

commodities, the CME introduced the world’s first financial futures more than

30 years ago.

Commodities Traded: - Butter milk, Diammonium phosphate, Feeder cattle,

frozen pork bellies, Lean Hogs, Live cattle, Non-fat Dry Milk, Urea, Urea

Ammonium Nitrate, etc.


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CHAPTER 6

DIFFERENT COMMODITIES TRADED IN COMMODITY

MARKET

World –over one will find that a market exists for almost all the commodities

known to us. These commodities can be broadly classified into the following:


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METAL Aluminum, Copper, Lead, Nickel, Sponge Iron, Steel Long,

Steel Flat, Tin, Zinc

BULLION Gold, Gold HNL, Gold M, I- Gold, Silver HNL, Silver M

FIBER Cotton L Staple, Cotton M Staple, Cotton S Staple, Cotton

Yarn, Kapas

ENERGY Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E.

Sour Crude Oil

SPICES Cardamom, Jeera, Pepper, Red Chili, Turmeric

PLANTATIONS Cashew Kernel, Coffee (Robusta), Rubber

PULSES Chana, Masur, Yellow Peas

OIL & OIL SEED Castor Oil, Castor Seed, Coconut Cake, Coconut Oil, Ctton

Seed,

Crude Palm Oil, Groundnut Oil, Kapasia Khalli, Mustered

Oil, Mustered Seed, RBD Palmolein, Refined Soya Oil,

Refined Sunflower Oil, Rice Bran Doc, Rice Bran Refined

Oil, Sesame Seed, Soya meal, Soya bean, Soya Seeds

CEREALS Maize

OTHER Guargum, Guar Seed, Gurchaku, Mentha Oil, Potato, Sugar

M-30, Sugar S-30


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TO QUALIFY AS A COMMODITY FOR FUTURES TRADING, AN

ARTICLE OR A PRODUCT HAS TO MEET SOME BASIC

CRITERIA:

1. The product must not have gone through any complicated manufacturing

activity, except for certain basic processing such as mining, cropping, etc. In

other words, the product must be in a basic, raw, unprocessed state. There are of

course some exceptions to this rule. For example, metals, which are refined

from metal ores, and sugar, which is processed from sugarcane.

2. The product has to be fairly standardized, which means that there cannot be

much differentiation in a product based on its quality. For example, there are

different varieties of crude oil. Though these different varieties of crude oil can

be treated as different commodities and traded as separate contracts, there can

be a standardization of the commodities for futures contract based on the largest

traded variety of crude oil. This would ensure a fair representation of the

commodity for futures trading. This would also ensure adequate liquidity for the

commodity futures being traded, thus ensuring price discovery mechanism.

3. A major consideration while buying the product is its price. Fundamental

forces of market demand and supply for the commodity determine the

commodity prices.

4. Usually, many competing sellers of the product will be there in the market.

Their presence is required to ensure widespread trading activity in the physical

commodity market.

5. The product should have adequate shelf life since the delivery of a

commodity through a futures contract is usually deferred to a later date (also

known as expiry of the futures contract).


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CHAPTER 7

ROLE OF GOVERNMENT IN DEVELOPING COMMODITY

MARKET

Government of India has introduced two approaches strategies to

strengthening Indian Commodity Market. The responsibility of agriculture

produce mechanism is of state government as per constitution of India.

Agriculture is a state subject. The responsibility of a central government is to

enact modern act for Agriculture Marketing which may adopted by state

government as it is or in a modified format. The responsibility of a developing

and regulating commodity exchange is of central government.

There are two board regulatory aspect of commodity market in India. The

agricultural commodity market are established and regulated under the State Act

or State Agricultural Produce Marketing Regulation Act.

The forward, future and option trading in India is governed by Forward

Contract Regulation Act, 1952. It is implemented by Forward Market

Commission (FMC). FMC is an agency constituted under the provision of

FCRA, 1952 and its function under the Ministry of Consumer Affairs, Food and

Public Distribution.

Agricultural Marketing is witnessing major changes all over the world due to

LPG. In order to make global market opportunities available in India,

Government of India decided to integrate and strengthen the internal

agricultural marketing system of the country.

