A Project on Commodity Trading

COMMODITY MARKET Commodity markets are markets where raw or primary products are exchanged. It covers physical product (food, metals, and electricity) markets but not the ways that services, including those of governments, nor investment nor debt, can be seen as a commodity.

HISTORY

y

Modern

Commodity

OF COMMODITY MARKET

Market

have their roots in the trading of agricultural

products. y

Wheat

and corn, cattle and pigs, were widely tradedusing standard

instruments in the 19th century in theUnited States. y

Historically,

in ancient times Sumerian use of sheepor goats, or other

peoples using pigs, rare seashells, orother items as commodity money, have tradedcontracts in the delivery of such items, to render tradeitself more smooth and predictable.

SIZE OF THE MARKET y

The

trading of commodities includes physical tradingof food items, Energy

and Metals, etc. and trading ofderivatives. y

In the five years up to 2007, the values of global physical exports of commodities increased by 17% while the notional value outstanding of commodity. OTC derivatives increased more than 500% andcommodity derivative trading on exchanges morethan 200%.

1

Analysis of commodity indices in the global shipping trade

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y

Agricultural contracts trading grew by 32% in 2007, energy 29% and industrial metals by 30%.

y

Precious

metals trading grew by 3%, with higher volume in New York being

partially offset by declining volume in Tokyo. y

OTC trading accounts for the majority of trading in gold and silver.

LIST

OF TRADED T RADED COMMODITY

y

Agricultural (Grains, and Food and Fiber)

y

Livestock

y

Energy

y

Precious

y

Industrial metals

& Meat

metals

Agricultural Products Corn, Oats, Rough Rice, Soybeans, Rapeseed, Soybean Wheat,

Meal,

Soybean Oil,

Cocoa, Coffee C , Cotton No.2, Sugar No.11, Sugar No.14.

Livestock Lean Hogs,

and meat

Frozen Pork Bellies, Live Cattle, Feeder Cattle.

Energy WTI

Crude Oil, Brent Crude, Ethanol, Natural Gas,

Gasoline, RBOB Gasoline, Propane, Uranium.

Heating

Oil, Gulf Coast





















Precious Metal Gold,Platinum, Palladium, Silver.

Industrial Metals Copper, Lead, Zinc, Tin, Aluminum, aluminum alloy, Nickel, aluminum alloy, Recycled steel.

COMMODITY EXCHANGES y

Abuja Securities and Commodities Exchange

y

Bhatinda Om & Oil Exchange Bathinda

y

Brazilian Mercantile and Futures Exchange

y

Chicago Board of Trade

y

Chicago Mercantile Exchange

y

Commodity Exchange Bratislava, JSC

y

Dalian

y

Dubai Mercantile

y

Intercontinental Exchange

y

Minneapolis

y

Multi

y

National Commodity and Derivatives Exchange

y

National Multi-Commodity Exchange of India Ltd

Commodity Exchange Exchange

Grain Exchange

Commodity Exchange

y

New York Mercantile Exchange

y

New York Board of Trade

y

London Metal

Exchange





















RECENT TRENDS IN COMMODITYMARKE COMMODITYMARKET T y

The

2008 global boom in commodity prices ± for everything from coal to

corn ± was fueled by heated demand from the likes of China and India. y

Speculation in forward markets.

y

Farmers are expected to face a sharp drop in crop prices as a result of bad rainfall.

y

Other commodities, such as steel, are also expected to fall due to lower

.

demand

Basics Perhaps

of Futures Trading

the biggest advantage to trading futures contracts is the leverage provided

by the exchange. However, controlling large contracts with relatively low amounts of capital can create high levels of volatility. As a result, many traders will argue that leverage is actually a disadvantage. Regardless of your opinion on leverage and margin requirements, it is important that you fully understand the concepts.

Before a customer can establish a position he is required to make a minimum ³good faith deposit,´ or margin, to assure the performance of his obligations. A margin deposit is, in essence, a performance bond, which is usually between 5% and 10% of the underlying contract value. A good faith deposit indicates the buyer or seller¶s willingness and capability to compensate the opposite party to a transaction





















Because margin requirements are low, hedgers are given the ability to lock in pricing of cash market goods without tying up a lot of capital. It would be counterproductive for a hedger who handles large quantities to put up 100% of the value of the hedged commodity. The exchange grants margin discounts to those that are deemed to be ³bonefied´ hedgers, due to the fact that the underlying cash position is seen as collateral to secure the capital risked in the futures market.

