A SPECIALIZATION PROJECT ON

“A STUDY ON COMMODITY MARKET IN INDIA”

Submitted in partial fulfillment for the award of the degree of

Master of Management Studies (MMS)

CONDUTED BY

UNIVERSITY OF MUMBAI

SUBMITTED BY

VICKY VILAS MEHER

M. M. S. (SEMESTER IV)

Roll No.:- MB/A/16/003

UNDER THE GUIDANCE OF

PROF. SONAL RAUL

ACADEMIC YEAR
2016-18

SAS INSTITUE OF MANAGEMENT STUDIES (MMS)

SARAVALI, BOISAR (W), MAHARASHTRA-401404

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 CERTIFICATE

This is to certify that project titled “A STUDY ON COMMODITY MARKET IN INDIA” is

successfully completed by Mr. VICKY VILAS MEHER during the IV Semester, in partial

fulfillment of the Master’s Degree in Management Studies recognized by the University of

Mumbai for the academic year 2016-18 through SAS INSTITUE OF MANAGEMENT

STUDIES (MMS). This project work is original and not submitted earlier for the award of any

degree / diploma or associateship of any other University / Institution.

Name: _____________________

Date:______________________ (Signature of the Guide)

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 DECLARATION

I hereby declare that this Project Report submitted by me to the “A STUDY ON COMMODITY
MARKET IN INDIA” is a bonafide work undertaken by me and it is not submitted to any other
University or Institution for the award of any degree diploma / certificate or published any time
before.

Name: Vicky Vilas Meher

Roll No.: MB/A/16/003 Signature of the student

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 ACKNOWLEDGEMENT

I am extremely grateful to University of Mumbai for having prescribed this project work as a
part of academic requirement in the SAS Institute of Management Studies (MMS) course.

I wish to appreciate the management and staff of SAS Institute of Management Studies for
providing state of art infrastructure and resources.

I wish to express a special thanks to my project guide Miss. Sonal Raul and Mr. Bhagyesh
Sankhe, Director of SAS Institute of Management Studies, without whose guidance the project
may not have taken shape and a sincere thanks to professor of the college for continuous
assistance and motivation.

Finally I would like to thank all those who have directly or indirectly helped me towards the
executions of this project with full sincerity.

Sincere thanks to all.

VICKY VILAS MEHER

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 EXECUTIVE SUMMARY

Different web based literature has been studied to understand which are the major players of
commodity markets in the world And what is their way of operation? Which are the major
commodity exchanges in India? What is their modus operandi?

While we were surveying various web site we came to know the whole commodity market and
the exchange takes place in this market is broadly classify into two principle categories that is
agriculture and non-agriculture commodity market.

The first session deals with the significance of commodity market. As commodity market is the
place where 2 parties agree to buy and sell a specified and standardized quantity of a
commodity at a certain time of future at a price agreed upon at the time of agreement agreed
upon irrespective of availing future price. Following the significance of commodity market is
the history of the commodity market. The root of commodity market is traced from Japan
where Japanese merchants used to store rice in ware houses and later on they have issued „Rice
tickets‟. And as the time passes rice tickets are started to accepted as a currency.

Patterns of exchange that was prevailing in the market which was auction and the pattern that is
currently prevailing in the market which is future is discussed. Major international and national
players are described.

Various national and international markets and their features in brief are described. The
perspective of commodity market in which active and passive mode of commodity market,
volatility, liquidity of commodity market and their relation with economy are discussed.

Benefits of future commodity markets to agriculturists, farmers are discussed in brief along
with price discovery, price risk management, import-export competitiveness, improved product

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quality-market transparency etc. are discussed. The attractive features of commodity market,
various instruments those are available in the market are listed.
Participants of the commodity market those are hedgers, speculators and arbitrators their power
and limitations, functioning etc. are described in brief.

A complete working and delivery process of commodity market including various stages are
clearly mentioned with the use of flow chart. Spot trade and future trade are also explained
well.

At the end unresolved issues of commodity market and future prospect of commodity market is
written down.

Whole commodity market is divided into two broad categories those are agriculture
commodities and non-agriculture commodities. Agriculture commodities include wheat, rice,
pulses, cereals, edible oils, ground nut etc. Non- agriculture commodities includes crude oil,
nonferrous metals like gold, silver, nickel, copper etc.

We have mainly focused upon the commodity groundnut. What are the essential features of
groundnut as a crop and as a commodity? This session would broadly deal with groundnut as a
commodity, its cropping pattern, production, major markets and its significance as a
commodity traded in exchange

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 INDEX

Chapter No Topic Page No.

1 Introduction to Commodity Market 08 – 12
2 History of Evolution of Commodity Markets 13 – 14
3 India and the Commodity Market 15 – 21
4 International Commodity Exchanges 22 – 24
5 Working of Commodity Market 25 – 26
6 Investment in Commodity Market 27 – 31
7 Current Scenario in Indian Commodity Market 32 – 37
8 Commodities 38 – 42
9 Research Methodology 43
10 Data interpretation and analysis 44 – 54
11 Findings 55
Current scenario 56 – 57
Conclusion 58
Bibliography 59
Annexure 60 – 63

Chapter 1

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 Introduction to Commodity Market

Meaning of commodity
Any product that can be used for commerce or an article of commerce which is
traded on an authorized commodity exchange is known as commodity. The article should be
movable of value, something which is bought or sold and which is produced or used as the
subject or barter or sale. In short commodity includes all kinds of goods. Indian Forward
Contracts (Regulation) Act (FCRA), 1952 defines “goods” as “every kind of movable property
other than actionable claims, money and securities”.

In current situation, all goods and products of agricultural (including plantation),

mineral and fossil origin are allowed for commodity trading recognized under the FCRA. The
national commodity exchanges, recognized by the Central Government, permits commodities
which include precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and
un-ginned cotton, oilseeds, oils and oilcakes, raw jute and jute goods, sugar and gur, potatoes and
onions, coffee and tea, rubber and spices. Etc.

Commodity Exchange

A commodity exchange is an association or a company or any other body corporate

organizing futures trading in commodities for which license has been granted by regulating
authority.

Commodity Future

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 A Commodity futures is an agreement between two parties to buy or sell a specified and
standardized quantity of a commodity at a certain time in future at a price agreed upon at the
time of entering into the contract on the commodity futures exchange.
The need for a futures market arises mainly due to the hedging function that it can
perform. Commodity markets, like any other financial instrument, involve risk associated with
frequent price volatility. The loss due to price volatility can be attributed to the following
reasons:

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

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

The objectives of Commodity futures: -

 Hedging with the objective of transferring risk related to the possession of physical assets
through any adverse moments in price. Liquidity and Price discovery to ensure base
minimum volume in trading of a commodity through market information and demand
supply factors that facilitates a regular and authentic price discovery mechanism.

 Maintaining buffer stock and better allocation of resources as it augments reduction in

inventory requirement and thus the exposure to risks related with price fluctuation
declines. Resources can thus be diversified for investments.
 Price stabilization along with balancing demand and supply position. Futures trading
leads to predictability in assessing the domestic prices, which maintains stability, thus
safeguarding against any short term adverse price movements. Liquidity in Contracts of
the commodities traded also ensures in maintaining the equilibrium between demand and
supply.

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  Flexibility, certainty and transparency in purchasing commodities facilitate bank
financing. Predictability in prices of commodity would lead to stability, which in turn
would eliminate the risks associated with running the business of trading commodities.
This would make funding easier and less stringent for banks to commodity market
players.

Benefits of Commodity Futures Markets:-

The primary objectives of any futures exchange are authentic price discovery and an
efficient price risk management. The beneficiaries include those who trade in the commodities
being offered in the exchange as well as those who have nothing to do with futures trading. It is
because of price discovery and risk management through the existence of futures exchanges that
a lot of businesses and services are able to function smoothly.

1. Price Discovery:-Based on inputs regarding specific market information, the demand

and supply equilibrium, weather forecasts, expert views and comments, inflation rates,
Government policies, market dynamics, hopes and fears, buyers and sellers conduct
trading at futures exchanges. This transforms in to continuous price discovery
mechanism. The execution of trade between buyers and sellers leads to assessment of fair
value of a particular commodity that is immediately disseminated on the trading terminal.