Ministry of Agricultural, GOI appointed an Export committee on 19th

Dec,

2000 followed by an Inter-Ministerial Task Force to review the prevailing of

agricultural marketing and the recommend measures to make system more

efficient and competitive. After several meeting the model legislation was

drafted by the name of legislation was given state Agricultural Produce

Marketing (Developmental &Regulation ) Act, 2003. This Act provides for


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establishment of private market yard, direct purchase centers, consumer/farmers

market for direct sale. These acts also provide special market for commodities

like onion, fruits, vegetable and flower. This acts prohibits commission agency

in a transaction of agricultural commodities with the producers. It redefines the

role of APMC to promote alternative marketing system such as contract

farming, direct marketing. It redefines the role of state government and state

agricultural marketing board. It requires promoting standardization of grading,

quality, certification, market led extension and training of farmers. This will

facilitate to get finance from the banks, international of E-commerce direct

purchasing, future, forward trading and introduction of negotiable warehouse

receipt system.


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RESPONSIBILITY OF AGRICULTURE PRODUCT MARKETING

COMMITTEE (APMC):

Following are the responsibility APMC under Section 24 &27 of

AMPRA :

To ensure complete transparency in the transaction taking place

in market area.

To provide market related services to the farmers

To ensure payment for agricultural produce sold by the farmers

on the same date.

To promote agricultural processing to promote value added

products of agricultural produce.

To publish data at arrival of agricultural commodities data on

products sold by the farmers directly.

To set up and promote public private partnership in the

management of agricultural markets.


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Section 36 of AMPRA deals with appointment of Chief

Executive Officer (CEO) of market committee.

Section 59 of AMPRA gives permission to market committee to

use funds to create facilities like grading, standardization and quality

certification, creation of infrastructure and to promote public private

participation.

Section 63 deals with establishment of state agricultural market

board which is responsible for setting up of marketing extension

Section 79 provides for research and development.


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ROLE OF NABARD IN DEVELOPING COMMODITY

MARKET

NABARD is the apex financial institution of the country for agricultural &

rural development and plays a vital role in coordinating all financial institution,

banks, state agencies, etc. to develop the agricultural sector. It formulates

strategies provides information and extends financial assistance. However the

role of NABARD is indirect. It provides refinance to financing institutions. It

ensures flow of credit to small and marginal farmer by implementing different

schemes it also promotes flow of credit for activities like poultry, diary,

aquaculture, sericulture and goat farming, etc. NABARD also supports

initiatives in natural resources management. It also provides credit for

agricultural marketing, infrastructure facilities like Rythu Bazaar, TMC. It

provides refinance and co-finance for various agricultural facilities.

As per recommendation of FMC (Forward Market Commission)NABARD

plays promotional and developmental role in setting up modern, transparent and

vibrant commodity exchange. NABARD participates in spot and future markets

for efficient price discovery of farmer produce. NABARD has provided equity

to two national level commodity exchange i.e. NCDX & MCX

Role of NABARD in promoting Agricultural Export Zone (AEZ):

At present, Agricultural Products Exports Development Authority

(APEDA)has setup 60 Agricultural Export Zone (AEZ) all over the country.

The crops covered under AEZ include fruits, vegetables, flowers, spices,

cashew, tea basmati rice, medicinal plants and pulses, etc. In all over 35 crops

have been identified for AEZ. The main objective of AEZ is to promote exports

of this 35 agricultural commodities. NABARD also plays active role in contract

farming and development of farmers club.


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ROLE OF DEPOSITORIES IN DEVELOPING COMMODITY

MARKET

The Indian Farming community consist of small and marginal farmers. The

studies indicate that small farmers contribute 54% of marketable surplus. The

small farmers sell their produce in a distress manner. Farmers often sell their

products to repay their debts immediately often harvesting. The solution for

these problem is to provide access to safe and scientific storage facilities and to

provide finance against the stored goods at minimum rate of interest. This is

referred as ‘Pledge Financing’. Farmers get warehousing receipt is a document

of title which represents legal rights on goods stored in warehouse. Nowadays

warehousing receipt are not issued in a paper format but in a electronic format.

Dematerialization refers to process of conversion of physical security or paper

security into electronic format. Demat helps settlement of trade on commodity

exchanges and improves settlement efficiency. Demat of warehousing receipt

as being introduced by - multi commodity exchange of india limited.