Low

margins make speculation in the futures markets very attractive, without the

advantage of leverage the rate of return on most commodities would be marginal. The

exchanges are responsible for setting margin requirements, but brokerage

firms have discretion to require higher deposits. Generally, the initial margin is sufficient to cover the maximum daily price fluctuations. It is not uncommon for margin requirements to fluctuate with the volatility of the market. A maintenance level is established below the initial margin, usually 75% of the initial margin. Once a trader's good faith deposit falls below this threshold additional funds must be deposited or positions must be liquidated.

This

is known as a margin

call.

Orders There

are several types of orders that can be placed. In order to maximize

efficiency and profitability, traders must be comfortable in executing each of the following options.

Market

Order: The purpose of a market order is to execute a trade immediately at

the best possible price. Such orders give traders the ability to enter or exit a trade





















Limit

Order: Limit orders are used to buy or sell at a specified price or better, and

will only be filled at the state price or one that is more favorable. For a sell limit li mit order ³better´ means higher, for buy limit orders ³better´ means lower. Stop Order: This type of order is usually placed to close a position; its name is derived from the fact that, if placed properly, it will ³stop loss´ should the market go against a trader¶s position.

Most

traders chose to place a stop order at the time

that they enter a position. By definition, a sell stop will be placed below the market while a buy stop will be placed above. All orders are day orders unless specified otherwise and are canceled at the end of the trading day. By entering the order GTC (good µtil canceled), the order will be working in each trading session until canceled by the trader.

Execution Many

beginning traders are unaware of the mechanics of executing a futures trade.

When

you call your broker, an order ticket is completed and time stamped in order

to keep accurate track of the time and specifics of each order.

The

broker then

transmits the order to his firm¶s trading desk located on the floor of the exchange either by a computerized trading platform or by phone.

The

order clerk then fills

out an order card; time stamps it, and hands it to a runner who will take it directly to a broker in the pit.

The

pit broker will execute the order by open outcry and

record the execution on the card before it is given back to the runner.

The

runner

takes the executed order back to the desk where the order clerk time stamps the card one more time before the fill is reported to your broker























T H E FIE L D

I . B ACKGROUND OF T H E INDUSTRY

THE NCDEX PLATFORM National Commodity and

Derivatives

Exchange

Ltd

(NCDEX) is a technology

driven commodity exchange. It is a public limited company registered under the Companies Act, 1956 with the Registrar of Companies,

Maharashtra

in Mumbai on

April 23, 2003. It has an independent Board of Directors and professionals not having any vested interest in commodity markets. It has been launched to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency.

NCDEX is regulated by Forward

Markets

Commission in respect of futures trading

in commodities. Besides, NC DEX 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. It is located in Mumbai

and offers facilities to its members in about 91 cities throughout India at

the moment.NCDEX currently facilitates trading of ten commodities - gold, silver,





















STRUCTURE OF NCDEX

NCDEX has been formed with the following objectives: y

To

create a world class commodity exchange platform for the market participants.

y

To

y

To

bring professionalism and transparency into commodity trading.

inculcate best international practices like de. platforms, low cost

Modularization,

technology

y

Solutions and information dissemination without noise etc. into the trade.

y

To

provide nationwide reach and consistent offering.

y

To

bring together the entities that the market can trust

PROMOTERS NCDEX is promoted by a consortium of institutions. Limited

These

include the ICICI Bank

(ICICI Bank), Life Insurance Corporation of India ( LIC), National Bank

for Agriculture and Rural Development (NABAR D) and National Stock Exchange of India Limited (NSE). NC DEX is the only commodity exchange in the country promoted by national level institutions.

This

unique parentage enables it to offer a





















GOVERNANCE NCDEX is run by an independent Board of Directors. Promoters do not participate in the day to day activities of the exchange.

The

directors are appointed in

accordance with the provisions of the Articles of Association of the company.

The

board is responsible for managing and regulating all the operations of the exchange and commodities transactions. It formulates the rules and regulations related to the operations of the exchange. Board appoints an executive committee and other committees for the purpose of managing activities of the exchange. The

executive committee consists of

Managing Director

of the exchange who

would be acting as the Chief Executive of the exchange, and also other members appointed by the board.

Apart from the executive committee the board has constitute committee like Membership

committee,

Audit

Committee,

Risk

Committee,

Nomination

Committee, Compensation Committee and Business Strategy Committee, which, help the Board in policy formulation.

