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DYNAMICS OF INDIAN COMMODITY MARKET

STUDENTS’ COLLOQUIUM REPORT

ON









SUBMITTED TO:

Dr. HIMANI JOSHI

(Academic Coordinator)

SUBMITTED BY:

DIPA SHAH

KEYUR SAVALIA

BHARAT MAHESHWARI

KRISHNA RAJPUT

MITESH SHAH

NIKITA SANGHVI




DATE OF SUBMISSION

8
th
APRIL 2010


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ACKNOWLEDGEMENT





An Acknowledgement is the expression of one’s thanks giving to the people who have extended
their help in every possible way. Help is a voluntary fulfillment of duty, which, all the people
mentioned below have performed it to their maximum possible, in a way giving us & our
research the utmost important.




At the onset, we wish to express our gratitude to Dr. Himani Joshi, Academic Coordinator,
Stevens Business School for her keen interest, constant support & help in completing this report
successfully.




We would also like to thanks to the authors, websites for providing us the related information to
our project’s subject.






























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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 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.


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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.

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, non ferrous 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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TABLE OF CONTENT





S. No. PARTICULARS PAGE No.



i. ACKNOWLEDGEMENT 02



ii. EXECUTIVE SUMMARY 03



1. INTRODUCTION 08

1.1 AN INTRODUCTION

1.2 MARKET

1.3 COMMODITY


1.4 COMMODITY EXCHANGE


2. HISTORY OF EVOLUTION OF COMMODITY MARKET 10


2.1 BRIEF HISTORY




2.2 COMMODITY MARKETS OF WORLD


3. INDIA AND THE COMMODITY MARKET 12

3.1 HISTORY


3.2 PRESENT COMMODITY MARKET


4. NATIONAL LEVEL COMMODITY EXCHANGES IN INDIA 15

4.1 NMCE


4.2 NCDEX


4.3 MCX

4.4 ICEX


4.5 MAJOR REGIONAL COMMODITY EXCHANGES


5. COMMODITIES TRADED IN INDIA 18

5.1 FIBRES AND MANUFACTURERS


5.2 SPICES


5.3 EDIBLE OILSEED AND OIL

5.4 PULSES

5.5 ENERGY PRODUCTS


5.6 VEGETABLE


5.7 METALS




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5.8 OTHERS


6. COMMODITY FUTURE MARKET 25

6.1 COMMODITY

6.1.1 Characteristics To qualify as a product for


future trading


6.2 COMMODITY MARKET

6.2.1 A perspective

6.2.2 Commodity Future


6.2.3 Objective of commodity futures


6.2.4 Benefits of commodity future market

6.2.5 What makes commodity trading


attractive?


6.3 Comparative analysis of Commodity and Equity

market



7.







INSTRUMENTS AVAILABLE FOR TRADING 33



7.1 FORWARD CONTRACTS




7.2 FUTURE MARKET


7.2.1 Margin Requirements


7.3 OPTIONS

8. PARTICIPANTS OF COMMODITY MARKET 37


8.1 HEDGERS



8.2 SPECULATORS

8.3 ARBITRAGERS


9.

HOW THE COMMODITY MARKET WORKS

40


9.1 WORKING PROCEDURE

9.2 DELIVERY PROCESS


9.3 CLEARING AND SETTLEMENT


10. REGULATORY FRAMEWORK OF INDIAN COMMODITY 48


MARKET
10.1 NEED FOR REGULATION






10.2 FORWARD MARKET COMMISSION


11. CURRENT SCENARIO OF INDIAN COMMODITY MARKET 51

11.1 CURRENT SCENARIO

11.2 PERFORMANCE ANLYSIS OF INDIAN

COMMODITY MARKET




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11.3 UNRESOLVED ISSUES
11.4 FUTURE PROSPECTS

12. FUTURE TRADING IN AGRI – COMMODITY IN INDIAN 61

COMMODITY MARKET



13. TRADING IN AGRI – COMMODITY – GROUNDNUT 65



13.1 INTRODUCTION




13.2 OVERVIEW


13.3 GROUNDNUT PRODUCING COUNTRIES

13.4 PRODUCTION OF GROUNDNUT IN INDIA

13.5 INDIAN GROUNDNUT MARKET

14. INTERESTTING FACTS 72



15. CONCLUSION 73



16. ANNEXTURE 1 : COMMONLY USED TERMS IN 74


COMMODITY MARKET




ANNEXTURE 2: ATTACHED EXCELL FILES


 COMPARISION OF INDIA AND USA

 VOLUME AND VALUE OF TRADING IN MAJOR


AGRI – COMMODITY YEAR 2006 TO 2008


17. REFERENCE 84



























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1. INTRODUCTION



“Organized futures markets in India are now 134 years old, with the first such organization – the
Bombay Cotton Trade Association Ltd. – been set up in 1875. While India was gradually becoming
the largest consumer of gold in the world, a position it still enjoys, futures markets in bullion were
inevitable and began to emerge in Mumbai in 1920.”




1.1 AN INTRODUCTION


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



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 was in 2009.

1.2 MARKET

A market is conventionally defined as a place where buyers and sellers meet to
exchange goods or services for a consideration. This consideration is usually money. In
an Information Technology-enabled environment, buyers and sellers from different
locations can transact business in an electronic marketplace. Hence the physical
marketplace is not necessary for the exchange of goods or services for a consideration.


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Electronic trading and settlement of transactions has created a revolution in global
financial and commodity markets.

1.3 COMMODITY

A commodity is a product that has commercial value, which can be produced, bought,
sold, and consumed. Commodities are basically the products of the primary sector of an
economy. The primary sector of an economy is concerned with agriculture and
extraction of raw materials such as metals, energy (crude oil, natural gas), etc., which
serve as basic inputs for the secondary sector of the economy.

1.4 COMMODITY EXCHANGE

A commodity exchange is an association or a company or any other body corporate
organizing futures trading in commodities for which license has been granted by
regulating authority.






































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2. HISTORY OF EVOLUTION OF COMMODITY MARKET


2.1 BRIEF HISTORY

Commodities future trading was evolved from need of assured continuous supply of
seasonal agricultural crops. The concept of organized trading in commodities evolved in
Chicago, in 1848. But one can trace its roots in Japan.

In 19th century Chicago in United States had merged as a major commercial hub. So that
wheat producers from Mid-west attracted here to sell their produce to dealers &
distributors. Due to lack of organized storage facilities, absence of uniform weighing &
grading mechanisms producers often confined to the mercy of dealers discretion. These
situations lead to need of establishing a common meeting place for farmers and dealers
to transact in spot grain to deliver wheat and receive cash in return.

Gradually sellers & buyers started making commitments to exchange the produce for
cash in future and thus contract for “futures trading” evolved; Whereby the producer
would agree to sell his produce to the buyer at a future delivery date at an agreed upon
price.

Trading of wheat in futures became very profitable which encouraged the entry of other
commodities in futures market. This created a platform for establishment of a body to
regulate and supervise these contracts. That‟s why Chicago Board of Trade (CBOT) was
established in 1848. In 1870 and 1880s the New York Coffee, Cotton and Produce
Exchanges were born. Agricultural commodities were mostly traded but as long as there
are buyers and sellers, any commodity can be traded. In 1872, a group of Manhattan
dairy merchants got together to bring chaotic condition in New York market to a system
in terms of storage, pricing, and transfer of agricultural products.

The largest commodity exchange in USA is Chicago Board of Trade, The Chicago
Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity
Exchange and New York Coffee, sugar and cocoa Exchange. Worldwide there are major
futures trading exchanges in over twenty countries including Canada, England, India,
France, Singapore, Japan, Australia and New Zealand.



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2.2 COMMODITY MARKETS OF WORLD

Some of the exchanges of the world are:


S. No. Global Commodity Exchanges
1 New York Mercantile Exchange (NYMEX)
2 London Metal Exchange (LME)
3 Chicago Board of Trade (CBOT)
4 New York Board of Trade (NYBOT)
5 Kansas Board of Trade
6 Winnipeg Commodity Exchange, Manitoba
7 Dalian Commodity Exchange, China
8 Bursa Malaysia Derivatives exchange
9 Singapore Commodity Exchange (SICOM)

10 Chicago Mercantile Exchange (CME), US

11 London Metal Exchange

12 Tokyo Commodity Exchange (TOCOM)

13 Shanghai Futures Exchange

14 Sydney Futures Exchange

15 London International Financial Futures and Options Exchange (LIFFE)

16 Dubai Gold & Commodity Exchange (DGCX)

17 Dubai Mercantile Exchange (DME), (joint venture between Dubai
holding and the New York Mercantile Exchange (NYMEX))



















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3. INDIA AND THE COMMODITY MARKET


3.1 HISTORY 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. Following Cotton, derivatives trading started in oilseed in Bombay
(1900), raw jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion
in Bombay (1920).

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:

(i) Exchange which organizes forward trading in commodities can regulate
trading on day-to-day basis;

(ii) Forward Markets Commission provides regulatory oversight under the
powers delegated to it by the central Government.

(iii) 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

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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 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.


3.2 PRESENT COMMODITY MARKET IN INDIA

Today, commodity exchanges are purely speculative in nature. Before discovering the
price, they reach to the producers, endusers, and even the retail investors, at a
grassroots level. It brings a price transparency and risk management in the vital market.
By Exchange rules and by law, no one can bid under a higher bid, and no one can offer
to sell higher than someone else‟s lower offer. That keeps the market as efficient as
possible, and keeps the traders on their toes to make sure no one gets the purchase or
sale before they do. Since 2002, the commodities future market in India has
experienced an unexpected boom in terms of modern exchanges, number of
commodities allowed for derivatives trading as well as the value of futures trading in
commodities, which crossed $ 1 trillion mark in 2006.

In India there are 25 recognized future exchanges, of which there are four national level
multi-commodity exchanges. After a gap of almost three decades, Government of India
has allowed forward transactions in commodities through Online Commodity Exchanges,
a modification of traditional business known as Adhat and Vayda Vyapar to facilitate
better risk coverage and delivery of commodities.

The four exchanges are:

(i) National Commodity & Derivatives Exchange Limited (NCDEX) Mumbai,

(ii) Multi Commodity Exchange of India Limited (MCX) Mumbai and

(iii) National Multi- Commodity Exchange of India Limited (NMCEIL) Ahmedabad.

(iv) Indian Commodity Exchange Limited (ICEX), Gurgaon




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There are other regional commodity exchanges situated in different parts of India.



