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Intl Commodity Mgt.

MBA 326
Session 1-2 dtd 06.07.12 Faculty-Bandana Chadha ; bchadha@amity.edu

Learning Objectives
Know which countries dominate world trade in various commodities Know how Commodity Trading works.
Terminologies, Functioning & Mechanism of Indian & Global Commodity Exchanges in Spot & Derivatives segment. Learning to identify & mitigate commodity risks. Manage international Commodity supply & trade.

Session Plan
Module I: (1- 5 session; 5 session) Intro to Intl Commodity Markets, Trading & Worlds Top commodity producing, exporting & importing countries.
Module II: (6-10 session ; 5 sessions) Worlds Commodity Exchanges History, Contract specifications, Volumes, Products & terminologies.

Module III: (11-16 ; 6 sessions) Indian Commodity Exchanges Mechanism of commodity trading in NCDEX.

Session Plan
Mid-Term Session 17 Module IV: (Session 18-22 ; 5 sessions) Derivatives Exchanges & Operation Futures & Options Hedging-Speculative & Arbitrage strategies
Group Presentation Session 23-26

Topics
1. Cotton 2. Rapeseed 3. Soybean 4. Sugar 5. Tea 6. Coffee 7. Wheat 8. Rice 9. Rubber 10. Gold 11. Silver 12. Crude Oil 13. Coal 14. Iron & Steel 15. Guar 16. Corn

Content 1. Total World Trade 2. World Exporters/Importers 3. Total trade in India 4. Position in Commodity Trade 5. World Production 6. Producing countries 7. Country position in world trade 8. Avg./max. price fluctuation 9. How is it produced/extracted 10.Yield per hectre/acre 11.Various forms/Variety 12.Cropping/growth pattern

cont..

Content

13.Annual rainfall, temp, sunshine, harvesting 14.Global Demand & Supply 15.Supply dynamics 16.Major world Trading centres 17.Major Trading centres in India 18.Price-makers 19.Consumption patter-worldwide/India 20.Influences on Demand/Supply 21.Govt. Policy 22.Competition from substitutes 23.Price trends & factors influencing prices 24.Trade Policy in India

Session Plan
Module V: (Session 27-29 ; 3 sessions) Worlds Most Traded Commodity markets, Warehousing, Physical settlement, Ports & Logistics, Review
Final Test 2 (Session 30)

Evaluation Criteria Total Internal Marks :30 marks ( 25 + 5 Attd.)


Components Mid-Term Codes Case Presentations Test-2

Weightage

10

Date Planned

31st Aug

15th 30th Sep End-Oct 2012

Niti Nandini Chatnani, Commodity Markets Operations, Instruments and Application, Tata McGraw Hill Education Private Limited, New Delhi NSE Certificate in Financial Markets (NCFM) Study material on Commodities Markets Module
http://www.nseindia.com/education/content/module_ncfm.htm

Reference Books

NCDEX Institute of Commodity Markets & Research (NICR), Study Manual for Commodity Trading

Intl Business in 21st Century

U.S. superpower in military; China in trade

Five potential superpowers:


Brazil, Russian Federation, India, China (BRIC) & EU

Reliance on digital technology. In 2011: 5.6 bill cell phone users (80% world pop)
2.3 bill internet users (33% of world pop)

Top 5 mobile phone countries -2011

Source : http://en.wikipedia.org/wiki/List_of_countries_by_number_of_mobile_phones_in_use

Top 5 internet user countries -2011

Source: http://www.internetworldstats.com/top20.htm

Intl Business in

st 21

Century

Telecom & Transportation Advancement Integration of Europe Union Globalization Terrorism Protectionism, distortions & barriers to free trade Business Ethics Intellectual Property- copyright, trademark &
patent infringement

Intl Business in 21st Century Overpopulation UN estimates will reach 9.2


billion from 7 bill by 2050

Food & water scarcity


Ecological sustainability stress on resources Global warming

CSR

EU Member states & Capital


1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Austria - Vienna Belgium - Brussels Bulgaria - Sofia Cyprus - Nicosia Czech Republic - Prague Denmark - Copenhagen Estonia - Tallinn Finland -Helsinki France - Paris Germany - Berlin Greece - Athens Hungary - Budapest Ireland - Dublin Italy - Rome 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. Latvia - Riga Lithuania - Vilnius Luxembourg - Luxembourge Malta - Valletta Netherlands - The Hague Poland - Warsaw Portugal - Lisbon Romania - Bucharest Slovakia - Bratislava Slovenia -Ljubljana [lyoo-BLYAH-nah] Spain - Madrid Sweden - Stockholm United Kingdom - London

Population = 500 mill

EU Countries in Schengen Area


1. 2. 3. 4. 3. 4. 5. 6. 7. 8. 9. 10. 11. 11. 12. 13. Austria Belgium Bulgaria Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania 14. 15. 16. 17. 18. 19. 19. 20. 21. 22. 23. 23. 24. 25. 26. Luxembourg Malta Netherlands Poland Portugal Romania Slovakia Slovenia Spain Sweden United Kingdom Norway (non EU) Iceland ( ) Switzerland ( ) Liechtenstein ( )

