You are on page 1of 76







Commodity Market



Submitted In Partial Fulfillment of the requirements For the Award of the Degree of Bachelor of Commerce Financial Markets



2|P a g e

Commodity Market


This is to certify that MISS. RIDDHI J. DOSHI of B.Com. Financial Markets Semester V (Academic Year) 2011-2012 has successfully Completed Project On COMMODITY MARKETS under the guidance of PROF. HARESHPARPIANI.

_________________ Course Coordinator


__________________ Principal

_________________ Internal ExaminerExternal Examiner


_________________ Project Guide


3|P a g e

Commodity Market

I, MISS. RIDDHI J. DOSHI the student of B.Com-Financial Markets Semester V (2011-2012) hereby declares that I have completed Project on COMMODITY MARKETS. Wherever the data/information has been taken from any book or other sources have been mentioned in bibliography. The information submitted is true and original to the best of my knowledge.

Students Signature

_______________ RIDDHI J. DOSHI (Roll No. 06)

4|P a g e

Commodity Market

On the event of completion of my project COMMODITY MARKETS I take the opportunity to express my deep sense of gratitude towards all those people without whose guidance, inspiration, & timely help this project would have never seen the light of day. Heartily thanks to Mumbai University for giving me the opportunity to work on this project. I would also like to thank our principal Dr.Mrs.SUDHA. VYASfor giving us this brilliant opportunity to work on this project. Any accomplishment requires the effort of many people and this project is not different. I find great pleasure in expressing my deepest sense of gratitude towards my project guide PROF. HARESH PARPIANI, whose guidance & inspiration right from the conceptualization to the finishing stages proved to be very essential & valuable in the completion of the completion of the project. I would like to thank Library staff, all my classmates, and friends for their invaluable suggestions & guidance for my project work. Lastly I would like to thank My Parents without whose consent & support it would have not been possible for me to complete this project.

Students Signature _______________ RIDDHI J. DOSHI (Roll No. 06)

5|P a g e

Commodity Market

EXECUTIVE SUMMARY This project is based on commodity markets, their significance in the economy & their contribution towards the GDP of the country. Commodity markets are now the buzz word all the investors are looking at the commodity market as a revenue generator. In includes FMC i.e. Forward Market Commissions & the Government played in the markets, the global commodity dynamics as all these influence the Indian commodity Markets their repercussions are seen in the local bourses. It also throws light on highly traded commodities their volumes, margins & more importantly volatility. It contains analysis of 3 commodities, demand & supply scenario etc. The soul of the project is the commodity boosters the reasons who will drive the commodity bourses ahead. Hence this project has covered the recognized exchanges & their organizational trading & the regulatory setup for future trading in commodities. Finally it covers all important points on the bases of which a person can understand the commodity market & start trading in them.

6|P a g e

Commodity Market

RESEARCH METHODOLOGY The method of data collection for my project is based on both primary as well as secondary data collection. I have adopted the following methodology of study throughout the project. Various internet websites. Opinion of experts. Reference books. Newspaper magazines.

Objectives The objective of this study is to understand. 1. What is commodity market? 2. Need & scope of commodity market? 3. How it trade in stock market of India & other countries? 4. Present status of commodity market in India? 5. Future of commodity market?

7|P a g e

Commodity Market

INDEX Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 17 18 19 20 21 22 23 24 25 26 Commodity Market Basics Leading Commodity Markets Of World Regulator Leading Commodity Markets Of India Commodity Future Trading in India What makes Commodity Trading Attractive? Commodity Trading Need for Commodity Derivatives for India History Of Development of Commodity Markets Relevance & Potential Of Commodity Markets in India Commodity Market Ecosystem Indias place in World Market Working of Commodity Market Trading of Commodity Market Merits & Demerits of Commodity Market Study of Single Commodity Gold Questionnaire on Gold Gold Terminology MCX Contract Specifications of Gold Regulatory Body Role Of Government in Commodity Market National Multi-Commodity Exchange Of India Multi-Commodity Exchange Of India National Commodity & Derivatives Exchange LTD. Suggestions Conclusion Bibliography Topic Page No 1-15 16 17 18 19-21 22 23 23 24-26 27-28 29-30 31 32-34 35-38 38-39 40-45 46-49 50 51-57 58-59 60 61-63 64-65 66-71 72-73 74 75
8|P a g e

Commodity Market


We are moving from a world in which the big eat the small to one in which the fast eat the slow -Klaus Schwab, 2000 (Founder of the World Economic Forum) A strong & vibrant cash market is a pre-condition for a successful & transparent futures market. 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 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 future markets. The article aims at understanding commodity market & how are the commodities traded on exchange. The idea is to study the importance of commodity derivatives & learn about the market from an Indian point of view. The development & growth was shunted due to numerous restriction in the early 70s which resulted in vibrant market. COMMODITY A commodity may be defined as an article, a product or material that is bought & sold. It can be classified as every kind of movable property, except actionable claims, money & securities. Commodity actually offers immense potential to become a separate asset class for market-savvy investors, arbitrageurs & speculators. Retail investors, who claim to understand the equity markets, may find commodities an
9|P a g e

Commodity Market

unfathomable market. But commodities are easy to understand as far as fundamentals of demand & supply are concerned. Retail investors should understand the risk & advantages of trading in commodities futures before taking a leap. In fact, the size of the commodities market in India is also quite significant. Of the countrys GDP of Rs 13, 20,730 crore (Rs 13, 20 billion), commodities related (& dependent) industries constitute about 58%. Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crore (1,400 Billion). With the introduction of futures trading, the size of the commodities market grows many folds here on. COMMODITY MARKET Commoditymarketisanimportantconstituentofthefinancialmarketsof any country. It isthemarketwherea widerangeofproducts, viz., preciousmetals,basemetals,crudeoil,energyandsoftcommoditieslike palmoil,coffeeetc.aretraded.Itisimportanttodevelopavibrant,active and liquidcommoditymarket. This would help investors hedge their commodityrisk,take speculative positions in commoditiesand exploitArbitrageopportunities inthe market.
Turnover inFinancialMarkets andCommodityMarket (Rs inCrores) S No. 1 2 3 I Marketsegments 2002-03 2003-04 2004-05(E)

GovernmentSecuritiesMarket 1,544,376 (63) 2,518,322 (91.2) 2,827,872 (91) ForexMarket 658,035 (27) 2,318,531 (84) 3,867,936 (124.4) TotalStockMarketTurnover(I+II 1,374,405 (56) 3,745,507 (136) 4,160,702 (133.8) NationalStockExchange(a+b) 1,057,854 (43) 3,230,002 (117) 3,641,672 (117.1) ) a)Cash 617,989 1,099,534 1,147,027 b)Derivatives 439,865 2,130,468 2,494,645 II BombayStockExchange(a+b) 316,551 (13) 515,505 (18.7) 519,030 (16.7) a)Cash 314,073 503,053 499,503 b)Derivatives 2,478 12,452 19,527 4 CommoditiesMarket NA 130,215 (4.7) 500,000 (16.1) Note:Fig.inbracketrepresentspercentagetoGDP atmarketprices Source:Sebi bulletin

10 | P a g e

Commodity Market

Ministry of Consumer Affairs

FMC (Forwards Market Commission)

Commodity Exchange

National Exchange

Regional Exchange





20 other regional exchanges

11 | P a g e

Commodity Market

Quality Certification Agencies Hedger (Exporters / Millers Industry)


Clearing Bank

Commodities Ecosystem MCX

Producers (Farmers/Cooperatives/Ins titutional)

Transporters/ support agencies Consumers (Retail/Institutio -nal)

Traders (speculators)arbi -trageurs/client)

12 | P a g e

Commodity Market

DIFFERENTTYPESOFCOMMODITIESTRADED: World-overonewillfindthatamarketexitsforalmostallthecommodities known tou s . These commodities canbe broadlyclassifiedintothe following:


Aluminium, Copper, Lead, Nickel, Sponge Iron, Steel Long Gold,GoldHNI,GoldM,i-gold,Silver,SilverHNI,SilverM CottonL Staple,CottonM (Bhavnagar),SteelLong(Govindgarh),SteelFlat, Staple,CottonSStaple,CottonYarn, Tin,Zinc BrentCrudeOil,CrudeOil,FurnaceOil,NaturalGas,M.E. Kapas Cardamom,Jeera,Pepper,RedChilli SourCrudeOil Arecanut,CashewKernel,Coffee (Robusta),Rubber Chana,Masur,YellowPeas

PETROCHEMICAL HDPE, Polypropylene(PP),PVC S &OIL SEEDS OIL CastorOil,CastorSeeds,CoconutCake,CoconutOil,Cott on Seed,CrudePalmOil,GroundnutOil,KapasiaKhalli,Mu stard Oil, Mustard Seed (Jaipur), Mustard Seed (Sirsa), RBD Palmolein,RefinedSoyOil,RefinedSunflowerOil,RiceB ran DOC,RiceBranRefinedOil,Sesame CEREALS OTHERS Seed,Soymeal,SoyBean, SoySeeds Maize Guargum, Guar Seed, Gurchaku, Mentha Oil, Potato (Agra), Potato(Tarkeshwar),SugarM-30,SugarS-30

13 | P a g e

Commodity Market

TURNOVEROFINDIANCOMMODITYEXCHANGES Indian CommodityFuturesMarket(RsCrore) Exchanges Multi Commodity NCDEX Exchange(MCX) NMCE(Ahmadabad) NBOT(Indore) Others AllExchanges 2004 165147 266,338 13,988 58,463 67,823 571,759 2005 961,633 1,066,686 18,385 53,683 54,735 2,155,122 2006 1,621,803 944,066 101,731 57,149 14,591 2,739,340 2007 2,505,206 733,479 24,072 74,582 37,997 3,375,336


14 | P a g e

Commodity Market

DIFFERENT SEGMENTSINCOMMODITIESMARKET ThecommoditiesmarketexitsintwodistinctformsnamelytheOverthe Counter(OTC)marketandthe Exchangebasedmarket.Also,asin equities,thereexiststhespotandthederivativessegment.Thespotmarkets areessentiallyoverthecountermarketsandtheparticipationisrestrictedto peoplewho areinvolvedwiththatcommoditysaythefarmer,processor, wholesaler etc. Derivative t r a d i n g takes place t h r o u g h exchange-based marketswithstandardizedcontracts, settlements etc.

