Overview of Commodity Market 110821064508 Phpapp01

A report on Dynamics of Indian commodity market
Submitted By: Group No: 1 Girish Hitesh Madhu Mala Nirmal Reshma
Acknowledgement
As any other report the success of this report is the result of active involvement of many people: From time of inception of an idea till the end. Many brains has worked together to make this exclusive and informative report on Dynamics of Indian Commodity Market.
With a great pleasure and privilege we are presenting this report with our deepest gratitude to our institute for providing us this immense.
We would like to acknowledge our sincere thanks, to Dr. Himani Joshi (Academic Coordinator) for her guidance throughout the project, her interest, enthusiasm and Involvement had been greatest motivational factor during the study.
It is a privilege to have weighty appreciation to Mrs. Neha Saxena for giving us complete support and cooperation, and for helping us with the knowledge regarding the planning of the business and execution of the same.
Special and sincere thanks to all the respondents who co-operated with us and share their suggestions and recommendation.
Stevens Business School (2009-2011)
Page 2
Preface
By working together, ordinary people can perform extraordinary feats; they can push things that comes in their hands higher up a little further on towards the height of excellence. We have accepted the above statement and has prepared the report based on our knowledge and secondary data. We are very glad to present our report that has all efforts knowledge & hard work involved in its completion.
Page 3
Table of Content
Sr. No.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Introduction History
Particular
Page no.
5 8 10 13 16 18 21 25 30 37 40 51 56 60 64 67 73 75
Indian Commodity Market Structure of commodity market Commodity Traded Pricing Functioning Major Players Performance of Commodity Market Trends Gold in Indian commodity market Characteristics of commodity market Strategies for trading in commodities and futures How to trade in commodity market Commodity exchanges in world Commodity exchanges in India Conclusion References
Page 4
Introduction
Page 5
1.1- COMMODITY
A commodity may be defined as an article, a product or material that is bought and sold. It can be classified as every kind of movable property, except Actionable Claims, Money & Securities. Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets, may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option.
1.2- COMMODITY MARKET
Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. 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.
Page 6
1.3- Overview
Despite intermittent curbs, Indias six-year-old commodity futures market has seen a steady stream of new entrants, drawn by the promise of richer rewards. The intense growth, even in the absence of basic reforms, has attracted financial institutions, trading companies and banks to set up large commodity bourse. Since, Indian Commodity Exchange (ICEX), promoted by India bulls Financial Services Ltd in partnership with MMTC is going to start its operation from November 2009; it is expected to create an extensive competition among national level commodity exchanges. Commodity derivatives market of India is drawing attention from all over the world, albeit FMC had banned nine commodities since early 2007, out of which 4 are still out of trade and even financial institutions and foreign entities are barred from trading in the market. Even, industry players are of the view that commodity market regulator (FMC) should permit banks and financial institutions to trade in commodity futures, allow options, exchange-traded indices and some more powers to the market regulator from Ministry of Consumer Affairs to develop the market.
Page 7
History
Page 8
Before the North American futures market originated some 150 years ago, farmers would grow their crops and then bring them to market in the hope of selling their commodity of inventory. But without any indication of demand, supply often exceeded what was needed, and unpurchased crops were left to rot in the streets. Conversely, when a given commodity such as Soybeans was out of season, the goods made from it became very expensive because the crop was no longer available, lack of supply.
In the mid-19th century, grain markets were established and a central marketplace was created for farmers to bring their commodities and sell them either for immediate delivery (spot trading) or for forward delivery. The latter contracts, forwards contracts, were the forerunners to today's futures contracts. In fact, this concept saved many farmers from the loss of crops and helped stabilize supply and prices in the off-season.
Today's commodity market is a global marketplace not only for agricultural products, but also currencies and financial instruments such as Treasury bonds and securities futures. It's a diverse marketplace of farmers, exporters, importers, manufacturers and speculators. Modern technology has transformed commodities into a global marketplace where a Kansas farmer can match a bid from a buyer in Europe.
Page 9
Indian Commodity Market
Page 10
The vast geographical extent of India and her huge population is aptly complemented by the size of her market. The broadest classification of the Indian Market can be made in terms of the commodity market and the bond market. The commodity market in India comprises of all palpable markets that we come across in our daily lives. Such markets are social institutions that facilitate exchange of goods for money. The cost of goods is estimated in terms of domestic currency. India Commodity Market can be subdivided into the following two categories: Wholesale Market Retail Market
The traditional wholesale market in India dealt with whole sellers who bought goods from the farmers and manufacturers and then sold them to the retailers after making a profit in the process. It was the retailers who finally sold the goods to the consumers. With the passage of time the importance of whole sellers began to fade out for the following reasons: The whole sellers in most situations, acted as mere parasites that did not add any value to the product but raised its price which was eventually faced by the consumers. The improvement in transport facilities made the retailers directly interact with the producers and hence the need for whole sellers was not felt.
In recent years, the extent of the retail market (both organized and unorganized) has evolved in leaps and bounds. In fact, the success stories of the commodity market of India in recent years has mainly centered on the growth generated by the Retail Sector. Almost every commodity under the sun both agricultural and industrial is now being provided at well distributed retail outlets throughout the country. Moreover, the retail outlets belong to both the organized as well as the unorganized sector. The unorganized retail outlets of the yesteryears consist of small shop owners who are price takers where consumers face a highly competitive price structure. The organized sectors on the other hand are owned by various business houses like Pantaloons, Reliance, Tata and others. Such markets are usually selling a wide range of articles agricultural and manufactured, edible and
Page 11
inedible, perishable and durable. Modern marketing strategies and other techniques of sales promotion enable such markets to draw customers from every section of the society. However the growth of such markets has still centered on the urban areas primarily due to infrastructural limitations. Considering the present growth rate, the total valuation of the Indian Retail Market is estimated to cross Rs. 10,000 billion by the year 2010. Demand for commodities is likely to become four times by 2010 than what it presently is.
The size of the commodities markets in India is also quite significant. Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent. Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the size of the commodities market grows many folds here on.
Page 12
STRUCTURE OF COMMODITY MARKET
Page 13
Page 14
Consumers (Retail/ Warehouses Institutional) Hedger (Exporters / Millers Industry)
Clearing Bank
Commodities Ecosystem MCX
Producers (Farmers/Cooperatives/Instituti onal)
Transporters/ Support agencies
Quality Certification Agencies
Traders (speculators) arbitrageurs/ client
Page 15
DIFFERENT TYPES OF COMMODITIES TRADED
Page 16
World-over one will find that a market exits for almost all the commodities known to us. These commodities can be broadly classified into the following: METAL Aluminum, Copper, Lead, Nickel, Sponge Iron, Steel Long (Bhavnagar), Steel Long (Govindgarh), Steel Flat, Tin, Zinc Gold, Gold HNI, Gold M, i-gold, Silver, Silver HNI, Silver M Cotton L Staple, Cotton M Staple, Cotton S Staple, Cotton Yarn, Kapas Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E. Sour Crude Oil
BULLION FIBER
ENERGY SPICES PLANTATIONS PULSES
Cardamom, Jeera, Pepper, Red Chili Areca nut, Cashew Kernel, Coffee (Robusta), Rubber Chana, Masur, Yellow Peas
PETROCHEMICALS HDPE, Polypropylene(PP), PVC OIL & OIL SEEDS Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton Seed, Crude Palm Oil, Groundnut Oil, Kapasia Khalli, Mustard Oil, Mustard Seed (Jaipur), Mustard Seed (Sirsa), RBD Palmolein, Refined Soy Oil, Refined Sunflower Oil, Rice Bran DOC, Rice Bran Refined Oil, Sesame Seed, Soymeal, Soy Bean, Soy Seeds Maize Guargum, Guar Seed, Gurchaku, Mentha Oil, Potato (Agra), Potato (Tarkeshwar), Sugar M-30, Sugar S-30
CEREALS OTHERS
Page 17
Pricing
Page 18
Prices and monthly changes Commodities Units 02 Dec 2Q 08
Historical Prices 4Q 08 1Q 09 2Q 09
Price Forecasts 3m 6m
Energy
WTI Crude Oil Brent Cude Oil RBOB Gasoline USGC Heating Oil NYMEX Nat. Gas UK NBP Nat. Gas $/bbl $/bbl $/gal $/gal $/mmBt u p/th 76.60 77.88 1.99 1.97 4.53 28.59 123.8 122.79 3.17 3.53 11.47 63.08 59.08 57.49 1.34 1.84 6.40 65.59 43.32 45.72 1.25 1.34 4.47 45.30 59.79 59.90 1.71 1.56 3.81 27.57 85.00 83.50 2.16 2.16 5.50 28.60 92.00 90.5 2.44 2.35 6.00 31.30
Industrial Metals
LME Aluminum LME Copper LME Nickel LME Zinc $/mt $/mt $/mt $/mt 2157 7125 16300 2430 2995 8323 25859 2150 1885 3948 11118 1219 1401 3494 10625 1208 1530 4708 13147 1509 2160 7460 16640 2390 2260 8105 17590 2620
Precious Metals
London Gold London Silver $/troy oz 1212 $/troy oz 19.2 896 17.2 795 10.2 908 12.6 922 13.8 1200 20.0 1260 21.0
Agriculture
CBOT Wheat CBOT Soybean CBOT Corn NYBOT Cotton NYBOT Coffee cent/bu cent/bu cent/bu cent/lb 555 1034 392 74 843 1388 629 72 552 915 9 384 47 551 49 377 46 572 1116 406 54 500 1050 400 70 550 1050 450 70
cent/lb
143
136
112
113
124
140
140
Page 19
Prices and monthly changes Units NYBOT Cocoa NYBOT Sugar CME Live Cattle CME Lean Hog $/mt cent/lb cent/lb cent/lb 02 Dec 3317 23.0 82.1 59.7 2Q 08 2769 11.2 93.7 72.5
Historical Prices 4Q 08 2252 11.6 88.7 59.1 1Q 09 2553 12.7 83.8 60.1 2Q 09 2499 14.7 83.0 63.2
Price Forecasts 3m 2700 20.0 85.0 65.0 6m 2700 17.0 90.0 80.0
Page 20
Functioning
Page 21
The futures market is a centralized market place for buyers and sellers from around the world who meet and enter into commodity futures contracts. Pricing mostly is based on an open cry system, or bids and offers that can be matched electronically. The commodity contract will state the price that will be paid and the date of delivery. Almost all futures contracts end without the actual physical delivery of the commodity.
7.1- What Exactly Is a Commodity Contract?