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REGULATORY FRAMEWORK OF INDIAN COMMODITY

MARKET

The need for regulation arises on account of the fact that the benefits of

futures markets accrue in competitive conditions. Proper regulation is needed to

create competitive conditions. In the absence of regulation, unscrupulous

participants could use these leveraged contracts for manipulating prices. This

could have undesirable influence on the spot prices, thereby affecting interests

of society at large.

Regulation is also needed to ensure that the market has appropriate risk

management system. In the absence of such a system, a major default could

create a chain reaction. The resultant financial crisis in a futures market could

create systematic risk.

Regulation is also needed to ensure fairness and transparency in trading,

clearing, settlement and management of the exchange so as to protect and

promote the interest of various stakeholders, particularly non-member users of

the market.

After independence, the Constitution of India brought the subject of "Stock

Exchanges and futures markets" in the Union list. As a result, the responsibility

for regulation of commodity futures markets devolved on Govt. of India. A Bill

on forward contracts was referred to an expert committee headed by Prof.

A.D.Shroff and Select Committees of two successive Parliaments and finally in

December 1952 Forward Contracts (Regulation) Act, 1952, was enacted. The

Act provided for 3-tier regulatory system;

(a) An association recognized by the Government of India on the

recommendation of Forward Markets Commission,

(b) The Forward Markets Commission (it was set up in September 1953) and

(c) The Central Government.


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Forward Contracts (Regulation) Rules were notified by the Central Government

in July, 1954.The Act divides the commodities into 3 categories with reference

to extent of regulation, viz.:

The commodities in which futures trading can be organized under the

auspices of recognized association.

The Commodities in which futures trading is prohibited.

Those commodities which have neither been regulated for

being traded under the recognized association nor prohibited are referred

as Free Commodities and the association organized in such free

commodities is required to obtain the Certificate of Registration from the

Forward Markets Commission.


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FORWARD MARKETS COMMISSION

Forward Markets Commission (FMC) headquartered at Mumbai, is a

regulatory authority which is overseen by the Ministry of Consumer Affairs,

Food and Public Distribution, Govt. of India. It is a statutory body set up in

1953 under the Forward Contracts (Regulation) Act, 1952.

Forward Markets Commission provides regulatory oversight in order to

ensure financial integrity (i.e. to prevent systematic risk of default by one major

operator or group of operators), market integrity (i.e. to ensure that futures

prices are truly aligned with the prospective demand and supply conditions) and

to protect and promote interest of customers/ non-members. It prescribes the

following regulatory measures:

Limit on net open position as on the close of the trading

hours. Sometimes limit is also imposed on intra-day net open position.

The limit is imposed operator-wise, and in some cases, also member-

wise.

Circuit-filters or limit on price fluctuations to allow cooling

of market in the event of abrupt upswing or downswing in prices.

Special margin deposit to be collected on outstanding

purchases or sales when price moves up or down sharply above or below

the previous day closing price. By making further purchases/sales

relatively costly, the price rise or fall is sobered down. This measure is

imposed only on the request of the exchange.


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Circuit breakers or minimum/maximum prices: These are

prescribed to prevent futures prices from falling below as rising above not

warranted by prospective supply and demand factors. This measure is

also imposed on the request of the exchanges.

Skipping trading in certain derivatives of the contract, closing

the market for a specified period and even closing out the contract: These

extreme measures are taken only in emergency situations.

Besides these regulatory measures, the F.C(R) Act provides that a client's

position cannot be appropriated by the member of the exchange, except when a

written consent is taken within three days time. The FMC is persuading

increasing number of exchanges to switch over to electronic trading, clearing

and settlement, which is more customer-friendly. The FMC has also prescribed

simultaneous reporting system for the exchanges following open out-cry

system. These steps facilitate audit trail and make it difficult for the members to

indulge in malpractices like trading ahead of clients, etc. The FMC has also

mandated all the exchanges following open outcry system to display at a

prominent place in exchange premises, the name, address, telephone number of

the officer of the commission who can be contacted for any grievance. The

website of the commission also has a provision for the customers to make

complaint and send comments and suggestions to the FMC. Officers of the

FMC have been instructed to meet the members and clients on a random basis,

whenever they visit exchanges, to ascertain the situation on the ground, instead

of merely attending meetings of the board of directors and holding discussions

with the office-bearers.