EVOLUTION OF COMMODITY MARKET IN INDIA Bombay Cotton Trade Association Ltd., set up in 1875 was the 1st organized Futures Market. Bombay Cotton Exchange Ltd. was established in 1893 following the widespread discontent amongst leading cotton mill owners merchants over functioning of Bombay Cotton Trade Association. The Futures trading in oilseed started in 1900 with the establishment of Gujarati Vyapari Mandali, which carried on futures trading in groundnut, castor seed & cotton. Futures trading in wheat were existent at several places in Punjab & Uttar Pradesh. But the most notable futures exchange for wheat was Chambers Of Commerce at Hapur set up in 1913. Futures trading in bullion in Mumbai began in 1920. Calcutta Hessain Exchange Ltd. was established in 1919 for futures trading in raw jute & jute goods. But organized futures trading in raw jute began only in 1927 with the establishment of East Indian Jute Association Ltd. These two associations amalgamated in 1945 to form East India Jute & Hessain Ltd. to conduct organized trading in both Raw Jute & Jute goods. Forward Contracts (Regulation) Act was enacted in 1952 & the FMC was established in 1953 under the Ministry of Consumer Affairs & Public Distribution. In due course, several other exchanges were created in the country to trade in diverse commodities.

15 | P a g e

Commodity Market

LEADING COMMODITYMARKETSOFWORLD Someoftheleading exchanges oftheworldare: S.No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 GlobalCommodityExchanges NewYorkMercantileExchange(NYMEX) LondonMetalExchange(LME) Chicago BoardofTrade(CBOT) NewYorkBoardofTrade(NYBOT) KansasBoardofTrade WinnipegCommodityExchange,Manitoba DalianCommodityExchange,China Bursa MalaysiaDerivatives exchange SingaporeCommodityExchange(SICOM) Chicago MercantileExchange(CME), US LondonMetalExchange Tokyo CommodityExchange(TOCOM) ShanghaiFutures Exchange SydneyFutures Exchange London InternationalFinancialFutures and Options Exchange(LIFFE) NationalMulti-CommodityExchangeinIndia(NMCE),India NationalCommodityand Derivatives Exchange(NCDEX),India MultiCommodityExchangeofIndiaLimited(MCX),India DubaiGold&CommodityExchange(DGCX) DubaiMercantileExchange(DME),(jointventurebetweenDubai holding and the NewYorkMercantileExchange(NYMEX))

16 | P a g e

Commodity Market

REGULATORS: Eachexchangeisnormallyregulatedbyanationalgovernmental(orsemigovernmental) regulatoryagency:

Country Australia Chinesemainland HongKong India Pakistan Singapore UK USA Malaysia

Regulatoryagency AustralianSecurities and Investments Commission China Securities RegulatoryCommission Securities and Futures Commission Securities and ExchangeBoardofIndiaandForward MarketsCommission (FMC) Securities and Exchange Commission ofPakistan MonetaryAuthorityofSingapore FinancialServices Authority Commodity Futures Trading Commission Securities Commission

17 | P a g e

Commodity Market

LEADING COMMODITY MARKETSOFINDIA Thegovernmenthasnowallowednationalcommodityexchanges,similarto theBSE&NSE,tocomeupandletthemdealincommodityderivativesinan electronic tradingenvironment. These exchangesareexpectedtooffera nation-wide anonymous, order driven, screen based trading system for trading.TheForwardMarkets Commission (FMC)willregulatethese exchanges. Consequentlyfourcommodityexchangeshavebeenapprovedtocommencebusinessint his regard.Theyare:

S.NO. 1 2 3 4

CommodityMarketinIndia MultiCommodityExchange(MCX),Mumbai National Commodity and Derivatives Exchange Ltd (NCDEX), Mumbai NationalBoardofTrade(NBOT),Indore NationalMultiCommodityExchange(NMCE),Ahmadabad

18 | P a g e

Commodity Market

COMMODITY FUTURES TRADING IN MARKET Introduction DerivativesasatoolformanagingriskfirstoriginatedintheCommodities markets.Theywerethenfoundusefulasahedgingtoolinfinancialmarkets aswell.Thebasicconceptofaderivativecontractremainsthesamewhether theunderlyinghappenstobeacommodityorafinancialasset.Howeverthere aresomefeatures,whichareverypeculiartocommodityderivativemarkets. Inthecaseoffinancialderivatives,mostofthesecontractsarecashsettled. DerivativesasatoolformanagingriskfirstoriginatedintheCommodities markets.Theywerethenfoundusefulasahedgingtoolinfinancialmarkets aswell.Thebasicconceptofaderivativecontractremainsthesamewhether theunderlyinghappenstobeacommodityorafinancialasset.Howeverthere aresomefeatures,whichareverypeculiartocommodityderivativemarkets. Inthecaseoffinancialderivatives,mostofthesecontractsarecashsettled. Eveninthecaseofphysicalsettlement,financialassetsarenotbulkyanddo notneedspecialfacilityforstorage.Duetothebulkynatureoftheunderlying assets,physicalsettlementincommodity derivativescreatestheneedfor warehousing.Similarly,theconceptofvaryingqualityofassetdoesnotreally existasfarasfinancial underlyingareconcerned.Howeverinthecaseof commodities,thequalityoftheassetunderlyingacontractcanvarylargely. This becomes animportantissueto bemanaged.

Benefitstoindustryfromfuturestrading Hedging the price risk associated with futures contractual commitments. Spacedoutpurchasespossibleratherthanlargecashpurchasesandits storage. Efficientpricediscoveryprevents seasonalpricevolatility. Greaterflexibility,certaintyandtransparencyinprocuringcommodities wouldaidbank lending.
19 | P a g e

Commodity Market

Facilitate informedlending. Hedgedpositionsofproducersandprocessorswouldreducetheriskof defaultfacedbybanks.*Lendingforagriculturalsectorwouldgoup withgreatertransparencyinpricing and storage. mmodityExchangestoactasdistributionnetworktoretailagri- financefromBanks toruralhouseholds. Providetrading limitfinanceto Traders incommodities Exchanges.

Benefitstoexchangemember Accesstoahugepotentialmarketmuchgreaterthanthesecuritiesand cashmarketincommodities. Robust,scalable,state-of-arttechnologydeployment. Membercantradeinmultiplecommoditiesfromasinglepoint,onreal timebasis. Traderswouldbe t r a i n e d tobe R u r a l AdvisorsandCommodity Specialistsandthroughthemmultipleruralneedswouldbemet,like bankcredit, information dissemination, etc. Why commodityfutures? Oneanswerthatisheardinthefinancialsectoris"weneedcommodity futuresmarketssothatwewillhavevolumes,brokeragefees,andsomething totrade''.Wehavetolookatfutures marketinabigger perspective--whatis theroleforcommodityfutures inIndia's economy? InIndiaagriculturehastraditionallybeenanareawithheavygovernment intervention.Governmentintervenesbytryingtomaintainbufferstocks,they trytofixprices,andtheyhaveimport-exportrestrictionsandahostofother interventions.Manyeconomiststhinkthatwecouldhavemajorbenefitsfrom liberalization oftheagriculturalsector. Inthiscase,thequestionarisesaboutwhowillmaintainthebufferstock,how willwesmoothenthepricefluctuations,howwillfarmersnotbevulnerable
20 | P a g e

Commodity Market

thattomorrowthepricewillcrashwhenthecropcomesout,howwillfarmers getsignalsthatinthefuturetherewill beagreatneedforwheatorrice.Inall theseaspects thefutures markethas averybigroleto play. Ifwethinktherewillbeashortageofwheattomorrow,thefuturespriceswill goup today,anditwillcarrysignalsbacktothefarmermakingsowing decisions today. Inthisfashion,asystemoffuturesmarketswillimprove cropping patterns. Next,ifIamgrowingwheatandamworriedthatbythetimetheharvest comesoutpriceswillgodown,thenIcansellmywheatonthefuturesmarket.Icansellmywhe atataprice,whichisfixedtoday,whicheliminates myriskfrompricefluctuations.Thesedays,agriculture requiresinvestments-Farmersspendmoneyonfertilizers,highyieldingvarieties,etc.Theyare worriedwhenmakingtheseinvestmentsthatbythetimethecropcomesout pricesmighthavedropped,resultinginlosses.Thusafarmerwouldliketo lockinhis futurepriceand notbe exposedto fluctuations inprices. Thethirdistheroleaboutstorage.TodaywehavetheFoodCorporationof India,whichisdoingahugejobofstorage,andit,isasystem,which--inmy opinion-doesnotwork.Futuresmarketwillproducetheirownkindof smoothingbetweenthepresentandthefuture.Ifthefuturepriceishighand thepresentpriceislow,anarbitrager willbuytodayand sell inthefuture.The converseisalsotrue,thusifthefuturepriceislowthearbitrageurwillbuyin thefuturesmarket.Theseactivitiesproducetheirown"optimal"bufferstocks, smooth prices. They alsoworkveryeffectivelywhenthereistradeinagriculturalcommodities;arbitra geursonthefuturesmarketwilluseimports and exports to smoothIndianprices using foreignspot markets. Intotality,commodityfuturesmarketsare apartandparcelofaprogramfor agricultural liberalization.Many agricultureeconomistsunderstandtheneedof liberalizationinthesector.Futuresmarketsareaninstrumentforachieving thatliberalization.