Let's say, for example, that you decide to subscribe to satellite TV. As the buyer, you enter into an agreement with the company to receive a specific number of channels at a certain price every month for the next year. This contract made with the satellite company is similar to a futures contract, in that you have agreed to receive a product or commodity at a later date, with the price and terms for delivery already set. You have secured your cost for now and the next year, even if the price of satellite rises during that time. By entering into this agreement, you have reduced your risk of higher prices.
That's how the futures market works. Except instead of a satellite TV provider, a producer of wheat may be trying to secure a selling price for next season's crop, while a bread maker may be trying to secure a buying price to determine how much bread can be made and at what profit. So the farmer and the bread maker may enter into a futures contract requiring the delivery of 5,000 bushels of grain to the buyer in June at a price of $4 per bushel. By entering into this futures contract, the farmer and the bread maker secure a price that both parties believe will be a fair price in June. It is this contract that can then be bought and sold in the commodity market.
A futures contract is an agreement between two parties: a short position, the party who agrees to deliver a commodity, and a long position, the party who agrees to receive a commodity. In the above scenario, the farmer would be the holder of the short position (agreeing to sell) while the bread maker would be the holder of the long (agreeing to buy). (We will talk more about the outlooks of the long and short positions in the section on strategies, but for now it's important to know that every contract involves both positions.)
Page 22
In every commodity contract, everything is specified: the quantity and quality of the commodity, the specific price per unit, and the date and method of delivery. The price of a futures contract is represented by the agreed - upon price of the underlying commodity or financial instrument that will be delivered in the future. For example, in the above scenario, the price of the contract is 5,000 bushels of grain at a price of $4 per bushel.
7.2- Profit And Loss - Cash Settlement.

