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Modern commodity exchanges date back to the trading of rice futures in the 17th century in
Osaka, Japan, although the principles that underpin commodity futures trading and the
function of commodity markets are still older. The first recorded account of derivative
contracts can be traced to the ancient Greek philosopher Thales of Miletus in Greece, who,
during the winter, negotiated what were essentially called options on oil presses for the spring
olive harvest. The Spanish dramatist Lope de Vega reported that in the 17th century options
and futures were traded on the Amsterdam Bourse soon after it was opened.

Futures trading is a natural application to the problems of

maintaining a year-round supply of seasonal products like agricultural crops. Exchanging
traded futures and options provide several economic benefits, including the ability to shift or
otherwise manage the price risk of market or tangible positions. With the liberalization of
agricultural trade in many countries, and the withdrawal of Government support to
agricultural producers there is a new need for price discovery and even physical trading
mechanisms, a need that can often be met by commodity exchanges. Hence, the rapid
creation of new commodity exchanges, and the expansion of existing ones have increased
over the past decade. At present, there are major commodity exchanges in over twenty
countries, including the United States, the United Kingdom, Germany, France, Japan, the
Republic of Korea, Brazil, Australia and Singapore. A large number of brand new exchanges
have been created during the past decade in developing countries, but many of them have
A 'commodity market' is a market that trades in primary rather than manufactured
products. Soft commodities are agricultural products such as wheat, coffee, cocoa and sugar.
Hard commodities are mined, such as gold and oil Investors access about 50 major
commodity markets worldwide with purely financial transactions increasingly outnumbering
physical trades in which goods are delivered. Futures contracts are the oldest way of
investing in commodities. Futures are secured by physical assets. Commodity markets can
include physical trading and derivatives trading using spot prices, forwards, futures,
and options on futures. Farmers have used a simple form of derivative trading in the
commodity market for centuries for price risk management.
A financial derivative is a financial instrument whose value is derived from a commodity
termed an underlie .Derivatives are either exchange-traded or over-the-counter (OTC). An
increasing number of derivatives are traded via clearing houses some with Central


Counterparty Clearing, which provide clearing and settlement services on a futures exchange,
as well as off-exchange in the OTC market.

Commodity futures markets have a long history in India. The first

organised futures market, for various types of cotton, appeared in 1921. In the 1940s, trading
in forward and futures contracts as well as options was either outlawed or rendered
impossible through price controls. This situation remained until 1952, when the Government
passed the Forward Contracts Regulation Act, which to this date controls all transferable
forward contracts and futures. During the 1960s, the Indian Government either banned or
suspended futures trading in several commodities. The Government policy slackened in the
late 1970s and recommendations to revive futures trading in a wide range of commodities
were made. With the full convertibility of the rupee, the ongoing process of economic
liberalisation and the Indian economys opening to the world market, the role of futures
markets in India is being reconsidered. Most contracts being traded are unique in the world.
Although some are clearly domestic-oriented, others (such as raw jute, pepper, and oilseeds)
have the potential to become of regional or even international importance. Two of the betterknown commodity exchanges are the Bombay Oilseeds and Oils Exchange, founded in 1950,
and the International Peppers Futures Exchange, in 1997.

Chinas first commodity exchange was established in 1990 and at least forty had
appeared by 1993, as China accelerated the transformation from a centrally planned to
a market-oriented economy.
Futures exchanges in Japan have also gone through a process of consolidation since
1993, and only 10 remained in 1999 (down from 17 just five years earlier).. The
biggest is The Tokyo Commodity Exchange (TOCOM), created in November 1984.
Malaysia hosts two futures and options exchanges, which hold the 50th and 51st place
in the 2000 ranking of world futures exchanges by trading volume. Singapore is home
to the Singapore Exchange (SGX), which was formed in 1999 by the merger of two
well-established exchanges, the Stock Exchange of Singapore (SES) and Singapore

The modern commodity market originated during the 19th

century when American farmers began using "forward" contracts. These were agreements to
deliver agricultural products at a future date in return for a guaranteed price. In the form of
standardized futures contracts traded on exchanges like the Chicago Board of Trade, those
forward contracts are the primary securities traded on the commodity market.



The main aim of this paper is to seek whether commodity exchanges and their twin tools of
Futures and Options can bring about price stabilization in agriculture commodities. It is
generally argued that futures trading, among other things, reduces the seasonal price
variations in agriculture commodities and also helps in discovery of spot (ready) prices. The
cropping pattern and sowing decisions are also said to be influenced by futures trading in

This study is based upon these following objectives


To build awareness of the solutions that commodity exchanges provide, and their track
record in doing so, among key national, regional and international stakeholders including
Governments, regulators, the private sector, civil society and the media.
Accumulation of knowledge:
To produce a high-quality report that adds to the existing knowledge base
establishing within a coherent framework the enduring impacts that commodity exchanges
have made in key markets over time.
Promotion of best practice: To identify innovative and effective practices that can be held up
as models for or drivers of embedding a pro-growth, pro-development symbiosis within
exchange and market development
How Seasonal variation in prices of agricultural commodities are reduced by trading
at the Commodity exchange
Short-term (weekly or daily) price variations can be reduced by futures and options
To know The definite relationship between futures prices and actual commodity prices
(Spot or ready prices)
How Futures trading influence the long-term price trend (price stabilization) in any
How Futures trading influence the sowing decisions and cropping pattern.

Apart from these, the study also traces the problems of Indian Commodity exchanges with
respect to non-transparency of prices, product standardization etc. It further attempts to find
out the nature and volume of the commodity trading pattern in India is also assessed.


First of all this report fulfils the completion of our 2 year full time MFC course
Then this report needed to find out how the commodity exchanges play a major role
for facilitating agricultural growth in India.
The most important and foremost requirement of this report is to know the different
mechanisms formulated by the commodity exchanges for the benefits of the
agricultural sector. And basically the interrelation as well as the interaction between



This chapter deals with the description of the study area, sampling procedure adopted,
method of survey, nature and sources of data.
The present study pertains to all six nationalised commodity exchanges namely, National
Multi-commodity Exchange Ltd.(NMCE), Multi Commodity Exchange Of India Ltd.(MCX),
National Commodity and Derivative Exchange Ltd.(NCDEX), Indian Commodity
Exchange(ICEX), Universal Commodity Exchange(UCE) and ACE Commodity and
Derivative Exchange Ltd(ACE), and different role played by them
For the present study five major agricultural commodities currently traded in the
commodity exchanges were selected, namely potato, almond, chana, wheat, soybean. Which
were selected on the basis of their volume of trade.
Secondary data thus collected from the official websites of different nationalised
commodity exchanges and other websites as well as from various text books and magazines,


The present study did not consider regional commodity exchanges due to difficulties
in obtaining data.
Can be a bifold belted sword. Low allowance requirements can animate poor money
management, arch to boundless accident taking. Not alone are profits added but so are
Lack of knowledge among investors.
Lack of governance.
Insufficient information to interested parties.



Commodity trading is prevailing in India since mid-19th century. The shape and
structure of trading has undergone a sea change in terms of nature of commodities
traded, volume of trade, clearing, settlement & guarantee system, transparency in
trade, governance and regulation. The commodities trading through exchanges have
traditionally been limited to single commodity exchanges until the Union Government
decided in favour of national-level multi-commodity exchanges. It has been observed
at global level that the commodities have witnessed much more volatile price
situations than the prices in the market for financial instruments.
The relationship between spot and futures markets in price discovery has been an
important area of research. Garbade & Silber in their article Price movements
and price discovery in futures and cash markets (1982) tested whether futures
prices lead spot prices. Correlation of basis (spot prices futures prices) of the previous
time period with spot or futures prices of the current time period was empirically


tested. If basis innovations forecast futures returns, then the spot market leads the
futures market. If basis innovations forecast spot returns, then the futures market leads
the spot market. Susan Thomas and Kiran Karande used it for castor seed market in
M. Thiripalraju & T.P. Madhusoodanan in their paper Commodity Futures
prices in India: Evidence on Forecast Power, Price Formation and Inter-Market
Feedback found the efficiency of price formation in the Indian commodity futures
markets of Pepper and Castor seeds. Susan Thomas of IGIDR, Mumbai has in her
paper Agricultural Commodity Markets in India shown some evidence of role
played by futures market in price stabilisation. Her study is based on Mujaffarnagar
jaggery futures market. In her paper with D Balasundaram on cotton futures it has
been concluded that the futures market benefit the cotton economy by increasing the
efficiency of price discovery, in addition to enabling the reduction of price risk.
Futures and options market lead to destabilising speculation and malpractice if not
properly regulated. The Gupta Commit- tee (1997) on Hedging through
international commodity exchanges noted:

The need for regulation of the markets arises when such regulations
increase the allocative efficiency of these markets from what would prevail under no
regulation at all. Allocative efficiency of the futures and options market is reflected by the
ability of these markets to perform their price discovery and risk shifting functions


Commodity-based money and commodity markets in a crude early form are believed to have
originated in Sumer between 4500 BC and 4000 BC. Sumerians first used clay tokens sealed
in a clay vessel, then clay writing tablets to represent the amountfor example, the number
of goats, to be delivered. These promises of time and date of delivery resemble future
Early civilizations variously used pigs, rare seashells, or other items
as commodity money. Since that time traders have sought ways to simplify and standardize
trade contracts.
Gold and silver markets evolved in classical civilizations. At first the
precious metals were valued for their beauty and intrinsic worth and were associated with


royalty. In time, they were used for trading and were exchanged for other goods and
commodities, or for payments of labour. Gold, measured out, then became money. Gold's
scarcity, unique density and the way it could be easily melted, shaped, and measured made it
a natural trading asset.
Beginning in the late 10th century, commodity markets grew as a
mechanism for allocating goods, labour, land and capital across Europe. Between the late
11th and the late 13th century, English urbanization, regional specialization, expanded and
improved infrastructure, the increased use of coinage and the proliferation of markets and
fairs were evidence of commercialization. The spread of markets is illustrated by the 1466
installation of reliable scales in the villages of Sloten and Osdorp so villagers no longer had
to travel to Haarlem or Amsterdam to weigh their locally produced cheese and butter.
Indeed, the Amsterdam Stock Exchange, often cited as the first stock
exchange, originated as a market for the exchange of commodities. Early trading on
the Amsterdam Stock Exchange often involved the use of very sophisticated contracts,
including short sales, forward contracts, and options. "Trading took place at the Amsterdam
Bourse, an open aired venue, which was created as a commodity exchange in 1530 and
rebuilt in 1608. Commodity exchanges themselves were a relatively recent invention, existing
in only a handful of cities.
In 1864, in the United States, wheat, corn, cattle, and pigs were
widely traded using standard instruments on the Chicago Board of Trade (CBOT), the world's
oldest futures and options exchange. Other food commodities were added to the Commodity
Exchange Act and traded through CBOT in the 1930s and 1940s, expanding the list from
grains to include rice, mill feeds, butter, eggs, Irish potatoes and soybeans. Successful
commodity markets require broad consensus on product variations to make each commodity
acceptable for trading, such as the purity of gold in bullion. Classical civilizations built
complex global markets trading gold or silver for spices, cloth, wood and weapons, most of
which had standards of quality and timeliness.
Through the 19th century "the exchanges became effective
spokesmen for, and innovators of, improvements in transportation, warehousing, and
financing, which paved the way to expanded interstate and international trade.

Trading with lagging indicators.-As a Broker, I get to see the whole range, from
traders making their first trade, to traders making their last trade, and everything in between.
The beginner traders almost always start along the same path. Using MACD, Williams %R,
Stochastic, RSI and most other indicators you can find to predict price is a very common
mistake. These indicators often follow price movement, not predict future price movement.


Sure when looking at a chart in hindsight, they match up great, but in real time they are
lagging. This style of trading will more than likely lead to losses.

Trading Undercapitalized.-This mistake should be placed in the premarket (before

opening an account) because an account shouldnt even be opened without proper
capitalization. Assuming you did open an account, trade within limits. Each Trader has
different risk tolerance, but across the board, no one should be trading with funds they cannot
afford to lose. When trading with limited funds or overleveraged 1 day can end your trading
career before it began. Cannon offers aggressive day trading margins, as do our competitors,
but by no means do we endorse taking advantage of all that leverage.. When Traders take
losses psychology shifts, when a shift in psychology meets lack of funds or overleveraged
trading decisions are affected. Trading on low balance or outside reasonable limits is a sure
recipe for losses.