2. Price Risk Management: - Hedging is the most common method of price risk
management. It is strategy of offering price risk that is inherent in spot market by taking
an equal but opposite position in the futures market. Futures markets are used as a mode
by hedgers to protect their business from adverse price change. This could dent the
profitability of their business. Hedging benefits who are involved in trading of
commodities like farmers, processors, merchandisers, manufacturers, exporters, importers
etc.
3. Import- Export competitiveness: - The exporters can hedge their price risk and improve
their competitiveness by making use of futures market. A majority of traders which are

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 involved in physical trade internationally intend to buy forwards. The purchases made
from the physical market might expose them to the risk of price risk resulting to losses.
The existence of futures market would allow the exporters to hedge their proposed
purchase by temporarily substituting for actual purchase till the time is ripe to buy in
physical market. In the absence of futures market it will be meticulous, time consuming
and costly physical transactions.

4. Predictable Pricing: - The demand for certain commodities is highly price elastic. The
manufacturers have to ensure that the prices should be stable in order to protect their
market share with the free entry of imports. Futures contracts will enable predictability in
domestic prices. The manufacturers can, as a result, smooth out the influence of changes
in their input prices very easily. With no futures market, the manufacturer can be caught
between severe short-term price movements of oils and necessity to maintain price
stability, which could only be possible through sufficient financial reserves that could
otherwise be utilized for making other profitable investments.

5. Benefits for farmers/Agriculturalists: - Price instability has a direct bearing on farmers

in the absence of futures market. There would be no need to have large reserves to cover
against unfavorable price fluctuations. This would reduce the risk premiums associated
with the marketing or processing margins enabling more returns on produce. Storing
more and being more active in the markets. The price information accessible to the
farmers determines the extent to which traders/processors increase price to them. Since
one of the objectives of futures exchange is to make available these prices as far as
possible, it is very likely to benefit the farmers. Also, due to the time lag between
planning and production, the market-determined price information disseminated by
futures exchanges would be crucial for their production decisions.

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

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

7. Improved product quality: - The existence of warehouses for facilitating delivery with
grading facilities along with other related benefits provides a very strong reason to
upgrade and enhance the quality of the commodity to grade that is acceptable by the
exchange. It ensures uniform standardization of commodity trade, including the terms of
quality standard: the quality certificates that are issued by the exchange-certified
warehouses have the potential to become the norm for physical trade.

Chapter 2

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 History of Evolution of commodity markets

Commodities future trading was evolved from need of assured continuous supply of
seasonal agricultural crops. The concept of organized trading in commodities evolved in
Chicago, in 1848. But one can trace its roots in Japan. In Japan merchants used to store Rice in
warehouses for future use. To raise cash warehouse holders sold receipts against the stored rice.
These were known as “rice tickets”. Eventually, these rice tickets become accepted as a kind of
commercial currency. Latter on rules came in to being, to standardize the trading in rice tickets.
In 19th century Chicago in United States had emerged as a major commercial hub. So that wheat
producers from Mid-west attracted here to sell their produce to dealers & distributors. Due to
lack of organized storage facilities, absence of uniform weighing & grading mechanisms
producers often confined to the mercy of dealers discretion. These situations lead to need of
establishing a common meeting place for farmers and dealers to transact in spot grain to deliver
wheat and receive cash in return.
Gradually sellers & buyers started making commitments to exchange the produce for
cash in future and thus contract for “futures trading” evolved. Whereby the producer would agree
to sell his produce to the buyer at a future delivery date at an agreed upon price. In this way
producer was aware of what price he would fetch for his produce and dealer would know about
his cost involved, in advance. This kind of agreement proved beneficial to both of them. As if
dealer is not interested in taking delivery of the produce, he could sell his contract to someone
who needs the same. Similarly producer who not intended to deliver his produce to dealer could
pass on the same responsibility to someone else. The price of such contract would dependent on
the price movements in the wheat market. Latter on by making some modifications these
contracts transformed in to an instrument to protect involved parties against adverse factors such
as unexpected price movements and unfavorable climatic factors. This promoted traders entry in
futures market, which had no intentions to buy or sell wheat but would purely speculate on price
movements in market to earn profit.

Trading of wheat in futures became very profitable which encouraged the entry of
other commodities in futures market. This created a platform for establishment of a body to

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regulate and supervise these contracts. That’s why Chicago Board of Trade (CBOT) was
established in 1848. In 1870 and 1880s the New York Coffee, Cotton and Produce Exchanges
were born. Agricultural commodities were mostly traded but as long as there are buyers and
sellers, any commodity can be traded. In 1872, a group of Manhattan dairy merchants got
together to bring chaotic condition in New York market to a system in terms of storage, pricing,
and transfer of agricultural products. In 1933, during the Great Depression, the Commodity
Exchange, Inc. was established in New York through the merger of four small exchanges – the
National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange,
and the New York Hide Exchange.
The largest commodity exchange in USA is Chicago Board of Trade, The Chicago
Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity Exchange
and New York Coffee, sugar and cocoa Exchange. Worldwide there are major futures trading
exchanges in over twenty countries including Canada, England, India, France, Singapore, Japan,
Australia and New Zealand.

Chapter 3

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 India and the commodity market

History of Commodity Market in India:-

The history of organized commodity derivatives in India goes back to the nineteenth
century when Cotton Trade Association started futures trading in 1875, about a decade after they
started in Chicago. Over the time datives market developed in several commodities in India.
Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute and jute
goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920).

However many feared that derivatives fuelled unnecessary speculation and were
detrimental to the healthy functioning of the market for the underlying commodities, resulting in
to banning of commodity options trading and cash settlement of commodities futures after
independence in 1952. The parliament passed the Forward Contracts (Regulation) Act, 1952,
which regulated contracts in Commodities all over the India. The act prohibited options trading
in Goods along with cash settlement of forward trades, rendering a crushing blow to the
commodity derivatives market. Under the act only those associations/exchanges, which are
granted reorganization from the Government, are allowed to organize forward trading in
regulated commodities. The act envisages three tire regulations: (i) Exchange which organizes
forward trading in commodities can regulate trading on day-to-day basis; (ii) Forward Markets
Commission provides regulatory oversight under the powers delegated to it by the central
Government. (iii) The Central Government- Department of Consumer Affairs, Ministry of
Consumer Affairs, Food and Public Distribution- is the ultimate regulatory authority.

The commodities future market remained dismantled and remained dormant for
about four decades until the new millennium when the Government, in a complete change in a
policy, started actively encouraging commodity market. After Liberalization and Globalization in
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1990, the Government set up a committee (1993) to examine the role of futures trading. The
Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17
commodity groups. It also recommended strengthening Forward Markets Commission, and
certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing option
trading in goods and registration of brokers with Forward Markets Commission. The
Government accepted most of these recommendations and futures’ trading was permitted in all
recommended commodities. It is timely decision since internationally the commodity cycle is on
upswing and the next decade being touched as the decade of Commodities.

Commodity exchange in India plays an important role where the prices of any commodity are
not fixed, in an organized way. Earlier only the buyer of produce and its seller in the market
judged upon the prices. Others never had a say.

Today, commodity exchanges are purely speculative in nature. Before discovering the
price, they reach to the producers, end-users, and even the retail investors, at a grassroots level. It
brings a price transparency and risk management in the vital market. A big difference between a
typical auction, where a single auctioneer announces the bids and the Exchange is that people are
not only competing to buy but also to sell. By Exchange rules and by law, no one can bid under a
higher bid, and no one can offer to sell higher than someone else’s lower offer. That keeps the
market as efficient as possible, and keeps the traders on their toes to make sure no one gets the
purchase or sale before they do. Since 2002, the commodities future market in India has
experienced an unexpected boom in terms of modern exchanges, number of commodities
allowed for derivatives trading as well as the value of futures trading in commodities, which
crossed $ 1 trillion mark in 2006. Since 1952 till 2002 commodity datives market was virtually
non- existent, except some negligible activities on OTC basis.

In India there are 25 recognized future exchanges, of which there are three national
level multi-commodity exchanges. After a gap of almost three decades, Government of India has
allowed forward transactions in commodities through Online Commodity Exchanges, a

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modification of traditional business known as Adhat and Vayda Vyapar to facilitate better risk
coverage and delivery of commodities. The three exchanges are: National Commodity &
Derivatives Exchange Limited (NCDEX) Mumbai, Multi Commodity Exchange of India
Limited (MCX) Mumbai and National Multi-Commodity Exchange of India Limited
(NMCEIL) Ahmedabad.There are other regional commodity exchanges situated in different
parts of India.