The profits and losses of futures depend on the daily movements of the market for that contract and is calculated on a daily basis. For example, say the futures contracts for wheat increases to $5 per bushel the day after the above farmer and bread maker enter into their commodity contract of $4 per bushel. The farmer, as the holder of the short position, has lost $1 per bushel because the selling price just increased from the future price at which he is obliged to sell his wheat. The bread maker, as the long position, has profited by $1 per bushel because the price he is obliged to pay is less than what the rest of the market is obliged to pay in the future for wheat. On the day the change occurs, the farmer's account is debited $5,000 ($1 per bushel X 5,000 bushels) and the bread maker's account is credited by $5,000 ($1 per bushel X 5,000 bushels).
As the market moves every day, these kinds of adjustments are made accordingly. Unlike the stock market, futures positions are settled on a daily basis, which means that gains and losses from a day's trading are deducted or credited to a person's account each day. In the stock market, the capital gains or losses from movements in price aren't realized until the investor decides to sell the stock or cover his or her short position. As the accounts of the parties in futures contracts are adjusted every day, most transactions in the futures market are settled in cash, and the actual physical commodity is bought or sold in the cash market. Prices in the cash and futures market tend to move parallel to one another, and when a futures contract expires, the prices merge into one price. So on the date either party decides to close out their futures position, the contract will be settled. If the contract was settled at $5 per bushel, the farmer would lose $5,000 on the
Page 23
contract and the bread maker would have made $5,000 on the contract. But after the settlement of the wheat futures contract, the bread maker still needs wheat to make bread, so he will in actuality buy his wheat in the cash market (or from a wheat pool) for $5 per bushel (a total of $25,000) because that's the price of wheat in the cash market when he closes out his contract. However, technically, the bread maker's futures profits of $5,000 go towards his purchase, which means he still pays his locked-in price of $4 per bushel ($25,000 - $5,000 = $20,000). The farmer, after also closing out the contract, can sell his wheat on the cash market at $5 per bushel, but, because of his losses from the futures contract with the bread maker, the farmer still actually receives only $4 per bushel. In other words, the farmer's loss in the commodity contract is offset by the higher selling price in the cash market--this is referred to as hedging.
Now that you see that a futures contract is really more like a financial position, you can also see that the two parties in the wheat futures contract discussed above could be two speculators rather than a farmer and a bread maker. In such a case, the short speculator would simply have lost $5,000 while the long speculator would have gained that amount. (Neither would have to go to the cash market to buy or sell the commodity after the contract expires.)
Page 24
Major Players In Commodity market
Page 25
The players in the futures market fall into two categories: 1) Hedger 2) Speculator 3) Arbitrage
8.1- 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.
Example:
A silversmith must secure a certain amount of silver in six months time for earrings and bracelets that have already been advertised in an upcoming catalog with specific prices. But what if the price of silver goes up over the next six months? Because the prices of the earrings and bracelets are already set, the extra cost of the silver can't be passed onto the retail buyer, meaning it would be passed onto the silversmith. The silversmith needs to hedge, or minimize her risk against a
Stevens Business School (2009-2011) Page 26
possible price increase in silver. How? The silversmith would enter the futures market and purchase a silver contract for settlement in six months time (let's say June) at a price of $5 per ounce. At the end of the six months, the price of silver in the cash market is actually $6 per ounce, so the silversmith benefits from the futures contract and escapes the higher price. Had the price of silver declined in the cash market, the silversmith would, in the end, have been better off without the futures contract. At the same time, however, because the silver market is very volatile, the silver maker was still sheltering himself from risk by entering into the futures contract. So that's basically what a hedger is: the attempt to minimize risk as much as possible by locking in prices for a later date purchase and sale.
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. A potato farmer would hedge against lower French fry prices, while a fast food chain would hedge against higher potato prices. A company in need of a loan in six months could hedge against rising in the interest rates future, while a coffee beanery could hedge against rising coffee bean prices next year.
8.2- Speculator:
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 hedger selling a contract low in anticipation of declining prices in the future.
Page 27
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 off setting rising and declining prices through the buying and selling of contracts.
Long Hedger Speculator

Secure a price now to protect against future rising prices Secure a price now in anticipation of rising prices
Short
Secure a price now to protect against future declining prices Secure a price now in anticipation of declining prices
In a fast-paced market into which information is continuously being fed, speculators and hedgers bounce off of--and benefit from--each other. The closer it gets to the time of the contract's expiration, the more solid the information entering the market will be regarding the commodity in question. Thus, all can expect a more accurate reflection of supply and demand and the corresponding price. Regulatory Bodies the United States' futures market is regulated by the Commodity Futures Trading Commission, CFTC, and an independent agency of the U.S. government. The market is also subject to regulation by the National Futures Association, NFA, a self-regulatory body authorized by the U.S. Congress and subject to CFTC supervision.
A Commodity broker and/or firm must be registered with the CFTC in order to issue or buy or sell futures contracts. Futures brokers must also be registered with the NFA and the CFTC in order to conduct business. The CFTC has the power to seek criminal prosecution through the Department of Justice in cases of illegal activity, while violations against the NFA's business ethics and code of conduct can permanently bar a company or a person from dealing on the futures exchange. It is imperative for investors wanting to enter the futures market to understand these regulations and make sure that the brokers, traders or companies acting on their behalf are licensed by the CFTC.
Page 28
8.3- Arbitrage:
Arbitrage refers to the opportunity of taking advantage between the price difference between two different markets for that same stock or commodity. In simple terms one can understand by an example of a commodity selling in one market at price x and the same commodity selling in another market at price x + y. Now this y, is the difference between the two markets is the arbitrage available to the trader. The trade is carried simultaneously at both the markets so theoretically there is no risk. (This arbitrage should not be confused with the word arbitration, as arbitration is referred to solving of dispute between two or more parties.) The person who conducts and takes advantage of arbitrage in stocks, commodities, interest rate bonds, derivative products, forex is know as an arbitrageur. An arbitrage opportunity exists between different markets because there are different kind of players in the market, some might be speculators, others jobbers, some market-markets, and some might be arbitrageurs. In India there are a good amount of Arbitrage opportunities between NCDEX, MCX in commodities.
Page 29
Performance Of Commodity Market
Page 30
Indias inflation fell to near zero levels although it may take some time for it to get reflected in the prices of essential commodities. Even as the BSE Sensex is moving in a narrow range unable to break the 9000 mark, Indias largest commodity bourse created a record by as its turnover touched Rs 32016 crore on a single day the previous highest being Rs 29,887 crore in September 18, 2008. Angel Commodities, one of the leading commodity brokerages also announced the crossing of a major milestone of Rs 1000 crore turnover. What ever gains in BSE in recent days has been attributed to growth in commodity stocks.
Commodity market regulator, Forward Markets Commission (FMC) will install at least 180 display boards at locations such as rural post offices, Krishi Vigyan Kendras and APMCs across the country in the next 10 days to provide prices of farm com modity futures to farmers. Meanwhile gold and crude oil continue to generate more volumes in Indias commodity bourses.
9.1- Precious Metals