* constituting for 400 mill population

EU countries in EURO ZONE


1. Austria 2. Belgium 3. Bulgaria 3. Cyprus 4. Estonia (1.1.2011) 5. Czech Republic 6. Denmark 5. Finland 6. France 7. Germany 8. Greece 4. Hungary 9. Ireland 10. Italy 15. Latvia 16. Lithuania 11. Luxembourg 12. Malta 13. Netherlands 14. Poland 14. Portugal 15. Romania 15. Slovakia 16. Slovenia 17. Spain 18. Sweden 19. United Kingdom
* Constituting for 330 mill pop

Financial Markets
Markets/organizations that facilitate: Raising of funds or Investment of assets or Trading of financial securities/instruments e.g. Stocks, Bonds, Treasury Bills, Commodities Hedging of various risks Types:

1. 2. 3. 4.

Equity Markets Debt Markets Foreign Exchange Markets Commodities Markets


Spot & Derivatives Markets

Financial Markets
1. Capital Markets Stock/Equity investments.
2. Debt Markets Borrowers & lenders for a specific period. e.g. T-Bills, Bonds & Securities 3. Forex Market facilitate intl trade & global investment.

4. Commodity Markets Markets where raw or primary products are exchanged. They are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts through Futures & Options. Banks are the largest financial institutions which participate in all the financial markets.

What is a Commodity ? Primary product of standardized and consistent quality that can be traded on international markets Often substances that come out of the earth Maintain roughly a universal price Fungible i.e. equivalent no matter who produces Fluctuate daily based on global supply and demand No aspect of product differentiation or perceived quality such as brands

What is a Commodity ? Well-established physical commodities have actively traded Spot & Derivative markets.

Generally, these are basic resources and classified as : Grains Wheat, corn, rice, oats, soybean Soft Sugar, coffee, cotton, lumber, orange juice Precious metals - gold, silver, platinum Hard - Mined metals, copper, iron ore, tin, aluminium Energy - Electricity, gas, coal and oil Meat Pork bellies, lean hogs & live cattle

What is SPOT & Derivatives Mkt. Every transaction has three components: 1. Trading - A buyer & seller come together, negotiate and arrive at a price. 2. Clearing - involves finding out the net outstanding i.e. exactly how much of goods & money the two should exchange. e.g. A buys goods worth Rs.100 from B & sells goods worth Rs. 50 to B. On a net basis, A has to pay Rs. 50 to B. 3. Settlement - the actual process of exchanging money & goods.

Spot & Derivatives Market


Spot Transactions Trading/Clearing/Settlement happen instantaneously, i.e. 'on the spot'. Delivery takes place immediately or with a minimum lag. OTC - Delivery is by visual inspection e.g. wholesale mkt. Exchange-Delivery is w/o visual inspection. Derivative Transactions Exchange of money & the underlying goods i.e. Clearing & Settlement only happen at the future date. OTC Exchange - Futures & Options

Commodity Exchange? Is an exchange where various commodities & derivatives products are traded. Organized Trade in contracts based on agricultural products and other raw materials (wheat, barley, sugar, maize,
cotton, cocoa, coffee, oil, gold, natural gas, metals etc.)

Contracts are standardized (quality, quantity, delivery month, terms) Contracts for Spot, Futures & Options. Regulator Commodity Futures Trading Commission in U.S. ; Forward Markets Commission in India ; Securities and Commodities Authority in UAE.

History of Commodity Trading


Earliest evidences of international future markets in 18th century comprised spices & olive oil, which were used by merchants residing in Persia. Rice futures were traded at Dojima Rice Exchange in Osaka in 1710, Japan. First organized futures trading began in the U.S. in middle 19th century with "corn contracts" in/around Chicago in 1840s & later in "cotton contracts" in/around New York.

History of Commodity Trading


The first organized forward trading was done at the Board of Trade of the City of Chicago in 1848. Futures trading began when contracts were later standardized in terms of quantity, quality, delivery month & terms to streamline trading & delivery and negotiated prices were made public by exchange The usefulness of Futures trading spread & led to the founding of The Chicago Butter & Egg Board in 1898, later called Chicago Mercantile Exchange.

History of Commodity Trading


Next decade saw many new exchanges but Chicago remained the most influential & predominant . For the first seven decades of the 20th century, futures were predominantly commodity focused. Financial futures developed after World War II After the breakdown of the Bretton Woods system of fixed exchange rates, the spotlight changed to Financial Derivatives.

History of Commodity Trading


Last one decade, highest growth has been in China & India as both are major commodity consumers & producers.

Gold Trading
Traded as a valuable asset even before Christ

The London market, since 1919, set the price for gold daily around the world and was the standard/basis for gold contracts Trade was interrupted due to World War II, because participating governments used gold to support their military operations. Was reopened in 1954.
London market continues to be the standard or basis for gold contracts.Prices are published at 10:30 a.m. and 3 p.m. Daily GMT.