Overtrading-This mistake is common among beginner and advanced traders. Until it

is overcame, significant profits will be lost to commissions. More importantly, your trading
profit potential will be limited. Whether trading 1 lot or 1000 lots per order there is still only
so many moves a market can make in a given trading period. Intraday trading typically results
in three moves or less. Sure there are days that bounce between the high and the low all day,
but that is one move, sideways. Other days include trend days (one direction), or 3 move
days, which I believe to be most common. A 3 move day is up then down (usually a
retracement) then up, or down then up then down. A two move day would be up then down or
down then up. If most days fall under these formats, what reason would a 1 lot trader have to
make 100 trades? Not a good one, Ill tell you that.


Losing Days-About every Trader has losing days, it is part of the business. The key is
to limit losses, similarly to trading. You should monitor your account balance like you
monitor your trades. When you see it going the wrong way, you should become impatient and
look to cut it short. There are infinite factors why you are having a losing day, the fact is you
are and you need to know in advance where the bleeding stops. Many skilled and professional
traders regularly take profits from the market day in and day out only to blow the account up
the one day the market doesnt react the way they expect. Often ego or anger can block
rational thoughts and averaging in and reversing is all too easy. Having hard rules like
maximum lot size and maximum daily loss can preserve your capital and prevent losing days
from burying your account.


Chasing the market-There are so many mistakes, it is hard to only choose five, but
chasing the market will conclude this list. Markets do not move in straight lines. Aside from
major news there are very few large moves without retracements. Depending on the market a
big move can be calculated by taking the average daily range and multiplying by 2 or 3.
Market conditions are constantly changing, but in all circumstances, when a market makes a

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big move, it is more likely to retrace or reverse before continuing. Traders that buy the ES
after 15 points up or sell gold after a $50 move down are behind the ball and more times than
not will be stopped out with a loss. Wait for the retracement or play the other side, this will
help limit loses by chasing.


Farming as an activity contributes nearly 1/6th to our national GDP and a major
portion of our population is dependent on for livelihood. It has risen the challenge of making
India largely self sufficient in providing food for a growing population. To make farming
competitive and profitable there is an urgent need to step up investment, both public and
private, in agro technology development and creation and modernisation of existing agribusiness infra. Establishing agricultural research institute in Assam and Jharkhand, in
addition to this an amount of Rs.100crores is being set aside for setting of an
Agritech Infrastructure Fund. And also Agricultural Universities along with Horticulture
Universities. And a sum of Rs.200crores has been allocated for this.
Deteriorating soil health has been a cause of concern and leads to sub optimal utilisation
of farming resources. Government will initiate a scheme to provide to every farmer a soil
health card in a mission mode. And a sum of Rs.100crores for this purpose and an additional
Rs.56crores to set up 100 Mobile Soil Testing Laboratories across the country. There
have also been growing concerns about imbalance in the utilisation of different types of
fertilizers resulting deteriorating of the soil.
Other Developmental Steps Include: Agricultural Credit: - A target of Rs.8lakh crore has been set for agricultural credit
during 2014-15.
Interest Subvention Scheme for Short Term Crop Loans: - Under this scheme, the
banks are extending loans to farmers at concessional rate of 7%.
Rural Infrastructure Development Fund (RIDF):- NABARD operates RIDF, out
of the priority sector lending shortfall of the banks, which helps in the creation of
Infrastructure in agriculture and rural sectors across the country.
Warehouse Infrastructure Fund: - Increasing the warehousing capacity for
increasing the shelf life of agricultural produces and there by the earning capacity of
the firms is utmost importance. Keeping in view of Scientific Warehousing
Infrastructure in the country.

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Creation of Long Term Rural Credit Fund (LTRCF):- In order to give a boost to
long term credit in agriculture, scheme named LTRCF set up in NABARD for the
purpose of refinance support to cooperative banks and Regional Rural Banks.

Source: - Finance Bill 2014-15, By Mr. ARUN JAITLEY

(Union Finance Minister)

Background of the study

India is predominantly an agrarian economy with very high population dependence on
agriculture and allied activities. More than 90% of rural population and about 65% of total
population derive their livelihood from agriculture, directly or indirectly. Hence, the price
determination and stabilisation in prices of agriculture commodities become very significant
for sustainable growth in agriculture. It was in this perspective that the Long-term grain
policy of the Govt. of India1 emphasized that the role of public intervention should primarily
be to stabilise prices and that any system of price stabilisation must be national in scope. The
opening up of agricultural trade has forced farmers to cope with the vagaries and volatility of
international market prices.

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Apart from the role of public intervention through MSPs (mini- mum support prices)
and Procurement Price in price stabilisation of agriculture commodities, commodity
exchanges have been an effective tool in price determination and stabilisation of such
commodities. While public intervention brings about distortions in efficient price discovery,
cropping pattern and market mechanism, the role of commodity exchanges is to evolve an
efficient price discovery system along with ensuring hedging of price risks.
The High-level Committee on long-term grain policy noted:
Price instability is not merely a matter of concern from the point of view of the welfare of
producers and consumers and their incomes. There is very strong evidence from across the
world and from Indias own experience in the past that agricultural investment and growth is
adversely affected if price instability is high and, in particular, if farmers cannot be
reasonably sure that prices will remain above their costs of production
India has very large agriculture production in number of agri-commodities, which needs use
of futures and derivatives as price-risk management system. Fundamentally price you pay for
goods and services depend greatly on how well business handle risk. By using effectively
futures and derivatives, businesses can minimize risks, thus lowering cost of doing business.
Commodity players use it as a hedge mechanism as well as a means of making money. For
e.g. in the bullion markets, players hedge their risks by using futures Euro-Dollar fluctuations
and the international prices affecting it. For an agricultural country like India, with plethora
of mandis, trading in over 100 crops, the issues in price dissemination, standards, certification
and warehousing are bound to occur. Commodity Market will serve as a suitable alternative
to tackle all these problems efficiently.


Spot trading takes place mostly in regional mandis & unorganised markets. Markets are
fragmented and isolated. Reduced Government procurement activity, mostly in cereals
through MSP distorts markets in favour of food grains. Mandi trading in India is done in 140
crops through over 7500 Mandis amongst trading Farmers, licensed Traders, Brokers and
Wholesale Dealers. Mandi Inspectors issue type & quantity certificate by levying Transaction
fee and Taxes that varies between 4% and 12%. State Agricultural Marketing Boards
(SAMBs) and Mandi Board (Farmers, Traders, State) govern Mandis.
The first derivative in the world started with the commodities. Organised
futures trading started in 1865 at the Board of Trade of Chicago, followed by
other trading centres such as Kansas, Minneapolis, New York. Futures trading

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in commodities like rubber, soyabean, black pepper etc. was started in the
U.S.A after 1920. Apart from US and UK, India is the only country that had
active futures market over a long period of time. A good deal of futures trading
in cotton was done at Bombay. Other markets soon developed for oilseeds
(Gujarat & Punjab), wheat (Hapur, 1913), raw jute (Calcutta, 1912). During
WW II, futures trading in many commodities were banned under Defence of
India Rules.
Turnaround came in 1952 with the passing of Forward Contracts (Regulation)
Act (FCRA, 1952), which led to the establishment of Forward Markets
Commission (FMC) in September 1953. FMC, headquartered at Mumbai, is a
regulatory authority which is overseen by the Ministry of Consumer Affairs and
Public Distribution, Govt. of India. There are 24 commodity exchanges in the
country including recently established 4 national-level multi-commodities
Exchange is an association of members, which provides all organizational support for
carrying out futures trading in a formal environment. These exchanges are managed by the
Board of Directors, which is composed primarily of the members of the association. There
are also representatives of the government and public nominated by the Forward Markets
Commission. The majority of members of the Board have been chosen from among the
members of the Association who have trading and business interest in the exchange. The
chief executive officer and his team in day-to-day administration assist the Board. There are
different classes of members who capitalize the exchange by way of participation in the form
of equity, admission fee, security deposits, registration fee etc.
a. Ordinary Members: They are the promoters who have the right to have own account
transactions without having the right to execute transactions in the trading ring. They have to
place orders with trading members or others who have the right to trade in the exchange.

Leads to price discovery

Provides hedging option
A smart investment choice
Integrates players and markets
Improves cropping pattern (in case of commodity futures)
Reducing the impact of future uncertainties





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As has been discussed, the usefulness of a commodity exchange lies in its

institutional capacity to remove or reduce the high transaction costs often faced by entities
along commodity supply chains in developing countries. A commodity exchange reduces
transaction costs by offering services at lower cost than that which participants in the
commodity sectors would incur if they were acting outside an institutional framework. These
can include but are not limited to the costs associated with finding a suitable buyer or
seller, negotiating the terms and conditions of a contract, securing finance to fund the
transaction, managing credit, cash and product transfers, and arbitrating disputes between
contractual counterparties. Therefore, by reducing the costs incurred by the parties to a
potential transaction, a commodity exchange can stimulate trade.
Moreover, properly functioning commodity exchanges can promote more efficient
production, storage, marketing and agro-processing operations, and improved overall
agriculture sector performance. It is precisely because of these benefits that transition
and developing economies with large agricultural sectors have embraced commodity
exchanges in recent years (Seeger, 2004).
Specifically, a commodity exchange can perform one or more of a range of potential
functions exactly which functions will depend on the nature of the exchange and the
local context in which it operates. For exchanges that offer spot trade or supporting
activities, the institutional function is to facilitate trade bringing together buyers and
sellers of commodities, and then imposing a framework of rules that provides the
confidence to transact.
Robust procedures for overseeing these transactions can also trigger improvements in
the efficiency and infrastructure of commodity cash markets for example, through
the upgrading of exchange-accredited warehousing and logistics infrastructure, the
acceptance among market participants of exchange-defined product quality
specifications, and the reduction of default levels, through intermediation by the
exchange in the processing (or clearing) and settling of contracts.
Commodity exchanges offering trade in instruments such as forwards and futures
contracts also provide sector participants with a means of managing exposure to
commodity-price volatility. This is important, as world commodity prices are often
highly volatile over short time periods sometimes fluctuating by over 50 per cent
within a year. These hedging instruments can bring producers greater certainty over
the planting cycle, while enabling processors, traders and purchasers to lock in a
margin that can secure them a positive return. This allows those active in the
commodity sector to commit to investments that yield longer-term gains, and also
makes it more viable for farmers to plant higher-risk but higher-revenue crops.
Finally, where spot, forwards and futures transactions take place on a commodity
exchange, the price information those results from this trade the so-called price
discovery mechanism also performs a vital economic function. As exchange prices
come to reflect the information known about the market, they provide an accurate
reflection of the actual supply/demand situation. This provides important signals that
market participants can use to make informed production, purchasing and investment

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decisions. Furthermore, the availability of a neutral and authoritative price reference

can overcome information asymmetries that have often disadvantaged smaller or less
well-connected sector participants in the past.




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

(Bhavnagar), Steel Long (Govindgarh), Steel Flat, Tin, Zinc
Gold, Gold HNI, Gold M, i-gold, Silver, Silver HNI, Silver M
Cotton L Staple, Cotton M Staple, Cotton S Staple, Cotton Yarn,
Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E. Sour
Crude Oil
Cardamom, Jeera, Pepper, Red Chili
Areca nut, Cashew Kernel, Coffee (Robusta), Rubber
Chana, Masur, Yellow Peas
HDPE, Polypropylene(PP), PVC
Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton
Seed, Crude Palm Oil, Groundnut Oil, Kapasia Khalli, Mustard
Oil, Mustard Seed (Jaipur), Mustard Seed (Sirsa), RBD
Palmolein, Refined Soy Oil, Refined Sunflower Oil, Rice Bran
DOC, Rice Bran Refined Oil, Sesame Seed, Soymeal, Soy Bean,
Soy Seeds
Guargum, Guar Seed, Gurchaku, Mentha Oil, Potato (Agra),
Potato (Tarkeshwar),


The government of India has allowed national commodity exchanges, similar to the BSE &
NSE, to come up and let them deal in commodity derivatives in an electronic trading
environment. These exchanges are expected to offer a nation-wide anonymous, order driven;
screen based trading system for trading. The Forward Markets Commission (FMC) will
regulate these exchanges.
Consequently four commodity exchanges have been approved to commence business in this
regard. They are:


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Multi Commodity Exchange (MCX), Mumbai

National Commodity and Derivatives Exchange Ltd (NCDEX),


National Board of Trade (NBOT), Indore

National Multi Commodity Exchange (NMCE), Ahmadabad

ACE ( Ace Derivatives and Commodity Exchange Limited)

UCX (Universal Commodity Exchange Limited)

NMCE :( National Multi Commodity Exchange of India Ltd.)