21 | P a g e

Commodity Market

WHATMAKES COMMODITYTRADINGATTRACTIVE? Agoodlow-riskportfolio diversifier Ahighlyliquidassetclass,acting asacounterweighttostocks, bonds and realestate. Less volatile,comparedwith,equities and bonds. Investors canleveragetheirinvestments and multiplypotential earnings. Betterrisk-adjustedreturns. Agoodhedgeagainstanydownturninequities or bonds as thereis Littlecorrelationwithequityand bondmarkets. Highco-relation withchanges ininflation. No securities transaction taxlevied.

22 | P a g e

Commodity Market

Commodity Trading in India is regulated by FMC headquartered at Mumbai; it is a regulatory authority which is overseen by the Ministry of Consumer Affairs & Public Distribution, Govt. Of India. It is a statutory body set up in 1953 under the Forward Contract (Regulation) Act, 1952. After Equity trading, commodity trading is going to be the next big thing for investors. In India people have a love for Gold & Silver, trading is also going to pick up in Gold & Silver. Globally, the commodity market is about three times the size of equities trade market. In India, presently, the commodity market is still is the nascent stage & is gradually picking up taking a cue from the global 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 & energy products. Agriculture contributes about 22% of the GDP of Indian economy. It employees around 57% of the labor force on total of 163 million hectors of land. Agriculture sector is an imp 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.


23 | P a g e

Commodity Market

Global Scenario: It is widely believed that the futures trade first started about approximately 6,000 yrs ago in China with rice as a commodity. Futures trade first started in the 17th century. In ancient Greece, Aristotle described the use of call options by Thales of Miletus on the capacity of olive oil presses. The first organized futures market was the Osaka Rice Exchange, in 1730. Historically, organized trading in futures began in the US in the mid-19th century with maize contracts at the Chicago Board Of Trade (CBOT) & a bit later cotton contracts in New York. In the first few yrs of COBT, weeks could go by without any transaction taking place & even the weeks could go by without any transaction taking place & even the provision of a daily free lunch did not entice exchange members to actually come to the exchange! Trade took off only in 1856, when new management decided that the mere provision of a trading floor was not sufficient & invested in the establishment of grades & standards as well as nationwide price information system. CBOT preceded futures exchanges in Europe. In the 1840s Chicago had become a commercial centre since it had good railroads & telegraph lines connecting it with the east. Around the same time good agriculture technologies were developed in the area, which lead to higher wheat production. Midwest farmers, therefore, used to connect to Chicago to sell their wheat to dealers who, in turn, transports it to all over the country. Farmers usually brought their wheat to Chicago hoping to sell at a good price. The city had very limited storage facility & hence, the farmers were often left at the mercy of the dealers. The situation changed for the better in 1848 when a central marketplace was opened where farmers & dealers could meet to deal in CASH grain i.e. to exchange cash for immediate delivery of wheat. Farmers (sellers) & dealers (buyers) slowly started entering into contract for forward exchanges of grain for cash at some particular future date so that farmers could avoid taking the trouble of transporting & storing wheat (at very high costs) if the price was not acceptable. This system was suitable to farmers as well as dealers.
24 | P a g e

Commodity Market

The farmer knew how much he would be paid for his wheat, & the dealer knew his costs of procurement well in advance. Such forward contracts became common & were even used subsequently as collateral for bank loans. The contracts slowly got standardized on quantity & quality of commodities being traded. They also began to change hands before the delivery date. If the dealer decided he didnt want the wheat, he would sell the contract to someone who needed it. Also, if the farmer didnt want to deliver his wheat, could pass on his obligation to another farmer. The price would go up & down depending on what was happening in the wheat market. Slowly, even those individuals who had no intention of ever buying or selling wheat began trading in these contracts expecting to make some profits based on their knowledge of the situation in the market for wheat. They were called speculators. They hoped to buy contracts at low price & sell them at high price or sell the contracts in advance for high price & buy for lower price. This is how the future market in commodities developed in US. The hedgers began to efficiently transfer their market risk of holding physical commodity to these speculators by trading in future exchange. Indian Scenario: History of trading in commodities in India dates back to several centuries. But organized futures market in India emerged in 1875 when the Bombay Cotton Trade Association was established. The futures trading in oilseed started in 1900 when Gujarati Vyapari Mandali (todays NMCX, Ahmadabad) was established. The futures trading in Gold began in Mumbai in 1920. During the 1st half of the 20th century, there were many commodity futures exchanges, including the Calcutta Hessain Exchange Ltd. that was established in 1927. Those exchanges traded in jute, pepper, potatoes, sugar, turmeric, etc. However, Indias history of commodity futures market has been turbulent. Options were banned on cotton in 1939 by the Government of Bombay to curb widespread speculation. In mid-1940s, trading in forwards & futures became difficult as a result of price control by Government. The Forward Contract Regulation Act was passed in 1952. This put a regulatory guideline on forward trading. In 1960s,
25 | P a g e

Commodity Market

the Government of India suspended forward trading in several commodities jute, edible oil, seeds, cotton, etc. due to fears of increase in commodity prices. However, the government offered to buy agricultural products at Minimum Support Price (MSP) to ensure that the farmers benefited. The Government also managed storage, transportation & distribution of agricultural products. These measures weakened the agricultural commodity markets in India. The Government appointed four committees (Shroff Committee in 1950, Dantwala Committee in 1966, Khusro Committee in 1979 & Kabra Committee in 1993) to go into the regulatory aspects of forward & futures trading in India. In 1996, the World Bank in association with United Nations Conference on Trade & Development (UNCTAD) conducted a study on Indian Commodities Market. In the post-liberalization era of the Indian economy, it was the Kabra Committee & the World Bank-UNCTAD study that finally assessed the scope for forward & futures trading in commodities markets in India & recommended steps to revitalize futures trading.


26 | P a g e

Commodity Market

Majority of commodities traded on global commodity exchanges are agri-based. Commodity Markets therefore are of great importance & hold a great potential in case of economies like India, where more than 65% of the population are dependent on agriculture. There is huge domestic market for commodities in India since India consumes a major portion of its agricultural produce locally. Indian Commodities Market has an excellent growth potential & has created good opportunities for market players. India is Worlds leading producer of more than 15 agricultural commodities & is also the worlds largest consumer of edible oils & gold. It has major markets in regions of urban conglomeration (Cities & Towns) & nearly 7,500 + Agricultural Produce Market Cooperative (APMC) mandis. To add to this, there is a network of over 27,000+ haats (Rural Bazaars) that are seasonal market places of various commodities. These marketplaces play host to a variety of commodities every day. The commodity trade segment employs nearly five million plus traders. The potential of the sector has been well identified by the Central Government & the State Government & they have invested substantial resources to boost production of agricultural commodities. Many of these commodities would be traded on the futures markets as food-processing industry grows at a phenomenal pace. The Government also has recognized three national level commodity exchanges, which are trading in more than 85 commodities at present, & the list continues to expand. According to the experts in commodity markets, global trends indicate that the volume in futures trading trends to be 5-7 times the size of commodities spot trading in the country (Internationally, the multiple for physical versus derivatives is much higher at 15-20 times). Many nationalized & private sector banks have announced plans to disburse substantial amounts to finance commodity-trading business. The Government of India has initiated several measures to stimulate active trading interest in commodities. Steps like lifting the ban on futures trading in commodities, approving new exchanges, developing exchanges with modern infrastructure & systems such as online trading, & removing legal hurdles to attract more participants have increased the scope of commodities derivatives trading in India. The trading volumes are
27 | P a g e

Commodity Market

increasing as the list of commodities traded on NCE also continues to expand. The volumes are likely to surge further as a result of the increased interest from the international participants in Indian Commodity Markets. If these international participants are allowed to participate in the markets (like in case of capital markets), the growth in commodity futures can be expected to be phenomenal. It is expected that Foreign Institutional Investors (FIIs), mutual funds & banks may be able to participate in commodity futures is also expected after the amendments to the FCR Act, 1952. Commodity Trading & commodity financing are going to be a rapidly growing business in the coming years in India. With the liberalization of the Indian economy in 1991, the commodity prices (especially international commodities such as base metals & energy) have been subject to price volatility in international markets, since India is largely a net importer of such commodities. Commodity derivatives exchanges have been established with a view to minimize risk associated with such price volatility.


28 | P a g e

Commodity Market

After studying the importance of commodity markets & trading in commodity futures, it is essential to understand the different components of the commodity markets ecosystem. The following illustration shows the different components in the commodity markets ecosystem:

Thecommodity markets ecosystem includes the following components:

1) Buyers/Sellers or Consumers/Producers: Farmers, manufacturers, wholesalers, distributors, farmers co-operatives, APMC mandis, traders, State Civil Suppliers Corporations, Importers, Exporters, Merchandisers, Oil producing companies, etc.

2) Logistics Companies: Storage & transport Companies/operators, quality testing & certifying companies, etc.