Legal framework for regulating commodity futures in India:-

The commodity futures traded in commodity exchanges are regulated by the

Government under the Forward Contracts Regulations Act, 1952 and the Rules framed there
under. The regulator for the commodities trading is the Forward Markets Commission, situated at
Mumbai, which comes under the Ministry of Consumer Affairs Food and Public Distribution

Forward Markets Commission (FMC):-

It is statutory institution set up in 1953 under Forward Contracts (Regulation) Act,

1952. Commission consists of minimum two and maximum four members appointed by Central
Govt. Out of these members there is one nominated chairman. All the exchanges have been set
up under overall control of Forward Market Commission (FMC) of Government of India.

National Commodities & Derivatives Exchange Limited (NCDEX)

National Commodities & Derivatives Exchange Limited (NCDEX) promoted by

ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank of
Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited
(NSC). Punjab National Bank (PNB), Credit Ratting Information Service of India Limited
(CRISIL), Indian Farmers Fertilizer Cooperative Limited (IFFCO), Canara Bank and Goldman
Sachs by subscribing to the equity shares have joined the promoters as a share holder of
exchange. NCDEX is the only Commodity Exchange in the country promoted by national level
institutions.

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 NCDEX is a public limited company incorporated on 23 April 2003. NCDEX is a
national level technology driven on line Commodity Exchange with an independent Board of
Directors and professionals not having any vested interest in Commodity Markets.
It is committed to provide a world class commodity exchange platform for market participants to
trade in a wide spectrum of commodity derivatives driven by best global practices,
professionalism and transparency.
NCDEX is regulated by Forward Markets Commission (FMC). NCDEX is also
subjected to the various laws of land like the Companies Act, Stamp Act, Contracts Act, Forward
Contracts Regulation Act and various other legislations.
NCDEX is located in Mumbai and offers facilities to its members in more than 550
centers through out India. NCDEX currently facilitates trading of 57 commodities.

Commodities Traded at NCDEX:-

 Bullion:-
Gold KG, Silver, Brent

 Minerals:-
Electrolytic Copper Cathode, Aluminum Ingot, Nickel
Cathode, Zinc Metal Ingot, Mild steel Ingots

 Oil and Oil seeds:-

Cotton seed, Oil cake, Crude Palm Oil, Groundnut (in shell),
Groundnut expeller Oil, Cotton, Mentha oil, RBD Pamolein, RM
seed oil cake, Refined soya oil, Rape seeds, Mustard seeds,
Caster seed, Yellow soybean, Meal

 Pulses:-
Urad, Yellow peas, Chana, Tur, Masoor,

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  Grain:-
Wheat, Indian Pusa Basmati Rice, Indian parboiled Rice (IR-
36/IR-64), Indian raw Rice (ParmalPR-106), Barley, Yellow
red maize

 Spices:-
Jeera, Turmeric, Pepper

 Plantation:-
Cashew, Coffee Arabica, Coffee Robusta

 Fibers and other:-

Guar Gum, Guar seeds, Guar, Jute sacking bags, Indian 28
mm cotton, Indian 31mm cotton, Lemon, Grain Bold, Medium
Staple, Mulberry, Green Cottons, , , Potato, Raw Jute,
Mulberry raw Silk, V-797 Kapas, Sugar, Chilli LCA334

 Energy:-
Crude Oil, Furnace oil

Multi Commodity Exchange of India Limited (MCX)

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 Multi Commodity Exchange of India Limited (MCX) is an independent and de-mutulized
exchange with permanent reorganization from Government of India, having Head Quarter in
Mumbai. Key share holders of MCX are Financial Technologies (India) Limited, State Bank of
India, Union Bank of India, Corporation Bank of India, Bank of India and Cnnara Bank. MCX
facilitates online trading, clearing and settlement operations for commodity futures market across
the country.
MCX started of trade in Nov 2003 and has built strategic alliance with Bombay Bullion
Association, Bombay Metal Exchange, Solvent Extractors Association of India, pulses Importers
Association and Shetkari Sanghatana.
MCX deals wit about 100 commodities.

Commodities Traded at MCX:-

 Bullion:-
Gold, Silver, Silver Coins,

 Minerals:-
Aluminum, Copper, Nickel, Iron/steel, Tin, Zinc, Lead

 Oil and Oil seeds:-

Castor oil/castor seeds, Crude Palm oil/ RBD Pamolein, Groundnut oil, Mustard/
Rapeseed oil, Soy seeds/Soy meal/Refined Soy Oil, Coconut Oil Cake, Copra,
Sunflower oil, Sunflower Oil cake, Tamarind seed oil,

 Pulses:-
Chana, Masur, Tur, Urad, Yellow peas

 Grains:-
Rice/ Basmati Rice, Wheat, Maize, Bajara, Barley,

 Spices:-
Pepper, Red Chili, Jeera, Cardamom, Cinnamon, Clove,
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 Ginger,

 Plantation:-
Cashew Kernel, Rubber, Areca nut, Betel nuts, Coconut,
Coffee,

 Fiber and others:-

Kapas, Kapas Khalli, Cotton (long staple, medium staple,
short staple), Cotton Cloth, Cotton Yarn, Gaur seed and
Guargum, Gur and Sugar, Khandsari, Mentha Oil, Potato, Art
Silk Yarn, Chara or Berseem, Raw Jute, Jute Goods, Jute
Sacking,

 Petrochemicals:-
High Density Polyethylene (HDPE), Polypropylene (PP), Poly
Vinyl Chloride (PVC)

 Energy:-
Brent Crude Oil, Crude Oil, Furnace Oil, Middle East Sour
Crude Oil, Natural Gas

National Multi Commodity Exchange of India Limited (NMCEIL)

National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-
mutualised Electronic Multi Commodity Exchange in India. On 25th July 2001 it was
granted approval by Government to organize trading in edible oil complex. It is being
supported by Central warehousing Corporation Limited, Gujarat State Agricultural
Marketing Board and Neptune Overseas Limited. It got reorganization in Oct 2002.
NMCEIL Head Quarter is at Ahmedabad.

Chapter 4
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 INTERNATIONAL COMMODITY EXCHANGES

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

year round supply of commodities/ products that are seasonal as is the case of agricultural
produce. The United States, Japan, United Kingdom, Brazil, Australia, Singapore are homes to
leading commodity futures exchanges in the world.

The New York Mercantile Exchange (NYMEX):-

The New York Mercantile Exchange is the world’s biggest exchange for trading in
physical commodity futures. It is a primary trading forum for energy products and precious
metals. The exchange is in existence since last 132 years and performs trades trough two
divisions, the NYMEX division, which deals in energy and platinum and the COMEX division,
which trades in all the other metals.
Commodities traded: - Light sweet crude oil, Natural Gas, Heating Oil, Gasoline, RBOB
Gasoline, Electricity Propane, Gold, Silver, Copper, Aluminum, Platinum, Palladium, etc.

London Metal Exchange:-

The London Metal Exchange (LME) is the world’s premier non-ferrous market,
with highly liquid contracts. The exchange was formed in 1877 as a direct consequence of the
industrial revolution witnessed in the 19th century. The primary focus of LME is in providing a
market for participants from non-ferrous based metals related industry to safeguard against risk
due to movement in base metal prices and also arrive at a price that sets the benchmark globally.
The exchange trades 24 hours a day through an inter office telephone market and also through a
electronic trading platform. It is famous for its open-outcry trading between ring dealing
members that takes place on the market floor.
Commodities traded:- Aluminum, Copper, Nickel, Lead, Tin, Zinc, Aluminum Alloy, North
American Special Aluminum Alloy (NASAAC), Polypropylene, Linear Low Density
Polyethylene, etc.

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The Chicago Board of Trade:-

The first commodity exchange established in the world was the Chicago Board of
Trade (CBOT) during 1848 by group of Chicago merchants who were keen to establish a central
market place for trade. Presently, the Chicago Board of Trade is one of the leading exchanges in
the world for trading futures and options. More than 50 contracts on futures and options are
being offered by CBOT currently through open outcry and/or electronically. CBOT initially dealt
only in Agricultural commodities like corn, wheat, non storable agricultural commodities and
non-agricultural products like gold and silver.
Commodities Traded: - Corn, Soybean, Oil, Soybean meal, Wheat, Oats, Ethanol, Rough Rice,
Gold, Silver etc.