NMCE is the first demutualised electronic commodity exchange of India granted the National
exchange on Govt. of India and operational since 26th Nov, 2002.
Promoters of NMCE are, Central warehousing corporation (CWC), National Agricultural
Cooperative Marketing Federation of India (NAFED), Gujarat Agro- Industries Corporation
Limited (GAICL), Gujarat state agricultural Marketing Board (GSAMB), National Institute
of Agricultural Marketing (NIAM) and Neptune Overseas Ltd. (NOL). Main equity holders
are PNB. The
Head Office of NMCE is located in Ahmadabad. There are various commodity trades on
NMCE Platform including Agro and non-agro commodities.

NCDEX (National Commodity & Derivates Exchange Ltd.)

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NCDEX is a public limited co. incorporated on April 2003 under the Companies Act, 1956; it
obtained its certificate for commencement of Business on May 9, 2003. It commenced its
operational on Dec 15, 2003. Promoters shareholders are:
Life Insurance Corporation of India (LIC),
National Bank for Agriculture and Rural Development (NABARD) and
National Stock Exchange of India (NSE)
other shareholder of NCDEX are: Canara Bank, CRISIL limited, Goldman Sachs,
Intercontinental Exchange (ICE), Indian farmers fertilizer corporation Ltd (IFFCO) and
Punjab National Bank (PNB).
NCDEX is located in Mumbai and currently facilitates trading in 57 commodities mainly in
Agro product.

MCX (Multi Commodity Exchange of India Ltd.)

Headquartered in Mumbai, MCX is a demutualised nationwide 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, Euro next, State Bank of India and its associated,
NABARD NSE, SBI Life Insurance Co. Ltd., Bank of India, Bank of Baroda, Union Bank of
India, Corporation Bank, Canara Bank, HDFC Bank, etc.
MCX is well known for bullion and metal trading platform.

ICEX (Indian Commodity Exchange Ltd.)

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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

ACE ( Ace Derivatives and Commodity Exchange Limited)

Organization Profile
As India has entered a new phase wherein its markets are opening up more, allowing
participants to be exposed to global commodity risk, there is a growing need to bridge the
current gap through more entrants in the Indian commodity exchange space.
Kotak Anchored, Ace Derivatives and Commodity Exchange Limited is a screen based online
derivatives exchange for commodities in India. Ace Commodity Exchange earlier known as
Ahmedabad Commodity Exchange has been in existence for more than 5 decades in
Commodity Business, bringing in the best and transparent Business Practices in the Indian
commodity space. The Kotak group brings in more than 25 years of financial expertise and
has pioneered many business practices existing in the financial services industry. With Ace,
Kotak Group brings to the commodity market a new, state-of-the-art trading platform which
combines the operational efficiency of global exchanges with deep domain expertise in each
commodity vertical.

Kotak Mahindra Group
A legacy built over 2 decades, Kotak Mahindra is one of Indias leading banking and
financial services organizations, offering a wide range of financial services that encompass
every sphere of life. From commercial banking, to stock broking, to mutual funds, to life
insurance, to investment banking, the group caters to the diverse financial needs of
individuals and corporate sector.


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The Haryana State Cooperative Supply & Marketing Federation Ltd. (HAFED) is an apex
State Co-operative service and marketing institution, under the patronage and sponsorship
of the Government of Haryana (India).
Other Key Shareholders
Bank of Baroda
Corporation Bank
Union Bank

UCX (Universal Commodity Exchange Limited)

Universal Commodity Exchange Limited is the next generation national level commodity
exchange for derivatives market across all commodity segments. UCX is headquartered in the
financial capital of India, Mumbai with presence in all major trading destinations across the
It aims to be one of the largest commodity derivatives exchanges ensuring price transparency
and a robust risk management & surveillance system for facilitating online trading, clearing
Universal Commodity Exchange Ltd. has received a permanent and perpetual recognition
from Govt. of India (Ministry of Consumer Affairs, Food & Public Distribution) under the
provision of FC(R)A.


National Bank for Agriculture and Rural Development ( NABARD)

National Bank for Agriculture and Rural Development ( NABARD) is an apex institution
accredited with all matters related to policy, planning and operations in the field of credit for
agriculture and other economic activities in rural areas. It promotes research in the fields of
rural banking, agriculture and rural development. Over the last 3 decades of operations
NABARD has played a pivotal role towards inclusive growth of rural areas & promoting
developmental activities.

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Indian Farmers Fertiliser Cooperative Limited (IFFCO)

IFFCO is the largest producer and marketer of fertilizers having thousands of co-operative
IDBI Bank is India's leading public sector bank which has played a
pioneering role in laying the foundations of some of the world class institutions such as
National Stock Exchange (NSE), National Securities Depository Services Ltd (NSDL), Stock
Holding Corporation India Ltd (SHCIL) and others.
Rural Electrification Corporation Limited (REC)
REC is a Navratna Central Public Sector Enterprise under Ministry of Power, was
incorporated on July 25,1969 under the Companies Act,1956. It is one of India's leading
Public Financial Institutions operating in Power Infrastructure space. It has established itself
as a strategic player in financing of entire Power Infrastructure space which includes
financing for generation, transmission, distribution and rural electrification projects, across
the country.REC was accorded the coveted "Navratna" status by
Govt. of India in 2008.
Commex Technology
Commex Technology is a technology and consulting service provider in commodity & capital
markets. Their domain expertise and management bandwidth is poised to cater to the various
initiatives planned by the exchange.UCX's business strategies along with the active support
from its strategic partners in the Bullion & Agri segments, should lead to a convergence of
large-scale processors, traders, producers & co-operative societies along with banks in the
long run and in the process- assist in the development of the Indian commodity futures

2nd largest agricultural land

At 179.9 million hectares, India holds the second largest agricultural land in the world.

Favourable climatic conditions

With 20 agri-climatic regions, all 15 major climates in the world exist in India. The country
also possesses 46 of the 60 soil types in the world.
Record production of food grains

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Total food grains production in India reached an all-time high of 259.32 million tonnes in
FY12. Rice and wheat production in the country stood at 105.3 and 94.9 million tonnes,
Largest producer of major agricultural and horticulture crops
India is the largest producer of pulses, milk, tea, cashew and jute; and the second largest
producer of wheat, rice, fruits and vegetables, sugarcane, cotton and oilseeds.
Increasing farm mechanisation
India is one of the largest manufacturers of various farm equipments like tractors, harvesters
and tillers. India manufactures one-third of tractors in the world; the number of tractors in the
country is estimated to reach 16 million by 2030 from 4 million in 2012.
Agricultural advantages of India
In 19606:-1 Food grain production: 69.3 million tonne
In 201112 Food grain production: 259.3 million tonnes

Robust demand
A large population is the key driver of demand for agricultural products
Rising urban and rural incomes have also aided demand growth
External demand has also been growing especially from key markets like the Middle East

Attractive opportunities
Increasing demand for agricultural inputs such as hybrid seeds and fertilisers
Promising opportunities in storage facilities; potential storage capacity expansion of 35
million tonnes under the 12th Five Year Plan
Competitive advantages
High proportion of agricultural land (54.7 per cent or 179.9 million hectares)
Leading producer of jute, pulses; second-largest producer of wheat, paddy, fruits and

Policy support

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Government is increasing Minimum Support Prices (MSPs) to ensure higher crop

Schemes like Rashtriya Krishi Vikas Yojana (RKVY) incentivises states to increase private
investment in agriculture and allied sectors
Launched National Food Security Mission (NFSM) to increase production of rice, wheat
and pulse


Mandi in Hindi language means market place. Traditionally, such

market places were for food and aggri-commodities. However, over time the coverage of
mandis got widened to include trading hubs for grains, vegetables, timber, gems and
diamonds; almost every tradable was included. Mandis for animals like cattle, goats, horses,
mules, camels and buffaloes, and poultry are often organised as fairs. Thus the word mandi
assumes the contours of a catch-all market place where anything is bought and sold.
In a still predominantly rural India, mandis form part of the lifeline infrastructure for the people. In most of the states/provinces in India, the Agricultural
Produce Marketing Committee(APMC) operates the wholesale market for agri-products.
Wholesale markets are segregated depending on the type of commodity handled: for instance,
for grains, pulses, vegetables, potato and onion, spices and condiments, fruits. The growing
disenchantment with the functioning of APMCs has led to relaxation of the APMC Rules and
the emergence of direct marketing in agri-commodities. These are often called farmers
markets: inthe state of Andhra Pradesh they are called Rythu bazaar and in Tamil Nadu
Uzhavar Sandhai .These markets enable the farmer to sell his produce directly to the

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consumers without the middlemen in the APMCs. Minimising intermediation and the creation
of a national common market are long cherished policy goals of the government.
Tezi mandi or Futures markets
India is known for commodity forward and futures markets that existed
for centuries though standardised, regulated futures trading has a history of over a century
only. Unregulated futures markets are often called Satta Bazar.
Futures markets are auction markets in which participants buy and sell
futures contracts for delivery on a specified future date. Trading used to be carried out
through open outcry- yelling and hand signals- in a trading pits .However, since the early
2000s most of the commodity futures exchanges have migrated to the new technology
platform of online or electronic trading. The commodity futures markets are regulated by the
Forward Markets Commission. Through the Finance Act, 2015, Forward Markets
Commission has been merged with the securities market regulator - SEBI.
Market Imperfections and Prices
India is a huge agri-nation with shortages and surpluses. But a
national common market is a far cry. Further, there is also wide discrepancy in the prices at
various levels. Price heterogeneity could be largely because of information asymmetry
existing in the markets; quite similar to the market for lemons. However, the latent demand
for the commodities ensures that Greshams law does not prevail, and commodities, which
are graded by quality, are sold at all prices. Owing to this, food inflation in India did not quite
follow the peaks and troughs experienced in the global markets. The year 2008-09 was a
watershed year in terms of the volatility in prices that was witnessed in global prices; when
global commodity markets went through a roller-coaster ride, with prices sharply rising
during the first half and having a free fall in the second half and culminating in a recessionary
phase. Although the Indian market was spared the volatility, it became evident in 2010-11 that
price levels of essential commodities had moved on to a higher trajectory.

Creation of a common market

Government has been working on the issues for internal trade
reforms and making a common market for agriculture products across the country since 2012.
Setting up of Spot Exchanges, was an attempt towards creation of a single market in the
agricultural commodities in pursuance of the national agenda given by the Prime Minister in
his address at Agricultural summit in 2005. The Department of Consumer Affairs had
conceived spot exchanges as an alternative marketing channel which would facilitate a
transparent system of direct marketing. It was felt that direct marketing will ensure that there

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is no credit and quality risk resulting in low transaction costs. It was also to integrate the
physical market spatially and temporally by integrating it with the futures market. However,
spot exchanges soon landed up in trouble and the permissions were withdrawn in September

All agricultural commodities in India are trade in wholesale

markets or mandies where the prices of commodity is set.If it is a principle commodity and
the market determinant price is below msp the trader has to take the delivery at the msp.In
return the trader is compensated by the mandi which interm compensated by government.
Mandies are set-up only with the permission of state government.Each state have a
agricultural marketing board and they set-up mandi boards at the level of district.