EXCHANGE MEMBERSHIP Membership

of NCDEX is open to any person, association of persons,





















TRADING CUM CLEARING MEMBERS (TCMS) NCDEX invites applications for Trading cum Clearing

Members

(TCMs) from

persons who fulfill the specified eligibility criteria for trading in commodities. TCM

The

membership entitles the members to trade and clear, both for themselves and/

or on behalf of their clients. Applicants accepted for admission as

TCM

are

required to pay the required fees/ deposits and also maintain net worth as given in Table

Table Fee/ deposit structure and net worth requirement: TCM

particulars

Rupees( in lakh)

Interest free cash security deposit

15.00

Collateral security deposit

15.00

Annual subscription charges

0.50

Advance minimum transaction charges

0.50

Net worth requirement

50.00





















PROFESSIONAL CLEARING MEMBERS (PCM) NCDEX also invites applications for Professional Clearing Membership (PCMs) from persons who fulfill the specified eligibility criteria for trading in commodities. The PCM membership entitles the members to clear c lear trades executed through Trading cum Clearing Members (TCMs), both for themselves and/ or on behalf of their clients. Applicants accepted for admission as PCMs are required to pay the following fee/ deposits and also maintain net worth as given in

Table

Fee/ deposit d eposit structure and net worth requirement: PCM Table 3.2 Fee/

particulars

Rupees( in lakh)

Interest free cash security deposit

25.00

Collateral security deposit

25.00

Annual subscription charges

1.00

Advance minimum transaction charges

1.00

Net worth requirement

5000.00























CAPITAL REQUIREMENTS NCDEX has specified capital requirements for its members. On approval as a member of NCDEX, the member has to deposit Base Minimum Capital (B MC) with the exchange. Base Minimum Capital comprises of the following: 1. Interest free cash security deposit 2. Collateral security deposit All Members have to comply with the security deposit requirement before the activation of their trading terminal  Cash: Mumbai

This

can be deposited by issuing a cheque/ demand draft payable at

in favour of National Commodity &

Derivatives

Exchange Limited.

 Bank guarantee: Bank guarantee in favour of NC DEX as per the specified format from approved banks. 12 months.

The

minimum term of the bank guarantee should be





















Members Lakh

are required to maintain minimum level of security deposit i.e. Rs.15

in case of TCM and Rs.25 Lakh in case of PCM at any point of time. If the

security deposit falls below the minimum required level, NC DEX may initiate suitable action including withdrawal of trading facilities as given below:

If the security deposit shortage is equal to or greater than Rs. 5

Lakh,

the trading

facility would be withdrawn with immediate effect.

If the security deposit shortage is less than Rs.5

Lakh

the member would be

given one calendar weeks' time to replenish the shortages and if the same is not done within the specified time the trading facility would be withdrawn.

Members who wish to increase their limit can do so by bringing in additional





















TRADING The

trading system on the NC DEX provides a fully automated screen. Based

trading for futures on commodities on a nationwide basis as well as an online monitoring and surveillance mechanism. It supports an order driven market and provides complete transparency of trading operations. The trade timings of the NCDEX are 10.00 a.m. to 4.00 p.m. After hours trading has also been proposed for implementation at a later stage.

The

NCDEX system supports an order driven market, where orders

match automatically. Order matching is essentially on the basis of commodity, its price, time and quantity. All quantity fields are in units and price in rupees.

The

exchange specifies the unit of trading and the delivery unit for futures contracts on various commodities. The exchange notifies the regular re gular lot size and tick size for each of the contracts traded from time to time.

When

any order enters the trading





















CLEARING National Securities Clearing Corporation Limited (NSCC L) undertakes clearing of trades executed on the NC DEX. The settlement guarantee fund is maintained and managed by NCDEX. Only clearing members including professional clearing members (PCMs) only are entitled to clear and settle contracts through the clearing house. At NCDEX, after the trading hours on the expiry date, based on the available information, the matching for deliveries takes place firstly, on the basis of locations and then randomly, keeping in view the factors such as available capacity of the vault/ warehouse, commodities already deposited and dematerialized and offered for delivery etc.,

Matching

done by this process is binding on the clearing

members. After completion of the matching process, clearing members are informed of the deliverable/ receivable positions and the unmatched positions.





















at the daily settlement price or the final settlement price at the close of trading hours on a day. On the date of expiry, the final settlement price is the spot price on the expiry day.

The

Responsibility of settlement is on a trading cum clearing

member for all trades done on his own account and his client's trades. A professional clearing member is responsible for settling all the participants¶ trades which he has confirmed to the exchange.