3) Markets & Exchanges: Spot Markets (mandis, bazaars, etc.) & Commodity Exchanges (national & regional level)

4) Support Agencies: Depositories/de-materializing agencies, Central & State Warehousing Corporations & Private Sector Warehousing Companies.

5) Lending Agencies: Banks & Financial Institutions.

The users are the producers & consumers of different commodities. They have
29 | P a g e

Commodity Market

exposure to the physical commodities market, thus, exposing themselves to price risk. In turn, they depend on logistic companies for transportation of commodities, warehouses for storage, & quality testing & certification agencies for assessment & evaluation of commodity quality standards. Commodity derivatives exchanges provide a platform for hedging against price risk for these users.


Logistic Companies

Support Agencies

Farmers & Farmers Co-operatives

Storage & Transport Requirements & Quality Certification Requirements Quality Certification Requirements

Central & State Warehousing Corporation

APMC Mandis Testing & Certifying Companies Traders Spot Market State Civil Suppliers Cooperation Commodity Market

Private Sector Warehousing Companies

Warehouse Receipt System

Lending Agencies


30 | P a g e

Commodity Market

The following table shows the position of Indian Commodity Market in the International Commodity Market with respect to certain significant commodities.

Commodity Rice(Paddy) Wheat Pluses Groundnut Rapeseed Sugarcane Tea Coffee(Green) Jute & Jute Fibers Cotton(Lint)

India 240 74 13 6 6 315 0.75 0.28 1.74

World 2049 599 55 35 40 1278 2.99 7.28 4.02

Share 11.17 12.35 23.64 17.14 15.00 24.65 25.08 3.85 43.30

Rank 3rd 2nd 1st 2nd 3rd 2nd 1st 8th 2nd






31 | P a g e

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 is the warehouse receipt. A person deposits certain amount of say, goods X in a warehouse and gets a warehouse receipt. Which allows him to ask for physical delivery of the goods from the warehouse? But someone trading in commodity futures need not necessarily possess 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 for specific commodities. Following diagram gives 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: 1. Trading:- At this stage the following is the system implemented -Order receiving -Execution -Matching -Reporting -Surveillance
32 | P a g e

Commodity Market

-Price limits -Position limits. 2. Clearing: - This stage has following system in place -Matching -Registration -Clearing -Clearing limits -Notation -Margining -Price limits -Position limits -Clearing house. 3. Settlement: - This stage has following system followed as follows-Marking to market -Receipts and payments -Reporting -Delivery upon expiration or maturity.

10 STEPS TO INVEST IN COMMODITY MARKET: The future trading in commodities has emerged as a major investment option in India. Commodity market performances are equal to that of the stock market and analysts predict that the commodities market will overtake the capital market in trade volumes sooner than later. But since commodities futures market is a relatively new entrant in India, not many investors know how to tap and benefit from trading in various commodities. Here are 10 steps that you need to know to invest in commodities market. Step 1: Locate a brokerage house with a reputation for service.
33 | P a g e

Commodity Market

Step 2: Fill a demat account opening form with a registered brokerage house and a member with the national commodity exchanges. You could require PAN card, address proof and passport size photos.

Step 3: Be clear of the rules and regulations especially transaction costs.

Step 4: Choose the right brokerage plan that optimizes your costs, brokerage fees ranging from 0.03% to 0.08% on contract value.

Step 5: Be clear of the service deliverables from your broker.

Step 6: Insist on regular reports and special knowledge / training opportunities.

Step 7: Set aside funds for commodity investing, but remember not at the cost of other traditional investing avenues.

Step 8: Focus on a few commodities, gather requisite knowledge and pay up the initial amount for margin money, account opening charges and annual maintenance charges.

Step 9: Clear any or all doubts now - set stop loss and book profit levels.

Step 10: Get ready for investing and track your success and losses all the time.


34 | P a g e

Commodity Market

Money making is not a commodity, but commodity trading could earn you money!

35 | P a g e

Commodity Market

Investors choice: The future market in commodities offers both cash and delivery-based settlement. Investors can choose between the two. If the buyer chooses to take delivery of the commodity, a transferable receipt from the warehouse where goods are stored is issued in favour of the buyer. On producing this receipt, the buyer can claim the commodity from the warehouse. All open contracts not intended for delivery are cashsettled. While speculators and arbitrageurs generally prefer cash settlement, commodity stockiest and wholesalers go for delivery. The option to square off the deal or to take delivery can be changed before the last day of contract expiry. In the case of delivery-based trades, the margin raises to 0-25% 0f the contract value and the seller is required to pay sales tax on the transaction. Trading in any contract month will open on the twenty first day of the month, three months prior to the contract month. For example, the December 2004 contracts open on 21 September 2004 and the due date is the 20-day of the delivery month. All contracts settling in cash will be settled on the following day after the contract expiry date. Commodity trading follows a T+1 settlement system, where the settlement date is the next working day after expiry. However, in case of delivery-based traders, settlement takes place five to seven days after the expiry.

Investing in Commodities:

Commodity investment can be done in a number of ways: By investing in companies that produce commodities. Many investors already hold shares in such companies or hold units in collective investment schemes such as unit trusts which invest all or part of the fund assets into such companies. By purchasing, or selling, the commodities themselves on the spot market for immediate delivery. This involves high transaction costs and is not a suitable
36 | P a g e

Commodity Market

method of investment for individual investors. By purchasing, or selling via the commodities exchanges for later delivery. Most trading in commodities is done through futures and options. Taking positions in individual commodities is essentially speculative and should only be undertaken by professional investors who can afford to lose large sums of money if things go wrong. It seems an obvious statement but commodities make a return for investors if price rise after purchase. They generate losses if prices fall. Unlike financial assets, commodities offer no gain from interest income or dividends.

Returns from Commodity trading:

Absolute returns from stocks and bonds are definitely higher than pure commodities. But commodity trading carries a lower downside risk than other asset classes, as pricing in commodity future is less volatile compared to equities and bonds. While the average annual volatility is 25-30% in benchmark equity indices like the BSE Sensex or NSEs Nifty, it is 12-18% in gold, 15-25% in silver, 10-12% in cotton and 5-10% in government securities. According to study, if an investor had put his money only in silver and bonds from 1997-2003,his absolute returns would have been above 24%. Commodities are also good bets to hedge against inflation. Gold offers good protection against exchange rate fluctuations, and in particular, against fluctuations in the value of the US dollar against other leading currencies. However, unlike stocks, commodity prices are dependent on their demandsupply position, global weather patterns, government policies related to subsidies and taxation and international trading norms as guided by the World Trade Organisation (WTO).

37 | P a g e

Commodity Market

Growth of commodity trading:

A soft interest rate regime and a weak US dollar have increased the demand for the commodities. In a short span of over a year, online commodity markets are witnessing good growth in India. The daily volume of trading of Rs.2500 crore at NCDEX alone has surpassed that of Rs.2000 crore on the Bombay Stock Exchange (BSE). It registered a record daily traded volume of Rs.2617 crore on 8 December 2004. Commodities like chana, urad, soya bean oil, sugar, pepper, mustard seeds and wheat contributed to the balance trading volume. MCX, on the other hand, has achieved a peak daily turnover of Rs.1889 crore. Though the most popular commodities for trading in India are gold, silver, soya bean and guar gum, the market is divided equally between bullion and agricultural commodities in terms of trading volumes. Expecting the turnover on the three online commodity exchanges to spurt to Rs.10000 crore per day, banks are keen to tap the commodity trade-financing front. Commercial banks are chasing the commodity industry with attractive lending rates between 8% and 8.5% as against the normal lending rate between 11% and 14%. On Aug. 01, 2009; 432 members (1,851 users) participated in trading and put through more than 99,198 trades. The volume for the trading session till 02:00 p.m. was Rs. 26.68 billion (one-way). Active trades were high in among others Guar seed, Turmeric, Chana, Rape Mustard seed and Soya oil. The daily turnover volume at the National Commodity and Derivative Exchange (NCDEX) stood at Rs.39.39 billion (one- way). There were 457 members (1,970 users) users participated in trading on Aug 3, 2009 up to 5:00 p.m. There were more than 93,638 trades put through by them. Active trades were high among others Guar seed, Soya oil, Chana, Turmeric and Soybeans.

38 | P a g e

Commodity Market


Advantages: The commodity markets try to integrate the fragmented rural markets. Multiple commodities can be procured at one centre. Efficient spot price can be discovered and disseminated. The bargaining power of the farmers would be increased. Transportation and warehousing facilities would be increased. There would be guarantees for trade and also payments. Considering all these advantages, economic experts say that if the farmer and the consumer are to be benefitted then future trading and spot trading in the rural commodity markets should be encouraged.

Disadvantages: Globally commodity markets are criticized for their part in indulging in speculation and thus increasing the prices. Another major criticism is that the farm gate price is very low when compared to the price paid by the consumer. Small producers have no say in the market and traders dominate.

39 | P a g e

Commodity Market


40 | P a g e

Commodity Market

GOLD Introduction Goldis auniqueassetbasedon few basic characteristics.First, itis primarilya monetaryasset,andpartlyacommodity.Asmuchastwothirdsofgoldstotal accumulatedholdingsrelatetostoreofvalueconsiderations. Holdingsinthis category include thecentralbankreserves,privateinvestments,andhigh- caratage jewlleryboughtprimarilyindevelopingcountriesasavehiclefor savings. Thus, goldis primarilya monetaryasset. Less thanonethirdofgolds total accumulatedholdingscanbeconsideredacommodity,thejewellery boughtinWesternmarkets foradornment,and goldusedinindustry. The d i s t i n c t i o n b e t w e e n gold a n d c o m m o d i t i e s i s important. Gold has maintained its value in after-inflation terms over the long run, while commodities havedeclined. Some analystslike tothink ofgoldasacurrency withoutacountry.Itis an internationallyrecognizedassetthatisnotdependentuponanygovernments promise topay. This is an important feature when comparing gold to conventional diversifierslikeT-billsorbonds,whichunlikegold,dohave counter-partyrisk.

