1. Commodity and Commodities market 1.

1 INTRODUCTION India, a commodity based economy where two-third of the one billion population depends on agricultural commodities, surprisingly has an under developed commodity market. Unlike the physical market, futures markets trades in commodity are largely used as risk management (hedging) mechanism on either physical commodity itself or open positions in commodity stock. For instance, a jeweler can hedge his inventory against perceived short-term downturn in gold prices by going short in the future markets. The article aims at know how of the commodities market and how the commodities traded on the exchange. The idea is to understand the importance of commodity derivatives and learn about the market from Indian point of view. In fact it was one of the most vibrant markets till early 70s. Its development and growth was shunted due to numerous restrictions earlier. Now, with most of these restrictions being removed, there is tremendous potential for growth of this market in the country. 1.2 COMMODITY A commodity may be defined as an article, a product or material that is bought and sold. It can be classified as every kind of movable property, except Actionable Claims, Money & Securities. Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets, may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. In fact, the size of the commodities markets in India is also quite significant. Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent. Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the size of the commodities market grows many folds here on. 1.3 COMMODITY MARKET Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.
Table: 1 Turnover in Financial Markets and Commodity Market (Rs in Crores) S No. Market segments 2002-03 2003-04 2004-05 (E)

035 1.865 316.5 Structure of Commodity Market 1.527 (16. Bombay Cotton Exchange Ltd.002 1.745.854 617. was the first organized futures market.160.4 Its EVOLUTION IN INDIA Bombay Cotton Trade Association Ltd. 1. in bracket represents percentage to GDP at market prices Source: Sebi bulletin 1.544.147.8) (117.1) II Bombay Stock Exchange (a+b) a)Cash b)Derivatives (13) 515.053 12.827.1 2 3 I Government Securities Market Forex Market Total Stock Market Turnover (I+ II) National Stock Exchange (a+b) a)Cash b)Derivatives 1.318.1) Note: Fig.215 (18.518. several other exchanges were created in the country to trade in diverse commodities.322 2.4) (133.405 1.374.130.478 NA (63) (27) (56) (43) 2.551 314.936 4.505 503.468 (91.057.645 (91) (124. Forward Contracts (Regulation) Act was enacted in 1952 and the Forwards Markets Commission (FMC) was established in 1953 under the Ministry of Consumer Affairs and Public Distribution.7) 4 Commodities Market (4.7) 519.2) (84) (136) (117) 2.027 2.503 19.507 3.867. castor seed and cotton.641.872 3. was established in 1919 for futures trading in raw jute and jute goods.376 658.494. Futures' trading in wheat was existent at several places in Punjab and Uttar Pradesh.. These two associations amalgamated in 1945 to form the East India Jute & Hessian Ltd. set up in 1875.672 1.230.531 3.452 130. was established in 1893 following the widespread discontent amongst leading cotton mill owners and merchants over functioning of Bombay Cotton Trade Association. The Futures trading in oilseeds started in 1900 with the establishment of the Gujarati Vyapari Mandali.073 2.7) 500. But organized futures trading in raw jute began only in 1927 with the establishment of East Indian Jute Association Ltd. Futures trading in bullion began in Mumbai in 1920.030 499.989 439.6 Different types of commodities traded . which carried on futures trading in groundnut.099. In due course.000 (16.534 2. to conduct organized trading in both Raw Jute and Jute goods. But the most notable futures exchange for wheat was chamber of commerce at Hapur set up in 1913.702 3. Calcutta Hessian Exchange Ltd.

8 Leading commodity markets of world Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX). The spot markets are essentially over the counter markets and the participation is restricted to people who are involved with that commodity say the farmer. as in equities. Corn. Derivative trading takes place through exchange-based markets with standardized contracts. In Crores) Exchange NCDEX NBOT MCX NMCE ALL EXCHANGES 2003-04 1490 53014 2456 23842 129364 2004-05 FIRST Half 54011 51038 30695 7943 170720 1. The Forward Markets Commission (FMC) will regulate these exchanges. Consequently four commodity exchanges have been approved to commence business in this regard. Gasoline etc 1. Platinum etc Other Metals: Nickel. National Board of Trade (NBOT) located at Indore. to come up and let them deal in commodity derivatives in an electronic trading environment.10 Volumes in Commodity Derivatives Worldwide . Turnover on Commodity Futures Markets (Rs. Copper etc Agro-Based Commodities: Wheat. the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT). processor. Oils. there exists the spot and the derivatives segment. Natural Gas. order driven. Cocoa.World-over one will find that a market exits for almost all the commodities known to us. National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai. Soft Commodities: Coffee. These commodities can be broadly classified into the following: Precious Metals: Gold. They are: Multi Commodity Exchange (MCX) located at Mumbai. Aluminum. Sugar etc Live-Stock: Live Cattle. These exchanges are expected to offer a nation-wide anonymous. Cotton. settlements etc. Oilseeds. 1. similar to the BSE & NSE. National Multi Commodity Exchange (NMCE) located at Ahmedabad. 1. wholesaler etc. Also.9 Leading commodity markets of India The government has now allowed national commodity exchanges. Pork Bellies etc Energy: Crude Oil. screen based trading system for trading.7 Different segments in Commodities market The commodities market exits in two distinct forms namely the Over the Counter (OTC) market and the Exchange based market. Silver.