EXIHIBIT 3.1: INDIAN COMMODITY MARKET STRUCTURE






MINISTRY OF CONSUMER
AFFAIRS, FOOD AND PUBLIC
DISTRIBUTION

FORWARD
MARKET
COMMISION

INDIAN
COMMODITY
EXCHANGE


NATIONAL REGIONAL
EXCHANGE EXCHANGE


20 OTHER
NCDEX MCX NMCEIL ICEX NBOT REGIONAL
EXCHANGES






















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4. NATIONAL LEVEL COMMODITY EXCHANGES IN INDIA


4.1 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 Ahmedabad. There are various commodity trades
on NMCE Platform including Agro and non-agro commodities.


4.2 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 commodities mainly in
Agro product.








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4.3 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.


4.4 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).


BSE is also planning to set up a Commodity exchange.


UNIQUE FEATURES OF NATIONAL LEVEL COMMODITY EXCHANGES

The unique features of national level commodity exchanges are:



They are demutualized, meaning thereby that they are run professionally and
there is separation of management from ownership. The independent
management does not have any trading interest in the commodities dealt with on
the exchange.


They provide online platforms or screen based trading as distinct from the open
outcry systems (ring trading) seen on conventional exchanges. This ensures
transparency in operations as everyone has access to the same information.


They allow trading in a number of commodities and are hence multi-commodity
exchanges.


They are national level exchanges which facilitate trading from anywhere in the country.
This corollary of being an online exchange.


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4.5 MAJOR REGIONAL COMMODITY EXCHANGES IN INDIA

a) BATINDA COMMODITY & OIL EXCHANGE LTD.

b) THE BOMBAY COMMODITY EXCHANGE

c) THE RAJKOT SEEDS OIL AND BULLION MERCHAT

d) THE KANPUR COMMODITY EXCHANGE

e) THE MEERUT AGRO COMMODITY EXCHANGE THE SPICES AND OILSEEDS
EXCHANGE (SANGI)

f) AHEMDABAD COMMODITY EXCHANGE

g) VIJAY BEOPAR CHAMBER LTD. (MUZAFFARNAGAR)

h) INDIA PEPPERS AND SPICE TRADE ASSOCIATION ( KOCHI )

i) RAJDHANI OILS AND SEEDS EXCHANGE ( DELHI )

j) THE CHAMBER OF COMMERCE (HAPUR)

k) THE EAST INDIA COTTON ASSOCIATION (MUMBAI)

l) THE CENTRAL COMMERCIAL EXCHANGE ( GWALIOR )

m) THE EAST INDIA JUTE & HESSIAN EXCHANGE OF INDIA (KOLKATA)

n) FIRST COMMODITY EXCHANGE OF INDIA ( KOCHI )

o) BIKANER COMMODITY EXCHANGE LTD. ( BIKANER )

p) THE COFEE FUTURE EXCHANGE LTD. ( BANGALORE )

q) E SUGAR INDIA LTD. (MUMBAI)













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5. COMMODITIES TRADED IN INDIA




EXHIBIT 5.1 COMMODITIES IN WHICH FUTURES TRADING IS BEING
CONDUCTED IN INDIA



























































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• 1. Kapas
• A. V797 Kapas
• 2. Hessian
• 3. Indian Cotton
• A. S06 L S Cotton Ahmedabad
• B. CottonKadi
• C. Indian 31 mm cotton
• D. indian 28 mm cotton
• E. J34 M S Cotton Bhatinda
• F. CottonAbohar
• 4. Sttaple Fibre Yarn
• 5. Sacking
• A. Jute (B twill-665 Gms) - Kollata
• 6. Gram
• A. Gram(Chana) - New Delhi
• 7. cottonbales
• 8. cottonseeds
• A. undecorticated cotton seed oilcake
• 9. Long Staple Cotton
• 10. Medium Stapple Cotton
• A. NEW MEDIUM STAPLE COTTON
• 11. Silk
• A. Mulberry Raw Silk - Bangalore
• B. Mulberry Green Cocoons - Ramnagar
• 12. Mulberry Raw Silk
• 13. Mulberry Green Cocoons
• 14. Coffee-Arabica
• 15. Cotton Long Kadi
• 16. Cotton Med Abohar
• 17. Cotton Short Staple
• 18. Sugar (S-30)
• 19. Muatardseed Oilcake
• 20. PPTQ
• 21. Cement
• 22. Medium cotton yarn
• 23. Polyvinchlorid


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• 1. Pepper Domestic-MG1
• 2. Turmeric
• A. Turmeric - Nizamabad
• 3. Pepper Domestic-500g/l
• 4. Black Pepper Int'l-MLS ASTA
• 5. Black Pepper Int'l-VB ASTA
• 6. Black pepper Int'l FAQ
• 7. Pepper
• A. Pepper Dommestic-MG1.
• B. Black Pepper Int'l VB ASTA.
• C. Black Pepper Int'l-MLS ASTA.
• D. Black Pepper Int'l FAQ.
• E. Pepper Dommestic-500g/L.
• F. Pepper - Kochi
• 8. Cardamom
• 9. Pepper 550 G/L
• 10. Red Chilly
• A. Chilli (Paala) Guntur
• B. Chilli (Paala) LCA 334
• 11. Jeera
• 12. Rubber RSS4
• 13. Jeera Unjha
• 14. CUMINSEED
• 15. Arecanut













.



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• 1. RBD Pamolein
• A. RBD P'Olein - Kakinada
• 2. Groundnut Oil
• A. Groundnut Expeller Oil
• 3. Sunflower Oil
• 4. Rapeseed/Mustardseed
• A. Rapeseed - 42
• B. Rape/Mustard seed - Jaipur
• 5. Rapeseed/Mustardseed Oil
• A. EXP R/M oil - Jaipur
• B. Expeller mustard oil -Sri Ganganagar
• 6. Rapeseed/Mustardseed oil-Cake
• 7. Soy bean

• A. Soy bean - Indore
• 8. Soy Meal
• A. Soy Meal - Indore
• B. Yellow Soybean Meal (Export)
• 9. Soy Oil
• A. Ref Soya oil - Indore
• 10. Copra
• 11. CottonSeed
• A. Cottonbales
• 12. Safflower
• 13. Groundnut
• A. Groundnut(shell)
• 14. Castor oil-Int'l
• 15. Coconut oil
• 16. Copra cake
• 17. Groundnut oilCack

5.3 EDIBLE
OILSEEDS
AND OIL


• 18. Cottonseed oil
• 19. Sesamum (Til or Jiljili)

• A. Whitish Sesame Seed - Rajkot
• 20. Sesamum oil
• 21. Sesamum OilCake
• 22. Safflower OilCake
• 23. Rice Bran
• 24. Rice Bran Oil
• 25. Rice Bran OilCake
• 26. Safflower Oil
• 27. Sanflower OilCake
• 28. Sunflower Seed
• 29. Crude Palm Oil

• A. Crude Palm oil - Kandla
• 30. Cottonseed - Oilcake

• A. Cotton Seed Oilcake - Akola
• 31. Vanaspati
• 32. Soybean Oilcake
• 33. Linseed
• 34. Linseed Oil
• 35. Linseed Oilcake
• 36. Coconut Oilcake
• 37. Mustard Seed
• 38. Mustard Seed Jaipur
• 39. Sesame Seed ( Natural 99.1)
• 40. Castorseed- Disa
• 41. Mustardseed Oilcake
• 42. KAPASKHALI
• 43. Middle east crude oil
• 44. refined sunflower oil
5.3 EDIBLE
OILSEEDS AND
OIL

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• 1. Masoor
• A. masoor grain bold
• 2. Urad
• A. Urad - Mumbai
• 3. Tur / Arhar
• A. Lemon Tur - Mumbai
• B. Maharashtra Lal Tur
- Akola
• 4. Moong
• 5. Yellow Peas
• A. Yellow Peas - Mumbai
• 6. Chana





5.4
PULSES
DYNAMICS OF INDIAN COMMODITY MARKET



• 1. Crude Oil
• 1.
Potato

• 2. Brent Crude Oil
• 3. Furnace Oil
• 4. Natural Gas











5.5
5.6

VEGETABL
ENERGY

ES

PRODUCT



S






























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DYNAMICS OF INDIAN COMMODITY MARKET


• 1. Aluminium Ingots



• 2. Nickel



• 3. Copper



• A. Copper Cathode



• 4. Zinc



• 5. Lead



• 6. Tin



• 7. Gold


• A. Gold-M

• B. Pure Gold - Mumbai

• C. Kilo - Gold

• D. Gold - HNI

• E. SONA995MUM

• F. Pure Gold - Mumbai - 1 Kg


• 8. Silver


• A. Silver-M

• B. Pure Silver - New Delhi - 30 Kg (Mega)

• C. Pure Silver - New Delhi

• D. Silver - HNI

• E. CHANDIDEL

• 9. Steel


• A. Steel - Long



• B. Steel - Flat



• C. Mild Steel Ingots - Ghaziabad



• 10. Steel Long Bhavnagar



• 11. Steel Long Govindgarh



• 12. sponge iron



• 13. GOLD AHMEDABAD



• 14. GOLD DELHI



• 15. GOLD KOLKATA



• 16. GOLD MUMBAI



• 17. GOLD MINI DELHI



• 18. GOLD MINI KOLKATA



• 19. GOLD MINI MUMBAI
5.7 METALS


• 20. GOLD MINI AHMEDABAD




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• 1. Gur
• A. Gur-chaku - Muzaffarnagar
• 2. Coffee-Plantation A
• 3. Potato
• 4. Sugar
• A. Sugar M Grade - Muzaffarnagar
• B. Sugar S Grade - Vashi
• C. Sugar S Grade
• D. Sugar Grade - M
• E. Sugar Grade - S
• 5. Coffee-Robusta Cherry AB
• 6. Raw Coffee Arabica Parchment
• 7. Raw Coffee Robusta Cherry
• 8. Castorseed
• A. Castorseed-5
• B. Castorseed - Disa
• 9. Castor-oil
• 10. Coffee
• A. Coffee-Plantation A.
• B. Coffee-Robusta Cherry AB.
• C. Raw Coffee Robusta Cherry.
• D. Raw Coffee Arabica Parchment.
• E. Arabica Coffee - Hassan
• F. Robusta Coffee - Kushalnagar
• G. Arabica Coffee - Hassan (New)
• H. Robusta Coffee - Kushalnagar (New)
• 11. Guarseed
• A. Guarseed - Jodhpur
• B. Guarseed - BND
• 12. CastorOil Cake
• 13. Rubber
• A. Rubber - Kottayam
5.8 OTHERS
DYNAMICS OF INDIAN COMMODITY MARKET

• 14. Rice
• A. Basmati Rice
• B. Grade A Parboiled Rice Delhi
• C. Common Parboiled Rice Delhi
• D. Indian Raw Rice Parmal
• E. Indian Parboiled Rice IR-36/IR-64
• F. Grade A Raw Rice Delhi
• G. Common Raw Rice Delhi
• 15. Wheat
• A. Wheat - New Delhi SMQ
• B. Wheat Delhi (New)
• 16. Raw Jute
• A. Raw Jute - Kolkata
• 17. GuarGum
• A. GuarGum - Jodhpur
• 18. Guarseed Bandhani
• 19. Maize
• A. Yellow Red Maize - Nizamabad
• 20. Guar Gum Bandhani
• 21. CASHEW KERNEL W320
• A. Cashew W 320 - Kollam
• 22. Sugar S
• 23. Sugar M
• 24. Sarbati Rice
• 25. Coffee-Arabica Plantation A
• 26. Cashews W-320-Kollam
• 27. Mentha Oil
• 28. Sugar (S30)
• 29. HIGH DENSITY POL
• 30. Gurchaku
• 31. cardamom
• 32. ISABGULSEED
• 33. Isabgul
5.8 OTHERS

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DYNAMICS OF INDIAN COMMODITY MARKET
6. COMMODITY FUTURE MARKET


6.1 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.