Whatmakes gold special?

Timeless and VeryTimelyInvestment Goldis aneffectivediversifier Goldis theidealgift Goldis highlyliquid Goldresponds when youneeditmost

41 | P a g e

Commodity Market

Market Characteristics Thegoldmarketishighlyliquid.Goldheldbycentralbanks,other majorinstitutions, and retailjewelleryis reinvestedinmarket. Dueto largestockofgold,againstitsdemand,itis arguedthatthecoredriveroftherealpriceofgoldisstockequilibriumratherthanflow equilibrium. Effectiveportfoliodiversifier:Thisphrasesummarizestheusefulnessof goldin termsofModernPortfolioTheory,astrategyusedbymany investmentmanagerstoday. Usingthisapproach,goldcan beusedas a portfolio diversifierto improveinvestmentperformance. Effectivediversificationduringstressperiods:Traditionalmethodof portfoliodiversificationoftenfailswhentheyaremostneeded,thatis duringfinancialstress(instability).Ontheseoccasions,thecorrelations and volatilities of return for most asset class (including traditional diversifiers, such as bond and alternative assets) increase, thus reducing theintendedcushioningeffectofthediversified portfolio.

42 | P a g e

Commodity Market

Demand and supply Chinaproduced276metrictonsofgoldlastyear,equaltoabout9.7 million ounces,saidLondonpreciousmetalsconsultancyGFMSLtd. That'sup12%fromtheyear-agoandrepresentedjustoverone-tenth oftheworld's supply. TherankingpushesSouthAfricaintosecondplace,thefirsttimethe Goldgianthaslostitstoprankingsince1905.SouthAfrica,whoslate 19thcentury goldrushledtothe foundingofminingheavyweightAnglo AmericanPlcandishometoglobalproducersGoldFieldsLtdand AngloGoldAshantiLtd;sawitsproductiondecline8%to272metric tons. Indiaisworldlargestgoldconsumerwithanannualdemandof800 tonnes.

Demand andSupplyofGoldinIndia(intonnes)

2006 Supply MineProduction NetProducerHedging Totalminesupply Officialsectorsales Old goldScrap TotalSupply Demand Fabrication Jewellery Industrial&Dental Subtotalofabovefabrication Bar&coinretail investment Otherretailinvestment ETFs and similar TotalDemand InferredInvestment Source: GFMSLtd. 573 -140 430 93 303 826 519 111 630 89 -3 113 829 -3

2007 580 -129 451 95 262 808 568 112 680 116 -5 36 827 -19

%change 1 5 2 -13 2 9 1 8 31 -68 0 -

43 | P a g e

Commodity Market

Risk and Return on Gold Investments

The return from investments in gold may be compared with the return on investment inGovernment bonds in the Indian markets. Illustratively, if gold had been purchased at end-February 1996 and sold at end-February 2002 at the prevailing rates in the local bullion market,the average annualized return would work out to be negative. On the contrary, investment in aliquid risk-free Government security on the same date would have fetched a comfortable positivereturn, and in case capital gains through marked to market is also taken into account, theannualized average return could be as high as 15 per cent.

IndianGoldJewelleryMarket Plain22caratjewelleryisthecoreofconsumptionespeciallyinthe ruralareas,wheregoldissoimportantinjudgingafamily'sstatusata marriage.Abasicmarriagesetfora brideistwoearrings,onenosepin, onering,one necklaceand two bangles,allin22 caratgoldand weighing up to 200grams (6.2oz). Studded(i.e.gem-set)18caratjewelleryisincreasinglypopularinthe cities and is estimatedto haveused31tones (1million oz)in 2001. Medallions,charmsandsmall giftitemsaccountforup tohalfofwhatis looselycalledjewellery.Theseitemsarepopularasgiftsatweddings and otherfamilyevents. Goldthread,knownasJariusedinhighqualitysariswornatweddings and specialoccasionsrequiressomewhereintheregionof20tones (0.6m oz) annually. Themarketishighlyfragmentedwithanestimated100,000workshopssupplying over300,000 retailers, mostlyfamily-owned, single shop operations. The
44 | P a g e

Commodity Market

industry isbeginningtobemodernizedwithlargefactories,installingthe latestequipment,incenterssuchasMumbai, Ahmadabad andBangalore. Hallmarking does notexistinIndiaandunder-caratageiscommonplace. The B u r e a u o f I n d i a n S t a n d a r d s h a s i n t r o d u c e d a voluntaryschemewhich,a lthoughnotyetwidelyused,isbecoming morepopular.Theminimum legalcaratageis 9carat. Thenumberofretailjewelleryoutletshasincreasedgreatlysincethe abolitionofgoldcontrol,ashasthenumberofIndianspossessinggoldjewellery.

FrequentlyAskedQuestionsonGold Q1.Whatis Goldandwhyis its chemicalsymbolAu?

45 | P a g e

Commodity Market

Gold is a rare metallic element with a melting point of 1064 degrees centigrade and a boiling point of 2808 degrees centigrade. Its chemical symbol,Au,isshortfortheLatinwordforgold,'Aurum',whichliterallymeans'GlowingDa wn'.Ithasseveralpropertiesthathavemadeitveryusefulto mankindovertheyears,notablyitsexcellentconductivepropertiesandits inabilityto reactwithwateroroxygen.

Q2.Wheredoes thewordGoldcomefrom?

ThewordgoldappearstobederivedfromtheIndo-Europeanroot'yellow', reflectingoneofthemostobviouspropertiesofgold.Thisisreflectedinthe similarities ofthe word goldinvariouslanguages: Gold (English), Gold (German),Guld(Danish), Gulden(Dutch),Goud(Afrikaans),Gull(Norwegian) and Kulta(Finnish).

Q3.Howmuchgoldis thereintheworld?

Attheendof2001,itisestimatedthatallthegoldeverminedamountsto about 145,000tonnes.

Q4.Whyis goldmeasuredincarats?

ThisstemsbacktoancienttimesintheMediterranean/MiddleEast,whena carat becameused asa measureofthepurityofgoldalloys(seenext Question5).Thepurityofgoldisnowmeasuredalsointermsiffineness,i.e. partsperthousand.Thus 18caratsis 18/24thof 1000parts=750fineness.


46 | P a g e

Commodity Market

ACarat(KaratinUSA&Germany)wasoriginallyaunitofmass(weight) based on the CarobseedorbeanusedbyancientmerchantsintheMiddle East.TheCarobseedisfromtheCaroborlocustbeantree.Thecaratisstill usedassuchfor the weightofgemstones(1caratisabout200mg).Forgold,ithascometobeusedformeasuringt hepurityofgoldwherepuregold isdefinedas24carats.Howandwhenthischangeoccurredisnotclear.It doesinvolvetheRomanswhoalsousedthenameSiliquaGraeca(Kerationin Greek,QiratinArabic,and nowCaratinmoderntimes)forthebeanoftheCarob tree.TheRomansalsousedthenameSiliquaforasmallsilvercoin,which wasone-twentyfourthofthegoldensolidusofConstantine.Thislatterhada massofabout4.54grammes,sotheSiliquawasapproximatelyequivalentin valuetothemassof1Kerationor SiliquaGraecaofgold,i.e.thevalueof 1/24thofaSolidus is about1Keration ofgold,i.e.1carat.

Q6.Whoowns mostgold?

Ifwetakenationalgoldreserves,thenmostgoldisownedbytheUSA followed byGermanyandtheIMF.Ifweincludejewelleryownership,then Indiaisthelargestrepositoryofgoldintermsoftotalgoldwithinthenational boundaries.In termsofpersonalownership,itisnotknownwhoownsthe most, butis possiblya memberofaruling royalfamilyintheEast.

Q7.Ifallthegoldwas laidaroundtheworld,howfarwoulditstretch?

Ifwemake allthegoldeverproducedintoathinwireof5microns(millionths ofameter)diameterthefinestonecandrawagoldwire,thenallthegold wouldstretcharoundthecircumferenceoftheworldanastounding72million times approximately!

47 | P a g e

Commodity Market

Q8.Howmuchnewgold is producedperyear?

In2001,mineproductionamountedto2,604tonnesor67%oftotalgold demandinthatyear. Goldproductionhasbeengrowingforyears,butthe real accelerationtookplaceafterthelate1970s,whenoutputwasintheregionof1,500tpa.Thisy earoutputwillfallshortofproductionlevelsin2001.Thisis partlyforspecificoperationalreasonsatsomeofthelargermines(Grasberg andPorgera),alongwithlowergradesatsomeoftheoperationsinNevada. Thereductioninexplorationanddevelopmentexpenditureoverthepastfive yearsisleadinganumberofanalyststosuggestthat,withotheroperations nearingtheendoftheirlives,globalproductionislikelytodropslightlyoverthenexttwoto threeyears subjectalwaysofcourseto price.

Q9.Howmuchdoes itcosttorunagold mine?