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ADVANTAGES OF COMMODITY MARKET

Price Discovery:- Based on inputs regarding specific market

information, the demand and supply equilibrium, weather forecasts,

expert views and comments, inflation rates, Government policies, market

dynamics, hopes and fears, buyers and sellers conduct trading at

commodity exchanges. This transforms in to continuous price discovery

mechanism. The execution of trade between buyers and sellers leads to

assessment of fair value of a particular commodity that is immediately

disseminated on the trading terminal.

Price Risk Management: - Hedging is the most common

method of price risk management. It is strategy of offering price risk that

is inherent in spot market by taking an equal but opposite position in the

futures market. Futures markets are used as a mode by hedgers to protect

their business from adverse price change. This could dent the profitability

of their business. Hedging benefits who are involved in trading of

commodities like farmers, processors, merchandisers, manufacturers,

exporters, importers etc.

Import- Export competitiveness: - The exporters can hedge

their price risk and improve their competitiveness by making use of

commodity market. A majority of traders which are involved in physical

trade internationally intend to buy forwards. The purchases made from

the physical market might expose them to the risk of price risk resulting

to losses. The existence of futures market would allow the exporters to

hedge their proposed purchase by temporarily substituting for actual

purchase till the time is ripe to buy in physical market. In the absence of


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commodity market it will be meticulous, time consuming and costly

physical transactions.

Predictable Pricing: - The demand for certain commodities

is highly price elastic. The manufacturers have to ensure that the prices

should be stable in order to protect their market share with the free entry

of imports. Commodity futures contracts will enable predictability in

domestic prices. The manufacturers can, as a result, smooth out the

influence of changes in their input prices very easily. With no commodity

market, the manufacturer can be caught between severe short-term price

movements of oils and necessity to maintain price stability, which could

only be possible through sufficient financial reserves that could otherwise

be utilized for making other profitable investments.

Benefits for farmers/Agriculturalists: - Price instability has

a direct bearing on farmers in the absence of commodity market. There

would be no need to have large reserves to cover against unfavorable

price fluctuations. This would reduce the risk premiums associated with

the marketing or processing margins enabling more returns on produce.

An option for high net worth investors:- With the rapid

spread of derivatives trading in commodities, the commodities route too

has become an option for high net worth and savvy investors to consider

in their overall asset allocation.


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DIS- ADVANTAGES OF COMMODITY MARKET

You need a mentor: - With this lack of guidance, it is only

natural to expect that many traders will be prone to repeating the same

mistakes which eventually cost them their capital. Trading in

commodities requires a trader to have firm knowledge of the factors that

affect the demand and supply of a particular commodity. Having an

experienced broker with whom you can discuss trading strategies is likely

to keep you out of trouble. This seeking an advice of a mentor is crucial

if we want to improve our trading proficiency.

Leverage: - Commodity futures operate on margin, meaning

that to take a position only a small percentage of the total value needs to

be available in cash in trading account. High leverage means high risk

attached to the account. It acts as a double edge sword where benefit of

low margin can result in poor money management.

Over trading:- The third disadvantage of online trading

relates to the issue of over trading. Online commodity trading can be

risky if you are not disciplined. There is a tendency for a trader to deviate

from his original trading strategy and switch o day trading after he gets

bored of holding a market position for a considerable period of time.

When this happens, it is similar to gambling in a casino.