On the expiry date of a futures contract, members submit delivery information through delivery request window on the trader workstations provided by NC DEX for all open positions for a commodity for all constituents individually. NC DEX on receipt of such information matches the information and arrives at a delivery position for a member for a commodity.

The

seller intending to make delivery takes the commodities to the designated

warehouse.

These

commodities have to be assayed by the exchange specified























COMMODITIES TRADED ON THE NCDEXPLATFORM



In December 2003, the National Commodity and

Derivatives

Exchange Ltd

(NCDEX) launched futures trading in nine major commodities.

 To

begin with contracts in gold, silver, cotton, soybean, soya oil, rape/

mustard seed, rapeseed oil, crude palm oil and RB D palmolein are being offered.





















COTTON Cotton accounts for 75% of the fibre consumption in spinning mills in India and 58% of the total fibre consumption of its textile industry (by volume). At the average price of Rs.45/ kg, over 17 million bales (average annual consumption, 1 bale = 170 kg) of raw cotton trade in the country. India is over Rs.130 billion.

The

The

market size of raw cotton in

average monthly fluctuation in prices of cotton

traded across India has been at around 4.5% during the last three years. maximum fluctuation has been as high as 11%.

Historically,

The

cotton prices in India





















consumed across the world. The average monthly fluctuation in prices of imported CPO traded at Kandla (one of the major importing ports in Gujarat) has been at 9.7% during the past two and a half years, the maximum monthly fluctuation being as high as 25% during the period.

Palm

oil is extracted from the mature fresh fruit bunches (FFBs) of oil palm

plantations. One hectare of oil palm yields approximately 20 FFBs, which when





















SOY OIL Soy oil is among the major sources of edible oils in India. Of the annual edible oil trade worth over Rs.440 billion in the country, soy oils share is over 20.21% at Rs.90.92 billion in terms of value. Being an agricultural commodity, which is often subjected to various production and market related uncertainties, soy oil prices traded across the world are highly volatile in nature.

The

average fluctuation in spot prices of refined soy oil traded at

Mumbai

has been

at 6.6% during the past two and a half years, the maximum monthly fluctuation





















RAPESEED OIL Rapeseed (also called mustard or canola) oil is the third largest edible oil produced in the world, after soy and palm oils. On crushing rapeseed, oil and meal are obtained. The average oil recovery from the seed is about 33%. The remaining is obtained as oil cake/ meal, which is rich in proteins and is used as an ingredient in animal feed.

Mustard

oil, which is known for its pungency, is traditionally the most

favoured oils in the major production tracts world over.























RAPESEED Rapeseed/ Mustard is one of the major sources of oil and meal to India. It supplies over 1.5 million tons of oil (15.18% of India's annual edible oil requirement) and 3.3.2 million tons of oil meal, the major protein source in animal feeds.

The























DEMAND The

Consumer demand for gold is more than 3400 tons per year making it

whopping $40 billion worth.

More

than 80% of the gold consumed is in the form























property whereas gold and silver jewellery was, and still is, a major component of the gifts given to a woman at the time of marriage.

The

at the time of marriage are from few grams to kgs.

changeover hands of gold The

gold also occupies a

significant position in the temple system where gold is used to prepare idol and

























Demand

exhibits income elasticity, particularly in the rural and semi-urban

areas.  Price differential creates import demand, particularly illegal import prior to the commencement of liberalization in 1990.























DEMAND Demand

for silver is built on three main pillars; industrial and decorative uses,

photography andjewelry & silverware. Together, these three categories represent











































































































































































































































































































































































































































































































































































































business environment. At the same time, it is true that too much speculative activity in essential commodities would destabilize the markets and therefore, t hese markets are normally regulated as per the laws of the country. co untry.

Modern Commodity Exchanges To

make up for the loss of growth and development during the four decades of restrictive

government policies, FMC and the Government encouraged setting up of the commodity exchanges using the most modern systems and practices in the world. Some of the main regulatory measures imposed by the FMC include daily mark to market system of margins, creation of trade guarantee fund, back-office computerization for the existing single commodity Exchanges, online trading for the new Exchanges, demutualization for the new Exchanges, and one-third representation of independent

D irectors

on the Boards of existing Exchanges etc.

Responding positively to the favourable po licy changes, several Nation-wide Multi-Commodity Exchanges (NMCE) have been set up since 2002, using modern practices such as electronic trading and clearing. Selected Information about the two most important commodity exchanges in India [Multi-Commodity Exchange of India Limited (MCX), and National Multi-Commodity & Derivatives Exchange of India Limited imited (NCDEX)] is given in Exhibit-1 and Exhibit-2.