Gold prices recovered strongly from its lows during last week and almost touched a high of $970/oz., as the Federal Reserve's plans to purchase as much as $1.15 trillion in U.S. bonds and mortgage-backed securities sparked worries of inflation ahead, raising gold's appeal as a hedge against rising prices. This is the most aggressive plan taken by Fed since the early 1960. Demand from gold ETF also increased during this week. Holdings in SPDR Gold Trust, worlds largest gold ETF, touched an all time high of 1103.29 tons. The volatility in prices in the Bullion pack has increased greatly over the past few months with 19 March being a highly volatile trading day. Spot Gold is finding excellent support in the zone of $880-$890 levels which is viewed as value buying zone by investors. Whereas major resistance zone is seen between $960-$970. The demand for the safe-haven asset is still prevalent with the USD weakening consistently over the past few trading sessions. Also, the increased volatility in the Rupee is playing its role in determining domestic bullion prices. In coming weeks & months, the state of the overall global economic scenario will play a key role in determining bullion prices as investors evaluate various asset classes to channel their funds. Still gold remains the best bet under current market scenario. MCX April Gold can face resistance around Rs.15600 levels, whereas support is seen at Rs. 14850 per 10 gram
Page 31
9.2- Crude Oil
Crude Oil prices traded higher amidst high amount of volatility in the last week. Oil prices surged to a three month high on account of weak dollar and rally in global equity markets. Despite bearish inventory data, prices rebounded from its lows, after US Federal Reserve decided to buy Treasury bonds worth $300bn to ease credit market. Steps taken by Fed rekindled hopes for economic recovery and rise in energy demand. Crude Oil prices have increased by more than 20% this year, on account of strict implementation of production cuts by OPEC to reduce excess supply and weak dollar against major currencies. Volatility in oil prices has increased sharply in past few trading sessions. We expect that oil prices can witness fierce tussle between bulls and bears in coming weeks. Factors like falling demand and weak economic data are favoring bears, but weak dollar, rise in risk appetite amidst strong equity markets are giving bulls a reason to come back in to market. After last weeks rally, oil prices can witness profit booking. During this week, NYMEX May Crude Oil prices are expected to trade in the range of $42.50 and $53.50.
9.3- Rubber
Rubber prices in domestic and global markets were on a recovery mode this week. In the weekend covering groups lifted the prices to further highs driven by possibly a speculative interest. However, 2009 as predicted by many analysts is not going to be a good year for rubber with consumption to fall 5.5 percent across the globe mainly due to falling automobile sales. Rubber prices have slumped 50 percent in a year as the global recession slashed tire demand. Europes car market shrank 7.8 percent in 2008, while U.S. sales contracted 18 percent to a 16 percent year low.
In TOCOM and Shanghai, benchmark natural rubber futures climbed to the highest in more than two weeks as producers restated proposed output cuts and on speculation China, the worlds largest consumer, is adding the commodity to state stockpiles.
Page 32
Spot rubber flared up on Friday. Sheet rubber RSS 4 moved up to Rs 76.50 from Rs.75.50 a kg, while the market made all-round improvement even in the absence of enquires from the major manufacturers. The volumes were comparatively better. The April futures for RSS 4 firmed up to Rs 77.99 (Rs 77.50), May to Rs 79 (Rs 78.56), June to Rs 79.99 (Rs 79.67) and July to Rs 79.95 (Rs 79.80) a kg on National Multi Commodity Exchange (NMCE).
Towards weekend in global markets, RSS 3 slipped further to Rs 73.37 (Rs 73.81) a kg on Singapore Commodity Exchange. The grades spot weakened to Rs 73.68 (Rs 74.43) a kg at Bangkok. The physical rubber rates were: RSS-4: 76.50 (75.50), RSS-5: 75 (74), Ungraded: 73.50 (73), ISNR 20: 74 (73.50), and Latex 60%: 57.50 (57). Meanwhile, Indias Rubber Board has raised alarm against the rapid growth in tyre imports mainly from China. A steady trend with an slight upward bias could be expected for rubber next week.
9.4- Base metals

Base metal prices are moving higher on the back of a weaker dollar and stable equities as both these factors have improved market sentiments. A weaker dollar makes base metals look attractive for holders of other currencies. This is providing a strong support to base metal prices but the upside could be capped as LME inventories have touched a 15-year high. The base metals market is in an oversupply situation and fundamentals look bearish. However, the current rise in base metal prices is mainly due to technical buying and short-covering. In the coming week, base metal prices are expected to remain volatile as the US is expected to announce economic data like existing home sales, new home sales, 4Q GDP, personal income and spending.
Page 33
9.5- Soybean
Refined soy oil futures fell sharply during the last week as government of India scrapped import duty on soy oil to reduce premium over palm oil. Government of India extended ban on exports of edible oil. Last year, Govt. of India had banned export soy oil in March to control rise in price. According to the Solvent Extractors Association of India, Indias import of edible oil increased to 7,30,094 metric tonnes in February, 2009, up 69.40% as compared to last year during the same period. Edible oil imports in the first four months of oil marketing year (November to February) was 28,24,941 metric tonnes, up 87% as compared to 15,12,695 metric tonnes during the same period last year. PEC Ltd. has floated two separate tenders for the local sales of 3161 metric tonnes of crude soy oil. PEC is authorized by the government of India to import edible oils and sales the local market. Global vegetable oil prices may still fall due to ample global supply. In the coming week, prices are expected to move lower on account of higher import of edible oil and scrapped import duty on soybean oil. NCDEX April Refined Soy Oil has support at 430/422 and resistance is seen at 452/460 levels in this week.
9.6- Other Edible Oil

Indias edible oil and oilseeds Futures recovered from their lower level tracking the global markets. The Bursa Malaysia Derivative making decent gains in the past few days and CBOTs projection aided market sentiments. It was a firm trend in crude palm oil that lends support to the oil seeds complex. The June Contract closed at 1985 a gain of 74. Nynex Crude Oil has support at US $51 per barrel. Mustard Seed and castor seed tracked the gains in soybean and ended on a mixed to higher note in physical, Futures markets
Page 34
9.7- Turmeric
Spot prices at Erode and Nizamabad over the past couple of days are being quoted at higher rates due to better off takes at the domestic market. Prices in the previous week were quoted in the range of Rs. 4,200-4,350/qtl. Even though the arrivals are more off takes are equally better due to domestic buying. Arrivals on an average in the previous week were around 25,000 bags daily in both the major mandis of Nizamabad and Erode. Fear of lower availability of Turmeric in 2009 is supporting the prices to strengthen. Demand from the domestic market especially from local stockiest is present but the overseas demand has reduced as the prices are at higher levels. Farmers are hoarding the stocks and not bringing in fresh turmeric to the market in good quantity in order to reap maximum profits. Turmeric Futures April 09 contract touched a high of Rs.5,090/qtl tracking spot prices. Prices are ruling at higher levels thus cautious trading is advisable at futures. Prices have initial support at Rs.4,840/qtl and thereafter at Rs.4,700/qtl. Resistance could be seen at Rs.5,205/qtl and thereafter at Rs. 5,395/qtl.
9.8- Sugar
Sugar market declined sharply by 15% in the last 3-4 weeks as the Indian government has adopted various measures to curb spiraling Sugar prices. Besides imposition of stock limits and duty free impost of Raw Sugar, Government is now considering a proposal to let state-run trading companies import refined sugar at zero duty to bridge the widening gap between demand and supply. Final decision by the cabinet regarding the duty free imports of refined Sugar is expected in the coming week.
India will have to import 3 million tonnes of Sugar to meet its domestic consumption of 22.5-23 million tonne. But imported sugar is much more expensive than local sweeteners at present, making the imports unviable. Thus, despite governments effort to ease import norms, we dont expect imports to take place in the coming months. Any significant decline in the prices should be treated as a good buying opportunity as Overall, fundamentals remain supportive for the prices with lower output forecast in India and a global deficit of more than 4.3 million tonnes.
Page 35
April Sugar futures are currently trading at around Rs. 2035 levels. Prices are having initial support at Rs. 1995 and then 1953. Resistance could be seen at Rs. 2080/qtl and thereafter Rs. 2120/qtl.
9.9- Black Pepper