Every mandi trades in at least one primary commodity specific to
that region. Typically trading is done in a set of primary and non primary
commodities. As the seller brings the produce to the market, it is first
weighted and both the type and quantity recorded at the entrance. The
seller is given a certificate of type and quantity. Once the produce
recorded at one mandi ,it has free assess to other mandies of the district.
The probability that the farmer will assess more than one mandi to find the
best price in the region , cost transportation , good storage and packaging

Other than the buyers and sellers the market has traders who
intermediate between the farmer and the wholesale dealer or the mill owners. This
traders are licensed by the mandi to trade in the market. Traders may use brokers to
expand their business.
Traders have to pay mandi fees which are of two types as :

A basic transaction fee which is a fraction of the value of trade.

Other fees in the form of taxes. This is charged by the state government and
can vary widely across states.
Recently the fees and taxes that the mandi charges to the traders being fixed
are a flat rate of 4%.

Trading in mandies has two stages , one is dealer market where sellers
typically approaches the trader for a price.Once they find a favorable price , it

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consider sold to the trader.The second is an open outcry auction , where the
commodity is sold. The auction process has a fixed time at every mandi, The auction
is run sequentially ,typically growing from 1 lot of commodity with a fixed grade to
the next.

Trader have to clear to deals with buyers and sellers immediately. At
the time trade is clear with the seller the produce gets inspector for quality. Typically
this is done by traders themselves. If there is a dispute about the quality of the
produce the conflict is resolved by the mandi inspector. At the close of the trading day
traders have to report both prices and volume to the mandi. Since traders pays fee to
the mandi reported traded volume , they may under report traded values. This means a
possibility that volumes are under reporting prices. Since under pricing could have
undesirable effect of keeping the farmer away.

Farmers bring goods to the mandi which they deliver to the trader
to whom they sell. Traders in term have this produce picked-up by buyers. There are
typically no facilities at mandi for long term storage. If there is excess produce than
could be sold on the same day ,the mandi permits the trader to keep goods at the
mandi yards overnight, There are either private or state owned warehouses provide
storage facilities close to mandi at a cost.

The mandies are set-up and monitor by the mandi board,
which is a committee that has representations both by the farmers and traders
communities. There is also a representative from the state government on the mandi
board. The chairman of the mandi board is typically from farmer community. It is the
farmer community that usually originates discussion with the State Agricultural
Management Board (SAMB) to organize a mandi in a new locality. And this
community typically has a large voice in the governance of the mandi. The operation
of the mandi is handed by staff consisting of a secretary, clerk (recording) and at least
one Inspector who is qualify to certify the quality of the produce. The staff are paid
out of the fee collected from farmers and market intermediaries.

At the spot market where settlement takes place are T+0 or T+1
basis, there is a very little scope for problem of regulation. The disputes that arise
about prices and quality of produce are typically handed by mandi Inspector . The
most important regulatory requirement is the reporting of prices and volumes to State
Agricultural Management Board (SAMB). Every district mandi board takes the
responsibility of collecting and dispatching this information to State Agricultural
Management Board (SAMB). The SAMB in turn dispatch it to Ministry of
agriculture where prices are available on internet. The site is .

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Warehouses are scientific storage structures especially
constructed for the protection of the quantity and quality of stored products.
Warehousing may be defined as the assumption of responsibility for the storage of
goods. It may be called the protector of national wealth, for the produce stored in
warehouses is preserved and protected against rodents, insects and pests, and against
the ill-effect of moisture and dampness. The warehousing scheme in India is an
integrated scheme of scientific storage, rural credit, price stabilization and market
intelligence and is intended to supplement the efforts of co-operative institutions.
Any warehouse is said to be an ideal warehouse if it possesses certain characteristics
Warehouse should be located at a convenient place near highways, railway
station and seaport where goods can be loaded and un-loaded easily.
Mechanical appliances should be there to load and un-load commodities to
reduce the wastages in handling.
Adequate space should be available inside the warehouse.
Warehouse should have cold storage facilities for preserving perishable goods.
Proper arrangement should be there to protect goods from rain, dust, moisture,
Warehouse having latest fire fighting equipments.

The important functions of warehouses are:

1. Scientific Storage:
Here, a large bulk of agricultural commodities may be stored. The product is protected
against quantitative and qualitative losses by the use of such methods of preservation as
are necessary.

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2. Financing: Warehouses meet the financial needs of the person who stores the
product. Nationalized banks advance credit on the security of the warehouse receipt
issued for the stored products to the extent of 75 to 80 per cent of their value.
3. Price Stabilization: Warehouses help in price stabilization of agricultural
commodities by checking the tendency to making post-harvest sales among the farmers.
Farmers or traders can store their products during the post-harvest season, when prices
are low because of the glut in the market. Warehouse helps in staggering the supplies
throughout the year. They thus help in the stabilization of agricultural prices.
4. Market Intelligence: Warehouses also offer the facility of market information to
persons who hold their produce in them. They inform them about the prices prevailing
in the period, and advise them on when to market their products.
This facility helps in preventing distress sales for immediate money needs
or because of lack of proper storage facilities. It gives the producer holding power; he
can wait for the emergence of favourable market conditions and get the best value for
his product.
PROCESSING :- Certain commodities are not consume in the firm they are
produce. Processing is required to make them consumable. For example paddy
is polished, timber is sizzled and fruits are ripened.
GRADING AND BRANDING :- On requirement warehouse also performs
the function of grading and branding of goods on behalf of manufacturer,
wholesaler or importer. Also provides facilities for mixing and packaging of
goods for convenience handling and sales.
TRANSPORTATION :- In some cases warehouses provide transport
arrangement to bulk depositor. It collects goods from the place of production
and also send goods to the place of delivery.

Growth & Development of Commodity Exchanges

General overview
Underpinned by initially strengthening industrial activity,1 strong demand from
developing countries and optimistic market sentiment following the European
Central Banks longer-term refinancing operations, the UNCTAD price index2 for
three groups of commodities all food,3 agricultural raw materials, and minerals,

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ores and metals rose in the first quarter of 2012 from their lows in December 2011.
However, prices fell in the second quarter as a result of the economic slowdown in
China, the intensification of the debt crisis in Europe and the appreciation of the
dollar against other currencies. The drop was particularly pronounced for agricultural
raw materials, and minerals, ores and metals.
The third quarter of 2012 witnessed a different price scenario between food and base
metals and ores. The food market was tight, mainly due to supply disruptions caused
by adverse weather in the United States, Australia and the Black Sea region. Surging
maize, wheat and soybean prices put a strain on the food market.
On the other hand, the prices of many important base metals and ores continued their
downward trend in July and August 2012. Copper prices, despite their brief recovery
in July, were significantly lower than a year ago. Metals and ores, key raw materials
for construction and manufacturing, are sensitive to the economic performance of
major consuming countries. The gloomy economic situation dampened the demand
for these commodities. At the same time, the development and expansion of new
projects over the last decade increased the global supply of many minerals and
metals. In some markets such as aluminium, nickel and zinc, supply exceeded
demand, driving down prices further.
To boost the economy, the central banks of the eurozone, the United States and Japan
eased their monetary policies in September. While the full impact of these policies on
economic growth is still unclear, commodity markets responded quickly, with the
prices of gold and key base metals rallying.4
The price of crude oil remained high and volatile during the first 10 months of 2012,
due to divergent factors. The uncertainty of the world economic outlook and
geopolitical risks in the Middle East, in particular, weighed heavily on oil markets.
The economic woes in the eurozone, struggling recovery in the United States and the
economic slowdown in emerging countries weakened the demand for crude oil. The
economic sanctions on oil exports from the Islamic Republic of Iran removed off the
oil market an estimated 0.82 million barrels of crude per day in the third quarter of
2012. This vacuum, however, was filled by the increased outputs from Saudi Arabia,
Libya and Iraq.

Functions of commodity exchanges

A commodity exchange acts as a portal or a common place where traders can buy and sell
commodities. Such exchanges enable seamless trading, eliminate the need for middle men
and allow the market to fix a price that is driven purely by demand and supply of the product.
How does a commodity exchange work?

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Just like the stock market, a commodity exchange serves as a marketplace for buyers and
sellers to engage in trading commodities directly. Trading can be done in two ways: cash/spot
and futures. In the former method, the buyer and seller agree upon a common price of the
commodity, and actual physical delivery of that commodity takes place. The latter is
different. Futures contract do not involve spot delivery of commodities; delivery is fixed for a
future date at a price agreed by both the parties.
Just like a stock exchange, a commodity exchange serves as a marketplace for buyers and
sellers to engage in trading commodities directly.
People engage in this kind of trading mainly because each party gets something out of the
deal. Commodity manufacturers/producers want to hedge their produces against fall in price
in the future. On the other hand, commercial consumers want to lock in goods at a favourable
price in order to avoid paying a higher price later. And individual traders wish to benefit from
future movements of commodity prices.
The entire process is done electronically. The producer submits an offer price and the future
delivery date of the commodity on this exchange. The seller, who agrees to pay that price,
enters into a contract with the buyer. Almost all transactions take place in the similar manner,
allowing the actual demand and supply to determine the price.
In India, there are three major national commodities exchanges: National Commodity and
Derivatives Exchange Ltd, Multi Commodity Exchange of India Ltd and National Multi
Commodity Exchange of India Ltd. In addition to these, 18 more domestic commodity
exchanges in India are known to function.

Any commodity exchange serves three main functions:

Defines rules and regulations of trading to carry out uniform trading practice
Provides dispute settlement mechanism
Circulates price movements and market news to the participating members

Trade-facilitating institutions boost trade by reducing the cost and the uncertainty of entering
into transactions. One of the ways in which they do this is by applying a framework of rules
and procedures to regulate trade, thereby providing individuals or organizations with
increased confidence to engage in mutually beneficial transactions.

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As has been detailed by UNCTAD (1997), beyond basic oversight

to ensure auctions are open and not manipulated, there are two important thresholds at which
the regulatory framework becomes an important foundation for commodity exchange
activities. The first is when an exchange moves from trading products that are physically
present at its premises to trading paper which represents the right to commodities. These
rights need to be enforceable, and this is achieved through the clear definition of contractual
rights and obligations arising from transactions conducted in the exchange, and of the
mechanisms that enforce them. A second threshold occurs when intermediaries start to play a
role in the market on behalf of end users; the activities of these intermediaries need to be
overseen to ensure that they fulfil obligations. When either of these thresholds is crossed,
there is a requirement upon the exchange to act as a self-regulator of activities taking place in
its markets, and for Government to provide an overall framework for oversight.
Protection of investors: measures taken to protect investors taken here to mean all
market users from unscrupulous or irresponsible practices by the exchanges,
counterparties or intermediaries that they may interact with. Common mechanisms
used to protect investors include: fitness or good character qualifications for
intermediaries; requirements for intermediaries to segregate client funds from their
own funds; and binding arbitration mechanisms for dispute settlement.
Ensuring that markets are fair, efficient and transparent: measures taken to ensure that
the market price truly reflects the information known about the market, to constrain
speculative excess, and to avoid manipulation of prices or physical stocks. Common
mechanisms used to uphold market integrity include: ensuring a time-stamped audit
trail of all trading activity; position limits for speculative participants, including
tighter limits in delivery months; constant monitoring of trading for suspicious
patterns; free, transparent dissemination of data; an approval process by the external
regulator for new contracts to ensure an adequate deliverable supply (among other
factors); and know-your-customer requirements for intermediaries.
Reduction of systemic risk: measures taken to effectively manage the systemic risk
arising from market operations, reducing the risk of default to acceptable levels, and
ensuring the system as a whole is sufficiently resilient to withstand shocks, such as
spikes in volatility or the collapse of a large trader. Common mechanisms used to
reduce systemic risk include: minimum capital requirements in order to participate in
the markets; the rigorous use of the margining system, with margin levels related to
market risk (including higher margin requirements in periods of increased volatility
and during the delivery period); daily price movement limits (or circuit filters) that
confine daily trading within defined price parameters; and a risk hierarchy, which
ensures that exchange members cover their clients positions in the case of a client
default and a clearing-house guarantee fund covers members positions in the case of
a member default.
External regulator: a governmental agency, or an independent agency accountable to
Government, that provides regulatory oversight across national markets as a whole.
An external regulator may also act as an interface with the external regulators of other

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national markets to ensure adequate regulation of transactions that are crossjurisdictional in nature.
The exchange as a self-regulatory organization: the exchanges own personnel and
systems that provide regulatory oversight over exchange operations, including both
the trading and where it is performed in-house the clearing and settlement

The industry self-regulatory organization: a body that either represents market

intermediaries (i.e. brokers and other entities active in the markets), or is appointed by
Government to oversee the activities of market intermediaries. In particular, an
industry self- regulatory organization can ensure investor protection by overseeing
relations between the intermediary and the end user.