MULTI-CO MULTI-COMMO MMODITY EXCHA EXCHANGE OF INDIA INDIA LIMITED (MCX) MCX

an independent and de-mutualized multi commodity exchange has permanent recognition

from Government of India for facilitating online trading, clearing and settlement operations for





















Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank Of India, Bank Of Baroda, Canara Bank, Corporation Bank. Headquartered

in Mumbai, MCX is led by an expert management team with deep domain

knowledge of the comm co mmodity odity futures markets. Through the integration of dedicated resources, reso urces, robust technology and scalable infrastructure, since inception MCX has recorded many first to its credit.

Inaugurated in November 2003 by ShriMukeshAmbani, Chairman & Managing Director, Reliance Industries Ltd, MCX offers futures trading in the following commodity categories: catego ries: Agro Commodities, Bullion, Metals- Ferrous & Non-ferrous, No n-ferrous, Pulses, Oils & Oilseeds, Energy, Plantations,

Spices and other ot her soft commodities. MCX has built strategic alliances with some of

the largest players in commodities eco-system, namely, Bombay Bullion Association, Bo mbay Metal

Exchange, Solvent So lvent Extractors' Association of India, Pulses Importers Association, Association,

ShetkariSanghatana, United Planters Association of India and India Pepper and Spice Trade Association.

Today MCX

is offering spectacular growth opportunities and advantages ad vantages to a large cross section

of the participants including Producers / Processors, Traders, Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives, Industry Associations, a mongst others MCX being nation-wide commodity exchange, offering o ffering multiple commodities for trading with wide reach and penetration and robust infrastructure, is well placed to tap this vast potential.

National Commodity & Derivatives Exchange Limited (NCDEX) National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed online multi commodity exchange promoted by ICICI Bank Limited imited (ICICI Bank), Life





















(P NB), CRISIL Limited imited (formerly (for merly the Credit Rating Information Services of India Limited), Indian Farmers Fertilizer Cooperative Coo perative Limited imited (IFFCO) and a nd Canara Bank by subscribing subscr ibing to the equity shares have joined the t he initial promoters as shareholders of the Exchange. NCDEX is the only commodity exchange in the country promoted by national level institutions. This unique parentage enables it to off o ffer er a bouquet of benefits, which are currently in short supply in the commodity markets. The institutional promoters of NCDEX are prominent players p layers in their respective fields and bring with them institutional building exper ience, trust, nationwide reach, technology and risk management skills . NCDEX is a public 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 nation-level, technology driven de-mutualized on-line commodity exchange with an independent Board of Directors and professionals professionals not having any vested interest in commodity markets. It is committed to provide a world-class commodity exchange platform for market participants participants to trade in a wide spectrum of commodity derivatives driven by best global g lobal practices, professionalism professionalism and transparency. t ransparency. NCDEX is regulated by Forward Market Commission in respect of futures trading in commodities. Besides, NCDEX is subjected to various various laws of o f the land like the Companies Co mpanies Act, Stamp Act, Contracts Act, Forward Commission Commission (Regulation) (Regu lation) Act and various other legislations, which impinge on its working

. NCDEX is located in Mumbai and offers o ffers facilities facilities to its members in more than 390 centers throughout India. The reach will gradually be expanded to more centers. NCDEX currently facilitates trading of thirty six commodities - Cashew, Castor Seed, Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking sack ing bags, Mild Steel Ingot, Mulberry Green Cocoons, Pepper, Rapeseed - Mustard Seed ,Raw Jute, RBD Palmolein, almolein, Refined Soy So y Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (Black Matpe),

Wheat,

Yellow Peas,





















Booming B usiness:

US$ 1 Trillion and Beyond

Since 2002 when the first national level commodity derivatives exchange started, the exchanges have conducted brisk business in commodities futures trading. In the last three years, there has been a great revival of the commodities futures trading in India, both in terms of the number of commodities allowed for futures trading as well as the value o f trading. While in year 2000, futures trading were allowed in only 8 commodities, the number jumped to 80 commodities in June 2004. The value of trading in local currency saw a quantum jump from about INR 350 billion in 2001-02 to INR 1.3 Trillion rillion in 2003-04. The data in Exhibit-3 indicates that the value of commodity derivatives in India could cou ld cross the US$ 1 Trillion mark in 2006. The market regulator Forward Markets Commission (FMC) disseminates fortnightly trading data for each of o f the 3 national & 21 regional exchanges that have been set up in recent years to carry on the futures trading in commodities in the country. Exhibit-3 presents p resents comparative trading data for three fortnightly periods in March, June and September 2008 and brings up some interesting facts.