Tokyo Commodity Exchange (TOCOM):-

The Tokyo Commodity Exchange (TOCOM) is the second largest commodity futures
exchange in the world. It trades in to metals and energy contracts. It has made rapid advancement
in commodity trading globally since its inception 20 years back. One of the biggest reasons for
that is the initiative TOCOM took towards establishing Asia as the benchmark for price
discovery and risk management in commodities like the Middle East Crude Oil. TOCOM’s
recent tie up with the MCX to explore cooperation and business opportunities is seen as one of
the steps towards providing platform for futures price discovery in Asia for Asian players in
Crude Oil since the demand-supply situation in U.S. that drives NYMEX is different from
demand-supply situation in Asia. In Jan 2003, in a major overhaul of its computerized trading
system, TOCOM fortified its clearing system in June by being first commodity exchange in
Japan to introduce an in-house clearing system. TOCOM launched options on gold futures, the
first option contract in Japanese market, in May 2004.
Commodities traded: - Gasoline, Kerosene, Crude Oil, Gold, Silver, Platinum, Aluminum,
Rubber, etc

Chicago Mercantile Exchange:-

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 The Chicago Mercantile Exchange (CME) is the largest futures exchange in the US
and the largest futures clearing house in the world for futures and options trading. Formed in
1898 primarily to trade in Agricultural commodities, the CME introduced the world’s first
financial futures more than 30 years ago. Today it trades heavily in interest rates futures, stock
indices and foreign exchange futures. Its products often serves as a financial benchmark and
witnesses the largest open interest in futures profile of CME consists of livestock, dairy and
forest products and enables small family farms to large Agri-business to manage their price risks.
Trading in CME can be done either through pit trading or electronically.
Commodities Traded: - Butter milk, Diammonium phosphate, Feeder cattle, frozen pork bellies,
Lean Hogs, Live cattle, Non-fat Dry Milk, Urea, Urea Ammonium Nitrate, etc

Chapter 5
Working of commodity Market

There are two kinds of trades in commodities. The first is the spot trade, in which one
pays cash and carries away the goods. The second is futures trade. The underpinning for futures
24 | P a g e
is the warehouse receipt. A person deposits certain amount of say, good X in a ware house and
gets a warehouse receipt. Which allows him to ask for physical delivery of the good from the
warehouse. But some one trading in commodity futures need not necessarily posses such a
receipt to strike a deal. A person can buy or sale a commodity future on an exchange based on his
expectation of where the price will go. Futures have something called an expiry date, by when
the buyer or seller either closes (square off) his account or give/take delivery of the commodity.
The broker maintains an account of all dealing parties in which the daily profit or loss due to
changes in the futures price is recorded. Squiring off is done by taking an opposite contract so
that the net outstanding is nil.
For commodity futures to work, the seller should be able to deposit the commodity at
warehouse nearest to him and collect the warehouse receipt. The buyer should be able to take
physical delivery at a location of his choice on presenting the warehouse receipt. But at present
in India very few warehouses provide delivery for specific commodities.
Following diagram gives a fair idea about working of the Commodity market.
Today Commodity trading system is fully computerized. Traders need not visit a
commodity market to speculate. With online commodity trading they could sit in the confines of
their home or office and call the shots.
The commodity trading system consists of certain prescribed steps or stages as
follows:

I. Trading: - At
this stage the following is the system implemented-
- Order receiving
- Execution
- Matching
- Reporting

25 | P a g e
 - Surveillance
- Price limits
- Position limits

II. Clearing: - This stage has following system in place-

- Matching
- Registration
- Clearing
- Clearing limits
- Notation
- Margining
- Price limits
- Position limits
- Clearing house.

III. Settlement: - This stage has following system followed as follows-

- Marking to market
- Receipts and payments
- Reporting
- Delivery upon expiration or maturity.

Chapter 6

Investment in Commodity Market

With whom investor can transact a business

26 | P a g e
 An investor can transact a business with the approved clearing member of previously
mentioned Commodity Exchanges. The investor can ask for the details from the Commodity
Exchanges about the list of approved members.

Identity Proof.

When investor approaches Clearing Member, the member will ask for identity proof. For
which Xerox copy of any one of the following can be given
a) PAN card Number
b) Driving License
c) Vote ID
d) Passport

Documents for Bank proofs

The front page of Bank Passbook and a canceled cheque of a concerned bank. Otherwise the
Bank Statement containing details can be given.

Documents for Address Proof

In order to ascertain the address of investor, the clearing member will insist on Xerox copy of
Ration card or the Pass Book/ Bank Statement where the address of investor is given.

Forms to be signed by the investor

The clearing member will ask the client to sign

a) Know your client form
b) Risk Discloser Document

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 The above things are only procedure in character and the risk involved and only after
understanding the business, he wants to transact business.

Aspects should be considered while selecting a commodity broker

While selecting a commodity broker investor should ideally keep certain aspects in mind
to ensure that they are not being missed in any which way. These factors include
 Net worth of the broker of brokerage firm.
 The clientele.
 The number of franchises/branches.
 The market credibility.
 The references.
 The kind of service provided- back office functioning being most important.
 Credit facility.
 The research team.
These are amongst the most important factors to calculate the credibility of
commodity broker.

Broker:-
The Broker is essentially a person of firm that liaisons between individual traders and the
commodity exchange. In other words the Commodity Broker is the member of Commodity
Exchange, having direct connection with the exchange to carry out all trades legally. He is also
known as the authorized dealer.

Commodity Trader/Broker of Commodity Exchange

To become a commodity trader one needs to complete certain legal and binding
obligations. There is routine process followed, which is stated by a unit of Government that lays

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down the laws and acts with regards to commodity trading. A broker of Commodities is also
required to meet certain obligations to gain such a membership in exchange.
To become a member of Commodity Exchange the broker of brokerage firm should have
net worth amounting to Rs. 50 Lakh. This sum has been determined by Multi Commodity
Exchange.

Member of Commodity Exchange

To become member of Commodity Exchange the person should comply with the
following Eligibility Criteria.
1. He should be Citizen of India.
2. He should have completed 21 years of his age.
3. He should be Graduate or having equivalent qualification.
4. He should not be bankrupt.
5. He has not been debarred from trading in Commodities by statutory/regulatory authority,
There are following three types of Memberships of Commodity Exchanges.

Trading-cum-Clearing Member (TCM):-

A TCM is entitled to trade on his own account as well as on account of his clients, and clear
and settle trades himself. A sole proprietor, Partnership firm, a joint Hindu Undivided Family
(HUF), a corporate entity, a cooperative society, a public sector organization or any other
Government or non-Government entity can become a TCM.
There are two types of TCM, TCM-1 and TCM-2. TCM-1 refers to transferable non-
deposit based membership and TCM-2 refers to non-transferable deposit based membership.

A person desired to register as TCM is required to submit an application as per the

format prescribed under the business rules, along with all enclosures, fee and other documents
specified therein. He is required to go through interview by Membership Admission Committee

29 | P a g e
and committee is also empowered to frame rules or criteria relating to selection or rejection of a
member.

Institutional Trading-cum-clearing Member (ITCM):-

Only an Institution/ Corporate can be admitted by the Exchange as a member, conferring

upon them the right to trade and clear through the clearing house of exchange as an Institutional
Trading-cum-clearing Member (ITCM). The member may be allowed to make deals for himself
as well as on behalf of his clients and clear and settle such deals. ITCMs can also appoint sub-
brokers, authorized persons and Trading Members who would be registered as trading members.

Professional Clearing Member (PCM):-

A PCM entitled to clear and settle trades executed by other members of the exchange. A
corporate entity and an institution only can apply for PCM. The member would be allowed to
clear and settle trades of such members of the Exchange who choose to clear and settle their
trades through such PCM.

Membership Details for NCDEX:-

Trading-cum-clearing Member: - TCM

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Sr.
Particulars NCDEX: TCM
No.
Interest Free Cash Security
1 15.00 Lakhs
Deposit
2 Collateral Security Deposit 15.00 Lakhs
3 Admission Fee 5.00 Lakhs
4 Annual Membership Fees 0.50 Lakhs
Advance Minimum Transaction
5 0.50 Lakhs
Charges
6 Net worth Requirement 50.00 Lakhs

Professional Clearing Membership: - PCM

Sr.
Particulars NCDEX: PCM
No.
Interest Free Cash Security
1 25.00 Lakhs
Deposit
Collateral Security Deposit
2 25.00 Lakhs

3 Annual Subscription Charges 1.00 Lakhs

Advance Minimum Transaction
4 1.00 Lakhs
Charges
5 Net worth Requirement 5000.00 Lakhs

Initial Net worth Criteria

Admission Annual
Category Security
Fees Subscription Corporate Partnership Individual
Deposit
TCM-1 Rs. 10 Lakhs Rs. 15 Lakhs Rs 50,000 Rs 50 Lakhs Rs. 50 Lakhs Rs. 50 Lakhs
TCM-2 Rs. 5 Lakhs Rs. 50 Lakhs Rs 50,000 Rs. 50 Lakhs Rs. 50 Lakhs Rs. 50 Lakhs
ITCM Rs. 10 Lakhs Rs. 50 Lakhs Rs 50,000 Rs. 50 Lakhs N.A. N.A.
PCM Nil Rs. 50 Lakhs Rs 1,00,000 Rs. 5Crores N.A. N.A.