Derivatives In India
Ministry of Finance


Ministry of ConsumerAffairs
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Stock Exchanges

Commodity Exchanges

Financial Derivatives

Commodity Derivatives


Precious Metal

Other Metals


In traditional stock market exchanges such as the New
York Stock Exchange(NYSE), most trading activity took place in the trading pits in face-toface interactions between brokers and dealers in open outcry trading. In 1992 the Financial
Information exchange (FIX) protocol was introduced, allowing international real-time
exchange of information regarding market transactions. The U.S. Securities and Exchange
Commission ordered U.S. stock markets to convert from the fractional system to a decimal
system by April 2001. Metrification, conversion from the imperial system of measurement to
the metrical, increased throughout the 20th century. Eventually FIX-compliant interfaces
were adopted globally by commodity exchanges using the FIX Protocol In 2001 the Chicago
Board of Trade and the Chicago Mercantile Exchange (later merged into the CME group, the
world's largest futures exchange company) launched their FIX-compliant interface.
By 2011, the alternative trading system (ATS)
of electronic trading featured computers buying and selling without human dealer
intermediation. High-frequency trading(HFT) algorithmic trading, had almost phased out
"dinosaur floor-traders".

Increased complexity of financial instruments and interconnectedness of global market[

The robust growth of emerging market economies (EMEs), (such as Brazil, Russia, India, and
China) in the 1990s, "propelled commodity markets into a supercycle". The size and diversity
of commodity markets expanded internationally.

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In 2012, as emerging-market economies slowed down, commodity prices

declined. From 2005-13 energy and metals' real prices remained well above their long-term
averages. In 2012 real food prices were at their highest level since 1982.
The price of gold bullion fell dramatically on 12 April 2013 and
analysts frantically sought explanations. Rumors spread that the European Central
Bank (ECB) would force Cyprusto sell its gold reserves in response to its financial crisis.
Major banks such as Goldman Sachs began immediately to short gold bullion. Investors
scrambled to liquidate theirexchange-traded funds (ETFs) and margin call selling accelerated.
George Gero, precious metals commodities expert at the Royal Bank of Canada (RBC)
Wealth Management section reported that he had not seen selling of gold bullion as panicked
as this in his forty years in commodity markets.
The earliest commodity exchange-traded fund (ETFs), such as SPDR
Gold Shares NYSE Arca: GLD and iShares Silver Trust NYSE Arca: SLV, actually owned
the physical commodities. Similar to these are NYSE Arca: PALL (palladium)
and NYSE Arca: PPLT(platinum). However, most Exchange Traded Commodities (ETCs)
implement afutures trading strategy. At the time Russian Prime Minister Dmitry
Medvedev warned that Russia could sink into recession. He argued that "We live in a
dynamic, fast-developing world. It is so global and so complex that we sometimes cannot
keep up with the changes". Analysts have claimed that Russia's economy is overly dependent
on commodities.

Contracts in the commodity market

A Spot contract is an agreement where delivery and payment either takes place immediately,
or with a short lag. Physical trading normally involves a visual inspection and is carried out
in physical markets such as a farmers market. Derivatives markets, on the other hand, require
the existence of agreed standards so that trades can be made without visual inspection.

US soybean futures, for example, are of standard grade if they are "GMO or a mixture of
GMO and Non-GMO No. 2 yellow soybeans of Indiana, Ohio and Michigan origin produced
in the U.S.A. (Non-screened, stored in silo)". They are of "deliverable grade" if they are
"GMO or a mixture of GMO and Non-GMO No. 2 yellow soybeans of Iowa, Illinois and
Wisconsin origin produced in the U.S.A. (Non-screened, stored in silo)". Note the distinction

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between states, and the need to clearly mention their status as GMO (Genetically Modified
Organism) which makes them unacceptable to most organic food buyers.
Similar specifications apply for cotton, orange juice, cocoa, sugar, wheat, corn, barley, pork
bellies, milk, feedstuffs, fruits, vegetables, other grains, other beans, hay, other livestock,
meats, poultry, eggs, or any other commodity which is so traded.
Standardization has also occurred technologically, as the use of the FIX Protocol by
commodities exchanges has allowed trade messages to be sent, received and processed in the
same format as stocks or equities. This process began in 2001 when the Chicago Mercantile
Exchange launched a FIX-compliant interface that was adopted by commodity exchanges
around the world.

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POTATO , popularly known as the king of
vegetables and a native of South America, has now become an indispensable part of Indian
cuisine. It ranks 4th among important staple food after wheat, rice and maize.
Potato is rich in carbohydrates,
constituting 22-24% of its weight. It contains 2.1% to 2.7% protein, less than 0.5% of fat and
the rest is water. Being a short duration crop, it produces more quantity of dry matter, edible
energy, and edible protein in lesser duration, compared to cereals like rice and wheat. Hence,
potatoes are useful tool to achieve the nutritional security of the nation.
Potato is a temperate or cool season crop which needs a low temperature, low humidity, less
windy, and bright sunny days. It does well under well-distributed rains or moist weather
situations to high temperatures. Humidity and rains are not conducive to potatoes as these
lead to insect pests and disease attacks
SCENARIO: - India produces around 8% of the worlds total produce. India ranks fourth in
terms of area and third in terms of production of potato across the globe. China and Russia
are ahead of India in terms of potato production. Uttar Pradesh produces the highest quantity
of potatoes for India followed by West Bengal. There has been an increase of 12.5% in the
production of Potato than last year (2010). Uttar Pradesh, the state which houses our basis i.e.
Agra, saw an increase of 22% in their production levels.

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FUTURE PROSPECTSThere has been a constant growth in production of Potato in India in the last 5
years. The productivity level in India is below the world average level. The production of
potato has gone up during the previous years due to better varieties and larger acreage under
potato. There is usually very little quantity left for exports, making Indias share in world
exports insignificant and inconsistent. India exports just around 1-0.5% of the worlds total
potato exports.
The overall objective of this short study is to determine the effectiveness of newly
developed commodity exchanges in India as a means of improving smallholder farmer
linkages to markets, particularly formal markets, and the advantages in terms of new
opportunities, more reliable trading relationships and improved incomes, compared with
traditional commodity trading routes. Where possible we compare typical means of
market linkage, whether through individual or farmer organizations, to wholesale markets
and other trading relationships such as fair trade and contracting.
The purpose of the study is to determine whether commodity
exchanges have provided a positive impact on farmer marketing channels, and assisted in
upgrading marketing institutions that support the smallholder community. The target
commodities for the study are coffee, maize and beans. All sophisticated market systems
in developed countries, such as commodity exchanges, were established by the users of
the market. They were not established and funded by outside organizations.


Chana belongs to leguminasae family and there are two main types - Desi and Kabuli.
Desi chickpeas is the main type grown in India

India's chana production fluctuates between 4-7 million tons and is normally 40% of
India's total pulse production of 12-15 million tons India's chana production in 200304, chana production is 5.33 million tons out of a total pulse production of 15.23
million tons.
The major producing states are Madhya Pradesh (1.5-2.5 million tons, Uttar Pradesh
(0.7-0.85 million tons), Rajasthan (0.5-2.5 million tons) and Maharashtra (0.5-0.7
million tons).
Chana is a rabi crop and is sown from November to December and harvested from
Feb to March. The peak arrival period begins from March-April at the major trading
centres of the country.
India accounts for 2/3rd of the world's chickpea production. India imports around 3-4
lakh tons of chickpeas annually. The major countries from where India imports

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chickpeas are Canada, Australia, Iran and Myanmar.

Indian chana markets are highly fragmented, with very long value chain. The major
players in the value chain are commission agents, brokers, stockists, wholesale
traders, dal mills, wholesalers (dal) and retail outlets. The information flow between
these participants is restricted and very slow.

Major Trading Centers

Indore, Bhopal, Vidisha in Madhya Pradesh.

Jalgaon, Latur, Mumbai, Akola in Maharashtra.
Jaipur, Bikaner, Kota, Jodhpur, Sriganaganagar, Hanumangarh in Rajasthan.
Other major centers are Delhi, Chennai, Kanpur, Hapur, Hyderabad, Vijayawada,
Gulbarga, Sirsa, Jalandhar, Ludhiana, Sangrur.

Market Influencing Factors

Chana can withstand moisture stress to a certain extent. However, the production
highly fluctuates between years, depending on the rains received and the moisture
availability in the soil.
The sentiments of traders play a significant role currently, as a consequence of the
lack of free-flow of information.
Stocks present with stockists and the stocks-to-consumption ratio.
Imports and the crop situation in the countries from where imports originate, viz.,
Canada, Australia, Myanmar.
There is high substitutability between pulses in India among the consumers. So the
price of other major pulses like tur, yellow peas, green peas etc also influences the
prices of chana.


General Characteristics

Wheat is one of the world's three most important cereal crops along with maize and
rice. It is reported to be grown domestically from atleast as early as 9000 BC and is
now grown in almost all parts of the world.
Wheat is a globally important source of dietary carbohydrate (starch) and protein
(gluten). Its grain is a staple food used to make flour for leavened, flat and steamed
breads, biscuits, cookies, cakes, breakfast cereal, pasta, noodles etc and for
fermentation to make beer, alcohol, vodka, or biofuel. It is also used for feeding
animals to a limited extent.
Different varieties of wheat are grown across the world. The three principal types of

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wheat used in modern food production are: Triticum vulgare (soft wheat), Triticum
durum (hard wheat) and Triticum compactum
Global Scenario

The annual global wheat production has been in the range of 600-630 tonnes in the
recent years. However, in 2008-09 it is estimated to have risen sharply to 689 million
tonnes. The combined production of all cereals in 2008-09 is estimated to be 2525
million tonnes.
EU-27, China, India, USA and Russia are the five major producers of wheat
accounting for close to 70% of the total global production, with 2008-09 production in
these regions being 151, 112.5, 78.6, 68 and 63.8 million tonnes respectively.
Wheat is the most important cereal traded in the world market. The global trade in
wheat during 2008-09 was sharply up at around 140 million tonnes in 2008-09 from
an average of around 110 - 115 million tonnes in the recent previous years.
While US (25 - 35 million tonnes), EU-27 (15-25 million tonnes), Canada (15-20
million tonnes), Australia (8-18 million tonnes) and Argentina (6 - 12 million tonnes)
are major exporters, there are a large number of countries importing wheat with
maximum demand emanating from developing nations. The major importing regions
are Middle-east Asia, South-east Asia and North-west Africa. Egypt, Brazil,
Indonesia, Algeria are the most important importing nations.
Wheat crops around the world have their own unique production cycles of planting
and harvest timeframes.

Important World Wheat Markets

Derivatives exchanges - Chicago Mercantile Exchange, which acquired Chicago

Board of Trade, Kansas City Board of Trade, Zhenghzhou Commodity Exchange, South
African Futures Exchange, MCX, NCDEX

US FOB and EU (France) FOB prices determine the physical prices

Indian Scenario

India has the largest area in the world under wheat cultivation. However, due to low
productivity it is only the third largest producer after EU-27 and China.

India's annual production of wheat has been around 75-79 million tonnes from 200607, with production in 2008-09 estimated to be around 78.6 million tonnes. Wheat
accounts for around 30-35% of India's total foodgrain production of around 220
million tonnes. India's annual wheat consumption is estimated to be around 72 million
tonnes currently.

Green revolution and increased focus by Government on wheat has helped wheat

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production to surge sharply from around 6 million tonnes at time of independence to

current levels. Close to 90% of the area under wheat is irrigated, which too has
supported the rise in output over the years.

Uttar Pradesh (34%), Punjab (20%), Haryana (13%), Rajasthan (10%) and Madhya
Pradesh (10%) are the main wheat producing states of India.

Wheat is cultivated as a rabi crop in India, with sowing being undertaken from
October to December and harvesting from March to May. The official marketing
season of wheat in India is assumed to commence from April.