6.1.1 TO QUALIFY AS A COMMODITY FOR FUTURES TRADING, AN ARTICLE
OR A PRODUCT HAS TO MEET SOME BASIC CHARACTERISTICS:

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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DYNAMICS OF INDIAN COMMODITY MARKET
6.2 COMMODITY MARKET


6.2.1 A PERSPECTIVE


A market where commodities are traded is referred to as a commodity market. These
commodities include bullion (gold, silver), non-ferrous (base) metals such as copper,
zinc, nickel, lead, aluminum, tin, energy (crude oil, natural gas, etc.), agricultural
commodities such as soya oil, palm oil, coffee, pepper, cashew, etc.

Existence of a vibrant, active, and liquid commodity market is normally considered as a
healthy sign of development of a country‟s economy. Growth of a transparent
commodity market is a sign of development of an economy. It is therefore important to
have active commodity markets functioning in a country.

6.2.2 COMMODITY FUTURES

A Commodity futures is an agreement between two parties to buy or sell a specified and
standardized quantity of a commodity at a certain time in future at a price agreed upon
at the time of entering into the contract on the commodity futures exchange.

The need for a futures market arises mainly due to the hedging function that it can
perform. Commodity markets, like any other financial instrument, involve risk associated
with frequent price volatility. The loss due to price volatility can be attributed to the
following reasons:


1. Consumer Preferences: - In the short-term, their influence on price volatility is
small since it is a slow process permitting manufacturers, dealers and wholesalers
to adjust their inventory in advance.


2. Changes In Supply: - They are abrupt and unpredictable bringing about wild
fluctuations in prices. This can especially noticed in agricultural commodities where
the weather plays a major role in affecting the fortunes of people involved in this
industry. The futures market has evolved to neutralize such risks through a
mechanism; namely hedging.

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6.2.3 OBJECTIVES OF COMMODITY FUTURES




Hedging with the objective of transferring risk related to the possession of physical
assets through any adverse moments in price. Liquidity and Price discovery to


ensure base minimum volume in trading of a commodity through market
information and demand supply factors that facilitates a regular and authentic
price discovery mechanism.




Maintaining buffer stock and better allocation of resources as it augments
reduction in inventory requirement and thus the exposure to risks related with

price fluctuation declines. Resources can thus be diversified for investments.





Price stabilization along with balancing demand and supply position. Futures
trading leads to predictability in assessing the domestic prices, which maintains


stability, thus safeguarding against any short term adverse price movements.
Liquidity in Contracts of the commodities traded also ensures in maintaining the
equilibrium between demand and supply.



Flexibility, certainty and transparency in purchasing commodities facilitate bank
financing. Predictability in prices of commodity would lead to stability, which in


turn would eliminate the risks associated with running the business of trading
commodities. This would make funding easier and less stringent for banks to
commodity market players.



6.2.4 BENEFITS OF COMMODITY FUTURES MARKETS



The primary objectives of any futures exchange are authentic price discovery and an
efficient price risk management. The beneficiaries include those who trade in the
commodities being offered in the exchange as well as those who have nothing to do with
futures trading. It is because of price discovery and risk management through the




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DYNAMICS OF INDIAN COMMODITY MARKET
existence of futures exchanges that a lot of businesses and services are able to function

smoothly.




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 futures 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 futures 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 futures
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. Futures contracts will


enable predictability in domestic prices. The manufacturers can, as a result,

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DYNAMICS OF INDIAN COMMODITY MARKET
smooth out the influence of changes in their input prices very easily. With no

futures 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 futures 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. Storing more and being more active in the markets. The price
information accessible to the farmers determines the extent to which
traders/processors increase price to them. Since one of the objectives of futures
exchange is to make available these prices as far as possible, it is very likely to
benefit the farmers. Also, due to the time lag between planning and production,
the market-determined price information disseminated by futures exchanges
would be crucial for their production decisions.




Credit accessibility: - The absence of proper risk management tools would
attract the marketing and processing of commodities to high-risk exposure making

it risky business activity to fund.


Even a small movement in prices can eat up a huge proportion of capital owned by
traders, at times making it virtually impossible to payback the loan. There is a
high degree of reluctance among banks to fund commodity traders, especially
those who do not manage price risks. If in case they do, the interest rate is likely
to be high and terms and conditions very stringent. This possesses a huge
obstacle in the smooth functioning and competition of commodities market.
Hedging, which is possible through futures markets, would cut down the discount
rate in commodity lending.





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DYNAMICS OF INDIAN COMMODITY MARKET

Improved product quality: - The existence of warehouses for facilitating
delivery with grading facilities along with other related benefits provides a very


strong reason to upgrade and enhance the quality of the commodity to grade that
is acceptable by the exchange. It ensures uniform standardization of commodity
trade, including the terms of quality standard: the quality certificates that are
issued by the exchange-certified warehouses have the potential to become the
norm for physical trade.



Commodities as an asset class for diversification of portfolio risk:


Commodities have historically an inverse correlation of daily returns as compared
to equities. The skewness of daily returns favors commodities, thereby indicating
that in a given time period commodities have a greater probability of providing
positive returns as compared to equities. Another aspect to be noted is that the


“sharpe ratio” of a portfolio consisting of different asset classes is higher in the
case of a portfolio consisting of commodities as well as equities. Thus, an
Investor can effectively minimize the portfolio risk arising due to price
fluctuations in other asset classes by including commodities in the portfolio.



Commodity derivatives markets are extremely transparent in the sense
that the manipulation of prices of a commodity is extremely difficult due to


globalisation of economies, thereby providing for prices benchmarked across
different countries and continents. For example, gold, silver, crude oil, natural
gas, etc. are international commodities, whose prices in India are indicative of
the global situation.



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.




Useful to the producer: Commodity trade is useful to the producer because he
can get an idea of the price likely to prevail on a future date and therefore can

decide between various competing commodities, the best that suits him.



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DYNAMICS OF INDIAN COMMODITY MARKET

Useful for the consumer: Commodity trade is useful for the consumer because
he gets an idea of the price at which the commodity would be available at a


future point of time. He can do proper costing/financial planning and also cover
his purchases by making forward contracts. Predictable pricing and transparency
is an added advantage.


6.2.5 WHAT MAKES COMMODITY TRADING ATTRACTIVE?

A good low-risk portfolio diversifier



A highly liquid asset class, acting as a counterweight to stocks, bonds and real estate.



Less volatile, compared with, equities and bonds.



Investors can leverage their investments and multiply potential earnings.



Better risk-adjusted returns.



A good hedge against any downturn in equities or bonds as there is



Little correlation with equity and bond markets.



High co-relation with changes in inflation.



No securities transaction tax levied.



6.3 COMPARATIVE ANALYSIS OF COMMODITY AND EQUITY
MARKETS


Factors Commodity Markets Equity Markets



Gold gives 10-15 %
Returns in the range of 15-



Percentage Returns

returns on the





20 % on annual basis.



conservative basis.









Initial Margins

Lower in the range of 4-

Higher in the range of 25-



5-6%

40%











Arbitrage

Exists on 1-2 month

Significant Arbitrage




contracts. There is a





Opportunities

Opportunities exists.




small difference in prices,









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DYNAMICS OF INDIAN COMMODITY MARKET
but in case of

commodities, which it is

in large tonnage makes a



huge difference.




Price movements are Prices movements based on


Price Movements

purely based on the

the expectation of future





supply and demand.

performance.








Price changes are due to

Price changes can also be



due to Corporate actions,



Price Changes

policy changes, changes





Dividend announcements,



in tariff and duties.







Bonus shares / Stock splits.







Predictability of future
Predictability of futures



prices is not in the



performance is reasonably



control due to factors like



Future Predictability

high, which is supplemented




Failure of Monsoon and



by the History of




Formation of El-ninos at



management performance.



Pacific.







Volatility Lower Volatility Higher Volatility




Securities

Securities Transaction

Securities Transaction Act is




Act is not applicable to



Transaction Act

applicable to equity markets



commodity futures



Application

trading.






trading.
























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DYNAMICS OF INDIAN COMMODITY MARKET
7. INSTRUMENTS AVAILABLE FOR TRADING



In recent years, derivatives have become increasingly popular due to their applications
for hedging, speculation and arbitrage.

While futures and options are now actively traded on many exchanges, forward
contracts are popular on the OTC market.

While at the moment only commodity futures trade on the NCDEX, eventually, as the
market grows, we also have commodity options being traded.


7.1 FORWARD CONTRACTS

A forward contract is an agreement to buy or sell an asset on a specified date for a
specified price.

One of the parties to the contract assumes a long position and agrees to buy the
underlying asset on a certain specified future date for a certain specified price. The other
party assumes a short position and agrees to sell the asset on the same date for the
same price. Other contract details like delivery date, price and quantity are negotiated
bilaterally by the parties to the contract. The forward contracts are normally traded
outside the exchanges.

The salient features of forward contracts are:

They are bilateral contracts and hence exposed to counter-party risk.



Each contract is custom designed, and hence is unique in terms of contract size,
expiration date and the asset type and quality.


The contract price is generally not available in public domain.


On the expiration date, the contract has to be settled by delivery of the asset.



If the party wishes to reverse the contract, it has to compulsorily go to the same
counterparty, which often results in high prices being charged.


However forward contracts in certain markets have become very standardised, as in the
case of foreign exchange, thereby reducing transaction costs and increasing transactions
volume. This process of standardisation reaches its limit in the organised futures
market.