Chapter 7

Current Scenario in Indian Commodity Market

Need of Commodity Derivatives for India:-

India is among top 5 producers of most of the Commodities, in addition to being a major
consumer of bullion and energy products. Agriculture contributes about 22% GDP of Indian
economy. It employees around 57% of the labor force on total of 163 million hectors of land
31 | P a g e
Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates
that India can be promoted as a major centre for trading of commodity derivatives.

Trends in volume contribution on the three National Exchanges:-

Pattern on Multi Commodity Exchange (MCX):-

MCX is currently largest commodity exchange in the country in terms of trade volumes,
further it has even become the third largest in bullion and second largest in silver future trading
in the world.
Coming to trade pattern, though there are about 100 commodities traded on MCX, only 3
or 4 commodities contribute for more than 80 percent of total trade volume. As per recent data
the largely traded commodities are Gold, Silver, Energy and base Metals. Incidentally the
futures’ trends of these commodities are mainly driven by international futures prices rather than
the changes in domestic demand-supply and hence, the price signals largely reflect international
scenario.
Among Agricultural commodities major volume contributors include Gur, Urad, Mentha
Oil etc. Whose market sizes are considerably small making then vulnerable to manipulations.

Pattern on National Commodity & Derivatives Exchange (NCDEX):-

NCDEX is the second largest commodity exchange in the country after MCX. However
the major volume contributors on NCDEX are agricultural commodities. But, most of them have
common inherent problem of small market size, which is making them vulnerable to market
manipulations and over speculation. About 60 percent trade on NCDEX comes from guar seed,
chana and Urad (narrow commodities as specified by FMC).

Pattern on National Multi Commodity Exchange (NMCE):-

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 NMCE is third national level futures exchange that has been largely trading in Agricultural
Commodities. Trade on NMCE had considerable proportion of commodities with big market size
as jute rubber etc. But, in subsequent period, the pattern has changed and slowly moved towards
commodities with small market size or narrow commodities.

Analysis of volume contributions on three major national commodity exchanges reveled

the following pattern,

Major volume contributors: - Majority of trade has been concentrated in few commodities that
are

 Non Agricultural Commodities (bullion, metals and energy)

 Agricultural commodities with small market size (or narrow commodities) like guar,
Urad, Mentha etc.

Trade strategy:-

It appears that speculators or operators choose commodities or contracts where the market
could be influenced and extreme speculations possible.
In view of extreme volatilities, the FMC directs the exchanges to impose restrictions on
positions and raise margins on those commodities. Consequently, the operators/speculators chose
another commodity and start operating in a similar pattern. When FMC brings restrictions on
those commodities, the operators once again move to the other commodities. Likewise, the

33 | P a g e
speculators are moving from one commodity to other (from methane to Urad to guar etc) where
the market could be influenced either individually or with a group.

Beneficiaries: - So far the beneficiaries from the current nature of trading are
Exchangers: - making profit from mounting volumes
Arbitragers
Operators

In order to understand the extent of progress the trading the trading in Commodity
Derivatives has made towards its specified objectives (price discovery and price risk
management), the current trends are juxtaposed against the specification

Specified and actual pattern of futures trade:-1

Process Aught to be Actual
Commodities There should be large demand for and Largely Traded are
supply of the commodity- no individual or  Bullion, Metals and
a group of persons acting in concert  Commodities with small
should be in a position to influence the market size (or narrow
demand or supply, and consequently Commodities) like guar,
the price substantially Towards this, the Burmese Urad, Mentha etc.
major Produced or consumed
Commodities in the Country such as
wheat,
rice, jute etc. and India is the
top first or second
producer of these
Commodities.
Trade Hedging together with Over speculation and
Strategy Moderate speculation to Manipulation leading to wide
Smoothen the price Fluctuations.
Fluctuations.
Beneficiaries Farmers/producers,, So far exchangers, arbitrageurs,
Consumers and traders Operators etc.,
1

34 | P a g e
 Either through direct Further there were instances of
Participation or through Wrong price signals accruing losses to
Price signals. farmers in case of menthe, and to traders
in case
Of imported pulses.
Price Discovery  Pure replication of
International trends not
Taking in account of
Domestic D-S in case of
Non-agril. Commodities
 Wide fluctuations from

Objectives Over speculation and

Manipulation in case of
Largely traded agril.
commodities
Risk Management No such evidences and contrarily, the
extreme volatilities in certain
commodities are making futures
More risky for participants.

Thus it is evident that the realization of specified objectives is still a distinct destination. It
is further, evident from the nature of the commodities largely traded on national exchanges that
the factors driving the current pattern of futures trade are purely speculative.

Reasons for prevailing trade pattern:-

No wide spread participation of all stake holders of commodity markets. The actual
benefits may be realized only when all the stake holders in commodity market including
producers, traders, consumers etc trade actively in all major commodities like rice, wheat, cotton
etc.

Some Suggestions to make futures market as a level playing field for all stake holders:-

35 | P a g e
 Creation of awareness among farmers and other rural participants to use the futures
trading platform for risk mitigation.
 Contract specifications should have wider coverage, so that a large number of
varieties produced across the country could be included.
 Development of warehousing and facilities to use the warehouse receipt as a
financial instrument to encourage participation farmers.
 Development of physical market through uniform grading and standardization and
more transparent price mechanisms.
 Delivery system of exchanges is not good enough to attract investors. E.g.- In many
commodities NCDEX forces the delivery on people with long position and when
they tend to give back the delivery in next month contract the exchange simply
refuses to accept the delivery on pretext of quality difference and also auctions the
product. The traders have to take a delivery or book losses at settlement as there are
huge differences between two contracts and also sometimes few contracts are not
available for trading for no reason at all.
 Contract sizes should have an adequate range so that smaller traders can participate
and can avoid control of trading by few big parties.
 Setting of state level or district level commodities trading helpdesk run by
independent organization such as reputed NGO for educating farmers.
 Warehousing and logistics management structure also needs to be created at state or
area level whenever commodity production is above a certain share of national
level.
 Though over 100 commodities are allowed for Derivatives trading, in practice only
a few commodities derivatives are popular for trading. Again most of the trade takes
place only on few exchanges. This problem can possibly solved by consolidating
some exchanges.
 Only about 1% to 5% of total commodity derivatives traded in country are settled
in physical delivery due to insufficiencies in present warehousing system. As good
delivery system is the back bone of any Commodity trade, warehousing problem
has to be handled on a war footing.

36 | P a g e
  At present there are restrictions in movement of certain goods from one state to
another. These needs to be removed so that a truly national market could develop
for commodities and derivatives.
 Regulatory changes are required to bring about uniformity in Octri and sales tax etc.
VAT has been introduced in country in 2005, but, has not yet been uniformly
implemented by all states.
 A difficult problem in Cash settlement of Commodities Derivatives contract is that,
under Forward Contracts Regulation Act 1952 cash settlement of outstanding
contracts at maturity is not allowed. That means outstanding contracts at maturity
should be settled in physical delivery. To avoid this participants square off their
their positions before maturity. So in practice contracts are settled in Cash but
before maturity. There is need to modify the law to bring it closer to the wide spread
practice and save participants from unnecessary hassle.

Chapter 8

Commodities

Steel: -

General Characteristics: -

Steel is an alloy of iron and carbon, containing less than 2% carbon, 1% manganese and
small amount of silicon, phosphorus, sulphur and oxygen. Steel is most important engineering

37 | P a g e
and construction material in the world. It is most important, multi functional and the most
adaptable of materials. Steel production is 20 times higher a compared to production of all non-
ferrous metals put together.
Steel compared to other materials of its type has low production costs. The energy
required for extracting iron from ore is about 25% of what is needed for extracting aluminum.
There are altogether about 2000 grades of steel developed of which 1500 grades are
high-grade steels. The large number of grades gives steel the characteristics of basic production
material.