Goldminingisverycapitalintensive,particularlyinthedeepminesofSouth Africawhereminingiscarriedoutatdepthsof3000metersandproposalsto mineeven deeperat4,500metersarebeingpursued.Typicalminingcosts areUS$238/troyouncegoldaveragebutthesecanvarywidelydependingon miningtypeandore quality.Richeroresminedatthesurface(opencast mining)isconsiderablycheapertominethanundergroundminingatdepth. Suchmining requires expensive sinking ofshaftsdeepinto the ground.


Thegold-containingorehastobedugfromthesurfaceorblastedfromthe rock faceunderground.This isthenhauledto thesurfaceand milledto release thegold. Thegoldisthenseparatedfromtherock(gangue)bytechniques suchasflotation,smeltedtoagold-richdorandcastintobars.Theseare thenrefinedtogold
48 | P a g e

Commodity Market

barsbytheMillerchlorinationprocesstoapurityof99.5%.Ifhigherpurityisneededorplatin umgroupmetalcontaminantsare present, thisgoldisfurtherrefinedbytheWohlwillelectrolyticprocessto 99.9%purity.Minetailingscontaininglowamountsofgoldmaybetreated withcyanidetodissolvethegoldandthisisthenextractedbythecarbonin pulptechniquebeforesmelting and refining.

Q12.Howbig isatonneof gold?

GoldistraditionallyweighedinTroyOunces(31.1035grammes).Withthe densityofgoldat19.32g/cm3,atroyounceofgoldwouldhaveavolumeof1.64cm3.Atonneo fgoldwouldthereforehaveavolumeof51,760cm3,whichwould be equivalentto acubeofside37.27cm(Approx.1 3)?

49 | P a g e

Commodity Market

Forthepurposeofthis standard,thefollowing definitions shallapply: Assaying:Themethodofaccuratedeterminationofthegoldcontentof thesample expressedinpartsperthousand(%). Carat:One-twenty fourthpartbymass ofthemetallic elementgold. Fineness:Theratiobetweenthemassofgoldcontentandthetotal mass expressedinpartsperthousand(%). FindGold:Itisgoldhavingfineness999partsperthousand(5)andabovewithoutanyn egativetolerance. Gold:Themetallic elementgold,freefromanyotherelement. StandardGold:Goldhavingfineness995partsperthousand(%)and abovewithoutany negativetolerance. Grain:Oneoftheearliestweightunitsusedformeasuringgold.One grainis equivalentto 0.0648 grams. Hallmark:Mark,ormarks,whichindicatetheproducerofagoldbar and itsnumber,fineness,etc. Karat:Unitoffineness,scaledfromoneto24.24karatgold(orpuregold)hasatleast99 9partspuregoldperthousand;18-karathas750, partspuregoldand 250partsalloy,etc. KiloBar:Abarweighingonekilogramapproximately32.1507troy ounces. Legal Tender: The coin or currency which the national monetary authority declares to be universally acceptable as a medium of exchange; acceptableforinstance inthedischargeofdebts. Liquidity:Thequalitypossessedbyafinancialinstrumentofbeing readilyconvertibleinto cash withoutsignificantloss of value. Troy O u n c e : A u n i t o f w e i g h t , e q u a l t o a b o u t 1 . 1 a v o i r d u p o i s (ordinary)ounces.Thewordounce whenappliedtogoldrefers to atroy ounce.1troyounceis equivalentto31.1034768grams. MCX Contract specifications of gold:
50 | P a g e

Commodity Market

GOLD Nameof Commodity TickerSymbol Trading System Trading Period Trading Session Gold GLDPURMUMK MCXTrading System Mondayto Saturday Mondayto Friday: 11:30p.m. Saturday: 2:00p.m. TRADING Trading Unit PriceQuote 1kg Rs.Per 10 g, ex-Ahmadabad (inclusive of all taxesandleviesrelatingtoimportandcustom duty, but excluding sales tax/VAT, any other additionaltaxorsurchargeonsalestax,local taxes and Maximum ordersize TickSize Dailypricelimit InitialMargin SpecialMargin octroi) 10kg Re.1per10g(minimumpricemovement) 3% 4% Incaseofinitialvolatility,aspecialmarginat suchpercentage(asdeemedfit),will beimposed immediatelyonbothbuyandsellsideinrespect ofalloutstandingpositions,whichwillremainin force fornext2days,afterwhichthespecial marginwillberelaxed. Maximum Allowable Forindividualclient: 2MT Formemberscollectivelyforallclients:6MTor 15%ofthemarketposition, whicheveris high DELIVERY Delivery unit Deliveryperiod margin 1kg 25%ofthevalueoftheopenpositionduringthe deliveryperiod

51 | P a g e

Commodity Market


AtdesignatedclearinghousefacilitiesofGroup4Securitas atthese centers andatadditionaldelivery centers at Chennai, New Delhi and Hyderabad.

DeliveryLogic SETTLEMENT PERIOD Tender Period DeliveryPeriod Pay-inofcommodities (deliverybyseller member)


1stto 6thdayofthecontractexpirymonth. 1stto 6thdayofthecontractexpirymonth. On any tender days by 6.00 p.m. except

Saturdays,Sundaysand Trading Holidays. Markingof deliverywillbedoneonthetender daysbasedon theintentionsreceivedfromthe sellersafterthetradinghours.Onexpiryallthe open positionsshallbemarkedfordelivery. Deliverypay-inwillbeon E+1basis.

Pay-inof funds Pay-outof fundsand commodities (deliveryto buyer member)

By 11.00a.m.on Tender day+1basis By 05.00p.m.on Tender day+1basis.

INFORMATIONRELATED TODELIVERY DeliveryLogic Compulsory D e l i v e r y . Any s e l l e r h a v i n g o p e n positionontheexpirydatefailstodeli verthen thepenaltyasperthepenalprovisionwillbe imposedto thedefaulting seller. ModeofCommunication Tender Period Margin FaxorCourier 5%incremental marginforlast5daysonall outstanding positions. Such margin will be additiontoinitial,additionalandspecialmargin as Marginduring delivery period applicable. 25%on themarkedquantity.

52 | P a g e

Commodity Market

Exemption frommargin during tenderand delivery period

Marginisexemptedonreceiptofdocumentary evidence(viz., WarehouseReceiptandQuality Certificate) of tendering delivery with the Exchangeduring tenderdays.


Settlement/closingpriceontherespectivetender daysexceptonexpirydate.Onexpirydatethe delivery orderrateshallbetheDueDateRate (DDR) and nottheclosing price.


Apenaltyof2.5%ofDORwillbeimposedon defaultingbuyer/selleroutofwhich2%will be creditedtoIPFand0.5%willbecreditedtothe counter party. Additionally,4%ofDORasareplacementcost willbechargedfromdefaultingbuyer/sellerout ofwhich90%willbegiventothecounterparty and10%willberetainedbytheExchangeasadministrative


expenses. AhmadabadandMumbaiatdesignatedClearingHousefacilit iesofGroup4Securitasat these centers and at additional delivery centers at Chennai,NewDelhiand Hyderabad

Deliverablegradeof underlying commodity

Thesellingmemberstenderingdeliverywillhave the optionofdeliveringsuchgradesasperthe contractspecifications.Thebuyerhasnooption to select aparticulargradeandthedelivery offered by the seller and allocation by the Exchangeshallbebinding on him.

53 | P a g e

Commodity Market

Verification bytheBuyer atthetimeofrelease of delivery

Atthetimeoftaking delivery,thebuyercan checkhisdeliveryinfrontofGroup4personnel. If heissatisfiedwiththequantity,weightand qualityofmaterial,thenhewillissuereceiptof themetals instantly.Ifheis notsatisfied withthe metal,he caninsistforassayingbyanyofthe approvedassayersavailableatthatcenter.Ifthe buyerchoosesforassaying,Group4personwill carrythegoodstotheassayersfacilities,getit assayedandbringitbacktoGroup4facilities along with assayerscertificate.Iftheassayers certificate differs from the certificate submitted by the seller in respect of quality or weightmaterially, then the buyer and seller have to mutually negotiate the final settlement proceeds within 1 day from receipt of assayers report, however if they do not agree on any mutually acceptable amount within 1 day, then the Exchange will send the goods to a second assayer and in that case, the report received from such assayer will be final and binding on both buyer and seller. The cost of first assaying as well as cost of transportation from Group 4 to assayers facilities to and fro will be borne by the buyer, while the cost of second assaying, if any, will be equally divided between the buyer and seller. The vault charges during such period of first and second assaying, if any, will be borne by both the buyers and sellers equally. If the buyer does not opt for assaying at the time of lifting delivery, then he will not have any further recourse to challenge the quantity or quality subsequently and it will be assumed that he has received the quantity and quality as per the bill made by the seller.

54 | P a g e

Commodity Market

Validation Process

On receipt of delivery, the Group 4 personnel will do the following validations: a. Whether the person carrying Gold is the Designated clearing agent of the member. b. Whether the selling member is the bonafied member of the Exchange. c. Whether the quantity being delivered is from Exchange approved refinery d. Whether the serial numbers of all the bars is mentioned in the packing list provided. e. Whether the original certificates are accompanied with the Gold Bars Any other validation checks, as they may desire.

Delivery Process

In case any of the above validation fails, the Group 4 Securitas will contact the Exchange office and take any further action, only as per Instructions received from the Exchange in writing. If all validations are through, then the Group 4 Securitas personnel will put the Gold in the vault. Then the custodian of Group 4 will cut a serially numbered Group 4 receipt (in triplicate consisting of White, Pink and Yellow slips), get the signature of the sellers clearing agent and signing the same for authorization, hand over the Pink slip to sellers clearing agent, send by courier the third copy (Yellow Colour slip) while retaining the White for the records of Group 4 Securitas. Group 4 in front of the selling members clearing agent will Deposit the said metal into their vault.