Sr. no

Name of the exchange

16 Mar 08 to 31 Mar 08

16 Jun 08 to 30 Jun 08

16 Sep 08 to 30 Sep 08

1

Multi-Commodity

$m4,603.69

$m5123.76

$m11,042.25

Exchange of India Limited, Mumbai





















Ahmedabad 3

National Commodity &Derivatives Exchange Limited, Mumbai

$m7360.45

$m8740.49

$m10,694.29

4

Total

$m12199.88

$m14007.59

$m21,843.39

of three exchanges

Note: The original data in local currency Indian Ind ian Rupee (INR) was obtained from the website of o f Forward Markets Commission (www.fmc.gov.in). The INR figures were translated into USD using the monthly average exchange rates prevailing in the respective months, as obtained from www.xrates.com. www.xrates .com. These exchange rates were: March 2008: INR 43.5861 per USD, June 2008: INR 43.5245 per USD, and Sept 2008: INR 43.8445 per USD. A comparison of the trading data dat a for the three two-weekly periods above shows that t hat the market for commodity derivatives more than doubled over a six-month period between second half of March

2008 and the second half of September 2008. It also shows that the total commodity

futures turnover for the three national level exchanges exc hanges added up to $21.84 billion billion for a fortnight in September 2008 or o r $546 billion for a year (assuming 25 working fortnights a year). This rising trend gives a strong indication that, if the commodity futures market continues to expand at t he present rate, it is likely to cross the $ 1 Trillion mark in 2006 and has jumped to $4-6 Trillion in another 2-3 years.

Top Top 10 Commodities Taking

together the turnover in commodities futures seen at the above three multi-commodity

exchanges during the two-week period 15-09-2005 to 30-09-2005, the following emerge as the top-10 commodities in terms of value of futures trading t rading done.

Commodity Turnover in $ Millions*























y

Gold - 4,082.15

y

Silver - 3,869.36

y

Crude oil - l3, 380.13

y

Chana (chick peas) - 2,100.15

y

Urad (Black Legume) - 624.71

y

Soy oil - 478.28

y

Gur (Jaggery: cane sugar) - 369.72

y

Guar Gum - 345.08

y

Tur (Lentils)

- 329.35

UNRESOLVED ISSUES AND F FUTURE UTURE PROSPECTS Even though the commodity derivatives market has made good progress in the last few years, the real issues facing the future of the market have not been resolved. Agreed, the number of commodities allowed for derivative trading have increased, the volume and the value of business has zoomed, but the objectives of setting up commodity derivative exchanges may not be achieved and the growth rates witnessed may not be sustainable unless these real issues are sorted out as soon as possible. po ssible. Some of the main unresolved issues are discussed d iscussed below.

a.

ommodity C ommodity

The

Options:

Trading

in commodity options contracts has been banned since 1952.

market for commodity derivatives cannot be called complete without the presence of o f this

Important derivative. Both futures and options are necessary for the healthy growth of the market. While

futures contracts help a participant (say a farmer) to hedge against downside price





















warehousing industry has yet to come about´. Further, independent labs or quality testing centers should be set up in each region to certify the quality, grade and quantity of commodities so that they are appropriately standardized and there are no shocks waiting for the ultimate buyer who takes the physical delivery. Warehouses also need to be conveniently located. Central

Warehousing

Corporation of India (CWC: www.fieo.com) is operating 500

Warehouses

across the country with a storage capacity of 10.4 million tons. This is obviously not adequate for a vast country.

To

resolve the problem, a GraminBhandaranYojana (Rural Warehousing

has been introduced to construct new and expand the existing rural godowns.

Large

P lan)

scale

privatization of state warehouses is also being examined.

c.