Categories of Steel: -

Steel market is primarily divided in to two main categories- flat and long. A flat carbon
steel product is a plate product or a (hot or cold) rolled strip product. Plate products vary in
dimensions from 10 mm to 200 mm and thin flat rolled products from 1 mm to 10 mm. Plate
products are used for ship building, construction, large diameter welded pipes and boiler
applications. Thin flat products find end use applications in automotive body panels, domestic
‘white goods’ products, ‘tin cans’ and the whole host of other products from office furniture to
heart pacemakers. Plates, HR coils and HR Sheet, CR Sheet and CR coils, GP/GC (galvanized
plates and coils) pipes etc. are included in this category.

A long steel product is a road or a bar. Typical rod product are the reinforcing rods
made from sponge iron for concrete, ingots, billets, engineering products, gears, tools, etc.
Wiredrawn products and seamless pipes are also part of the long products group. Bars, rods,
structures, railway materials, etc are included in this category.
Sponge Iron/ Direct reduced iron (DRI): This is a high quality product produced by
reducing iron ore in a solid state and is primarily used as an iron input in electric arc furnace
(EAF) steel making process. This industry is an integral part of the steel sector. India is one of
the leading countries in terms of sponge iron production. There are a number of coal-based
sponge iron/DRI plants (in the eastern and central region) and also three natural gas based plants
(in western part of the country) in the country.

38 | P a g e
Global Scenario: -

The total output of the word crude steel in 2006 stood at 945 million tons, resulting in a
growth of 6.7% over the previous year.
China is the word’s
Percentage Change > 5% 2-5% < 2%
largest crude steel producer
in the year 2006 with around 220.12 million tons of steel production, followed by Japan and
USA. USA was largest importer of steel products, both finished and semi finished, in 2005,
followed by China and Germany.
The words largest exporter of semi-finished and finished steel was Japan in 2005, followed
by Russia and Ukraine.
China is the largest consumer
now and consumption of steel by China is estimated to increase by 12-13% in 2007.

Indian Scenario: -

India is the 8 th largest producer of the steel with an annual production of 36.193 million
tons, while the consumption is around 30 million tons.
Iron & steel can be freely exported and imported from India. India is a net exporter of
steel.
The Government of India has taken a number of policy measures, such as removal of
iron & steel industry from the list of industries reserved for public sector, deregulation of price
and distribution of iron & steel and lowering import duty on capital goods and raw materials,
since liberalization for the growth and development of Indian iron & steel industry.

39 | P a g e
 After liberalization India has seen huge scale addition to its steel making capacity. The
country faces shortage of iron and steel materials.

Factors Influencing Demand & Supply of Steel Long and Steel Flat: -

The demand for steel is dependent on the overall health of the economy and the in
fracture development activities being undertaken. The steel prices in the Indian market primarily
depend on the domestic demand and supply conditions, and international prices. Government and
different producer and consumer associations regularly monitor steel prices.
The duty imposed on import of steel and its fractions also have an impact on steel prices.
The price trend in steel in Indian markets has been a function of World’s economic activity.
Prices of input materials of iron and steel such as power tariff, fright rates and coal prices, also
contribute to the rise in the input costs for steel making.
Monthly Variations in Steel Prices from Feb 2005- Dec 2006: -2

WHEAT

Wheat is cereal grain and consumed worldwide. Wheat is more popular than any other
cereal grain for use in baked goods. Its popularity stems from the gluten that forms when lour is
mixes with water. Wheat is the most widely grown cereal grain in the world.

Global and Indian Scenario: -

The world wheat production in the recent years has been observed to be hovering
between 555 million tons to 625 million tons a year. The biggest cultivators of wheat are EU 25,

40 | P a g e
China, India, USA, Russia, Australia, Canada, Pakistan, Turkey and Argentina. EU 25, China,
India and US are the four largest producers account for around 60% of total global production.
World’s wheat consumption is continuously growing with growth in a population, as it
is one of the major staple foods across the world. The major consuming countries of wheat are
EU, China, India, Russia, USA and Pakistan. India has largest area in the world under wheat.
However, in terms of production, India is second largest behind China. In India, Wheat is sown
during October to December and harvested during March to May. The wheat marketing season in
India is assumed to begin from April every year.
The major wheat producing states in India are Utter Pradesh, Punjab, Haryana, Madhya
Pradesh, Rajastan and Bihar. Which together account for around 93% of total production. In
terms of productivity, Punjab stands first followed by Haryana, Rajastan, UP, Gujarat, Bihar and
MP. Indian wheat is largely soft/medium hard, medium protein, bread wheat. India is also
produces around 1.5 million tons of durum wheat, mostly in central and western India, which is
not segregated and marketed separately. India consumes around 72-74 million tons of Wheat
every year.
There are around 1000 large flourmills in India, with a milling capacity of around 15
million tons. The total procurement of wheat by Government agencies during last 15 years from
8 to 20 million tons, accounting for only 15-20% of the total production. India exported around 5
m illion tons subsidized by Government in 2004-05, as a result of surplus stock. Recently Govt.
took decision to import wheat in view of, declining stocks and increasing demand.

Key market moving Factors: -

Price tends to be lower as harvesting progresses and produce starts coming in to the market.
At the time sowing and before harvesting price tend to rise in a view of tight supply situation.
Weather has profound influence on wheat production. Temperature plays crucial role towards
maturity of wheat and productivity.
Change in Minimum Support Price (MSP) by Govt. and the stock available with Food
corporation of India and the release from official stock influence of the price. Though,
international trade is limited, the ups and downs in the production and consumption at all the
major/minor producing and consuming nation dose influence the long term price trend.

41 | P a g e
 Chapter 9: Research Methodology

Objectives of the Study:

1. To study the concepts of commodities trading in India.
2. To study of the various trends In Commodity trading
3. To Study the Role of Commodities in Indian Financial Markets
4. To study in detail The Role of Futures and Forwards.
5. To analyze the present situation of the commodities in Indian market and suggest for any
improvements there after

42 | P a g e
Research Methodology:

To achieve the object of studying the commodities market in stock market data have been
collected. Research Methodology carried for this study is purely from Secondary data.

Limitations of the Study:

The study is limited to “Commodity Trading – Investment and Speculation” in the Indian
context.
1. The study cannot say as totally perfect as it is subjected to any alteration.
2. The study is not based on the international perspective of Commodity markets. It is
limited to national level only.
3. The finding of the study is based on information which was given by the respondent. It
may be possible that the respondents were not provided the right information.
4. There can be business from researcher or responds side.
5. Survey was conducted across Palghar City (in areas like Boisar, Palghar etc) to judge the
awareness of peoples regarding investment in Commodity Market.

Chapter 10: Data interpretation and Analysis

Q.1 Do you have any investment plan?

TABLE 1.1

Investment plan Frequency Percent

YES 32 32.0
NO 68 68.0
Total 100 100.0

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INTERPRETATION

 In our study, we have put down this question to check the analytical aspect of the
investors.
 We have found in our study that 68% of the investors would prefer to investment
plan in it and only 32% of the investors would not prefer to investment plan.

Q.2 If Yes, Where you would like to invest your money?

TABLE 2.1

Mode Of Investments Frequency Percent

Bank F.D 10 10.0

Commodity Market 13 13.0

Share Market 6 6.0
Other 3 3.0
Total 32 32.0

INTERPRETATION
 The above graph shows preferred mode of investment by investors.
 As we have taken sample of investors who invest in commodity market, it is
obvious that commodity market is most preferable mode of investment for them.
 The graph represents that Bank FD is second preferable mode of investment by
investors, i.e., 32% of the investors invest in Bank FD.

Q.3 If No, what reasons?

TABLE 3.1

Reasons Frequency Percent

Not Aware About Invest Avenues 28 28.0
Insufficient Income 37 37.0
Other 3 3.0
Total 68 68.0

INTERPRETATION
44 | P a g e
  In Our study, we have found that 55% of the investors have not aware about the invest
avenues.
 We also found that 41% of the inventors have insufficient income.
 We also found that 4% of the investors have other reason to not invest in money.

Q.4 Do you aware about Commodity Market?