The undertone in the Black Pepper spot and futures counter this week was steady due to increased buying interest and aided by a tight supply position. Indian parity in the international market was at $2,225-2,325 a tonne (c&f) as the rupee has strengthened against the dollar on Wednesday. Overseas reports on Wednesday said that Brazil was firmer and exporters appeared to reluctant to offer. B Asta was said to have been offered at $2,000 a tonne while B1 at $1,900 a tone.
Vietnam was reportedly steady at $1,800 a tonne for faq 500 GL. More buying interest was seen for black and white pepper from industry albeit for nearby deliveries. Lasta was being offered on replacement basis at $2,200-2,250 a tonne (fob). New Indonesian crop is said to be lower at 15,000 tonne against an estimated 30,000 tonnes last season. However, some substantial quantity of carry over stock is reportedly available therein the hands of middlemen and exporters.
In the weekend the physical counter traded steady amidst good underlying buying interest. The domestic as well as the overseas buyers from Europe were active. The stock availability remained low inducing the Indian traders to purchase from other cheaper origin like Indonesia at $2100/tonne fob. At the benchmark Kochi markets berries were offered at Rs.10300/qtl for the ungarbled variety and 10800/qtl for the garbled variety, steady as that of prior trading session. Around 33.5 tonnes were sold for the arrivals of 25 tonnes. Strengthening rupee against dollar pushed up Indian parity to $2300/tonne f.o.b while VASTA was offered at $2150/tonne and BASTA at $1950/tonne f.o.b. Pepper is likely to trade weak during early hours with the possibility of late recovery.
Page 36
Trends
Page 37
Assocham estimates that by 2010 volume on Indian exchanges will cross Rs. 75 lakh crore.
Page 38
10.1- Commodity-wise Turnover
Page 39
Gold
(Indian commodity market)
Page 40
11.1- Introduction
Gold is a unique asset based on few basic characteristics. First, it is primarily a monetary asset, and partly a commodity. As much as two thirds of golds total accumulated holdings relate to store of value considerations. Holdings in this category include the central bank reserves, private investments, and high-cartages jewelers bought primarily in developing countries as a vehicle for savings. Thus, gold is primarily a monetary asset. Less than one third of golds total accumulated holdings can be considered a commodity, the jewelers bought in Western markets for adornment, and gold used in industry.
The distinction between gold and commodities is important. Gold has maintained its value in after-inflation terms over the long run, while commodities have declined. Some analysts like to think of gold as a currency without a country. It is an internationally recognized asset that is not dependent upon any governments promise to pay. This is an important feature when comparing gold to conventional diversifiers like T-bills or bonds, which unlike gold, do have counter-party risk.
11.2- What makes gold special?

Timeless and Very Timely Investment Gold is an effective diversifier Gold is the ideal gift Gold is highly liquid Gold responds when you need it most
Page 41
11.3- Market Characteristics

The gold market is highly liquid. Gold held by central banks, other major institutions, and retail jewelery is reinvested in market. Due to large stock of gold, against its demand, it is argued that the core driver of the real price of gold is stock equilibrium rather than flow equilibrium. Effective portfolio diversifier: This phrase summarizes the usefulness of gold in terms of Modern Portfolio Theory, a strategy used by many investment managers today. Using this approach, gold can be used as a portfolio diversifier to improve investment performance. Effective diversification during stress periods: Traditional method of portfolio diversification often fails when they are most needed, that is during financial stress (instability). On these occasions, the correlations and volatilities of return for most asset class (including traditional diversifiers, such as bond and alternative assets) increase, thus reducing the intended cushioning effect of the diversified portfolio.
11.4- Importance and Uses

Gold has mainly three types of uses: Jewellery Demand, Investment Demand and Industrial uses. Jewellery Demand- Jewellery consistently accounts for around three-quarters of gold demand. In terms of retail value, the USA is the largest market for gold jewellery, whereas India is the largest consumer in volume terms, accounting for 25% of demand in 2007.
Page 42
Investment demand- Investment demand in gold has increased considerably in recent years. Since 2003, investment has representing the strongest source of growth in demand, with an increase in value terms to the end of 2007 of around 280%. Industrial Demand- Industrial and dental uses account for around 13% of gold demand (an annual average of over 425 tonnes from 2003 to 2007 inclusive).
11.5- World Gold Demand & Supply

Year 2006 2007 2008
Source: GFMS
Mine Production 2486 2473 2407
Total supply 3574 3488 3468
Total demand 3409 3526 3659
Page 43
11.6- Major Gold Producing Countries (2008) share

China United State 29% 10% South Africa Australia Peru Russia 10% Canada 3% 4% 4% 4% 7% 7% 10% Indonessia Uzbekistan Ghana Others
12%
Source: GFMS
Page 44
11.6- Domestic Scenario

India is arguably the largest bullion market in the world. It has been until now, the undisputed single-largest Gold bullion consumer, with its own final demand outweighing the next largest market China by almost 57 percent. But it seems now, that the Chinese Gold buyers have caught up during 2008 as Chinese demand is surging rapidly (up by 15 percent year-on-year). Indian demand fell as Indian Gold sales collapsed by about 65 percent in the year 2008. In spite of being the largest consumer of gold, India plays no major role globally in influencing this precious metal's pricing, output or quality issues. Indias total gold holdings are between 10,000 tonnes and 15,000 tonnes of which the Reserve Bank of India has only around 400 tonnes. India has the largest number of gold Jewellery shops in the world.
11.7- Major Gold Mines in India

There is a huge mismatch between demand and primary supply in India, the balance being made up by imports. The only major gold mine currently in production is the Hutti mine, owned by Hutti Gold Mines Company Limited, which produces around 3 tons of gold a year. Hindustan Copper also produces some gold as a by-product.
11.8- Gold Production in India (in tonNEs): State

Karnataka Jharkhand Gujarat Total
Source: www.pib.nic.in
2005-06
2.846 0.201 6.710 9.757
2006-07
2.334 0.154 10.335 12.823
2007-08
2.831 0.027 9.135 11.993
Page 45
As given in the above table, gold production in India is ruling lower in recent years. Karnataka was the leading producer of this precious metal with the output ranging from 2 to 3 tons per annum during 2005-06 and 2007-08. Jharkhand also produces small quantity of gold.
11.9- Gold Demand in India

Gold, the ultimate safe haven in troubled times, remained the hot commodity throughout the year. It scaled new heights in the global markets and in India, which is the largest buyer of the metal. Year India (IN TONNES) World (IN TONNES) % share of World Demand
2004
617.7
2961.5
20.86
2005
721.6
3091.9
23.34
2006
721.9
2681.9
26.92
2007
769.2
2810.9
27.36
2008
660.2
2906.8
22.71
Source: GFMS
Indian demand for Gold accounts for on an avg. 25% share of world gold demand. In 2008, demand for gold has decreased in India because of high price amid global financial crisis.
Page 46
11.10- Gold Imports in India

India imports around 500-800 tonnes of gold on an average every year. In 2008, Indias gold imports dipped by 45 per cent to touch 450 tons. However, buying of gold Jewellery has fallen sharply in January, February & March month of the year 2009, leading to a slump in the yellow metals imports.
11.11- Gold Prices