Quality Adjustment

The price of gold is on the basis of 995 purity. In case a seller delivers 999 purity, he would get a premium. In such case, the sale proceeds will be calculated by way of delivery order rate * 999/ 995

55 | P a g e

Commodity Market

Procedure of taking delivery from the Vault

For the purpose of taking delivery of goods fully or partially, the Member shall send to the Exchange an Authority letter on his letter head, authorizing a representative on his behalf to take the delivery. The Authority letter sent by the Member shall consist of the following details: a. Name of the authorized representative. b. Name of the Commodity along with quantity. c. Name of the Vault along with the location. d. Signature of the authorized representative. e. Proof of Identity viz. PAN card, driving license, Election ID. f. Photo identity proof duly attested by the Member.

Taxes, duties, cess and levies

The above-mentioned details are required to be sent to Ex-Ahmadabad. the Exchange. Once the Exchange Inclusive of all charges / levies relating to import duty, receives to be borne by Seller. But excluding Sales Tax / the above-mentioned details, customs the Exchange will send or surcharge on sales tax, VAT, any other additional tax Delivery Order (DO) to the Vault taxes and octroi to be borne by the Buyer. local authorities directly. Based on the Delivery Order received, the Vault will The buyer member can endorse delivery order to a client issue the requested or any third party with full disclosurequantity the to given to the Responsibility for contractual liability would Exchange.authorized representative who has to present be himself personally at the Vault along with the requisite with the original assignee.

Endorsement of delivery order

Vault, Insurance and Transportation charges Extension of delivery period Due date rate (DDR)

photo identity proof in original, the copy of which was Borne by the seller till the date of pay-out of delivery and sent/communicated to the Exchange by its the buyer after the date of pay-out. Member. As per Exchange decision due to a force majeure or The Vault officials will, upon final otherwise. scrutiny/checking of the identity, the contract month. This DDR is calculated on 5th day of deliver goods to the representative of the of taking simple average of last 5 case is calculated by way Member. The Vault officials in of any discrepancy or doubt or days of the spot market of Ahmadabad. any other reason may refuse to issue the goods The members will provide appropriate tax forms wherever to the representative under the intimation to the required as per law and as customary and neither of the Exchange. parties (seller member and buyer member) will The delivery given to the representative shall be final & unreasonably refuse to do so. binding to the Member at all times.
56 | P a g e

Legal obligation

Commodity Market

Applicability of Business Rules

The general provisions of Byelaws, rules and Business Rules of the Exchange and decisions taken by Forward Markets Commission, Board of Directors and Executive Committee of the Exchange in respect of matters specified above will form an integral part of this contract. The Exchange or FMC as the case may be further prescribe additional measures relating to delivery procedures, warehousing, quality certification, margining, and risk management from time to time. (The interpretation or clarification given by the Exchange on any terms of this contract shall be final and binding on the

members and others.) STEPSTOBEFOLLOWED FORDELIVERY Onanytender days by 6.00p.m. Intention to takedelivery bybuyers Dissemination of information on tendered deliveryand buyers interest The Exchange will informmembersthroughTWS regardingtendernoticeanddeliveryintentionsof thesellersmembersandthebuyersrespectively by7.00p.m.ontherespectivetenderdaysand on Saturdays by 1:00p.m. Evidenceofstocks in possession Atthetimeofissuingdeliveryorder,theMember mustsatisfytheExchangethatheholds stocksof thequantityandqualityspecifiedintheDeliveryOrder at the declared delivery center by producing warehousereceipt. Tendernoticebyseller The sellerwillissuetendernoticealongwithevidence of delivery to the Exchange in a specifiedformatby6:00p.m.andonSaturdays by 12:00noon. Buyers obligation Thebuyershallnotrefusetakingdeliveryand such refusalwillentertainpenaltyasperthepenalprovision.

Allocation ofdelivery

Aspertheclosingpriceontherespectivetender days.

57 | P a g e

Commodity Market

REGULATORY BODY At present there are three tiers of regulations of forward/future trading system exists in India, namely, Government of India, Forward Markets Commission & Commodity Exchanges. The need for regulation arises on account of the fact that the benefits of futures markets accrue in competitive conditions. The regulation is needed to create competitive condition. In the absence of regulation, unscrupulous participants could use these leveraged contracts for manipulating prices. This could have undesirable influence on spot prices, thereby affecting the interest of appropriate risk management system. In the absence of such a system, a major default could create a reaction. The reluctant financial crisis in a futures market could create systematic risk. Regulation is also needed to ensure fairness & transparency in trading, clearing. Settlement & management of exchange so as to protect & promote the interest of various stakeholders, particularly non-member users of the market. Hence there is a need of regulatory functions to be exercised by an exchange.

Ministry Of Consumers Affairs


Commodity Market

58 | P a g e

Commodity Market

Forward Market Commission FMC headquartered at Mumbai, is a regulatory authority which is overseen by the Ministry Of Consumer Affairs & Public Distribution,Govt. of India. It is a statutory body set up in 1953 under the Forward Contract (Regulation) Act, 1952. The functions of the FMC are as follows: 1. To advise the Central Govt. in respect of the recognition or withdrawal recognition from any association or in respect of any other matter arising out of the administration of Forward Contract(Regulation) Act, 1952.

2. To keep forward markets under observation & to take such action in relation to them, as it may consider necessary, in exercise of the powers assigned to it by or under the Act.

3. To collect & whenever the commission thinks it necessary, to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding demand, supply & prices, & to submit to the Central Government, periodical reports on the working of forward markets relating to such goods.

4. To make recommendations generally with a view to improving the organization 7 working of forward markets.

5. To undertake the inspection of the accounts & other documents of any recognized association or registered association or any member of such association whenever it considers necessary.
59 | P a g e

Commodity Market

ROLE OF GOVERNMENT IN COMMODITY MARKET The Government, too, may enter the game. The Government of India reckons that it could create a minimum support price like mechanism using commodity futures by entering into contracts for purchase of commodities covered under its programme at the prescribed minimum support price. Union consumer affairs secretary Labanyendu Mansingh believes this will help the Government save on procurement 7 shortage cost of food grains, estimated to cost it close to Rs 25,000 crore annually. Mansingh believes the Government could ferret back a part of these savings to farmers to help pay for the cost of delivering & storing food grains from the farms exchange accredited warehouses. In the process, the Government will minimize corruption in the grains management operations, give a major boost to commodity futures trading & take the farmers to the e-age. Legislative changes have been proposed to enable farmers to get loans against the receipt for goods deposited at accredited warehouses. If those proposals become law, then farmers could get finance, which would enable them to avoid distress sales of their produce at times of unfavorable market conditions. With 45% of Indias GDP (or RS 11lakh crore) coming from commodities, exchanges hope that eventually everyone involved in commodities trade across the value chain from the farmer to the processor will be hedging their positions using futures. To encourage large companies to trade in commodity futures, NCDEX has set up a network of 100 warehouses where commodities are graded & certified & where such commodity balances can be held electronically in demat form. Already, around 1,500 depository participant accounts have been opened with 32 depository participants. The exchanges tieing with other players to provide warehouses services to the traders 7 now NCDEX is to built 1,100 warehouses with all the facilities.

60 | P a g e

Commodity Market


NMCE is the 1st demutualized, Electron Multi-Commodity Exchange in India. NMCE was promoted by: 1. Neptune Overseas Ltd. (NOL) 2. Central Warehousing Corporation (CWC) 3. National Agricultural Co-operative Marketing Federation Of India (NAFED) 4. National Institute Of Agricultural Marketing (NIAM) 5. Gujarat Agro-Industries Corporation Ltd. (GAICL) 6. Gujarat State Agricultural Marketing Board (GSAMB) (It got its recognition in Oct 02) 7. NMCE facilitates electronic derivatives trading through robust & tested trading platform, Derivatives Trading Settlement System (DTSS). It is the only Commodity Exchange in the world to have received ISO 9001:2000 certification from British Standard Institutions (BSI). NMCE was the 1st commodity exchange to provide trading facility through internet, through VIRTUAL PRIVATE NETWORK (VPN). NMCE follows best international risk management practices. The contracts are marked to market on daily basis. The system of upfront margining based on value at Riskis followed to ensure financial security of the market. In the event of high volatility in prices, special intra-day clearing & settlement is held. NMCE was the 1st to initiate process of dematerialization& electronic transfer of warehoused commodity stocks. The unique strength of NMCE is its settlement via Delivery Backed System, an imperative in the commodity trading business. These deliveries are executed through a sound & reliable Warehouse Receipt System, leading to guaranteed clearing & settlement.
61 | P a g e

Commodity Market

NMCE would bring about the converge of large-scale processors, traders andfarmers along with banks. NMCE would provide a common ground for fixation of future prices of a number of commodities enabling efficient price discovery / forecast. In addition, hedging using different and diverse commodities would also be possible with help of NMCE. In short, NMCE is leading transition of highly fragmented, controlled and restricted commodity economy to globally integrated, efficient and competitive environment in the 21st century. INFORMATION: On 25th July, 2001, the NMCEIL has been granted in-principle approval by the Government to organize futures trading in the edible oil complex. The exchange is operationalised from November 26, 2002. NMCES Vision & Mission. Vision National Multi-Commodity Exchange of India Limited is committed to provide world class services of on-line screen Futures trading of permitted commodities and efficient Clearing and guaranteed settlement, while complying with Statutory /Regulatory requirements. We shall strive to ensure continual improvement of customer services and remain quality leader amongst all commodity exchanges. Mission Continual Improvement in Customer Satisfaction. Improving efficiency of marketing through on-line trading in Dematerialization form. Minimization of settlement risks. Improving efficiency of operations by providing best infrastructure and latest technology. Rationalizing the transaction fees to optimum level. Implementing best quality standards of warehousing, grading and testing in
62 | P a g e