TABLE 4.1

Aware About Commodity Market Frequency Percent

YES 29 29.0
NO 71 71.0
Total 100 100.0

INTERPRETATION

 In our study, we have put down this question to check the analytical aspect of the
investors.
 We have found in our study that 71% of the investors would prefer to not aware about
the commodity market and 29% of the investors would prefer to yes aware about the
commodity market.
 Whereas 29% of the investors analyze the market with the help of brokers / financial
advisors or themselves.

Q.5 If yes, which Commodity Exchange you will prefer for investment?

TABLE 5.1

Frequency Percent
MCX 7 7.0
NCDEX 8 8.0
NMCE 8 8.0
Can't Say 5 5.0
Other 1 1.0
Total 29 29.0

45 | P a g e
INTERPRETATION
 From the above graphical presentation, we can say that investors are mostly preferred
NCDEX (NATIONAL COMMODITY &DERIVATIVES EXCHANGE LTD.) & NMCE
(NATIONAL MULTI COMMODITY EXCHANGE) for trading in commodities.

 MCX holds a market share of over 80% of the Indian commodity futures market, and
more than 2000 registered members operating through over 100,000 trader work station,
across India.
 We also found that 24% of the investors preferred MCX for trading in commodity
market.
 From the above chart we can say that 17% of the investors preferred can’t say and 3% of
the investors use preferred local trading exchange for trading for trading in commodity
market.

Q.6 what is your perception about Commodity Market?

TABLE 6.1

Frequency Percent
Less Risk 30 30.0

Risk 52 52.0
Very Risk 18 18.0
Total 100 100.0

INTERPRETATION

 I can know that commodity is risky because the inventor says that there is no one can
predict to the commodity price in a market so that commodity is risky for the investing.

46 | P a g e
  We also that found that the 30% peoples are commodity are less risky and 18% people’s
arecommodity is very risky.

Q.7 For each statement given below, please tick mark in the box to in the indicate your
opinion.

Objective: To check the effectiveness of factors in determining commodities price from

investor’s perspective.
TABLE 7.1

Factors which affects to determine commodities price

Statement Strongly Agree Neutral Disagree Strongly
Agree Disagree
Export-import data of commodities 47 26 15 10 2
issued by government to the
commodities price.
Flood, earthquake, droughts and 26 39 17 14 4
tsunami create fluctuation

47 | P a g e
 incommodities price.
If buyers are standing less than 33 19 25 21 2
suppliers, reduces the price of
commodities.
Government policies like monetary 19 27 30 21 3
and fiscal policy affects commodities
price.
Crude oil inventory level data affects 18 29 16 28 9
commodities prices.
Seasons like monsoon, winter and 20 27 19 21 13
summer affects to the price of
commodities.

INTERPRETATION

 From the above graphical presentation and tables, we can say that investors are almost
agree with the all the statements related to the factors which affect to determine
commodity prices.
 We have calculate the mean and standard deviation for each of the statements and their
mean ranges from 1.94 to 2.81 which represent that investors are agree about that all
the factors are more or less important in determining commodity prices.
 The most important factors that affects the price of commodities are Export-Import
data of commodities issued by government, Flood, Earthquake, Droughts and Tsunami,
If buyers are standing less than suppliers, Government policies like monetary and
fiscal policy, interest rate issues by RBI and Foreign Exchange rate affects to
commodities price, having mean of 1.94, 2.31, 2.4, 2.62, 2.81 and 2.8 respectively

Q.8 Give your opinions about the followings…….

Objective: To check investors’ perception as compared to equity market and currency market
and to check views over reliability and transiency of on line trading in commodity market.

TABLE 8.1
Statement Strongly Agree Neutral Disagree Strongly
Agree Disagree
Commodity market gives more return 43 24 9 19 5
than equity market and currency market.

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Commodity market consists more risk 19 33 24 23 1
than equity market and currency market.
Commodity market is less volatile then 17 24 32 20 7
equity market and currency market.
Commodity market fluctuation makes 17 32 28 19 4
impact on equity market and currency
market.
Online trading in commodity market is 16 30 22 26 6
transparent.
Online trading in commodity market is 17 18 17 26 22
reliable.

INTERPRETATION

From the above graphical presentation and graph we can come to know that investor’s opinion is
approximately neutral for the two statements. The statements are commodity market and give
more return than Equity market and currency market and commodity market consists more risk
than Equity market which has mean of 2.19 and 3.18 respectively and on the basis of that we can
say that investors are neutral about both the statements.
In our study, we also found that investors are agreeing about the following statements.
Commodity market is less volatile than Equity market and currency market, commodity market
fluctuation makes impact on Equity market and currency market , online trading in commodity
market is transparent, online trading in commodity market is reliable because their means are
2.54, 2.76, 2.61 and 2.76 respectively.

PERSONAL DETAILS

1. GENDER:
TABLE 9.1

Gender Frequency Percentage

Male 79 79.00
Female 21 21.00
Total 100 100.00

INTERPRETATION

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  In our study, we have taken a sample of 100 investors who invest in commodity market.
 Out of 100, there are approximately 79% respondent are male while rest of the
respondents are female.

2. AGE GROUP:

TABLE 9.2

Frequency Percent

Below 20 30 30.0

20-30 42 42.0

31-40 15 15.0

41-50 10 10.0

51-60 2 2.0

Above 60 1 1.0

Total 100 100.0

INTERPRETATION
 The above chart shows the graphical presentation of age group of investors who in
commodity market.
← From the graph, we can say that majority of the respondents are of age group between 20-
30 year i.e. 42% of the respondent having their age between 20-30 year.

2. OCCUPATION:

TABLE 9.3
Frequency Percent
Government Employee 18 18

Self Employee 26 26

Professional 17 17

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 Farmer 5 5

Employee In Private Sector 11 11

Other 23 23

Total 100 100

INTERPRETATION
 The above graphical presentation shows the occupation of respondents.
 Out of total of respondents, 26% are self Employed, 18% government employees, 11%
are private sector employees, 17% are professional employees, and 26% are other
respondents.

3. Monthly Income of Family (in Rs.):

TABLE 9.4
Frequency Percent

Below 10000 43 43.0

10000-20000 24 24.0

20000-30000 18 18.0

30000-40000 9 9.0

40000-50000 3 3.0

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 Above 50000 3 3.0

Total 100 100.0

INTERPRETATION
 The above chart shows the graphical presentation of monthly income of family of
respondents.
 In this data there is mostly 43% investors has more than Below 10000 incomes per month
that reason is family business in market and it is well settled because if you have no
sufficient income so you cannot payout of deal that when you get big loss that time you
have to pay and you have no more income.

5. Educational Qualification:
TABLE 9.5

Frequency Percent

Below HSC 18 18.0

Undergraduate 13 13.0

Graduate 42 42.0

Post Graduate 26 26.0

Other 1 1.0

Total 100 100.0

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INTERPRETATION
 The above chart shows the graphical presentation of Education Qualification of investors
who invest in commodity market.
 From the graph, we can say that majority of the respondents are Graduate.

Qualitative Analysis

1. Investment preferences: -

Most of the investors prefer least risky investment which gives higher returns. That is
why majority (70% of sample) of people interested in investments other than Share and
commodity market.
Very less number of people (only 7%) showed their interest in investment in
commodity market. Main reason for this is lack of awareness and complete information about
commodity market.

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2. Commodity Exchanges: -

People who are interested in commodity investment showed more concern towards
NCDEX; for its brand name and people think there might be surety of transaction at
NCDEX.

3. Commodities: -

Bullion is most preferred commodity for investment. Because one can expect maximum
returns from such investment due to rapidly increasing prices of bullion in market.

4. Advertisements: -

Commodity market Advertisements should be more informative. And it is the failure of

commodity market’s advertisement campaign to attract people’s attention; as majority of
people are not aware about commodity market.

Chapter 10: FINDINGS

 In India MCX is trading in bullion market.

 Goldsmiths get their raw material from wholesale dealers.
 They fix the prices on daily trading bases.
 Hence there is positive correlation between both market traders can easily predict the
future prices of the commodities and hedge their positions.
 The investors expect that the brokers should provide them the genuine information
regarding the market.
 Also they want moderate brokerage and good services from the brokers.
 Mostly investor of commodity is trading in NCDEX or MCX Exchange.