* Provide trading limit finance to Traders in commodities Exchanges. certainty and transparency in procuring commodities would aid bank lending.4 Why Commodity Futures? . This becomes an important issue to be managed. financial assets are not bulky and do not need special facility for storage. the quality of the asset underlying a contract can vary largely. 2. etc. However there are some features. 2. on real time basis. * Hedging the price risk associated with futures contractual commitments. the concept of varying quality of asset does not really exist as far as financial underlyings are concerned. * Greater flexibility. Similarly. * Traders would be trained to be Rural Advisors and Commodity Specialists and through them multiple rural needs would be met.1 INTRODUCTION Derivatives as a tool for managing risk first originated in the Commodities markets. * Spaced out purchases possible rather than large cash purchases and its storage. physical settlement in commodity derivatives creates the need for warehousing. * Member can trade in multiple commodities from a single point. * Lending for agricultural sector would go up with greater transparency in pricing and storage. They were then found useful as a hedging tool in financial markets as well. state-of-art technology deployment. * Facilitate informed lending. Even in the case of physical settlement. most of these contracts are cash settled.2 Benefits to Industry from Futures trading. * Commodity Exchanges to act as distribution network to retail agri-finance from Banks to rural households. The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset.2. However in the case of commodities. Commodity Futures Trading in India 2. * Hedged positions of producers and processors would reduce the risk of default faced by banks. scalable. which are very peculiar to commodity derivative markets. * Robust. * Efficient price discovery prevents seasonal price volatility. information dissemination. In the case of financial derivatives. like bank credit. Due to the bulky nature of the underlying assets.3 Benefits to Exchange Member * Access to a huge potential market much greater than the securities and cash market in commodities. 2.

2005 . Ankur Rajoria Student(Batch-2006-SEM-III) ICFAI Business School ICFAI House. how will farmers get signals that in the future there will be a great need for wheat or rice. These days. Ahmedabad-380 054 E-mail: ankurrajoria04@yahoo. I can sell my wheat at a price. The converse is also true. Many economists think that we could have major benefits from liberalization of the agricultural sector. they try to fix prices. the question arises about who will maintain the buffer stock. high yielding varieties. commodity futures markets are a part and parcel of a program for agricultural liberalization.farmers spend money on fertilizers.what is the role for commodity futures in India's economy? In India agriculture has traditionally been an area with heavy government intervention.co. a system of futures markets will improve cropping patterns. I think that is missing the point. Futures market will produce their own kind of smoothing between the present and the future. Today we have the Food Corporation of India. and they have import-export restrictions and a host of other interventions. how will farmers not be vulnerable that tomorrow the price will crash when the crop comes out.in / ankur. arbitrageurs on the futures market will use imports and exports to smooth Indian prices using foreign spot markets. If you think there will be a shortage of wheat tomorrow. Thus a farmer would like to lock in his future price and not be exposed to fluctuations in prices. S. Many agriculture economists understand the need of liberalization in the sector. These activities produce their own "optimal" buffer stocks. if I am growing wheat and am worried that by the time the harvest comes out prices will go down. which eliminates my risk from price fluctuations. then I can sell my wheat on the futures market.rajoria@gmail.G. Bodakdev. GNFC Tower. Highway.One answer that is heard in the financial sector is "we need commodity futures markets so that we will have volumes. We have to look at futures market in a bigger perspective -. and it will carry signals back to the farmer making sowing decisions today. etc. In totality . how will we smoothen the price fluctuations. They also work very effectively when there is trade in agricultural commodities. thus if the future price is low the arbitrageur will buy in the futures market. If the future price is high and the present price is low. In this case. In this fashion. They are worried when making these investments that by the time the crop comes out prices might have dropped.com Mobile: 9898097790 Source : E-mail June 1.does not work. the futures prices will go up today. Next. The third is the role about storage. and something to trade''. agriculture requires investments -. an arbitrager will buy today and sell in the future. which is doing a huge job of storage. Futures markets are an instrument for achieving that liberalization. Government intervenes by trying to maintain buffer stocks. and it is a system. which -. Nr. resulting in losses.in my opinion -. In all these aspects the futures market has a very big role to play. smooth prices. which is fixed today. brokerage fees.

Sponsored Links .

Sign up to vote on this title
UsefulNot useful

Master Your Semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master Your Semester with a Special Offer from Scribd & The New York Times

Cancel anytime.