Commodity Market

tune with trade practices. Improving facilities for structured finance. Improving quality of services rendered by suppliers. Promoting awareness about on-line features trading services of NMCE across the length and breadth of the country. Innovation is the way of life at NMCE

63 | P a g e

Commodity Market


MCX an independent and de-mutulised commodity exchange has permanent recognition from Government of India for facilitating online trading, clearing and settlement operations for commodity futures markets across the country. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, Union Bank of India, Corporation Bank, Bank of India and Canara Bank. Headquartered in Mumbai, MCX is led by an expert management team with deep domain knowledge of the commodity futures markets. Through the integration of dedicated resources, robust technology and scalable infrastructure, since inception MCX has recorded many first to its credit. Inaugurated in November 2003 by Shri Mukesh Ambani, Chairman & Managing Director, Reliance Industries Ltd., MCX offers futures trading in the following commodity categories: Agri Commodities, Bullions, Metals- Ferrous & Non Ferrous, Pulses, Oils & Oilseeds, Plantations, Spices and other soft commodities. MCX has built strategic alliances with some of the largest players in commodities eco-system, namely Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors Association of India, Pulses Importers Association and Shetkari Sanghatana. Today MCX is offering spectacular growth opportunities and advantages to a large cross section of the participants including Producers / Processors, Traders, Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives, Industry Associations, amongst others MCX being nation- wide commodity exchange, offering multiple commodities for trading with wide reach and penetration and robust infrastructure, is well placed to tap this vast potential.

64 | P a g e

Commodity Market


Top Commodity futures traded across exchanges Commodity Guar seed Silver Soy oil Gold Mustard seed Castor seed Gaur gum Pepper Gur Rubber Crude oil Cotton Other metals Jute Value of futures traded (Rs crore) 129,522.98 116,267.99 101,527.66 62,784.85 19,422.46 14,327.34 13,412.08 8,334.28 7,891.49 2,745.84 1,900.14 779.16 618.22 91.74

Sources: Forward Market Commission

65 | P a g e

Commodity Market


The NCDEX Commodity Index is an equal-weighted spot price index of 20 agricultural commodities covering different groups such as oils and oilseeds, fibres, etc. It is the first such index to be launched in India. Based on the components of the spot price index, NCDEX also displays the national index futures-essentially, the noarbitrage price if one were to buy futures on the spot index. This price is derived by tracking the futures prices of the index components at the same weightage as the spot index. Currently, index futures are not allowed in India under the FCRA (Forward Contracts Regulation Act, 1952), which requires compulsory physical settlement of future contracts. National Commodity & Derivatives Exchange Limited (NCDEX) is an online commodity exchange based in India. It was incorporated as a private limited company incorporated on April 23, 2003 under the Companies Act, 1956. It obtained its certificate for Commencement of Business on May 9, 2003. It has commenced its operations on December 15, 2003. NCDEX is a closely held private company which is promoted by national level institutions and has an independent Board of Directors and professionals not having vested interest in commodity markets. NCDEX is regulated by Forward Market Commission (FMC) in respect of futures trading in commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations, which impinge on its working. On February 3rd, 2006, the FMC found NCDEX guilty of violating settlement price norms and ordered the exchange to fire one of their executive. NCDEX is located in Mumbai and offers facilities in more than 550 centres in India.
66 | P a g e

Commodity Market


NCDEX currently facilitates trading of 57 commodities:-

Agri- Based commodities:

Castor Seed Chana Chilli Coffee Arabica, Coffee Robusta Cotton Seed Oilcake Crude Palm Oil Expeller Mustard Oil Groundnut (in shell) Groundnut Expeller Oil Guar gum Guar Seeds Gur, Jeera Jute sacking bags Kidney Beans Indian 28 mm Cotton Indian 31 mm Cotton Masoor Grain Bold Medium Staple Cotton Mentha Oil
67 | P a g e

Commodity Market

Mulberry Green Cocoons Mulberry Raw Silk Rapeseed- Mustard Seed Pepper Raw Jute RBD Palmolein Refined Soy Oil Rubber Sesame Seeds Soy Bean Sugar- small Sugar- medium Turmeric Urad (Black Matpe) V-797 Kapas Yellow Peas Yellow Red Maize Yellow Soybean Meal.


Gold 1 kg Gold 100 gm Silver 30 kg Silver 5 kg

68 | P a g e

Commodity Market


Brent Crude Oil Furnace Oil Light Sweet Crude Oil.

Ferrous metals:

Mild Steel Ingot


Polypropylene Linear Low Density Polyethylene Polyvinyl Chloride.

Non-ferrous metals:

Aluminium Ingot Copper Cathode Nickel Ingot Zinc Cathode

69 | P a g e

Commodity Market

Facilities offered:

NCDEX also offers as an information product, an agricultural commodity index. This is a composite index, called NCDEXAGRI that covers 20 commodities currently being offered for trading by NCDEX. This is a spot-price based index. NCDEX also offers as an information product, the index futures, called FUTEXAGRI. This is essentially a what-if index. It indicates that if futures on the index could be traded, then the current FUTEXAGRI value should be the no-arbitrage value for the index futures. However, indexes and index futures are not allowed to be traded under the current regulatory structure. Hence, these are only available for information, as of now.


The governance of NCDEX vests with the Board of Directors. The Board comprises persons of eminence, each an authority in his own right, in the areas very relevant to the Exchange. The institution-shareholders Canara Bank, CRISIL Limited, ICICI Bank Limited, IFFCO, Life Insurance Corporation of India, National Bank for Agriculture and Rural Development, National Stock Exchange of India Limited and Punjab National Bank, in tune with the highest norms of corporate governance, have decided that they will not be taking part in the day-to-day activities of the Exchange. In NCDEX, Board of Directors comprises 8 Directors who are well known, highly experienced and is independent. The Managing Director is the only whole-time Director.

70 | P a g e

Commodity Market

Worldwide commodity markets.

SOME INFORMATION ABOUT WORLD WIDE COMMODITY EXCHANGE. In the middle of the 19th century in the United States, businessmen began organizing market forums to make the buying and selling of commodities easier. In 1982, a group pf Manhattan diary 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 exchangesthe National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange and the New York Hide Exchange. London metal exchange (LME), Chicago Mercantile exchange (CME), Chicago Board of Trade (CBOT), New York Mercantile exchange (NYME) is amongst the worlds largest and best exchanges. The major commodity markets are in the United Kingdom and in the USA major commodity markets are in London, Chicago, Sydney and Singapore. In London,- still the major international centers for transactions in a vast range of commodities-such markets include the London commodity Exchange (LCE) trading sugar, spices, cocoa, rubber, etc. The Tea Market, The London Wool Exchange, The London Metal Exchange (LXM), The London Gold Market, The London Diamond Market and International Petroleum Exchange (IPE). In the USA, the New York Mercantile Exchange (NYMEX) deals in metals, the Chicago Board of Trade (CBOT) in metals, soft commodities and financial futures, and the Chicago Mercantile Exchange in Livestock and Livestock futures. The two main futures exchanges, which traded gold, are COMEX in New York and TOCOM in Tokyo.
71 | P a g e

Commodity Market

According to experts:-

Volumes on commodity exchanges are growing because there is transfer from the mandis to the exchange platform, says Sanjiv Shah, executive director of Benchmark Asset Management Company. National exchanges have succeeded in creating trust in the minds of stakeholders as they are hi-tech, corporatized and employ modern management. A farmer has to trust the exchange the way he trusts State Bank of India. Modern exchanges have also reduced information asymmetry, which has resulted in their growth, says Jignesh Shah, managing director, MCX.

72 | P a g e

Commodity Market


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 NGOs should come forward to educate the people about commodity markets and to encourage them to invest into 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 benefitted from it. But for this to happen one has to take initiative to standardize and popularize the Commodity Market. Some Suggestions to make futures market as a level playing field for all stake holders: 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
73 | P a g e

Commodity Market

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 be 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. 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 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.

74 | P a g e

Commodity Market

CONCLUSION Afte ralmos ttwo yeas tha tcommodity trading is finding favou rwith Indian investors and is been seen as a separate asset class with good growth opportunities.For diversification of portfolio b yond shares,fixed deposits and mutual funds,commodity trading offers a good option for long-term investors and arbitrageurs and speculators. And, now,with daily global volumes in commodity trading touching three times that of equities,trading in commodities cannot be ignored by Indian investors. Online commodity exchanges need to revamp certain laws governing futures in commodities to maket more attractive. The national multi- commodity exchanges have unitedly proposed to the government that in view of the growth of the commodities market, foreign institutional investors should be given the go-ahead to invest in commodity futures in India.Their entry will deepenand broadbase the commodity futures market. As a matter of fact,derivative instruments,such as futures,can help India become a global trading hub for select commodities. Commodity trading in India is poised for a big take-off in India on the back of factors like global economic recovery and increasing demand from China for commodities. Considering the huge volatility witnessed in the equity markets recently with the Sensex touching 21000 level commodities could add the required zing to investors portfolio.Therefore, It won'tbe long before the market sees the emergence of acompletely re-defined set of retail investors.

75 | P a g e

Commodity Market


76 | P a g e