Government plays a major role in the wheat value chain in India as the cereal is very
important for the country's food security. The Central Govt. sets the Minimum
Support Price (MSP) every year, which sets the mood for the upcoming season. As
govt. agencies have been recently procuring close to 25-30% of annual production,
open market prices too do not generally fall below this price. Historically, the
procurement has been around 15-20%.

The procured wheat is used to maintain a minimum buffer stock for meeting
unforeseen exigencies, for providing foodgrains required for Public Distribution
System (PDS) and the other foodgrain based welfare programmes of the Government.
In addition, the grain is also sold at pre-determined prices to the open market.

Though, India is not a major player in global markets India has resorted to imports,
whenever there is a supply tightness. India has also exported around 5 million tonnes
of wheat in 2003-04. Govt. agencies take the decision to bring in imports and the
current policies are not in favour of exports.

Market Influencing Factors

Wheat is an annual, seasonal crop and prices usually tend to rise during the cultivation
period, i.e. December to March due to scarcity in the market and dip during the peak
arrival period (April and May).

Weather has a profound influence on production, especially in Haryana and Punjab as

temperature plays a crucial role in determining the yield.

The Govt. policies with regard to MSP, buffer stocks, PDS sales, Open Market Sales,
imports / exports are very important influencing factor with regards to Indian wheat

Despite international trade being limited, the several variations in production or

consumption at various major or minor producing or consuming country, which
influence global prices, are reflected in the domestic long-term price trend. However,

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in the short-term normally there is no significant relation with international prices.

Several international agencies like US Dept. of Agriculture, International Grains

Council, Food and Agricultural Organisation release regular, periodic reports on
global supply-demand situation, which is widely looked upon by the global players.


General Characteristics
Soybean is an important global crop and processed soybean is the largest source
of protein feed and second largest source of vegetable oil in the world.
The major portion of the global and domestic crop is solvent-extracted with
hexane to yield soy oil and obtain soymeal, which is widely used in the animal
feed industry. It is estimated that above 85% of the output is crushed worldwide.
Though, a very small proportion of the crop is consumed directly by humans,
soybean products appear in a large variety of processed foods.
The cultivation of soybean is successful in climates with hot summers, with
temperatures between 20C to 30C being optimum. Temperatures below 20C
and over 40C are found to retard growth significantly.
It can grow in a wide range of soils, with optimum growth in moist alluvial soils
with a good organic content.
Modern soybean varieties generally reach a height of around 1 m (3 ft), and take
80-120 days from sowing to harvesting.
Global Scenario

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The annual global soybean production has been in the range of 210-230 million
tonnes in the recent years, accounting for 55-58% of total global oilseed output of
around 390-400 million tonnes.
US, Brazil, Argentina, China and India are the major producers in order of
production with production in these countries ranging around 70-80, 55-60, 3248, 14-16 and 8-10 million tonnes in the recent couple of years.
Weather, acreage under other competitive crops like corn, cotton and pests &
diseases are the major factors influencing production.
While in US, India and China crop starts arriving from Aug-Sept, it starts from
Jan-Feb in S. America.
The annual global trade in soybean is estimated to be around 70-80 million
While, USA (30 -35 million tonnes), Brazil (23-28 million tonnes), Argentina (515 million tonnes) are the exporters of beans, China (35-40 million tonnes) and
EU (12-16 million tonnes) are the major importers.
In addition to soybean, soy oil and soymeal are also widely traded globally with
annual trade of around 9 million tonnes and 52 million tonnes respectively.
While, US is the largest exporters for soybeans, Argentina is the largest exporter
of soy oil and soy meal globally.

Important World Soy Markets

Chicago Mercantile Exchange, which acquired Chicago Board of Trade - the

world's oldest soy futures market
Dalian Commodity Exchange - trades the most liquid soybean contracts in the
Argentina and Brazil FOB determine the physical prices

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India in World Soy Industry

(Rounded figs.)


% Share

(In million tons)

Soybean Production


Soybean Trade


Soy Oil Production



Soy Oil Imports


Soy Oil Exports

Soy Meal Production


Soy Meal Exports



Soy Meal Imports


Indian Scenario

India's annual production of soybean has been around 8.5-10 million tonnes in
the recent years with India's production in 2009-10 estimated to be around 8.9
million tonnes by the Government of India.
The acreage under this crop has more than doubled in the past two decades to
around 11 million hectares currently being sown under this crop, with better
returns encouraging more farmers to adopt this new crop.
Madhya Pradesh, Maharashtra, Rajasthan and Andhra Pradesh are the major
cultivators of this important oilseed, with their respective contributions usually
around 60%, 25%, 6-7% and 1-2%.
Soybean is exclusively grown in the khariff season in India, with sowing taking
place after the first monsoon showers in late June or early July. Sowing can
extend upto end of July in different parts of the country.
The harvesting commences from September, with Maharashtra reporting the
earliest arrivals. October and November are the peak arrival months, with allIndia arrivals crossing 10 lakh bags of approximately 90 kg on the peak arrival
The production is dependent on the monsoon and fluctuates between years.
India is highly dependent on imports to meet domestic edible oil requirement.
Government policies are in favour of developing the domestic crushing industry
and supporting Indian farmers and do not promote import or export of soybean.
Thus, there is virtually no import or export of soybeans.
However, India out of its total soymeal production of around 6.5-7 million
tonnes, exports around 3.5 million tonnes with Vietnam, Japan, Thailand,

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Indonesia, UAE, Greece being the major importers.

Major Trading Centres

Indore, Ujjain, Dewas, Mandsore in Madhya Pradesh, Akola, Sangli, Nagpur in

Maharashtra, Kota in Rajasthan are major trading centres.

Market Influencing Factors

Domestic prices are highly influenced by the global price movements, with prices
highly correlated with the CME prices.
Fundamentally, weather at all producing centers, domestic and international is the
most crucial factor, with the pod bearing period, being the most crucial.
United States Department of Agriculture makes progressive assessment of crops,
stocks, global supply and demand and releases regular reports, which are widely
looked upon by the global market to determine prices.
The other major influencing factor is the prices of soy oil and soymeal, which are
in-turn dependent on the fundamentals of global edible oil and global animal feed
Locally, prices are influenced by currency fluctuations, weather, acreage, pest &
diseases, production estimates by industry associations, Government agencies.
India imports more than 60% of its entire edible oil requirement and the entire
edible oilseed and oil sector is a highly sensitive sector. Thus, new Government
policies and apprehensions about new policies have a strong sway over prices,
during periods when new announcements are made or are about to be made.
The supply-demand and price scenario of competitive oils, viz., palmoil.
The crush margin between meal, oil and seed


General Characteristics

Almonds, though considered to be nuts are technically the seed of the fruit of the
almond tree, which is a medium-sized tree that bears fragrant pink and white

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flowers. The fruit, botanically referred to as a drupe has an outer hull and a hard
shell with the seed inside.
Almonds are commonly sold shelled. Shelling almonds refers to removing the
shell to reveal the seed. Almonds with their shells attached are called unshelled
almonds. Blanched almonds are shelled almonds that have been treated with hot
water to soften the seedcoat, which is then removed to reveal the white embryo.
Sweet almonds and Bitter almonds are two forms of almonds, of which sweet
almond is the variety, which is consumed directly or indirectly by humans as a
food product. Bitter almond is slightly shorter and broader than sweet almonds
and are mainly used for extracting almond oil and not consumed as food, as it is
Chocolate confectionary, bakery and snacking are the three major global
categories for almond usage.

Global Scenario

The annual global Sweet almond production on shelled-basis has been in the
range of 7 - 8.5 lakh tonnes in the recent years. Record crops and a steady
increase in production were seen from 2005-06 to 2008-09 (Almond crop year is
from August to July). However, the output in 2009-10 is forecasted to dip on
account of unfavourable climatic conditions.
United States of America is the single largest producer, consumer and exporter of
Sweet almonds, with the country contributing to over 80% of the global almond
The state of California in US is the most important producer of Sweet almonds,
as this region is reported to be accounting for 99% of the American production.
Nonpareil is the single largest variety planted in California. Its production is
reported to be 38% of the total output, followed by Carmel (12%), Monterey
(10%), Butte/Padre (9%) and Butte (8%).
The world's largest almond handler is the Blue Diamond Growers Cooperative,
which is located in Sacramento, California. Blue Diamond is owned by over twothirds of California growers and markets one-third of California's crop.
The other producing countries are Australia, Turkey, Chile, European Union,
China and India with a production of 26,000 tonnes, 16,000, 9500, 79,800, 1,500
and 1,200 tonnes on a shelled basis in 2008-09. Spain is the single largest
producer in the European Union.
The annual trade in almonds has been around 4.6 lakh tonnes (on shelled basis)
in the recent years. The major exporters are US, Australia and Chile with exports
of 4,40,000 tonnes, 12,300 tonnes and 6,700 tonnes (on shelled basis) in 2008-09.
European Union, India, Japan, Canada and Turkey are the major importers with
imports of 2,00,000 tonnes, 45,000 tonnes, 21,000 tonnes, 19,000 tonnes and
14,000 tonnes in 2008-09.
While, the peak harvesting period of the Californian crop starts from mid-August
and extends till September that of Australian crop occurs between February and

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Indian Scenario

The ever-expanding middle class and increase in health awareness, has lead the
growing consumption of almond in the country in recent years. The annual rate
of increase in India's domestic consumption of almonds is reported to be around
More than 95% of almonds consumed by Indians is imported with more than
80% of imports being sourced from California. The other major country from
which India imports almonds is Australia. While, Indian imports in 2008-09 is
reported to be above 45,000 tonnes, the imports in 2009-10 are expected to rise to
50,000 tonnes.
India has to resort to imports to meet almost its entire requirements as domestic
production of sweet almonds is only around 1,200 tonnes. The other almond trees
present in the country are of non-descript variety and mostly produce bitter
India imports almonds with shells and processes it domestically to obtain shelled
almonds, unlike almost all other importing nations, which import shelled
almonds. This is due to availability of cheap labour and better appearance and
lesser losses in manual shelling of almonds as against mechanized shelling.
Most of the manual shelling of almonds in India is undertaken at Bombay and
New Delhi, from where the shelled almonds are transported to other consumption
The Indian festival season extending from September to December is the peak
consumption period for almonds, with maximum demand witnessed in
November. Thus heavy imports of new Californian almonds are seen from
September to meet the strong domestic demand during the festival season.
Imports from Australia pick up during April and May after the harvesting season
in that country.

Major Indian Trading Centres

Mumbai, New Delhi
Market Influencing Factors

The domestic almond prices are a reflection of global supply-demand

fundamentals, with the annual production at California being the most important
price determining factor.
The Indian traders keep a close track of the Californian crop progress with

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special focus kept on forecasts by US agencies, weather, pest attacks etc. The
United States Department of Agriculture and the California Almond Board makes
progressive assessment of crops, stocks, global supply and demand and releases
regular reports, which are widely looked upon by the global market to determine
Domestically, stock present with traders and the cost at which it has been
acquired is the most important price influencing factor.
The major importers and traders of almond in India are well aware of the
fundamentals of the domestic market requirements and are usually well-stocked
to meet the annual festival demand.
Meanwhile, as almond is not considered as an essential commodity and there is
no local farming community producing this crop, policy intervention in this
commodity is very minimal.

Agriculture Price Policy

1. Although Indias past record in food price stabilisation is good, principally because of
governments intervention, instability has increased very markedly in recent years. In real
terms (i.e. in terms of the ratio of the wholesale price index (WPI) for cereals to the allcommodity WPI), cereals prices increased 17.4 per cent between 1997-98 and 1999-00
followed by an almost equally sharp decline of 13.3 per cent between 1999- 00 and 2001-02.
High MSPs have distorted inter-crop price parities, particularly in favour of wheat, leading to
shift of area from oilseeds and pulses and to high import of these commodities.
2. Agricultural price policy, as it exists in India currently, was conceived of on the premise of
a closed economy where domestic production has to meet domestic demand in almost every
commodity. MSP serves the requirement of price stability by ensuring that years of glut are
not followed by large production declines leading to high prices in the subsequent year. The
procedure assumes that long-run domestic costs are good indicators of long-run prices and
that stocks accumulated when production exceeds demand in the short-run, pushing prices
below MSP, can in normal course be disposed off without undue downward pressure on
market prices at other times when production falls below demand.
3. In an open economy, however, long-run domestic prices will increasingly be affected by
trends in international prices although domestic production costs would still be the dominant
determinant in a large economy such as Indias. Assessment of how Indias costs of
production are moving relative to world prices will, therefore, become progressively more
important not only for the design of domestic price policy but also in areas such as
technology development and trade policy. More importantly for price stability, since world
prices fluctuate considerably around their long-run trends, it would also be necessary to
ensure a mechanism to prevent international price fluctuations from influencing domestic
prices so much as to nullify the domestic price policy.