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CURRENT SCENARIO

The growth paradigm of India’s commodity markets is best reflected by the

figures from the regulator’s official website, which indicated that the total

value of trade on the commodity futures market in the financial year 2008/09

was INR52.49 lakh crore (over US$1 trillion) as against INR 40.66 lakh crore

in the preceding year, registering a growth of 29.09%, even under challenging

economic conditions globally. The main drivers of this impressive growth in

commodity futures were the national commodity exchanges. MCX, NCDEX

and NMCE along with two regional exchanges – NBOT Indore and ACE,

Ahmedabad – contributed to 99.61% of the total value of commodities traded

during 2008/09. So far, this year’s volumes have seen a significant jump over

the last year in agro-commodities, as well as „international‟ commodities like

gold, silver, crude oil and copper. Of course, more than 100 commodities are

today available for trading in the commodity futures market and more than 50

of them are actively traded. These include bullion, metals, agricultural

commodities and energy products. Most importantly, an archaic market has

suddenly turned into an organized, service-oriented set-up with shooting

volumes. The unqualified success of the futures market has ensured the next

step, i.e., the launch of electronic spot markets for agro-products. Being in a

time-zone that falls in the gap left by the major commodity exchanges in the

US, Europe and Japan has also worked in India’s favor because commodity

business by its very nature is a 24/7 business. Innovation coupled with modern

and successful financial market environment has ensured the beginning of a

success story in commodities which will eventually see India becoming a price-

setter in major commodities on the strength of its large production and

consumption.


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It is pertinent to note that India and China are being projected as the major

drivers for the initiation of yet another commodity super-cycle. Tracking price

trends and analyzing the statistics have always been key areas of economic

research; but in each cycle – whether defined by Jim Rogers, Kondratieff or

Dewey & Dakin – the trigger is always different, and in this case it may well be

increase in regional consumption, some of which we have already seen. One

outcome of the recent boom-bust cycle has been that mergers and acquisitions

have gained speed and the biggest beneficiaries will likely be large companies

from historically conservative countries, like India. This phase is likely to

propel India into the international big league quicker and on a firmer footing.

In fact, India did well to weather the global financial crisis over the last year

and a half, with GDP growing at 6% at the worst of times, compared to almost

every other country which showed negative growth in one or more quarters

during this period. Growth did fall from 9% to 6% but was way above the

World Bank’s forecast of 4%, demonstrating economic resilience, a sure sign

of things to come.

Turnover at Indian commodity bourses rose 49.80 percent to 73.51 trillion

rupees in the first eleven-and-a-half months of fiscal 2009/10, regulator

Forward Markets Commission (FMC) said on its website (as on 25th March

2010).

Turnover rose 44.12 percent to 3.79 trillion rupees in the fortnight ending

March. 15, data showed on Thursday.

Active trade was seen in gold, silver, copper and crude oil in the energy and

metals pack during the March ’10 first fortnight.

Guar seed, chana, soybean, turmeric and jeera saw maximum trade among

agricultural commodities.


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Turnover at India's 23 commodity bourses, including four operating at the

national level, grew from 1.29 trillion rupees in 2003/04 to 52.49 trillion rupees

in 2008/09.

The regulator said it has approved Fid Fund (Mauritius) Ltd, an affiliate of

Fidelity International's sale of 1.62 percent stake in Multi Commodity

Exchange of India (MCX) to Intel Capital (Mauritius) Ltd.

FMC had last month allowed Fid Fund (Mauritius) Ltd's sale of 2.03 percent

stake in MCX to Passport India Investments (Mauritius) Ltd.


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CONCLUSION

This decade is termed as Decade of Commodities. Prices of all commodities

are heading northwards due to rapid increase in demand for commodities.

Developing countries like China are voraciously consuming the commodities.

That‟s why globally commodity market is bigger than the stock market. India

is one of the top producers of large number of commodities and also has a long

history of trading in commodities and related derivatives. The Commodities

Derivatives market has seen ups and downs, but seems to have finally arrived

now. The market has made enormous progress in terms of Technology,

transparency and trading activity. Interestingly, this has happened only after the

Government protection was removed from a number of Commodities, and

market force was allowed to play their role. This should act as a major lesson

for policy makers in developing countries, that pricing and price risk

management should be left to the market forces rather than trying to achieve

these through administered price mechanisms. The management of price risk is

going to assume even greater importance in future with the promotion of free

trade and removal of trade barriers in the world.

As majority of Indian investors are not aware of organized commodity market;

their perception about is of risky to very risky investment. Many of them have

wrong impression about commodity market in their minds. It makes them

specious towards commodity market. Concerned authorities have to take

initiative to make commodity trading process easy and simple. Along with

Government efforts NGO‟s should come forward to educate the people about

commodity markets and to encourage them to invest in to it. There is no doubt

that in near future commodity market will become Hot spot for Indian farmers

rather than spot market. And producers, traders as well as consumers will be


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benefited from it. But for this to happen one has to take initiative to standardize

and popularize the Commodity Market

Education

commodity market project