ash C ash

versus Physical Settlement: It is probably due to the inefficiencies in the present

warehousing system that only about 1% to 5% of the total commodity derivatives trades in the country are settled in physical delivery. Therefore the warehousing problem obviously has to be handled on a war footing, as a good delivery system is the backbone of any commodity trade. A particularly difficult problem in cash settlement of commodity derivative contracts is that at present, under the Forward Contracts (Regulation) Act 1952, cash settlement of outstanding contracts at maturity is not allowed. In other ot her words, all outstanding contracts at maturity should be settled in physical delivery. To avoid this, participants square off their positions before maturity. So, in practice, most contracts are settled in cash but before maturity. There is a need to modify the law to bring it closer to the widespread practice and save the participants from unnecessary hassles. d. The Regulator: As the market activity pick-up and the volumes rise, the market will definitely need a strong and independent regular; similar to the Securities and Exchange Board of India





















derivatives are popular for only a few commodities. Again, most of the trade takes place only on a few exchanges. All this splits volumes and makes some exchanges unviable. This problem can possibly be addressed by consolidating some exchanges. Also, the question of convergence of securities and commodities derivatives markets has been debated for a long time now. The Government of India has announced its intention to integrate the two markets. It is felt that convergence of these derivative markets would bring in economies of scale and scope without having to duplicate the efforts, thereby giving a boost to the growth of commodity derivatives market. It would also help in resolving some of the issues concerning regulation of the derivative markets.

However,

this would necessitate complete coordination among various regulating

authorities such as Reserve Bank of India, Forward

Markets

commission, the Securities and

Exchange Board of India, and the Department of Company affairs etc.

f. Tax and Legal bottlenecks: from one state to another.

There

These

are at present restrictions on the movement of certain goods

need to be removed so that a truly national market could

develop for commodities and derivatives. Also, regulatory changes are required to bring about uniformity in octroi and sales taxes etc. VAT has been introduced in the country in 2005, but has not yet been uniformly implemented by b y all states.

Conclusion





















price risk is going to assume even greater importance in future with the promotion of free trade and removal of trade barriers in the world. All this augurs well for the commodity derivatives markets.

3 ) To provide a trend analysis of the current MCX & NCDEX indices

TREND OF METALS IN MULTI COMMODITY EXCHANGE OF INDIA (MCX) AND NATIONAL COMMODITY & DERIVATIVES EXCHANGE (NCDEX) (FOR 10TH MAY 2010)

Commodityname

Expirydate

CurrentClosing

Yesterday'sClosing

PresentTrend

Rate at which the trend changed

Date when the trend changed

Aluminium

(May)

5/28/2010

94.65

94.5

Down

105.6

4/20/2010

Aluminium

(June)

6/30/2010

95.6

95.55

Down

106.9

4/20/2010

Aluminium

(July)

7/30/2010

96.25

96.85

Down

Copper (June)

6/30/2010

317.3

316.9

Down

352.35

4/10/2010

Copper (August)

8/31/2010

319.3

318.7

Down

354.05

4/10/2010

Gold (June0

6/5/2010

17940

17940

Up

16805

4/24/2010

Gold (August)

8/5/2010

18021

18031

Up

16875

4/24/2010

10/5/2010

18085

18085

Up

17316

5/4/2010

Gold (Oct)

-

-





















METAL COMMODITIES TRADED AT NCDEX Commodity name

Expiry date

Brent crude (May)

5/14/2010

3638.5

3636.5

Down

5/6/2010

Rate at which the trend changed 3636.5

Brent crude (June)

6/15/2010

3652

3650

Down

5/6/2010

3650

Brent crude (July)

7/16/2010

3665.5

3663.5

Down

5/6/2010

3663.5

Silver (May)

5/20/2010

27765

27350

Up

4/26/2010

27835

Silver (June)

6/18/2010

27864

27645

Up

4/26/2010

27937

Silver (July)

7/20/2010

27973

27754

Up

4/26/2010

28050

Current Closing

Yesterday's Closing

Present Trend

Date when the trend changed

Trend of Commodities in National Commodity Commodit y & Derivatives Exchange (for 10th May 2010)























Channa (Sept)

9/20/2010

2383

2372

Castorseed (May) Castorseed (June) Castorseed (July) Castorseed (August) Chilli (J une)

5/20/2010

3100

3109.5

6/18/2010

530.9

7/20/2010

3242.5

3214.5

8/20/2010

3309

3261.5

6/18/2010

4452

4448

Chilli (J uly)

7/20/2010

4600

Chilli (August)

8/20/2010

Guarseed (May)

Down

4/20/2010

2520

5/8/2010

3100

3/19/2008

546.3

Up

5/7/2010

3242.5

Up

5/7/2010

3309

Down

4/17/2010

4808

4580

Down

4/14/2010

5073

4744

4693

Down

5/20/2010

2386

2377

Down

5/3/2010

2368

Guarseed (June)

6/18/2010

2399

2392

Down

5/3/2010

2381

Guarseed (July)

7/20/2010

2419

2403

Down

5/3/2010

2396

Guarseed(aug)