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4. Traditional system of price stability through MSP mechanism has increased Governments
food-subsidy burden and is, therefore, unviable. Hence, it is also necessary to consider very
seriously alternative mechanisms of risk management. One of these is the idea of extending
insurance to cover not only the risks of crop failure and yield loss but also losses stemming
from unforeseen price fluctuations. Futures trading in grains can significantly reduce the risks
of price fluctuations. Futures trading lead to more efficient price discovery by allowing more
agents with relevant information to participate in price formation than would be possible if all
these agents had to bear the fixed costs of physical trading. Secondly, since risks in physical
trading can be reduced through hedge options, existence of futures markets can reduce costs
of insuring against price risks and encourage more trade in spot physicals.


1. Price discovery: Price discovery refers to the mechanism through which prices come to reflect known
information about the market. The price level established on the open market can
therefore represent an accurate depiction of the prevailing supply/demand situation in
the underlying commodity markets, whether in the spot market for current deliveries
or in the forwards/futures markets for deliveries at specified future occasions. The
benefits of price discovery can be categorized as those arising from a more efficient
price formation process, and those arising from the wider supply of more and more
accurate market information.
The former refers to those benefits arising from the proper alignment of supply and
demand, ensuring that the market pricing signal triggers efficient production,
purchasing and investment decisions by participants in the sector. The latter refers to
those benefits arising from the publication and dissemination of market information,
with the resulting price transparency providing a readily available, authoritative and
neutral price reference to sector participants.
2. Price-risk management: A commodity exchange can provide price-risk management solutions by offering
trade in commodity futures and options contracts. These instruments address the fact
that as Governments have withdrawn from the sector, commodity sector participants
have become increasingly exposed to the notorious price volatility that has long
afflicted global commodity markets.

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Price volatility breeds risk, and vulnerability to risk is recognized as one of four
dimensions that constitute poverty. When farmers receive prices that are unstable and
uncertain, they run price risks from the moment that they decide to plant a crop and
every time that they buy and apply inputs such as fertilizers or pesticides, or use paid
labor. They never know whether the price that they receive at the end will cover their
costs and be worth their efforts. Such risks can deter farmers from making important
investments in upgrading their productive activities, and can instead lock them into a
vicious cycle of low productivity and low returns. Thus, price volatility creates and
sustains rural poverty.
The usage of commodity-linked instruments to hedge commodity price risk can bring
greater certainty over the planting cycle, allowing those active in the commodity sector to
commit to investments that yield longer-term gains, and increasing the viability of planting
higher-risk but higher-revenue crops. Even in the face of a long-term decline in the prices
of their commodity, the ability to hedge against shorter-term price movements provides
farmers with a window in which to adjust cropping patterns and diversify their risk profile.
3. Venue for investment: Commodity futures exchanges also offer a number of wider benefits as an
institutional venue for investment. Firstly, the exchange clearing house acts as a
counterparty to all trades, reducing the risk of counterparty default and providing
a more secure and reliable investment environment. Secondly, the exchanges
rules, regulations and governance procedures, coupled with those of its regulators
and intermediary bodies, provide an orderly rule-based framework within which
investment practices can be enhanced and disputes can be arbitrated. Thirdly, the
speculative interest that it generates is usually necessary to provide the liquidity
required for hedging to be effective.
However, the role of speculative participation in commodity futures markets is
heavily contested. In some situations, speculation may be considered by
Government or society to be a wasteful or morally undesirable activity.

Impacts on farmer; A liquid environment in which to effectively hedge.

Speculation may lift price, and therefore farmer return.
Speculation can increase futures market volatility making effective hedging more
Tendency for farmers to speculate in ways in which they cannot afford.
4. Facilitation of physical commodity trade:-

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The orthodox theory argues that futures markets evolve after the development of a
well-ordered cash market. However, recent experience suggests that in certain circumstances,
the introduction of a commodity futures market can stimulate the development of the cash
markets. Central to this experience has been the notion of the exchange as an island of
excellence, extending the high levels of performance in its core trading functions to the
physical commodity markets that it serves.
Impacts on farmer
Improved price from intermediaries received by farmers because availability of
neutral & authoritative reference price.
Reduces need for distress sales.
Access to more distant markets through logistics.
Facilitates new sources of commodity finance.
Increases crops suitability to end user requirements.
5. Facilitation of financing to the agricultural sector:Lack of access to affordable sources of finance is a significant constraint faced
by many entities in the developing world. Financiers often consider agriculture to be a
particularly high-risk and low-profit proposition for standard modes of bank lending. This
means that farmers and other entities in agricultural sectors typically pay high rates of interest
for borrowing, through both formal and informal channels. Alternatively, they may abstain
from borrowing altogether, and become locked into a cycle of low investment and low
returns. However, forms of commodity finance have been developed that can reduce
financiers risks and costs of delivery, by linking traditional financial tools with commodity
exchange services. The lower risks and lower costs that ensue can enable banks to reduce
accordingly the rates of interest charged to the borrower.
Impacts on farmer
Increases farmers access to finance.
Reduces costs of borrowing by reducing risks to borrower & lender.
Provides working capital to cover important expenses and avoid distress sales.
Ultimately enables greater capital for investment Financing becomes more organized
and predictable.
Cash and carry arbitrage provides an alternative cheap source of financing.
Income stabilization for farmers

Policy options for commodity income stabilization

Diversification strategies: Reducing dependence on limited and volatile income
streams, by diversifying into new crops with unrelated price development.
Supply management: Controlling the supply of a commodity relative to demand, in
an attempt to influence price.
National revenue management: Budgetary management designed to smooth
government expenditure over time, via stabilization funds and spending rules.

50 | P a g e

Compensatory finance: Relief loans or payments to countries triggered by falls in

commodity export revenues.
Market-based risk management instruments: Instruments used to offset exposure to
price risk through financial markets or other institutions.


India does not have a large nation-wide commodity market, but isolated regional
commodity markets. In parallel with the underlying cash markets, Indian commodity
futures markets too are dispersed and fragmented, with separate trading communities
in different regions and with little contact with one another. While the exchanges
have varying degrees of success, the industry is generally viewed as unsuccessful.
The exchanges with a few exceptions have acknowledged that they need to
embrace new technologies, and, above all, modern and transparent methods of
doing business. But management often find it difficult to chart out a route into the
future, and have had difficulties in convincing their membership.
Next to the officially approved exchanges, there are many havala markets. Most of
these unofficial commodity exchanges have operated for many decades and have built
up a reasonable reputation in terms of integrity and liquidity. Some unofficial markets
trade 20-30 times the volume of the official futures exchanges. They are often
localised in close proximity to the official exchanges. They offer not only futures, but
also option contracts. Transaction costs are low, and they therefore attract many
speculators and the smaller hedgers. Absence of regulation and proper clearing
arrangements, however, mean that these markets are mostly regulated by the
reputation of the main players. Many market participants feel that as this system has
worked well for a long time, there is no reason to fear a breakdown of this system
based on trust. However, this clearly cannot be the base for government policy, which
has a duty to protect the public against the risks that use of these markets pose.


Risks and transaction costs in agriculture
The Government of India (GOI) Working Group on Risk Management in Agriculture
defines agricultural risk in the following way: Agricultural risk is associated with
negative outcomes that stem from imperfectly predictable biological, climatic, and
price variables. These variables include natural adversities (for example, pests and
diseases) and climatic factors not within the control of the farmers. They also include

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adverse changes in both input and output prices (GOI, 2007b: 6). These risks are
exacerbated by deficiencies in infrastructure and market formation, information
asymmetries, and the lack of livelihood resilience that results from a situation of
poverty and its root causes (these include access to health, education, social security,
land and capital).

A range of risks can be identified:

Production risk, associated with uncertainty about quantity and quality of


Price risk, associated with commodity-price volatility that creates uncertainty about
the level of return on investment and assets;

Market risk, associated with uncertainty about whether a purchaser can be found for
farmers produce;

Counterparty risk, associated with uncertainty about whether other parties to a

transaction will fulfil the terms of a contract;

Credit risk, associated with uncertainty about securing funds to cover working capital
during the course of the season and investment for next years crop;

Institutional risk, associated with uncertainty about changes to public regulation or to

government support regimes that may adversely affect the producer.
Farmers have a range of mechanisms for dealing with these risks . From the
preceding remarks, it becomes clear that price risk is only one of the risks that farmers
face, and futures contracts are only one of the mechanisms to deal with these risks.
However, it will be argued in this study that commodity exchanges do not merely
provide hedging services that enable producers to manage price risk although this is
what they are most famous for. Instead, it will be contended that commodity
exchanges are versatile and dynamic entities that enable entities in agricultural sectors,
including small-scale farmers, to address the key challenges that face their market. It
will be shown that they offer a range of instruments for tackling not just price risk, but
also potentially production, market,


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Benefits of Futures Trading

Efficient Price discovery
Price risk management
Credit mobilization
Integration of rural, urban and global markets
Increased awareness about quality standards
Rising investment in market related infrastructure (e.g., standardization/quality
testing/warehousing) Benefit Investment, employment generation and penetration of
financial services to rural India.


Reduces risks and locks cost.

Results in better cash flow management
Mechanism to identify,
Measure, manage and monitor risk.
Removes speculative element in the business by mitigating exchange rate risk.
Protects business margins
Enhances efficiency and competitiveness


Broken links in Agri-chain production

Poor extension
Low Lack of quality
Low capacity utilization Marketing
Lack of grading
Non transparency in prices
Quality inputs
Non demand linked production
Supply chain
Lack of storage
Poor transportation
High wastages
Productivity Multiple intermediaries Processing
Low processing
Poor returns
Poor infrastructure
No linkages

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Futures markets are centralized and organized markets where futures contracts and
options are traded. All economic agents, both professionals and speculators, can buy and sell
such contracts at low transaction costs and on a competitive basis. Market liquidity
guarantees the quality of the futures prices as well as the premium values of the put and call
options. This means that the futures price incorporates all available information. In other
words, at any time and for a set of current information, the futures price is the best predictor
of the future spot price.
Derivatives are financial evolved from simple commodity future contracts into a diverse
group of financial instruments that apply to every kind of asset, including mortgages,
insurance and many more. Futures contracts, Swaps (1970s-), Exchange-traded Commodities
(ETC) (2003-), forward contracts, etc. are examples. They can be traded through formal
exchanges or through Over-the-counter (OTC). Commodity market derivatives unlike credit
default derivatives for example, are secured by the physical assets or commodities.

A forward contract is an agreement between two parties to exchange at some fixed future
date a given quantity of a commodity for a price defined when the contract is finalized. The
fixed price is known as the forward price. Such forward contracts began as a way of reducing
pricing risk in food and agricultural product markets, because farmers knew what price they
would receive for their output.
Forward contracts for example, were used for rice in seventeenth century Japan.

Futures contracts are standardized forward contracts that are transacted through an exchange.
In futures contracts the buyer and the seller stipulate product, grade, quantity and location and
leaving price as the only variable.
Agricultural futures contracts are the oldest, in use in the United States for more than 170
years. Modern futures agreements, began in Chicago in the 1840s, with the appearance of the
railroads. Chicago, centrally located, emerged as the hub between Midwestern farmers and
east coast consumer population centers.

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A Swaps is a derivative in which counterparties exchange the cash flows of one party's
financial instrument for those of the other party's financial instrument. They were introduced
in the 1970s.

