COMMODITY MARKETS

Presented By Apoorva. P (1103009)

What is a Commodity Market

Commodity Markets are the markets where the raw or primary products are exchanged. Commodities are split into two types: Hard commodities: They are typically natural resources that must be mined or extracted (gold, rubber, oil, etc). Soft commodities: They are agricultural products or livestock (corn, wheat, coffee, sugar, soya beans, pork, etc).

History of Commodity Market

Before the advent of the industrial revolution, trading mainly took place with agricultural commodities such as corn, maize, oats, wheat, livestock, hogs and pigs. In 1848, the world s oldest futures exchange was formed and it was named the Chicago Board Of Trade [CBOT]. Modern Commodity Market have their roots in the trading of agricultural products. India, being an agro-based economy, has markets for most of the agro-based commodities. India is the largest consumer of Gold in the world, which implies a huge market for the yellow metal.

Continued
Commodity trading in India is regulated by the Forward Markets Commission (FMC) headquartered at Mumbai. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952. In India, presently, the commodities market is still in a nascent stage and is gradually picking up taking a cue from global markets.

Structure Of Indian Commodity Exchanges

FMC
Commodity Exchanges

National exchanges

Regional exchanges

NCDEX

NMCE

MCX

NBOT

20 Other Regional Exchanges

Commodity Exchanges In India

There are 24 commodity exchanges in India, and there are 3 national level commodity exchanges to trade in all permitted commodities. They are: Multi Commodity Exchange of India Ltd (MCX). National Commodity and Derivatives Exchange Ltd (NCDEX). National Multi Commodity Exchange (NMCE).

Multi Commodity Exchange Of India (MCX)

MCX is an independent commodity exchange based in India. It was established in 2003 and is located in Mumbai. MCX is India s No.1 commodity exchange with 83% market share. MCX's world rankingNo. 1 in Silver. No. 2 in Gold, Copper & Natural Gas. No. 3 in Crude Oil. MCX offers trading in ferrous and non-ferrous metals, energy and a number of agricultural commodities (cardamom, potatoes, palm oil and others).

National Commodity and Derivatives Exchange Ltd (NCDEX)

NCDEX is a professionally managed on-line multi commodity exchange. It is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956. It commenced its operations on December 15, 2003. NCDEX headquarters are located in Mumbai and offers facilities to its members from the centers located throughout India. The top 5 commodities, in terms of volume traded at the Exchange, are Mustard Seed, Gaur Seed, Soya bean Seeds, Turmeric and Jeera.

National Multi Commodity Exchange (NMCE)

NMCE is an online Multi-Commodity Exchange of India located at Ahmedabad which was granted the National status on a permanent basis by the Government of India and is operational since 26th November 2002. It is the only Indian commodity exchange without foreign investment partners, it is actively looking at bringing on board some strategic investors from the USA, UK and Japan. The commodities that are traded in NMCE are Among the metals, there are futures contracts for copper, lead, nickel, tin, zinc, silver, aluminum and gold. Within the agricultural sector there are pulses, and spices such as turmeric, cardamom and pepper. Various oils are also traded such as castor, coconut, groundnut, cotton seed.

Segments in Commodity Market

The commodities market exits in two distinct forms namely: Over the Counter (OTC) market and the Exchange based market. Over the Counter (OTC) markets are localized for specific commodities. Almost all the trading that takes place in these markets is delivery based. The buyers as well as the sellers have their set of brokers who negotiate the prices for them. The exchange-based markets are essentially only derivative markets, i.e. everything is standardized and a person can purchase a contract by paying only a percentage of the contract value.

Commodities Trading
The trading is done by contracts, which include Spot trading:- Spot trading is any transaction where delivery either takes place immediately, or with a minimum lag between the trade and delivery due to technical constraints. Forwards contracts:- It is an agreement between two parties to exchange at some fixed future date a given quantity of a commodity for a price defined today. The fixed price today is known as the forward price. Futures contracts:- A futures contract has the same general features as a forward contract but is transacted through a futures exchange. Hedging:- A risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities.

Most popular exchange traded commodities

The most traded commodities are: Silver - Costs Rs. 52200 (1kg) in Delhi. Gold - Costs Rs. 27760 (10gms) in Delhi. Rice - In Punjab, 32 tonnes of Rice costs Rs. 1660 per quintal, minimum price being Rs. 1450 per quintal. Jute - In Andhra Pradesh, 0.3 tonnes of Jute costs Rs. 2100 a quintal, minimum price being Rs. 2000 a quintal. Sugar - 28 tonnes of Sugar in Jaipur costs Rs. 3200 a quintal, minimum price being Rs. 3000 a quintal. Corn - In Maharashtra, 13.2 tonnes of Corn costs Rs. 1150 a quintal and Rs. 1000 a quintal (minimum). Wheat - In Jharkhand, 24.4 tonnes of Wheat flour costs Rs. 1600 per quintal, minimum price being Rs. 1500 per quintal. Cotton - In Haryana, 132.7 tonnes of cotton costs Rs. 4368 per quintal , minimum price is Rs. 4000 per quintal.

Benefits to Indian Economy

As the constituents of the commodity market ecosystem get benefited, the Indian economy is also benefited. Growth in the organized commodity markets and their constituents implies that there would be tremendous advantages and benefits accrued to the Indian economy in terms of business generation and growth in employment opportunities. As India imports bulk of raw material (especially in base metals and energy), there is scope for minimizing price risk for international commodities. With the consumption of commodities increasing rapidly, especially in developing countries such as China and India, the prices of commodities are volatile, emphasizing the need for organized commodity derivatives exchanges.