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  For the commodity deal the brokerage house provides a research advisory, delivery
facility for their clients.
 Most of investors say that commodity market is risky market for the investment.
 We have also found that maximum number of investors of investors’ are agree or strongly
agree with the statement that international commodity market affects national trading
activity.
 The most important factors that affects the price of commodities are Export-Import data
of commodities issued by government, if buyers are standing less than suppliers, red,
Government policies like Monetary and Fiscal policy, interest rate issue by RBI and
Foreign rate affects to commodities price.
 In our study we have also found that commodity market is lee volatile than Equity market
and currency market, commodity market fluctuation makes impact on Equity market and
currency market, Online trading in commodity market is transparent and online trading in
commodity market is reliable.

CURRENT SCENARIO

The growth paradigm of India’s commodity markets is best reflected by the figures from the
regulator’s official website, which indicated that the total value of trade on the commodity
futures market in the financial year 2008/09 was INR52.49 lakh crore (over US$1 trillion) as
against INR 40.66 lakh crore in the preceding year, registering a growth of 29.09%, even under
challenging economic conditions globally. The main drivers of this impressive growth in
commodity futures were the national commodity exchanges. MCX, NCDEX and NMCE along
with two regional exchanges – NBOT Indore and ACE, Ahmedabad – contributed to 99.61% of
the total value of commodities traded during 2008/09. So far, this year’s volumes have seen a
significant jump over the last year in agro-commodities, as well as „international‟ commodities

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like gold, silver, crude oil and copper. Of course, more than 100 commodities are today
available for trading in the commodity futures market and more than 50 of them are actively
traded. These include bullion, metals, agricultural commodities and energy products. Most
importantly, an archaic market has suddenly turned into an organized, service-oriented set-up
with shooting volumes. The unqualified success of the futures market has ensured the next step,
i.e., the launch of electronic spot markets for agro-products. Being in a time-zone that falls in
the gap left by the major commodity exchanges in the US, Europe and Japan has also worked in
India’s favor because commodity business by its very nature is a 24/7 business. Innovation
coupled with modern and successful financial market environment has ensured the beginning of
a success story in commodities which will eventually see India becoming a price-setter in major
commodities on the strength of its large production and consumption.

It is pertinent to note that India and China are being projected as the major drivers for the
initiation of yet another commodity super-cycle. Tracking price trends and analyzing the
statistics have always been key areas of economic research; but in each cycle – whether defined
by Jim Rogers, Kondratieff or Dewey & Dakin – the trigger is always different, and in this case
it may well be increase in regional consumption, some of which we have already seen. One
outcome of the recent boom-bust cycle has been that mergers and acquisitions have gained
speed and the biggest beneficiaries will likely be large companies from historically
conservative countries, like India. This phase is likely to propel India into the international big
league quicker and on a firmer footing. In fact, India did well to weather the global financial
crisis over the last year and a half, with GDP growing at 6% at the worst of times, compared to
almost every other country which showed negative growth in one or more quarters during this
period. Growth did fall from 9% to 6% but was way above the World Bank’s forecast of 4%,
demonstrating economic resilience, a sure sign of things to come.

Turnover at Indian commodity bourses rose 49.80 percent to 73.51 trillion rupees in the first
eleven-and-a-half months of fiscal 2009/10, regulator Forward Markets Commission (FMC)
said on its website (as on 25th March 2010).
Turnover rose 44.12 percent to 3.79 trillion rupees in the fortnight ending March. 15, data
showed on Thursday.

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Active trade was seen in gold, silver, copper and crude oil in the energy and metals pack during
the March ’10 first fortnight.
Guar seed, chana, soybean, turmeric and jeera saw maximum trade among agricultural
commodities.

Turnover at India's 23 commodity bourses, including four operating at the national level, grew
from 1.29 trillion rupees in 2003/04 to 52.49 trillion rupees in 2008/09.
The regulator said it has approved Fid Fund (Mauritius) Ltd, an affiliate of Fidelity
International's sale of 1.62 percent stake in Multi Commodity Exchange of India (MCX) to
Intel Capital (Mauritius) Ltd.
FMC had last month allowed Fid Fund (Mauritius) Ltd's sale of 2.03 percent stake in MCX to
Passport India Investments (Mauritius) Ltd.

CONCLUSION

This decade is termed as Decade of Commodities. Prices of all commodities are heading
northwards due to rapid increase in demand for commodities. Developing countries like China
are voraciously consuming the commodities. That‟s why globally commodity market is bigger
than the stock market. India is one of the top producers of large number of commodities and
also has a long history of trading in commodities and related derivatives. The Commodities
Derivatives market has seen ups and downs, but seems to have finally arrived now. The market
has made enormous progress in terms of Technology, transparency and trading activity.
Interestingly, this has happened only after the Government protection was removed from a
number of Commodities, and market force was allowed to play their role. This should act as a

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major lesson for policy makers in developing countries, that pricing and price risk management
should be left to the market forces rather than trying to achieve these through administered
price mechanisms. The management of price risk is going to assume even greater importance in
future with the promotion of free trade and removal of trade barriers in the world.
As majority of Indian investors are not aware of organized commodity market; their perception
about is of risky to very risky investment. Many of them have wrong impression about
commodity market in their minds. It makes them specious towards commodity market.
Concerned authorities have to take initiative to make commodity trading process easy and
simple. Along with Government efforts NGO‟s should come forward to educate the people
about commodity markets and to encourage them to invest in to it. There is no doubt that in
near future commodity market will become Hot spot for Indian farmers rather than spot market.
And producers, traders as well as consumers will be benefited from it. But for this to happen
one has to take initiative to standardize and popularize the Commodity Market

BIBLIOGRAPHY

 Trading Commodities and Financial Futures: A Step by Step guide to Mastering the
Market, 3rd Edition by George Kleinman

 Options, Futures and Other Derivatives by Johan C. Hull

 http://commodities.in

 http://finance.indiamart.com/markets/commodity/

 http://www.commoditiescontrol.com

 http://www.mcxindia.com
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  http://www.ncdex.com

 MCX Certified Commodity Professional Reference Material

 Business World (15th September 2003)

 Business World (4th December 2006)

 http://investmentz.co.in

 http://trade.indiainfoline.com

 http://www.finance.indiamart.com

ANNEXURE

Questionnaire

Dear Sir / Madam,

We Are Student Of MBA Programmer From SAS Institute of Management Studies, Boisar. As
A Part Of Our Study, We Are Required To Prepare A Comprehensive Project For Which We
Have Selected The Topic “A Study On Commodity Market in India”. We Ensure That The
Information Provided By You Will Be Kept Confidential & Exclusively Used For Academic
Purpose Only.

1. Do you have any investment plan?

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 YES

NO

(If NO move to question no. 4)

2. If, yes, where you would like to invest your money?

Bank F.D

Commodity Market

Share Market

Other (specify) ----------------------------------------------------------------

3. If no, why?

Not aware about invest avenues

Insufficient income

Other (specify) ----------------------------------------------------------------

4. Do you aware about Commodity Market?

YES

NO

(If NO move to question no. 7)

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 5. If yes, which Commodity Exchange you will prefer for investment?

MCX NCDEX

NMCE Can’t Say

Other (Specify) ----------------------------------------------------------

6. What is your perception about Commodity Market?

Less Risk Risk Very Risk

7. For each statement given below, please tick mark in the box to in the
indicate your opinion.

Factors which affects to determine commodities price

Statement Strongly Agree Neutral Disagree Strongly

Agree Disagree
Export-import data of commodities
issued by government to the
commodities price.
Flood, earthquake, droughts and
tsunami create fluctuation
incommodities price.
If buyers are standing less than
suppliers, reduces the price of
commodities.
Government policies like monetary
and fiscal policy affects commodities
price.
Crude oil inventory level data affects
commodities prices.
Seasons like monsoon, winter and
summer affects to the price of
commodities.

61
 8. Give your opinions about the followings…..

Statement Strongly Agree Neutral Disagree Strongly

Agree Disagree
Commodity market gives more return
than equity market and currency market.
Commodity market consists more risk
than equity market and currency market.
Commodity market is less volatile then
equity market and currency market.
Commodity market fluctuation makes
impact on equity market and currency
market.
Online trading in commodity market is
transparent.
Online trading in commodity market is
reliable.

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PERSONAL DETAILS:

1. Name:

2. Gender:

Male Female

3. Age:

Below 20 20 – 30

31-40 41-50

51-60 Above 60

4. Occupation:

Government employee Self-employee

Professional Farmer

Employee in Private Sector Others

5. Monthly family income:

Below 10,000 10,000-20,000

20,000-30,000 30,000-40,000

40,000-50,000 Above 50,000

6. Educational qualification:

Below HSC Undergraduate

Graduate Post graduate

63