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7.2 FUTURES MARKET

Futures markets were designed to solve the problems that exist in forward markets. A
futures contract is an agreement between two parties to buy or sell an asset at a certain
time in the future at a certain price. But unlike forward contracts, the futures contracts
are standardized and exchange traded. To facilitate liquidity in the futures contracts, the
exchange species certain standard features of the contract. It is a standardized contract
with standard underlying instrument, a standard quantity and quality of the underlying
instrument that can be delivered, (or which can be used for reference purposes in
settlement) and a standard timing of such settlement. A futures contract may be offset
prior to maturity by entering into an equal and opposite transaction. More than 99% of
futures transactions are offset this way.


The standardized items in a futures contract are:

Quantity of the underlying


Quality of the underlying



The date and the month of delivery



The units of price quotation and minimum price change



Location of settlement



Spot price: The price at which an asset trades in the spot market.



Futures price: The price at which the futures contract trades in the futures
market.



7.2.1 MARGIN REQUIREMENTS


Initial Margin

The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin.





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Initial margin based on “Value at Risk” Model (VaR) to estimate worst loss that can
happen for a time horizon 99% confidence level SPAN® is the system used for
margin calculation. Volatility is one of the inputs to the SPAN calculations EWMA/
J.P.Morgan Risk Metrics methodology for calculation of volatility will be adopted.
Similar procedure is followed in most international exchanges like CBOT, CME,
NYMEX, NYBOT, TOCOM, LME, LIFFE.


Marking- to- market Margin

In the futures market, at the end of each trading day, the margin account is adjusted
to reflect the investor's gain or loss depending upon the futures closing price. This is
called marking-to-market.

All open positions will be marked-to-market at the daily settlement price at the end of
the day Client has to bring mark-to-market (MTM) margin to be through funds
transfer the next day.


Maintenance margin

This is somewhat lower than the initial margin. This is set to ensure that the balance
in the margin account never becomes negative. If the balance in the margin account
falls below the maintenance margin, the investor receives a margin call and is
expected to top up the margin account to the initial margin level before trading
commences on the next day.



















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DYNAMICS OF INDIAN COMMODITY MARKET
7.3 OPTIONS

Options are fundamentally different from forward and futures contracts. An option gives
the holder of the option the right to do something. The holder does not have to exercise
this right. In contrast, in a forward or futures contract, the two parties have committed
themselves to doing something.

Whereas it costs nothing (except margin requirements) to enter into a futures contract,
the purchase of an option requires an up-front payment.


There are two basic types of options, call options and put options.


Call option: A call option gives the holder the right but not the obligation to buy
an asset by a certain date for a certain price.



Put option: A put option gives the holder the right but not the obligation to sell
an asset by a certain date for a certain price.








































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DYNAMICS OF INDIAN COMMODITY MARKET
8. PARTICIPANTS OF COMMODITY MARKET


Participants who trade in the derivatives market can be classified under the following
three broad categories:

Hedgers



Speculators



Arbitragers



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.

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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DYNAMICS OF INDIAN COMMODITY MARKET
8.2 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 hedger
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 off setting rising and
declining prices through the buying and selling of contracts.

LONG SHORT





HEDGER

Secure a price now to protect

Secure a price now to protect




against future rising prices

against future declining prices








SPECULATOR

Secure a price now in

Secure a price now in





anticipation of rising prices

anticipation of declining prices












8.3 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


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DYNAMICS OF INDIAN COMMODITY MARKET
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.

EXHIBIT 8.1 PARTICIPANTS OF COMMODITY MARKET




• Producers – farmers
• Consumers – refineries, food processing companies


• Brokerage houses
• Retail investors
• People involved in commodity spot trading


• Brokerage houses
• People trading in commodity spot markets
• Warehousing companies






















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DYNAMICS OF INDIAN COMMODITY MARKET
9. HOW THE COMMODITY MARKET WORKS


9.1 WORKING PROCEDURE


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.

There are two kinds of trades in commodities.


The first is the spot trade, in which one pays cash and carries away the goods.



The second is futures trade. The underpinning for futures is the warehouse receipt. A
person deposits certain amount of say, good X in a ware house and gets a warehouse
receipt which allows him to ask for physical delivery of the good from the warehouse but
some one trading in commodity futures need not necessarily posses such a receipt to
strike a deal. A person can buy or sale a commodity future on an exchange based on his
expectation of where the price will go.

Futures have something called an expiry date, by when the buyer or seller either closes
(square off) his account or give/take delivery of the commodity. The broker maintains
an account of all dealing parties in which the daily profit or loss due to changes in the
futures price is recorded. Squiring off is done by taking an opposite contract so that the
net outstanding is nil.

For commodity futures to work, the seller should be able to deposit the commodity at
warehouse nearest to him and collect the warehouse receipt. The buyer should be able
to take physical delivery at a location of his choice on presenting the warehouse receipt.
But at present in India very few warehouses provide delivery for specific commodities.





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DYNAMICS OF INDIAN COMMODITY MARKET
FIG 1:

Following diagram gives a fair idea about working of 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 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.

9.2 DELIVERY PROCESS

9.2.1 PROCEDURES FOR DELIVERY:

 Open a Beneficiary Demat account

9.2.2 INFORMATION REQUIRED FOR DELIVERY:

 Commodity code
 Quantity
 Location/branch preference for physical receipt/delivery of commodities

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DYNAMICS OF INDIAN COMMODITY MARKET
 Demat Indicator Delivery process requires

9.2.3 DELIVERY PROCESS REQUIRES:
 Delivery information submitted on Expiry date.
 This is done through the delivery request window on the Trading Terminal.
 Matching delivery information is obtained.
9.2.4 VALIDATION OF DELIVERY INFORMATION:

 On Client‟s Net Open Position
 On Delivery lot for commodity
 Excess quantity rejected and cash settled
 Matched delivery information

9.2.5 MATCHING PARAMETERS:

 Commodity
 Quantity
 Location
 Branch
 Matching limited to the total warehouse capacity
 Settlement through Depository.
 Settlement Schedule in Settlement Calendar




Today Commodity trading system is fully computerized. Traders need not visit a
commodity market to speculate. With online commodity trading they could sit in
the confines of their home or office and call the shots.


The commodity trading system consists of certain prescribed steps or stages as follows:















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I
.

T
R
A
D
I
N
G




-Order receiving

- Execution
- Matching
- Reporting
- Surveillance
- Price limits
- Position limits




I
I
.

C
L
E
A
R
I
N
G

DYNAMICS OF INDIAN COMMODITY MARKET


- Matching
S
E
T
T
L
E
M
E
N
T



- Registration -Marking to market

- Clearing - Receipts and payments
- Clearing limits - Reporting

- Notation - Delivery upon

III.



expiration or maturity

- Margining





- Price limits
- Position limits
- Clearing house













































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DYNAMICS OF INDIAN COMMODITY MARKET
9.3 CLEARING AND SETTLEMENT


Most futures contracts do not lead to the actual physical delivery of the underlying asset.
The settlement is done by closing out open positions, physical delivery or cash
settlement. All these settlement functions are taken care of by an entity called clearing
house or clearing corporation. National Securities Clearing Corporation Limited (NSCCL)
undertakes clearing of trades executed on the NCDEX. The settlement guarantee fund is
maintained and managed by NCDEX.


9.3.1 CLEARING

Clearing of trades that take place on an exchange happens through the exchange
clearing house.

A clearing house is a system by which exchanges guarantee the faithful compliance of all
trade commitments undertaken on the trading floor or electronically over the electronic
trading systems. The main task of the clearing house is to keep track of all the
transactions that take place during a day so that the net position of each of its members
can be calculated. It guarantees the performance of the parties to each transaction.
Typically it is responsible for the following:

Effecting timely settlement.



Trade registration and follow up.



Control of the evolution of open interest.



Financial clearing of the payment flow.



Physical settlement (by delivery) or financial settlement (by price difference)
of contracts.


Administration of financial guarantees demanded by the participants.




The clearing house has a number of members, who are mostly financial institutions
responsible for the clearing and settlement of commodities traded on the exchange. The
margin accounts for the clearing house members are adjusted for gains and losses at
the end of each day (in the same way as the individual traders keep margin accounts
with the broker).

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DYNAMICS OF INDIAN COMMODITY MARKET
9.3.1A Clearing Mechanism



Only clearing members including professional clearing members (PCMs) are entitled to
clear and settle contracts through the clearing house.

The clearing mechanism essentially involves working out open positions and obligations
of clearing members. This position is considered for exposure and daily margin
purposes. The open positions of PCMs are arrived at by aggregating the open positions
of all the TCMs clearing through him, in contracts in which they have traded. A TCM's
open position is arrived at by the summation of his clients' open positions, in the
contracts in which they have traded. Client positions are netted at the level of individual
client and grossed across all clients, at the member level without any set-offs between
clients. Proprietary positions are netted at member level without any set-offs between
client and proprietary positions.


9.3.2 SETTLEMENT

Futures contracts have two types of settlements, the MTM settlement which happens on
a continuous basis at the end of each day, and the final settlement which happens on
the last trading day of the futures contract.



Daily settlement price: Daily settlement price is the consensus closing price as
arrived after closing session of the relevant futures contract for the trading day.


However, in the absence of trading for a contract during closing session, daily
settlement price is computed as per the methods prescribed by the exchange from
time to time.




Final settlement price: Final settlement price is the closing price of the
underlying commodity on the last trading day of the futures contract. All open

positions in a futures contract cease to exist after its expiration day.








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DYNAMICS OF INDIAN COMMODITY MARKET

EXHIBIT 9.1: TYPES OF SETTLEMENT - DIAGRAM



























9.3.2A Settlement mechanism

Settlement of commodity futures contracts is a little different from settlement of
financial futures which are mostly cash settled. The possibility of physical settlement
makes the process a little more complicated.


a) Daily mark to market settlement

Daily mark to market settlement is done till the date of the contract expiry. This is done
to take care of daily price fluctuations for all trades. All the open positions of the
members are marked to market at the end of the day and the profit/ loss is determined
as below:

On the day of entering into the contract, it is the difference between the entry value and
daily settlement price for that day.

On any intervening days, when the member holds an open position, it is the difference
between the daily settlement price for that day and the previous day's settlement price.
On the expiry date if the member has an open position, it is the difference between the
final settlement price and the previous day's settlement price.


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DYNAMICS OF INDIAN COMMODITY MARKET
b) Final settlement

On the date of expiry, the final settlement price is the spot price on the expiry day. The
spot prices are collected from members across the country through polling. The polled
bid/ ask prices are bootstrapped and the mid of the two bootstrapped prices is taken as
the final settlement price.