There are many factors, which affect the gold prices in domestic as well as international market. However, it is highly correlated with the US dollar, the world's main trading currency. Gold has long been regarded by investors as a good protection against depreciation in a currency's value, both internally (i.e. against inflation) and externally (against other currencies). Gold is widely considered to be a particularly effective hedge against fluctuations in the US dollar, the world's main trading currency.
Page 47
The gold price has been found to be negatively correlated with the US dollar and this relationship appeared to be consistent over time. It is a consistently good protection against the economic instability and the exchange rate fluctuations.
11.12- Factors influencing Gold Prices

World macro economic factors including US Dollar, interest rate and so on Global gold mine production Demand by Central banks Domestic demand, which is linked to agricultural prosperity and festivals/marriages etc Producer / miner hedging interest Comparative returns on stock markets US dollar movement against other currencies Indian rupee movement against the US dollar Geopolitical tensions Global economic situation
Page 48
CHINESE COMMODITY MARKET (GOLD)

Introduction
Gold plays a vital role in Chinese culture. The Chinese have a strong affinity to gold when compared with Western countries. Gold has been present in Chinese history since the time of the Han Dynasty and even today is regarded as a sign of prosperity, an ornament, a currency and an inherent part of Chinese religion. Weddings are important gold-buying occasions amongst the Chinese. Gold is also traditionally bought as a gift during the Chinese New Year. According to the Chinese lunar calendar, 2010 is the Year of the Tiger and the year which started on 14 February 2010, promises to be a year of excitement, prosperity and potential good luck for almost everyone. Those who make a real effort will enjoy an auspicious wave of success when the brave and resilient Tiger rules. Some Chinese also describe 2010 as the Golden Tiger Year. Today, China is the second largest gold consumption market and the worlds largest producer. Gold demand from Chinas two largest sectors, (jewellery and investment) reached a combined total of 423 tonnes in 2009. However, total domestic mine supply contributed only 314 tonnes during the same year. WGC studies indicate that in the long term, gold demand is likely to continue to accelerate, driven by investment demand in China, while current jewellery consumption is likely to continue to grow despite higher gold prices. Gold could also gain further momentum from central bank purchasing.
Chinese gold demand is catching up with Western consumption levels. This is because market liberalization tends to have a dramatic impact in a local market. In India, for example, its gold consumption more than doubled from around 300 tonnes in the early 1990s to over 700 tonnes at the end of 2008 when the liberalization process was in full swing. WGC estimates that a substantial increase in gold demand would take place if demand in China were to rise to Japanese, USA or Taiwanese levels. In this case, total annual incremental demand ranges from another 1,000 tonnes at USA and Japanese per capita consumption levels, and still more, if Chinese consumption per capita were to rise to Taiwanese levels.
Page 49
Jewellery is by far the most dominant category of Chinese gold demand, accounting for almost 80% of all gold consumption in China in 2009. Chinese gold jewellery off-take increased 6% year-on-year to 347.1 tonnes in 2009 and China was the only country to experience an improvement in jewellery demand last year. WGC estimates that current per capita consumption of gold jewellery in China is around 0.26gm. This level is low when compared to countries with similar gold cultures. If gold were consumed in China at the same rate per capita as in India, Hong Kong or Saudi Arabia, annual Chinese demand could increase by at least 100 tonnes to as much as 4,000 tonnes in the jewellery sector alone.
Page 50
Characteristics of Commodity Market
Page 51
In commodity futures market, the calculation of profit and loss will be slightly different than on a normal stock exchange. The main concepts in commodity market are:
1) Margins.
In the futures market, margin refers to the initial deposit of good faith made into an account in order to enter into a futures contract. This margin is referred to as good faith because it is this money that is used to debit any losses.
When you open a futures account, the futures exchange will state a minimum amount of money that you must deposit into your account. This original deposit of money is called the initial margin. When your contract is liquidated, you will be refunded the initial margin plus or minus any gains or losses that occur over the span of the futures contract. In other words, the amount in your margin account changes daily as the market fluctuates in relation to your futures contract. The minimum-level margin is determined by the futures exchange and is usually 5% to 10% of the futures contract. These predetermined initial margin amounts are continuously under review: at times of high market volatility, initial margin requirements can be raised.
The initial margin is the minimum amount required to enter into a new futures contract, but the maintenance margin is the lowest amount an account can reach before needing to be replenished. For example, if your margin account drops to a certain level because of a series of daily losses, brokers are required to make a margin call and request that you make an additional deposit into your account to bring the margin back up to the initial amount.
E.g. - Let's say that you had to deposit an initial margin of $1,000 on a contract and the maintenance margin level is $500. A series of losses dropped the value of your account to $400. This would then prompt the broker to make a margin call to you, requesting a deposit of at least an additional $600 to bring the account back up to the initial margin level of $1,000.
Page 52
Word to the wise: when a margin call is made, the funds usually have to be delivered immediately. If they are not, the commodity brokerage can have the right to liquidate your Commodity position completely in order to make up for any losses it may have incurred on your behalf.
2) Leverage
Leverage refers to having control over large cash amounts of a commodity with comparatively small levels of capital. In other words, with a relatively small amount of cash, you can enter into a futures contract that is worth much more than you initially have to pay (deposit into your margin account). It is said that in the futures market, more than any other form of investment, price changes are highly leveraged, meaning a small change in a futures price can translate into a huge gain or loss.
Futures positions are highly leveraged because the initial margins that are set by the exchanges are relatively small compared to the cash value of the contracts in question (which is part of the reason why the futures market is useful but also very risky). The smaller the margin in relation to the cash value of the futures contract, the higher the leverage. So for an initial margin of $5,000, you may be able to enter into a long position in a futures contract for 30,000 pounds of coffee valued at $50,000, which would be considered highly leveraged investments.
You already know that the futures market can be extremely risky, and therefore not for the faint of heart. This should become more obvious once you understand the arithmetic of leverage. Highly leveraged investments can produce two results: great profits or even greater losses.
Due to leverage, if the price of the futures contract moves up even slightly, the profit gain will be large in comparison to the initial margin. However, if the price just inches downwards, that same high leverage will yield huge losses in comparison to the initial margin deposit. For example, say
Page 53
that in anticipation of a rise in stock prices across the board, you buy a futures contract with a margin deposit of $10,000, for an index currently standing at 1300. The value of the contract is worth $250 times the index (e.g. $250 x 1300 = $325,000), meaning that for every point gain or loss, $250 will be gained or lost.
If after a couple of months, the index realized a gain of 5%, this would mean the index gained 65 points to stand at 1365. In terms of money, this would mean that you as an investor earned a profit of $16,250 (65 points x $250); a profit of 162%!
On the other hand, if the index declined 5%, it would result in a monetary loss of $16,250a huge amount compared to the initial margin deposit made to obtain the contract. This means you still have to pay $6,250 out of your pocket to cover your losses. The fact that a small change of 5% to the index could result in such a large profit or loss to the investor (sometimes even more than the initial investment made) is the risky arithmetic of leverage. Consequently, while the value of a commodity or a financial instrument may not exhibit very much price volatility, the same percentage gains and losses are much more dramatic in futures contracts due to low margins and high leverage.
3) Pricing and Limits
Contracts in the Commodity futures market are a result of competitive price discovery. Prices are quoted as they would be in the cash market: in dollars and cents or per unit (gold ounces, bushels, barrels, index points, percentages and so on).
Prices on futures contracts, however, have a minimum amount that they can move. These minimums are established by the futures exchanges and are known as ticks. For example, the minimum sum that a bushel of grain can move upwards or downwards in a day is a quarter of one U.S. cent. For futures investors, it's important to understand how the minimum price
Page 54
movement for each commodity will affect the size of the contract in question. If you had a grain contract for 3,000 bushels, a minimum of $7.50 (0.25 cents x 3,000) could be gained or lost on that particular contract in one day.
Futures prices also have a price change limit that determines the prices between which the contracts can trade on a daily basis. The price change limit is added to and subtracted from the previous day's close, and the results remain the upper and lower price boundary for the day.
Say that the price change limit on silver per ounce is $0.25. Yesterday, the price per ounce closed at $5. Today's upper price boundary for silver would be $5.25 and the lower boundary would be $4.75. If at any moment during the day the price of futures contracts for silver reaches either boundary, the exchange shuts down all trading of silver futures for the day. The next day, the new boundaries are again calculated by adding and subtracting $0.25 to the previous day's close. Each day the silver ounce could increase or decrease by $0.25 until an equilibrium price is found. Because trading shuts down if prices reach their daily limits, there may be occasions when it is NOT possible to liquidate an existing futures position at will.
The exchange can revise this price limit if it feels it's necessary. It's not uncommon for the exchange to abolish daily price limits in the month that the contract expires (delivery or spot month). This is because trading is often volatile during this month, as sellers and buyers try to obtain the best price possible before the expiration of the contract.
In order to avoid any unfair advantages, the CTFC and the Commodity futures exchanges impose limits on the total amount of contracts or units of a commodity in which any single person can invest. These are known as position limits and they ensure that no one person can control the market price for a particular commodity.
Page 55
Strategies for Trading In Commodities and Futures
Page 56
Futures contracts try to predict what the value of an index or commodity will be at some date in the future. Speculators in the futures market can use different strategies to take advantage of rising and declining prices. The most common strategies are known as going long, going short and spreads.
1) Going Long
When an investor goes long, that is, enters a contract by agreeing to buy and receive delivery of the underlying at a set price, it means that he or she is trying to profit from an anticipated future price increase.
For example, let's say that, with an initial margin of $2,000 in June, Joe the speculator buys one September contract of gold at $350 per ounce, for a total of 1,000 ounces or $350,000. By buying in June, Joe is going long, with the expectation that the price of gold will rise by the time the contract expires in September.
By August, the price of gold increases by $2 to $352 per ounce and Joe decides to sell the contract in order to realize a profit. The 1,000 ounce contract would now be worth $352,000 and the profit would be $2,000. Given the very high leverage (remember the initial margin was $2,000), by going long, Joe made a 100% profit!
Of course, the opposite would be true if the price of gold per ounce had fallen by $2. The speculator would have realized a 100% loss. It's also important to remember that throughout the time the contract was held by Joe, the margin may have dropped below the maintenance margin level. He would have thus had to respond to several margin calls, resulting in an even bigger loss or smaller profit.
Page 57
2) Going Short
A speculator who goes short, that is, enters into a futures contract by agreeing to sell and deliver the underlying at a set price, is looking to make a profit from declining price levels. By selling high now, the contract can be repurchased in the future at a lower price, thus generating a profit for the speculator.
Let's say that Sara did some research and came to the conclusion that the price of Crude Oil was going to decline over the next six months. She could sell a contract today, in November, at the current higher price, and buy it back within the next six months after the price has declined. This strategy is called going short and is used when speculators take advantage of a declining market.
Suppose that, with an initial margin deposit of $3,000, Sara sold one May crude oil contract (one contract is equivalent to 1,000 barrels) at $25 per barrel, for a total value of $25,000.
By March, the price of oil had reached $20 per barrel and Sara felt it was time to cash in on her profits. As such, she bought back the contract which was valued at $20,000. By going short, Sara made a profit of $5,000! But again, if Sara's research had not been thorough, and she had made a different decision, her strategy could have ended in a big loss.
3) Spreads
As going long and going short, are positions that basically involve the buying or selling of a contract now in order to take advantage of rising or declining prices in the future. Another common strategy used by commodity traders is called spreads. Spreads involve taking
Page 58
advantage of the price difference between two different contracts of the same commodity. Spreading is considered to be one of the most conservative forms of trading in the futures market because it is much safer than the trading of long / short (naked) futures contracts.
There are many different types of spreads, including:
Calendar spread - This involves the simultaneous purchase and sale of