Exchange-traded commodities (ETCs)

Exchange-traded commodity is a term used for commodity exchangetraded funds (which are funds) or commodity exchange-traded notes (which are notes). These
track the performance of an underlying commodity index including total return indices based
on a single commodity. They are similar to ETFs and traded and settled exactly like stock
funds. ETCs have market maker support with guaranteed liquidity, enabling investors to
easily invest in commodities.
They were introduced in 2003.
At first only professional institutional investors had access,
but online exchanges opened some ETC markets to almost anyone. ETCs were introduced
partly in response to the tight supply of commodities in 2000, combined with record low
inventories and increasing demand from emerging markets such as China and India.
Prior to the introduction of ETCs, by the 1990s ETFs
pioneered by Barclays Global Investors (BGI) revolutionized the mutual funds industry. By
the end of December 2009 BGI assets hit an all-time high of $1 trillion. Gold was the first
commodity to be securitised through an Exchange Traded Fund (ETF) in the early 1990s, but
it was not available for trade until 2003. The idea of a Gold ETF was first officially
conceptualised by Benchmark Asset Management Company Private Ltd in India, when they
filed a proposal with the Securities and Exchange Board of India in May 2002.The first gold
exchange-traded fund was Gold Bullion Securities launched on the ASX in 2003, and the
first silver exchange-traded fund was iShares Silver Trust launched on the NYSE in 2006. As
of November 2010 a commodity ETF, namely SPDR Gold Shares, was the second-largest
ETF by market capitalization.
Generally, commodity ETFs are index funds tracking nonsecurity indices. Because they do not invest in securities, commodity ETFs are not regulated

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as investment companies under the Investment Company Act of 1940 in the United States,
although their public offering is subject to SEC review and they need an SEC no-action
letter under the Securities Exchange Act of 1934. They may, however, be subject to
regulation by the Commodity Futures Trading Commission.
The earliest commodity ETFs, such as SPDR Gold
Shares. NYSE Arca: GLD and iShares Silver Trust NYSE Arca: SLV, actually owned the
are NYSE Arca: PALL (palladium) and NYSE Arca: PPLT (platinum). However, most ETCs
implement a futures trading strategy, which may produce quite different results from owning
the commodity.
Commodity ETFs trade provide exposure to an increasing range of
commodities and commodity indices, including energy, metals, softs and agriculture. Many
commodity funds, such as oil roll so-called front-month futures contracts from month to
month. This provides exposure to the commodity, but subjects the investor to risks involved
in different prices along the term structure, such as a high cost to roll.
ETCs in China and India gained in importance due to those
countries' emergence as commodities consumers and producers. China accounted for more
than 60% of exchange-traded commodities in 2009, up from 40% the previous year. The
global volume of ETCs increased by a 20% in 2010, and 50% since 2008, to around 2.5
billion million contracts
Over-the-counter (OTC) commodities derivatives
Over-the-counter (OTC) commodities derivatives trading originally
involved two parties, without an exchange. Exchange trading offers greater transparency and
regulatory protections. In an OTC trade, the price is not generally made public. OTC are
higher risk but may also lead to higher profits.
Between 2007 and 2010, global physical exports of
commodities fell by 2%, while the outstanding value of OTC commodities derivatives
declined by two-thirds as investors reduced risk following a five-fold increase in the previous
three years.
Money under management more than doubled between
2008 and 2010 to nearly $380 billion. Inflows into the sector totaled over $60 billion in 2010,
the second highest year on record, down from $72bn the previous year. The bulk of funds
went into precious metals and energy products. The growth in prices of many commodities in
2010 contributed to the increase in the value of commodities funds under management.

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At the time of sowing the farmer has three basic potential strategies:
Strategy 1: Do nothing with the hope of a spot price increase. This position is usually called
Strategy 2: Hedge future production by selling futures contract at for a volume equivalent to
the expected crop. The farmer is covering the market price risk and fixing his financial
Strategy 3: Buy a put option at-the-money, meaning the right to sell for a premium.
Two possibilities may occur after the farmers decision during sowing: the market
price can increase or decrease during the production cycle. As expected, the
speculative strategy (Strategy 1) has the highest result variability, with very high and
very low results with respect to market behaviour. With no basis risk, the hedging
with futures contract (Strategy 2) offers as final payment the value of the target price
in both cases. Finally, the purchase of a put option (Strategy 3) is a good second
best strategy, bringing financial results very close to the best results of any of the
above cases. This example presents the basic interest of futures contract as well as
options. Combinations of strategies are required. Risk diversification comes from the
positive correlation between futures and spot prices as well as asymmetric risk
outcomes of options.
This hedging activity should be managed as a dynamic position. The question is when
to sell futures contract. Should the farmer sell the entire expected crop quantity when
planting seeds? Should he choose a time between sowing and harvest? In fact, the
farmer must diversify the hedging times in order to really diversify price risk and
manage yield risk. A satisfactory hedging programme could be utilizing futures
market at various stages of crop production and spreading the risk over the duration of
the crop.
Optimal hedging has been studied extensively by academics, first in the
seventies/early eighties using purely futures contracts and then in the late
eighties/nineties using option contracts. The models are increasingly complex but are
all based on price correlation between the futures and the local spot prices. They give
important information on the quantity to be hedged with respect to both the cash
position and the correlation coefficient between the futures and the spot prices.
Practical analysis also gives useful information on the diversification potential of
futures markets. This is called hedging effectiveness computed as the reduction in
variance that results from maintaining a hedged position rather than an unhedged

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position. All these types of practical computations are bridging the gap between
theoretical analysis of risk management and practical use of futures markets.


Most strategies that farmers can use to reduce income risk are likely to increase
their production cost or might not be sufficient in the case of natural catastrophes. Such
market failures have been used to justify government intervention in risk management in
Risk in agriculture is often considered as having specific characteristics that explain
the more frequent government intervention in risk management than in other sectors.
Specifically, the relationship with nature, in particular the dependence on climate and
biological processes, makes risk more difficult to control than with mechanical
processes. Inelasticity of both demand and supply also contribute to fluctuations in
agricultural commodity prices. In consequence, variability in agricultural prices is
often higher than that in other products and annual income from agricultural activities
can vary to a large extent in the absence of offsetting policy interventions. However,
futures markets help to reduce price volatility but do not prevent longer- term price
When government intervention in risk management involves elements of support, as
has often been the case in OECD countries, farm families have no incentive to adopt
risk strategies at the production and consumption level, or to use market-based
approaches. This in turn hampers the development of market, risk-shifting solutions.
In addition, reducing risk faced by farmers may encourage them to take production
decisions that are not sustainable. Hence, it is argued that some degree of instability
can be good as it encourages technical progress and innovation in marketing. Various
underlying elements contribute to increasing the costs of intervention and lower its
efficiency. Appreciating these concerns, some governments have tried to encourage
farmers to use futures markets. It is established widely that futures markets, where
they exist, help to reduce price fluctuations within a given year. Recognizing this,
governments first contribution could be to provide information on prices and
contracts, and training programmes to farmers on how to use futures markets. In some
cases, governments have acted as intermediaries between farmers and futures
exchanges, with or without subsidy.

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The important findings of the study & the conclusion drawn these from are
presented below.
Really commodity exchanges play a vital role for the growth of the agricultural sector
Because agriculture provides 1/6th to GDP & employs largest no of labour force
around the country
Commodity exchanges provide a basic future mechanisms which helps the hedgers,
producers, processors to minimise the risk.
The commodity exchanges are now trying to establish a direct interaction platform
with the farmers
The most important facility which provided by the commodity exchanges are saving
the farmers from unexpected future price fluctuation, moreover only for the
betterment of the agriculture sector & provides various mechanisms like,
Price discovery
Price risk management
Venue for investment
Facilitation of physical commodity trade
Facilitation of financing to the agricultural sector

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Regulatory Perspectives: What Should the Forward Markets Commission Focus On?
The FMC needs a new focus, a stronger role, and an improved day-to-day
oversight of exchanges. The Forward Contracts (Regulation) Act, 1952, does not properly
allow for many of these changes. Certain parts of the FR (C) Act would become superfluous
if the changes mentioned below were adopted (e.g., the references to transferable delivery
contracts), others need to be changed (e.g., the ban on options), and the FR (C) Act does not
provide the FMC to take on necessary new roles, e.g. properly regulating brokerage activity.
FMC may therefore consider the overhaul of the FR (C) Act, as long as this does not slow
down those changes that are both necessary, and possible under the Act.
The FMC should allow Option trading in commodity market in India.

The FMC has to take some steps to increase the awareness of future
commodity trading India.
The FMC has to encourage the mutual fund companies and institutional investors to
invest in commodity market in India.
The government has to allow FIIs to invest in commodity market in India in future
market not in option.
The FMC should have concrete plan to stop Dabba trading in commodity market in
The FMC should increase the range of commodities in future commodities in
commodity market in India.
To motivate the commodity business in India the FMC should come up with some
rebate in taxes.
The FMC should increase the delivery centres of commodities in India.
As commodity market is very potential for business, the angel co. should think about
various ways to attract the customers.
Trading Members: These members execute buy and sell orders in the trading ring
of the exchange on their account, on account of ordinary members and other clients.
Trading-cum-Clearing Members: They have the right to trade and also to
participate in clearing and settlement in respect of transactions carried out on their account
and on account of their clients.
Institutional Clearing Members: They have the right to participate in clearing and
settlement on behalf of other members but do not have the trading rights.

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Designated Clearing Bank: It provides banking facilities in respect of pay-in, payout

and other monetary settlements.
The composition of the members in an exchange however varies. In some exchanges
there are exclusive clearing members, broker members and registered non -members in
addition to the above category of members.
For developing-country Governments:
Where a commodity exchange (or commodity exchanges) do not exist already, appraising
the feasibility of establishing a commodity exchange (or commodity exchanges); determining
whether to perform registration and trade facilitation services or to provide markets for cash,
forwards, financing and/or futures instruments;
Ensuring an overarching regulatory framework that upholds the transparency and integrity
of commodity markets, protects market participants from unscrupulous practices, and
effectively manages the risks that arise from market operations;
Ensuring that the wider legaleconomic framework provides legal certainty for exchange
operations and is free of impediments that unduly restrict exchange functions, except where
superseded by other fundamental or strategic national development imperatives;
Developing elements of physical infrastructure that support commodity exchange and
market development including information and communications technology, electricity,
storage and logistics;
Recognizing that a rules- or principles-based approach to regulation as opposed to a
discretionary or ad hoc approach is an essential foundation for market development and
exchange success;
For established exchanges in the developing world:
Increasing awareness of the actual and potential development impacts arising from
commodity exchange services in developing countries, and recognizing that pursuit of these
impacts represents a winwin solution for both the exchange and the wider economy;
Educating key stakeholders about exchange functions, operations, services and benefits
including market users, commodity sector participants, government, the media, academia and
civil society;
Deepening and broadening the exchanges development impact through the innovative
application of products, services, technologies and capacity-building programmes;
Partnering with other entities that are well placed both to deliver exchange services to
market users and also to enhance impact on market users, especially rural communities. Such
entities may include farmer cooperatives/associations, government agencies, research

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institutes, extension agencies, financial and microfinance institutions, and civil society

Last but not the least what I found personally from the above study want to conclude that,
India is the second largest populated and first agriculture oriented country whose more than
70 percentage of the population are depending upon agriculture. As far as the study
concerned India have developed from both technologically as well as infrastructurally.
Nationalised commodity Exchanges like MCX, NCDEX, UCE, ACE, ICEX AND
NMCE, with the developed features like robust technology & scalable infrastructure, the
exchanges have added International 1st records to their history, but the most important thing is
the proper communication and networking with the grass root level farmers, which can only
be possible if Regional Commodity Exchanges actively participate in competition.
In most of the states the farmers are least aware of the commodity exchanges and other
mechanisms. Basically the farmers of the Drought and flood affected states face a huge loss,
which ultimately enhance the dearth of commodities and creates inflation.
Therefore, the most important ingredient about the commodity exchanges is
establishing a two way communication with the small holder farmers of the country. Which
will facilitate the following:

Stabilizing the prices-enabling information flow-wider participation

Overall strengthening of financial markets -portfolio diversification -hedging risks
Efficient markets-(financial/commodities)-financial stability
stability-political stability
Commexes-essential function-efficient allocation of primary sector resources

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