The responsibility of settlement is on a trading cum clearing member for all trades done
on his own account and his client's trades. A professional clearing member is responsible
for settling all the participants‟ trades which he has confirmed to the exchange.

EXHIBIT 9.2: SETTLEMENT PAY-IN AND PAY-OUT MECHANISM






PAY-IN



COMMODITIES

• Seller ensures Demat of commodities
prior to Pay-in
• Instruction to DP by seller to move
commodities to Clearing Member Pool
Account
• Pay-in of commodities on Settlement
Date thru Clearing member pool
account






FUNDS

• Pay-in of funds – Thru the Clearing
bank of the Member on the Pay-in day.






PAY-OUT




COMMODITIES

• Credit given into the Buyer member
CM Pool A/c
• Instruction by Member to transfer
from CM pool to buyer client’s Demat
account
• Subsequent Remat of commodities and
physical movement handled by buyer








FUNDS

• Funds pay-out is done into the
designated bank account of the
Member with the Clearing bank







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DYNAMICS OF INDIAN COMMODITY MARKET
10. REGULATORY FRAMEWORK INDIAN COMMODITY

MARKET

10.1 NEED FOR REGULATION

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.


Forward Contracts (Regulation) Rules were notified by the Central Government in July,
1954.

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The Act divides the commodities into 3 categories with reference to extent of regulation,
viz.:

(a) The commodities in which futures trading can be organized under the auspices of
recognized association.

(b) The Commodities in which futures trading is prohibited.


(c) 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.

10.2 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:


1. Limit on net open position as on the close of the trading hours. Some times limit is
also imposed on intra-day net open position. The limit is imposed operator-wise, and in
some cases, also member-wise.


2. Circuit-filters or limit on price fluctuations to allow cooling of market in the event of
abrupt upswing or downswing in prices.



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DYNAMICS OF INDIAN COMMODITY MARKET
3. 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.


4. 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.


5. 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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DYNAMICS OF INDIAN COMMODITY MARKET
11. CURRENT SCENARIO OF INDIAN COMMODITY MARKET


11.1 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 organised, 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 favour 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 25
th
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.

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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DYNAMICS OF INDIAN COMMODITY MARKET
11.2 PERFORMANCE ANALYSIS OF INDIAN COMMODITY
MARKET

Futures contracts are available for major agricultural commodities, metals and energy.
Commodity group-wise value of trading since 2004-05 is given in Fig. 11.1.






T
R
A
D
E

V
A
L
U
E

I
S
N

R
s
.

L
A
K
H

C
R
O
R
E


FIG 11.1 COMMODITY GROUP-WISE VALUE
OF TRADE

30


25



20

2004-05


15

2005-06


10

2006-07

5
2007-08

0



Bullion and

Agriculture

Energy

Others



other metals





SOURCE: ECFT

The year 2003 is a watershed in the history of commodity futures market. The last
group of 54 prohibited commodities was opened up for forward trading, along with
establishment and recognition of three new national exchanges with on-line trading and
professional management. Not only was prohibition on forward trading completely
withdrawn, including in sensitive commodities such as wheat, rice, sugar and pulses
which earlier committees had reservations about, the new exchanges brought capital,
technology and innovation to the market. These markets notched up phenomenal
growth in terms of number of products on offer, participants, spatial distribution and
volume of trade. Starting with trade in 7 commodities till 1999, futures trading is now
available in 95 commodities. There are more then 3000 members registered with the
exchanges. More than 20,000 terminals spread over more than 800 towns/cities of the
country provide access to trading platforms. The volume of trade has increased

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DYNAMICS OF INDIAN COMMODITY MARKET
exponentially since 2003- 04 to reach Rs. 36.77 lakh crore in 2006-07. Almost all of this

(97.2%) of this is now accounted for by the three national exchanges. The other 21
Exchanges have a miniscule share in the total volume.

The growth in commodity futures trade has spawned an upsurge of interest in a number
of associated fields, viz. research, education and training activities in commodity
markets, commodity reporting for print and visual media, collateral management,
commodity finance, ware-housing, assaying and certification, software development,
electronic spot exchanges etc. Markets and fields almost non-existent four years ago
now attract significant mind-share nationally and internationally.

Although agricultural commodities led the initial spurt, and constituted the largest
proportion of the total value of trade till 2005-06 (55.32%), this place was taken over
by bullion and metals in 2006-07. The growth in 2006-07 was almost wholly (88.7%)
accounted for by bullion and metals, with agricultural commodities contributing a small
fraction (10.7%). This was partly due to the stringent regulations, like margins and open
interest limits, imposed on agriculture commodities and the dampening of sentiments
due to suspension of trade in few commodities. Futures market growth in 2006-07
appears to have bypassed agriculture commodities.

Moreover, there has been a very significant decline in volume of futures trade in
agriculture commodities during the year 2007-08, by 28.5%. The overwhelming bulk of
this decline is accounted for by Chana, Maize, Mentha Oil, Guar seed, Potato, Guar Gum,
Chillies and Cardamom. Trade in these eight commodities, which accounted for 57.9% of
total futures trade in agricultural commodities in 2006-07, declined by over 66.4%
during 2007-08 compared to previous year. The decline in these eight commodities
exceeded the decline of futures trading volumes in all agricultural commodities taken
together.

Four commodities (wheat, rice, urad and tur) were de-listed for futures trading towards
the end of financial year 2006-07. This de-listing has been held responsible in many
circles for the recent general downturn in futures trading in agricultural commodities.
But these four de-listed commodities together accounted for only 6.65% of the total
value of futures trading in all agricultural commodities in 2006-07. Thus, although this


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DYNAMICS OF INDIAN COMMODITY MARKET
may have affected market sentiments adversely, the delisting did not have any major

direct contribution to the decline in trading observed during 2007-08.

In fact, except chana and urad, the share of sensitive commodities in total value of
futures trade in agricultural commodities has so far been quite insignificant. The
combined share of other food grains (i.e. wheat, rice, maize and tur) peaked at 5.0% in
2005-06 and of sugar at only 2.2%. This is in line with what various Committees
mentioned earlier had foreseen regarding prospects of futures trading in commodities
with significant government intervention. If, nonetheless, de-listing has adversely
affected market sentiment regarding futures trading more generally, this must be
because of the “go-stop” nature of government policy on the matter.


FIG 11 .2 TREND OF INDIAN COMMODITY MARKET

500,000.00

450,000.00

R
s
.

C
R
O
R
E

400,000.00

350,000.00

300,000.00

IN

250,000.00


V
A
L
U
E



200,000.00


2008-09
T
R
A
D
E


150,000.00
2009-10


100,000.00


50,000.00

0.00


1
/
4
-
1
5
/
4

1
6
/
4
-
3
0
/
4

1
/
5
-
1
5
/
5

1
6
/
5
-
3
0
/
5

1
/
6
-
1
5
/
6

1
6
/
6
-
3
0
/
6

1
/
7
-
1
5
/
7

1
6
/
7
-
3
0
/
7

1
/
8
-
1
5
/
8

1
6
/
8
-
3
0
/
8

1
/
9
-
1
5
/
9

1
6
/
9
-
3
0
/
9

1
/
1
0
-
1
5
/
1
0

1
6
/
1
0
-
3
0
/
1
0

1
/
1
1
-
1
5
/
1
1

1
6
/
1
1
-
3
0
/
1
1

1
/
1
2
-
1
5
/
1
2

1
6
/
1
2
-
3
0
/
1
2

1
/
1
-
1
5
/
1

1
6
/
1
-
3
1
/
1

1
/
2
-
1
5
/
2

1
6
/
2
-
2
8
/
2

1/3-15/3



TIME PERIOD- DATEWISE



SOURCE: www.fmc.gov.in




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DYNAMICS OF INDIAN COMMODITY MARKET
The above mentioned graph gives overall information of commodity market during
year 2008 09 and 2009-10

Here for instance year 2008-09 and 2009-10 from April to mid of May the market was
moving almost parallel with fall of 2% during commence of July and 8% peak in
Commence of September in 2009.

Again in December 2009 there is a peak in overall commodity market the peak of
30% in the commodity market. This is mainly because of in this tenure gold was at
its top in the commodity market. And the prices of gold touched pinnacle of 10 years
of market.



SOURCE: www.mcx.com

FIG 11.3 TRADING FROM APRIL 2007 - MARCH 2010
IN UNIT (AS PER MCX)

2%
0%

11%

6%
4%

Fibres and Manufactures




Spices


1%


Edible Oil seeds and Oil


10%



66%

Pulses




Energy Products




Vegetables




Metals

Other















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DYNAMICS OF INDIAN COMMODITY MARKET
11.3 UNRESOLVED ISSUES



Even though the commodity derivatives market has made good progress in the last few
years, the real issues facing the future of the market have not been resolved. Agreed,
the number of commodities allowed for derivative trading have increased, the volume
and the value of business has zoomed, but the objectives of setting up commodity
derivative exchanges may not be achieved and the growth rates witnessed may not be
sustainable unless these real issues are sorted out as soon as possible. Some of the
main unresolved issues are discussed below.


i. Commodity Options: Trading in commodity options contracts has been banned
since 1952. The market for commodity derivatives cannot be called complete
without the presence of this important derivative. Both futures and options are
necessary for the healthy growth of the market. While futures contracts help a
participant (say a farmer) to hedge against downside price movements, it does not
allow him to reap the benefits of an increase in prices. No doubt there is an
immediate need to bring about the necessary legal and regulatory changes to
introduce commodity options trading in the country. The matter is said to be under
the active consideration of the Government and the options trading may be
introduced in the near future.


ii. The Warehousing and Standardization: For commodity derivatives market to
work efficiently, it is necessary to have a sophisticated, cost-effective, reliable and
convenient warehousing system in the country. The Habibullah (2003) task force
admitted, “A sophisticated warehousing industry has yet to come about”. Further,
independent labs or quality testing centers should be set up in each region to
certify the quality, grade and quantity of commodities so that they are
appropriately standardized and there are no shocks waiting for the ultimate buyer
who takes the physical delivery. Warehouses also need to be conveniently located.