two futures of the same type, having the same price, but different delivery dates.
Inter-Market spread - Here the investor, with contracts of the same

month, goes long in one market and short in another market. For example, the investor may take Short June Wheat and Long June Pork Bellies.
Inter-Exchange spread - This is any type of spread in which each

position is created in different futures exchanges. For example, the investor may create a position in the Chicago Board of Trade, CBOT and the London International Financial Futures and Options Exchange, LIFFE.
Page 59
How to trade in commodity market
Page 60
You can invest in the futures market in a number of different ways, but before taking the plunge, you must be sure of the amount of risk you're willing to take. As a futures trader, you should have a solid understanding of how the market works and contracts function. You'll also need to determine how much time, attention, and research you can dedicate to the investment. Talk to your broker and ask questions before opening a futures account.
Unlike traditional equity traders, futures traders are advised to only use funds that have been earmarked as risk capital. Once you've made the initial decision to enter the market, the next question should be, how? Here are three different approaches to consider: Self Directed Full Service Commodity pool
1) Self Directed: - As an investor, you can trade your own account, without the
aid or advice of a Commodity broker. This involves the most risk because you become responsible for managing funds, ordering trades, maintaining margins, acquiring research, and coming up with your own analysis of how the market will move in relation to the commodity in which you've invested. It requires time and complete attention to the market.
2) Full Service: -
Another way to participate in the market is by opening a
managed account, similar to an equity account. Your broker would have the power to trade on your behalf, following conditions agreed upon when the account was opened. This method could lessen your financial risk, because a professional broker would be assisting you, or making informed decisions on your behalf. However, you would still be responsible for any losses incurred and margin calls.
Page 61
3) Commodity Pool: -
A third way to enter the market, and one that offers the
smallest risk, is to join a commodity pool. Like a mutual fund, the commodity pool is a group of commodities which can be invested in. No one person has an individual account; funds are combined with others and traded as one. The profits and losses are directly proportionate to the amount of money invested. By entering a commodity pool, you also gain the opportunity to invest in diverse types of commodities. You are also not subject to margin calls. However, it is essential that the pool be managed by a skilled broker, for the risks of the futures market are still present in the commodity pool.
Page 62
DIFFERENT SEGMENTS IN COMMODITIES MARKET