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DYNAMICS OF INDIAN COMMODITY MARKET
Central Warehousing Corporation of India (CWC: www.fieo.com) is operating 500
Warehouses across the country with a storage capacity of 10.4 million tonnes. This
is obviously not adequate for a vast country. To resolve the problem, a Gramin
Bhandaran Yojana (Rural Warehousing Plan) has been introduced to construct new
and expand the existing rural godowns. Large scale privatization of state
warehouses is also being examined.


iii. Cash versus Physical Settlement: It is probably due to the inefficiencies in the
present warehousing system that only about 1% to 5% of the total commodity
derivatives trade in the country is settled in physical delivery. Therefore the
warehousing problem obviously has to be handled on a war footing, as a good
delivery system is the backbone of any commodity trade. A International Research
Journal of Finance and Economics - Issue 2 (2006) 161 particularly difficult
problem in cash settlement of commodity derivative contracts is that at present,
under the Forward Contracts (Regulation) Act 1952, cash settlement of
outstanding contracts at maturity is not allowed. In other words, all outstanding
contracts at maturity should be settled in physical delivery. To avoid this,
participants square off their positions before maturity. So, in practice, most
contracts are settled in cash but before maturity. There is a need to modify the
law to bring it closer to the widespread practice and save the participants from
unnecessary hassles.


iv. The Regulator: As the market activity pick-up and the volumes rise, the market
will definitely need a strong and independent regular, similar to the Securities and
Exchange Board of India (SEBI) that regulates the securities markets. Unlike SEBI
which is an independent body, the Forwards Markets Commission (FMC) is under
the Department of Consumer Affairs (Ministry of Consumer Affairs, Food and Public
Distribution) and depends on it for funds. It is imperative that the Government
should grant more powers to the FMC to ensure an orderly development of the
commodity markets. The SEBI and FMC also need to work closely with each other

due to the inter-relationship between the two markets.

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DYNAMICS OF INDIAN COMMODITY MARKET
v. Lack of Economy of Scale: There are too many (3 national level and 21
regional) commodity exchanges. Though over 80 commodities are allowed for
derivatives trading, in practice derivatives are popular for only a few commodities.
Again, most of the trade takes place only on a few exchanges. All this splits
volumes and makes some exchanges unviable. This problem can possibly be
addressed by consolidating some exchanges. Also, the question of convergence of
securities and commodities derivatives markets has been debated for a long time
now. The Government of India has announced its intention to integrate the two
markets. It is felt that convergence of these derivative markets would bring in
economies of scale and scope without having to duplicate the efforts, thereby
giving a boost to the growth of commodity derivatives market. It would also help
in resolving some of the issues concerning regulation of the derivative markets.
However, this would necessitate complete coordination among various regulating
authorities such as Reserve Bank of India, Forward Markets commission, the
Securities and Exchange Board of India, and the Department of Company affairs
etc.


vi. Tax and Legal bottlenecks: There are at present restrictions on the movement
of certain goods from one state to another. These need to be removed so that a
truly national market could develop for commodities and derivatives. Also,
regulatory changes are required to bring about uniformity in octroi and sales taxes
etc. VAT has been introduced in the country in 2005, but has not yet been
uniformly implemented by all states.

















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DYNAMICS OF INDIAN COMMODITY MARKET
11.4 FUTURE PROSPECTS

With the gradual withdrawal of the Govt. from various sectors in the post liberalization
era, the need has been left that various operators in the commodities market be
provided with a mechanism to hedge and transfer their risk. India‟s obligation under
WTO to open agriculture sector to world trade require future trade in a wide variety of
primary commodities and their product to enable divers market functionaries to cope
with the price volatility prevailing n the world markets.


Following are some of applications, which can utilize the power of the commodity market
and create a win-win situation for all the involved parties:-


Regulatory approval/permission to FII‟S to trading in the commodity market.


Active Involvement of mutual fund industry of India.



Permission to Banks for acting as Aggregators and traders.



Active involvement of small Regional stock exchanges.



Newer Avenues for trading in Foreign Derivatives Exchanges.



Convergence of variance market.



Amendment of the commodities Act and Implementers of VAT.



Introduction of option contract.



























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DYNAMICS OF INDIAN COMMODITY MARKET
12. FUTURE TRADING IN AGRICULTURAL COMMODITY





FIG 12.1 TRADE IN AGRI-COMMODITY IN INDIAN
COMMODITY MARKET

C
R
O
R
E
80,000.00

70,000.00

60,000.00


R
s
.



50,000.00


I
N




T
R
A
D
E

40,000.00

30,000.00

O
F

20,000.00


V
A
L
U
E


10,000.00

0.00





1
/
4
-
1
5
/
4

1
6
/
4
-
3
0
/
4

1
/
5
-
1
5
/
5

1
6
/
5
-
3
0
/
5

1
/
6
-
1
5
/
6

1
6
/
6
-
3
0
/
6

1
/
7
-
1
5
/
7

1
6
/
7
-
3
0
/
7

1
/
8
-
1
5
/
8

1
6
/
8
-
3
0
/
8

1
/
9
-
1
5
/
9

1
6
/
9
-
3
0
/
9

1
/
1
0
-
1
5
/
1
0

1
6
/
1
0
-
3
0
/
1
0

1
/
1
1
-
1
5
/
1
1

1
6
/
1
1
-
3
0
/
1
1

1
/
1
2
-
1
5
/
1
2

1
6
/
1
2
-
3
0
/
1
2

1
/
1
-
1
5
/
1

1
6
/
1
-
3
1
/
1

1
/
2
-
1
5
/
2

1
6
/
2
-
2
8
/
2

1
/
3
-
1
5
/
3



TIME PERIOD - DATEWISE

SOURCE: www.fmc.com



















2008-09
2009-10


This graph is specific for agri commodity market. It shows market trend for the years
2008-09 and 2009-10.

Here If trends of April 2009 -10 is observed then there is a in the mid of April there is a
peak and commodity market reach to 50,000crore.Here market went up because of
summer harvest. Again at commence of August it is peaked up and cross the line of
60,000 crore. It goes down due to draught condition. Again in the months of November
December 2009 it went to peak as better winter crops are harvested it reach to peak
and crossed the line of 700 crore which was the highest of 2 years.

In 2008-09 between due to inflation in the world economy the market go to the bottom
of 12000crore.And it has started gradually growing up till January and again it falls down
and goes up in March.



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FIG 12.2 VOLATILITY IN MONTHLY SPOT PRICE
INDICES : ESTIMATES OF STANDARD DEVIATIONS


JAN 2000-DEC 2002

JAN 2003-DEC 2006

JAN 2007-DEC 2009



88

75
71





57
60 59


42
39


27
32


21

21


13
17

14

4 5 3

RICE WHEAT URAD POTATOES ONION SOYABEAN


SOURCE: Office of Economic Adviser, Ministry Of Commerce and Industry,
Government Of India

































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FIG 12.3 COMPARISON OF AGRI-COMMODITY
CONSUMPTION BETWEEN INDIA AND US
2006-07








Y
A
L
U
E

I
N

%


40

35

30

25

20

15

10

5

0











India Consumption

US consumption






Source: WBMS, IEA, FAO, IISI, World Bank

Here in a given graph overall consumption pattern of India and US is mentioned. Here it
is compared with overall consumption in the world of a given edibles. For instance if we
see wheat then India is consuming around 17% of and USA is consuming around 4% of
wheat out of total consumed in the world.






















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FIG 12.4 COMPARISON OF PROD/CONS RATIO
BETWEEN INDIA AND USA (2006-07)

5

4.5

4

3.5

3
2.5
India
2
USA
1.5
1

0.5

0







Source: WBMS, IEA, FAO, IISI, World Bank




This graph shows the country is able to export the edible or not. On Y axis the ration of
production to consumption is given, where this ratio is more than 1 that country is able
to import that particular commodity. When the ratio is less than 1 those commodity is
exported by that country as consumption of that commodity is more in that country than
the production.

USA has production consumption ratio i.e. US is not into the production of coffee. It
exports its entire coffee requirement from other countries.







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13. TRADING IN AGRI-COMMODITY- GROUNDNUT


13.1 INTRODUCTION

Groundnut is an important crop both for oil and food. It is grown in over 100 countries in
the world and plays an important role in the economy of several countries. About two
thirds of the crop produced in the world is crushed to extract oil and one-third is used to
make other edible products. India accounts for 40 per cent of the world area and 30 per
cent of world output of groundnut. On the other hand groundnut and groundnut oil is the
most illiquid commodity in the commodity exchanges in India. Therefore the focus of the
study is to understand the trade volume of groundnut as a commodity in commodity
exchanges all over the world and gain knowledge about various factors governing
supply, demand and price of these commodities in Indian market.

13.2 OVERVIEW

Groundnut is considered to be the one of the most important oilseed crops in the world.
It is grown in over 100 countries of the world and plays a crucial role in the world
economy. The seeds are a good source of edible oil and proteins present in the
groundnut oil cake. The percentage of oil and protein are extracted from the seed are
approximately 55% and 28% respectively. The oil cake meal left after the extraction of
the oil is used as an animal fodder and fertilizer. The peanut oil is primarily needed as a
cooking agent but it also has some industrial uses like in paint, varnish, lubricating oil,
soap, furniture polish etc. the peanut seeds are also consumed directly in roasted form,
as butter, in brittle and candies etc.

Groundnut production has reached the mark of around 34 million tons. China followed
by India is the largest producer of this oilseed crop in the world. The groundnut oil
production hovers around 8 million tons annually. These two countries are also
responsible for the highest consumption of groundnut. The list depicting the major
groundnut consuming countries is given below:

China



India


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Nigeria



United States



European Union



Except European Union, all the countries lie in the list of major groundnut producing
countries as well. European Union countries are the largest consumer of groundnuts
where the crop is not produced. The major demand i.e. around 75% comes from the
food sector and the rest from other sectors. As European Union is the largest consumer
of the oilseed where it is not produced, it has to rely on imports and that makes the
countries in the union the largest importers of groundnut. The trade done in the world in
the context of groundnuts is estimated to about 1 lakh tons per year. The leading
groundnut exporting countries are:

Argentina

China

Senegal

Vietnam

Nigeria

South Africa

India

Gambia

United States

The countries mentioned above contribute to about 90% of the world exports. Argentina
makes the largest groundnut exporter to the world. The major countries that satisfy
their domestic consumption demand by importing groundnuts are:

Belgium


United States

France


Germany

United Kingdom


Ireland

Sweden


Italy

Indonesia


Netherlands

Canada


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 Malaysia  Philippines
 Singapore  Japan


13.3 GROUNDNUT PRODUCING COUNTRIES



Groundnut is one of the vastly produced oilseed crop in the world as it is cultivated in
more than 100 countries in the world and that is why it is referred to as a universal
crop. The areas in the tropical belt of the earth enjoy the major share in this groundnut
crop production as this type of weather conditions suit well to it. It is estimated that
around 65% of the crop produced in the world is crushed to extract groundnut oil and
the rest is used in making other edible products.

The world production of groundnut seeds hovers around 34 million tons per year in the
current scenario. The groundnut oil is produced to an extent of around 8 million tons.
The major producers of groundnut in 2005 along with their production figures are


China (14408500 tons)



India (5900000 tons)



Nigeria(2937000 tons)



United States of America (2112700
tons)


Indonesia (1469000 tons)



Sudan (1200000 tons)



Senegal (820569 tons)



Myanmar (715000 tons)



Argentina (593000 tons)



Vietnam (453000 tons)




Chad (450000 tons)



Ghana (389649 tons)



Congo (368110 tons)



Guinea (300000 tons)



Brazil (291966 tons)



Burkina Faso (245307 tons)



Cameroon (225000 tons)



Egypt (190000 tons)



Mali (163900 tons)



Malawi (161162 tons)




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In context of the production of groundnut oil, China again tops the chart with a
production of around 2.5 million tons India following with the production of around 2
million tons. The other regions where groundnut oil is produced includes sub-Saharan
African countries and central and southern America. The maximum area that is used for
the production of this oilseed is bagged by India with around 8 million hectares that
accounts up to 30% share in the total area of around 26.5 million hectares. The country
that gets maximum yield from the groundnut crop is USA which has a yield of
approximately 3540 Kg/ hectare. The world production has been in the up- trend since
last decade and still, it is rising steadily.


13.4 PRODUCTION OF GROUNDNUT IN INDIA

India has been producing groundnut since it has been introduced in Asia in the 16th
century. The weather in the Indian subcontinent suited well to the crop and India
transformed into an important contributor to the world production. The country ranks
2nd in the world groundnut production scenario with an annual groundnut seed
production of 5.9 million tons and annual groundnut oil production of 1.5 million tons in
2007. Also, India has the maximum area covered under groundnut cultivation. The
major states in India that are indulged in the production of this crop along with their
production figures are:


Gujarat (2.5 million tons)



Tamil Nadu (1 million tons)



Andhra Pradesh (1 million tons)



Karnataka (0.5 million tons)



Maharashtra (0.5 million tons)



Madhya Pradesh



Orissa



Rajasthan




The Indian production and area covered is largely concentrated in the above-mentioned
states. Today, groundnut has a share of approximately 25% in the total Indian oilseed
production. But this share is constantly reducing since India got independent, as it was



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around 70% in 1950s. A quick summary of area under cultivation, production and yield

of groundnut crop is provided in the tables below:

Year Wise Area under Cultivation of Groundnut in India





























Year Wise Production of Groundnut in India





























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The inferences from the above data sets are that:


a. The average production per year had been to the tune of 5.95 million tones.



b. Nevertheless, the variation in average production has been high with a co-efficient of
variation of almost 27%.


13.5 INDIAN GROUNDNUT MARKET



India has been a land where oilseeds have much importance than any other crop.
Groundnut constitutes one of the major oil seed in India. As already mentioned, it
accounts to about 25% share in the total oilseeds production in India. The country
produces around 6 million tons of groundnuts annually; Gujarat being the leader in the
production of the crop producing over 40% of the crop produced India. The groundnut
oil production in India hovers around 1.5 million tons per year. The production of
groundnut seed in the country has shown fluctuations quite often largely due to the
monsoon behavior. India places 2nd in the world groundnut consumption list. The
country actually consumes all most all of its groundnut yield produced that is around
30% of the world„s total consumption. The main demand of groundnut and derivatives
generate from the western and southern parts of the country. This consumption pattern
of the country contracts the Indian groundnut export size and does not allow it to gain
dominance over the world market even though a high production level. Earlier it was an
important exporter of groundnut and its by-products in 1970s. But with time it lost all its
importance due to its high prices and increasing competitiveness. The Indian exports of
groundnut oil to the world showed a fluctuating trend in the last decade. In 2003-04
India exported around 1 lakh tons of groundnut oil due to a crop failure in Argentina and
Senegal. The imports in the country are second to none as the production level is quite
sufficient for the domestic demand level in the country.






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13.5.1 MARKET INFLUENCING FACTORS


Weather conditions in major groundnut producing regions.



Monsoon status in the country.



Price fluctuations of the other competitive edible oils.



International price movements.



High consumption in festive seasons and celebrations.



13.5.2 MAJOR TRADING CENTERS OF GROUNDNUT


The major trading centers of groundnut and derivatives in India are:



Rajkot (Gujarat)

Mumbai (Maharashtra)


Ahmedabad (Gujarat)

Indore (Madhya Pradesh)


Gondal (Gujarat)

Delhi


Junagarh (Gujarat)

Adoni (Andhra Pradesh)


Also, groundnut is traded in Indian commodity exchanges namely, NCDEX, MCX, NMCE




















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14. SOME INTERESTING FACTS



Commodities in which future contracts are successful are commodities those are
not protected through government policies; (Example: Gold/ Silver/ Cotton/ Jute)


and trade constituents of these commodities are not complaining too. This should
act as an eye-opener to the policy makers to leave pricing and price risk
management to the market forces rather than to administered mechanisms alone.
Any economy grows when the constituents willingly accept the risk for better
returns; if risks are not compensated with adequate or more returns, economic
activity will come into a standstill.



Worldwide, Derivatives volumes of non-US exchanges in the last decade, has been
increasing as compared to the US Exchanges.



Commodities are less volatile compared to equity market, but more volatile as
compared to G-Sec's.



The basic idea of Commodity markets is to encourage farmers to choose cropping
pattern based on future and not past prices.



Industry in India runs the raw material price risk, going forward they can hedge
this risk.



Commodities Exchanges are working with banks to provide liquidity to retail
investors against holdings such as bullion, cotton or any edible oil, much like loan

against shares.





















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15. 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 benefited from it. But for this to happen one has to take initiative to
standardize and popularize the Commodity Market.







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16. ANNEXURE1: COMMONLY USED TERMS IN
COMMODITY MARKET




Accruals:- Commodities on hand ready for shipment, storage and manufacture




Arbitragers: - Arbitragers are interested in making purchase and sale in different
markets at the same time to profit from price discrepancy between the two

markets.




At the Market: - An order to buy or sell at the best price possible at the time an
order reaches the trading pit.




Basis: - Basis is the difference between the cash price of an asset and futures
price of the underlying asset. Basis can be negative or positive depending on the

prices prevailing in the cash and futures.




Basis grade: - Specific grade or grades named in the exchanges future contract.
The other grades deliverable are subject to price of underlying futures




Baskets: - Basket options are options on portfolios of underlying assets. The
underlying asset is usually a weighted average of a basket of assets. Equity index

options are a form of basket options.


Bear: - A person who expects prices to go lower.




Bid: - A bid subject to immediate acceptance made on the floor of exchange to
buy a definite number of futures contracts at a specific price.


Breaking: - A quick decline in price.



Bulging: - A quick increase in price.



Bull: - A person who expects prices to go higher.




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Buy on Close: - To buy at the end of trading session at the price within the closing
range.



Buy on opening: - To buy at the beginning of trading session at a price within the
opening range.



Call: - An option that gives the buyer the right to a long position in the underlying
futures at a specific price, the call writer (seller) may be assigned a short position
in the underlying futures if the buyer exercises the call.



Cash commodity: - The actual physical product on which a futures contract is
based. This product can include agricultural commodities, financial instruments
and the cash equivalent of index futures.



Close: - The period at the end of trading session officially designated by exchange during
which all transactions are considered made “at the close”.



Closing price: - The price (or price range) recorded during the period designated by the
exchange as the official close.



Commission house: - A concern that buys and sells actual commodities or futures
contract for the accounts of customers.



Consumption Commodity: - Consumption commodities are held mainly for consumption
purpose. E.g. Oil, steel



Cover: - The cancellation of the short position in any futures contract buys the purchase
of an equal quantity of the same futures contract.



Cross hedge: - When a cash commodity is hedged by using futures contract of other
commodity.



Day orders: - Orders at a limited price which are understood to be good for the day
unless expressly designated as an open order or “good till canceled” order.



Delivery: - The tender and receipt of actual commodity, or in case of agriculture
commodities, warehouse receipts covering such commodity, in settlement of
futures contract. Some contracts settle in cash (cash delivery). In which case open
positions are marked to market on last day of contract based on cash market
close.



Delivery month: - Specified month within which delivery may be made under the
terms of futures contract.


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Delivery notice: - A notice for a clearing member‟s intention to deliver a stated
quantity of commodity in settlement of a short futures position.




Derivatives: - These are financial contracts, which derive their value from an
underlying asset. (Underlying assets can be equity, commodity, foreign exchange,


interest rates, real estate or any other asset.) Four types of derivatives are trades
forward, futures, options and swaps. Derivatives can be traded either in an
exchange or over the counter.



Differentials: - The premium paid for grades batter than the basis grade and the
discounts allowed for the grades. These differentials are fixed by the contract

terms on most exchanges.


Exchange: - Central market place for buyers and sellers.



Standardized contracts ensure that the prices mean the same to everyone in the
market. The prices in an exchange are determined in the form of a continuous
auction by members who are acting on behalf of their clients, companies or
themselves.



Forward contract: - It is an agreement between two parties to buy or sell an
asset at a future date for price agreed upon while signing agreement. Forward


contract is not traded on an exchange. This is oldest form of derivative contract. It
is traded in OTC Market. Not on an exchange. Size of forward contract is
customized as per the terms of agreement between buyer and seller. The contract
price of forward contract is not transparent, as it is not publicly disclosed. Here
valuation of open position is not calculated on a daily basis and there is no
requirement of MTM. Liquidity is the measure of frequency of trades that occur in
a particular commodity forward contract is less liquid due to its customized nature.
In forward contracts, counter- party risk is high due to customized & bilateral
nature of the transaction.





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Forward contract is not regulated by any exchange. Forward contract is generally
settled by physical delivery. In this case delivery is carried out at delivery center
specified in the customized bilateral agreement.


Futures Contract:- It is an agreement between two parties to buy or sell a
specified and standardized quantity and quality of an asset at certain time in the


future at price agreed upon at the time of entering in to contract on the futures
exchange. It is entered on centralized trading platform of exchange. It is
standardized in terms of quantity as specified by exchange.


Contract price of futures contract is transparent as it is available on centralized
trading screen of the exchange. Here valuation of Mark-to-Mark position is
calculated as per the official closing price on daily basis and MTM margin
requirement exists. Futures contract is more liquid as it is traded on the exchange.
In futures contracts the clearing-house becomes the counter party to each
transaction, which is called novation. Therefore, counter party risk is almost
eliminated. A regulatory authority and the exchange regulate futures contract.
Futures contract is generally cash settled but option of physical settlement is
available. Delivery tendered in case of futures contract should be of standard
quantity and quality as specified by the exchange.