The commodities market exits in two distinct forms namely the Over the Counter (OTC) market and the Exchange based market. Also, as in equities, there exists the spot and the derivatives segment. The spot markets are essentially over the counter markets and the participation is restricted to people who are involved with that commodity say the farmer, processor, wholesaler etc. Derivative trading takes place through exchange-based markets with standardized contracts, settlements etc.
Page 63
LEADING COMMODITY MARKETS OF WORLD
Page 64
Some of the leading exchanges of the world are: s. no. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Global commodity exchanges New York Mercantile Exchange (NYMEX) London Metal Exchange (LME) Chicago Board of Trade (CBOT) New York Board of Trade (NYBOT) Kansas Board of Trade Winnipeg Commodity Exchange, Manitoba Dalian Commodity Exchange, China Bursa Malaysia Derivatives exchange Singapore Commodity Exchange (SICOM) Chicago Mercantile Exchange (CME), US London Metal Exchange Tokyo Commodity Exchange (TOCOM) Shanghai Futures Exchange Sydney Futures Exchange London International Financial Futures and Options Exchange (LIFFE) National Multi-Commodity Exchange in India (NMCE), India National Commodity and Derivatives Exchange (NCDEX), India Multi Commodity Exchange of India Limited (MCX), India Dubai Gold & Commodity Exchange (DGCX) Dubai Mercantile Exchange (DME), (joint venture between Dubai holding and the New York Mercantile Exchange (NYMEX))
Page 65
Regulators
Each exchange is normally regulated by a national governmental (or semi-governmental) regulatory agency:
Country
Australia Chinese mainland Hong Kong India Singapore UK USA Malaysia
Regulatory agency
Australian Securities and Investments Commission China Securities Regulatory Commission Securities and Futures Commission Securities and Exchange Board of India and Forward Markets Commission (FMC) Monetary Authority of Singapore Financial Services Authority Commodity Futures Trading Commission Securities Commission
Page 66
Commodity Exchanges in India
Page 67
The government of India has allowed national commodity exchanges, similar to the BSE & NSE, to come up and let them deal in commodity derivatives in an electronic trading environment. These exchanges are expected to offer a nation-wide anonymous, order driven; screen based trading system for trading. The Forward Markets Commission (FMC) will regulate these exchanges.
Consequently four commodity exchanges have been approved to commence business in this regard. They are:
S.NO
1.
COMMODITY MARKET IN INDIA

Multi Commodity Exchange (MCX), Mumbai
2.
National Commodity and Derivatives Exchange Ltd (NCDEX), Mumbai
3.
National Board of Trade (NBOT), Indore
4.
National Multi Commodity Exchange (NMCE), Ahmadabad
Page 68
1) 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 Ahmadabad. There are various commodity trades on NMCE Platform including Agro and non-agro commodities.
2) NCDEX (National Commodity & Derivates Exchange Ltd.)

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 commodity mainly in Agro product.
Page 69
3) 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.
4) 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. and has Indian Potash Ltd. KRIBHCO and IFC among others, as its partners having its head office located at Gurgaon (Haryana).
Regulator of Commodity exchanges:FMCL forward Market commission headquarter in Mumbai, is regulation authority which is overseen by the minister of consumer affairs, food and public distribution Govt. of India, It is station body set up in 1953 under the forward contract (Regulation) Act 1952.
Page 70
Market share of commodity exchanges in India (APPROX)

% of market share of exchange
NMCE 1% NBOT 2%
OTHERS 1%
NCDEX 22%
MCX 74%
Page 71
Risk associated with Commodities Market

No risk can be eliminated, but the same can be transferred to someone who can handle it better or to someone who has the appetite for risk. Commodity enterprises primarily face the following classes of risk. Namely: The price Risk, the quantity risk, the yield/output risk and the political risk, talking about the nationwide commodity exchanges, the risk of the counter party not fulfilling his obligations on due date or at any time therefore is the most common risk.
This risk is mitigated by collection of the following margins: Initial margins Exposure margins Mark to Market on daily positions Surveillance.
Page 72
Conclusion
Page 73
The commodity Market is poised to play an important role of price discovery and risk management for the development of agricultural and other sectors in the supply chain. New issue and problems Govt. regulators and other share holders will need to proactive and quick in their response to new developments. WTO regime makes it all the more urgent to develop these markets to enable our economy, especially agriculture to meet the challenge of new regime and benefits from the opportunities unfolding before U.S. with risks not belong absorbed any more the idea is to transfer it as the focus is shifting to Manage price change rather than change prices the commodity markets will play a key role for the same.
Page 74
References
http://www.oxfordfutures.com/futures-education/futures-price.htm December 3, 2009, Commodities, Goldman Sachs Global Economics, Commodities and Strategy Commodities USDA, Goldman Sachs Global ECS Research GFMS World Gold Council (WGC) International Monetary Fund (IMF) http://en.wikipedia.org/wiki/Commodity_market http://www.mcxindia.com/ http://www.icexindia.com/profiles/gold_profile.pdf
Page 75

Overview of Commodity Market 110821064508 Phpapp01

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Overview of Commodity Market 110821064508 Phpapp01

Uploaded by

Copyright:

Available Formats

A report on Dynamics of Indian commodity market

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

1.2- COMMODITY MARKET

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

Indian Commodity Market

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

STRUCTURE OF COMMODITY MARKET

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

Consumers (Retail/ Warehouses Institutional) Hedger (Exporters / Millers Industry)

Commodities Ecosystem MCX

Producers (Farmers/Cooperatives/Instituti onal)

Transporters/ Support agencies

Quality Certification Agencies

Traders (speculators) arbitrageurs/ client

Stevens Business School (2009-2011)

DIFFERENT TYPES OF COMMODITIES TRADED

Stevens Business School (2009-2011)

ENERGY SPICES PLANTATIONS PULSES

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

Prices and monthly changes Commodities Units 02 Dec 2Q 08

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

7.1- What Exactly Is a Commodity Contract?

Stevens Business School (2009-2011)

7.2- Profit And Loss - Cash Settlement.

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

Major Players In Commodity market

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

Long Hedger Speculator

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

Performance Of Commodity Market

Stevens Business School (2009-2011)

9.1- Precious Metals

Stevens Business School (2009-2011)

9.2- Crude Oil

Stevens Business School (2009-2011)

9.4- Base metals

Stevens Business School (2009-2011)

9.6- Other Edible Oil

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

9.9- Black Pepper

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

10.1- Commodity-wise Turnover

Stevens Business School (2009-2011)

Stevens Business School (2009-2011)

11.2- What makes gold special?