Futures commission merchant: - A broker who is permitted to accept the
orders to buy and sale futures contracts for the consumers.




Futures Funds: - Usually limited partnerships for investors who prefer to
participate in the futures market by buying shares in a fund managed by

professional traders or commodity trading advisors.




Futures Market:-It facilitates buying and selling of standardized contractual
agreements (for future delivery) of underlying asset as the specific commodity and

not the physical commodity itself.






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The formulation of futures contract is very specific regarding the quality of the
commodity, the quantity to be delivered and date for delivery. However it does not


involve immediate transfer of ownership of commodity, unless resulting in
delivery. Thus, in futures markets, commodities can be bought or sold irrespective
of whether one has possession of the underlying commodity or not. The futures
market trade in futures contracts primarily for the purpose of risk management
that is hedging on commodity stocks or forward buyers and sellers. Most of these
contracts are squared off before maturity and rarely end in deliveries.



Hedging: - Means taking a position in futures market that is opposite to position
in the physical market with the objective of reducing or limiting risk associated

with price.




In the money: - In call options when strike price is below the price of underlying
futures. In put options, when the strike price is above the underlying futures. In-


the-money options are the most expensive options because the premium includes
intrinsic value.



Index Futures: - Futures contracts based on indexes such as the S & P 500 or
Value Line Index. These are the cash settlement contracts.




Investment Commodities: - An investment commodity is generally held for
investment purpose. e.g. Gold, Silver




Limit: - The maximum daily price change above or below the price close in a
specific futures market. Trading limits may be changed during periods of unusually

high market activity.




Limit order: - An order given to a broker by a customer who has some
restrictions upon its execution, such as price or time.




Liquidation: - A transaction made in reducing or closing out a long or short
position, but more often used by the trade to mean a reduction or closing out of

long position.


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Local: - Independent trader who trades his/her own money on the floor of the
exchanges. Some local act as a brokers as well, but are subject to certain rules

that protect customer orders.




Long: - (1) The buying side of an open futures contract or futures option; (2) a
trader whose net position in the futures or options market shows an excess of

open purchases over open sales.




Margin: - Cash or equivalent posted as guarantee of fulfillment of a futures
contract (not a down payment).




Margin call: - Demand for additional funds or equivalent because of adverse price
movement or some other contingency.




Market to Market: - The practice of crediting or debating a trader‟s account
based on daily closing prices of the futures contracts he is long or short.


Market order: - An order for immediate execution at the best available price.



Nearby: - The futures contract closest to expiration.




Net position: - The difference between the open contracts long and the open
contracts short held in any commodity by any individual or group.


Offer: - An offer indicating willingness to sell at a given price (opposite of bid).



On opening: - A term used to specify execution of an order during the opening.




Open contracts: - Contracts which have been brought or sold without the
transaction having been completed by subsequent sale, repurchase or actual

delivery or receipt of commodity.




Open interest: - The number of “open contracts”. It refers to unliquidated
purchases or sales and never to their combined total.





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Option: - It gives right but not the obligation to the option owner, to buy an
underlying asset at specific price at specific time in the future.




Out-of-the money: - Option calls with the strike prices above the price of the
underlying futures, and puts with strike prices below the price of the underlying

futures.




Over the counter: - It is alternative trading platform, linked to network of
dealers who do not physically meet but instead communicates through a network

of phones & computers.




Pit: - An octagonal platform on the trading floor of an exchange, consisting of
steps upon which traders and brokers stand while trading (if circular called ring).




Point: - The minimum unit in which changes in futures prices may be expressed
(minimum price fluctuation may be in multiples of points).


Position: - An interest in the market in the form of open commodities.




Premium: - The amount by which a given futures contract‟s price or commodity‟s
quality exceeds that of another contract or commodity (opposite of discount). In


options, the price of a call or put, which the buyer initially pays to the option writer
(seller).



Price limit: - The maximum fluctuation in price of futures contract permitted
during one trading session, as fixed by the rules of a contract market.




Purchase and sales statement: - A statement sent by FMC to a customer when
his futures option has been reduced or closed out (also called „P and S”)




Put: - In options the buyer of a put has the right to continue a short position in an
underlying futures contract at the strike price until the option expires; the seller


(writer) of the put obligates himself to take a long position in the futures at the
strike price if the buyer exercises his put.



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Range: - The difference between high and low price of the futures contract during
a given period.




Ratio hedging: - Hedging a cash position with futures on a less or more than
one-for-one basis.


Reaction: - The downward tendency of a commodity after an advance.




Round turn: - The execution of the same customer of a purchase transaction and
a sales transaction which offset each other.




Round turn commission: - The cost to the customer for executing a futures
contract which is charged only when the position is liquidated.




Scalping: - For floor traders, the practice of trading in and out of contracts
through out the trading day in a hopes for making a series of small profits.




Settlement price: - The official daily closing price of futures contract, set by the
exchange for the purpose of setting margins accounts.




Short: - (1) The selling of an option futures contract. (2) A trader whose net
position in the futures market shows an excess of open sales over open purchases.




Speculator: - Speculator is an additional buyer of the commodities whenever it
seems that market prices are lower than they should be.




Spot Markets:-Here commodities are physically brought or sold on a negotiated
basis.




Spot price: - The price at which the spot or cash commodity is selling on the cash
or spot market.


Spread: - Spread is the difference in prices of two futures contracts.




Striking price: - In options, the price at which a futures position will be
established if the buyer exercises (also called strike or exercise price).


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Swap: - It is an agreement between two parties to exchange different streams of
cash flows in future according to predetermined terms. The two commonly used

swaps are :


 Interest rate swaps: These entail swapping only the interest related cash flows
between the parties in the same currency.

 Currency swaps: These entail swapping both principal and interest between the
parties, with the cash flows in one direction being in a different currency than
those in the opposite direction.


Swaptions: Swaptions are options to buy or sell a swap that will become
operative at the expiry of the options. Thus a swaption is an option on a forward

swap.




Technical analysis (charting): - In price forecasting, the use of charts and
other devices to analyze price-change patters and changes in volume and open

interest to predict future market trends (opposite of fundamental analysis).




Time value: - In options the value of premium is based on the amount of time
left before the contract expires and the volatility of the underlying futures


contract. Time value represents the portion of the premium in excess of intrinsic
value. Time value diminishes as the expiration of the options draws near and/or if
the underlying futures become less volatile.



Volume of trading (or sales): - A simple addition of successive futures
transactions (a transaction consists of a purchase and matching sale).


Writer: - A sealer of an option who collects the premium payment from the buyer.















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S
T
E
V
E
N
S

B
U
S
I
N
E
S
S

S
C
H
O
O
L








B
A
T
C
H
:

2
0
0
9
-
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Comparison of India And USA commodity on the Bases of their Consumption, Production and Prod/Cons Ratio.



India US India US

India

USA

India Consumption US consumption world total volume Prod/cons Prod/cons Production Production

volume rank volume rank of world % of Word %

ratio ratio

Metals

aluminum 1021 8 7,145 2 2.869428 20.08038 35,582 1.014 0.426 1035.294 3043.77
copper 498 11 2,685 2 2.626028 14.15841 18,964 0.078 0.502 38.844 1347.87
lead 101 15 1,643 2 1.180734 19.20739 8,554 0.059 0.316 5.959 519.188
nickel 15 17 168 3 0.927644 10.38961 1,617 0 0 0 0
tin 12 7 58 2 2.469136 11.93416 486 0 0 0 0
zinc 425 8 1,524 2 2.616029 9.380771 16,246 1.402 0.81 595.85 1234.44
iron ore 61,890 5 59,982 6 4.353417 4.219206 1,421,642 2.055 0.96 127184 57582.72
steel production 46,122 7 102,710 3 3.743116 8.335619 1,232,182

0 0

0 0
Energy

coal 215 3 642 2 7.138114 21.31474 3,012 0.951 1.06 204.465 680.52
oil 104 7 958 1 3.233831 29.78856 3,216 0.368 0.421 38.272 403.318
Agriculture

wheat 80,482 2 31,850 4 13.45248 5.323692 598,269 1.253 1.866 100843.9 59432.1
rice 102,142 2 4,624 12 25.52848 1.155682 400,110 1.086 1.652 110926.2 7638.848
maize 16,140 6 251,231 1 2.337007 36.37723 690,627 1.103 1.317 17802.42 330871.2
soybeans 8,050 5 48,238 1 4.122202 24.70146 195,284 1.003 1.543 8074.15 74431.23
soy oil 1,900 4 8,243 1 6.402912 27.77853 29,674 0.693 1.108 1316.7 9133.244
palm oil 4,135 2 169 37 15.01889 0.613831 27,532 NA 1.397

236.093
sugar 31,020 1 24,388 2 16.13784 12.68761 192,219 1.217 0.992 37751.34 24192.9
tea 761 1 154 7 19.09182 3.863522 3,986 1.294 0 984.734 0
coffee 65 27 1,333 1 0.815763 16.72942 7,968 4.958 0.005 322.27 6.665
cotton 3,032 2 1,402 5 15.60393 7.215275 19,431 1.002 3.143 3038.064 4406.486
rubber 782 4 1,246 2 8.159432 13.00083 9,584 1.106 1.16 864.892 1445.36





















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DYNAMICS OF INDIAN COMMODITY MARKET
17. REFERENCE

http://www.fmc.gov.in/


http://www.eurojournals.com/finance.htm



http://www.scribd.com/doc/15961806/Commodity-Market-Report



http://www.coolavenues.com/know/fin/tushar_3.php3



http://finance.indiamart.com/markets/commodity/nmceil.html



http://business.mapsofindia.com/india-market/commodity.html



http://www.tradingpicks.com/beginners_guide.htm



http://www.indiancommodity.com/lic.htm



http://ncdex.com/Aboutus/profile.aspx



http://www.indiancommodity.com/trader.htm



http://finance.indiamart.com/markets/commodity/traders_derivatives_market.htm l



http://business.mapsofindia.com/india-market/commodity.html


http://isid.org.in/pdf/WP1003.PDF



http://www.ftkmc.com/markets-commodities.html



http://www.banknetindia.com/banking/80628.htm



http://www.religarecommodities.com/class_roomIntro.asp



http://www.oxfordfutures.com/futures-education/futures-fundamentals/how-the-
market-works.htm


http://www.smcindiaonline.com/commo_trading_faq.asp


http://www.docstoc.com/docs/32951953/Commodity-Futures-Market-in-India



http://www.fmc.gov.in/htmldocs/Abhijit%20Sen%20Report.pdf


















STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page
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