8/20/2010

2441

2440

Down

5/3/2010

2436

GuarGum (May)

5/20/2010

4650

4615

Up

4/6/2010

1192

GuarGum (June)

6/18/2010

5200

5157

Up

5/7/2010

1239

GuarGum (July)

7/20/2010

5267

5224

Up

5/7/2010

5224

GuarGum (August) Gur (July)

8/20/2010

5291

5332

Down

5/3/2010

5054

7/20/2010

961

958.2

Up

5/8/2010

961

Gur (Sept)

9/20/2010

930

928.8

Down

5/6/2010

935.8

Jeera (May)

5/20/2010

12529

12480

Down

5/8/2010

12529

Up Down

-

-





















Pepper (Sept)

9/20/2010

17363

17279

Up

4/23/2010

16461

Pepper (Oct)

10/20/2010

17525

17491

Up

4/24/2010

16930

Ref S ef Soy (May)

5/20/2010

586

591.25

Up

12/15/2007

547.35

Ref S ef Soy (June)

6/18/2010

450.8

449.05

Down

5/4/2010

445.55

Ref S ef Soy (July)

7/20/2010

452.4

450.35

Down

5/4/2010

446.6

Sugar (May)

5/20/2010

3526

3517

Up

-

3526

Sugar (June)

6/18/2010

2892

2866

Down

9/26/2009

2895

Sugar (July)

7/20/2010

2892

2866

Down

9/26/2009

2895

Sugar (August)

8/20/2010

2892

2866

Down

9/26/2009

2895

Turmeric (May)

5/20/2010

15121

14824

Up

4/26/2010

13343

Turmeric (June)

6/18/2010

14989

14695

Up

4/27/2010

13694

Turmeric (July)

7/20/2010

14903

14610

Up

4/27/2010

13499





















has happened only after the Government protection was removed from a number of commodities, and market forces were allowed a llowed to play their role.

y

The

management of price risk is going to assume even greater importance in future with

the promotion of free trade and removal of trade barriers in the world. wor ld.

y

Even though the comm co mmodity odity derivatives der ivatives market has made good progress in the last few years, the real issues facing the future of the market have not been resolved.The objectives of setting up commodity derivative exchanges may not be achieved and the growth rates witnessed may not be sustainable unless these real issues are sorted out as soon as possible. po ssible.

y

Sugar prices in India are therefore influenced by various demand supply factors operating within the country, international sugar beet and sugarcane prices, demand for refined sugar from abroad,Candy and confectionery sales , prices of sugarcane and the other sugar sources, are less likely to have any major impact on sugar prices p rices in India.





















y

The

statistical outlook for the market till the end of the season in September 2009 for

sugar remains constructive and supportive to the t he market values.

y

Wheat

farmers have little impact on demand, but putting all the heads together to gether can make

a significant difference in product demand and market price. And that leads to the ultimate goal of the improved income for wheat producers.

y

World

wheat consumption is consistently growing with growth in population, as it is one

of the major staple foods across the world.There exists a clear trough and crest in the seasonality of wheat production, indicating a t ypical seasonality in the production cycle.

y

Factors that influence price are Supply demand scenario of wheat and its competing crops like maize, barley etc., in the global market apart from other staple foods foo ds such as grains

y

Wheat

2010.

anticipates a change in trend from up to down on a break from the month of May





















y

More

training should be carried out periodically to enhance the skills of the persons

involved in commodity trading

y

Implementation aspects of margining and risk management at NCDEX must be monitored

continuously

y

To

impart knowledge on Commodity Market and their uses to Business Management

Students by revising courses taking into consideration consideration the increasing increasing importance of o f Commodity Market in India as an investment avenue.

y

More

simpler analytical techniques must be developed for analysis and interpretation of

commodity futures charts and data.























balance of payments problem. T he leap in food prices was in sharp contrast to the secular downward trend and the prolonged slump in commodity prices from 1995 to 2002, which even prompted calls for the revival of international commodity commodity agreements.

For some analysts, the increases or signaled the end of the long-term decline in real agricultural commodity prices, with

T he

Economist (2007) announcing ³the end of cheap food´. It is an

interesting question whether these sharp increases are fundamentally different from earlier price spikes and whether the long-term decline in real prices could have come to a halt, signaling a fundamental change in agricultural commodity market behavior. High-price events, like low ice low-price events, are not rare occurrences in agricultural markets, although high pr ices often tend to be short-lived compared with low prices, pr ices, which persist for longer periods.





















Charts: y

www.barcharts.com

y

www.chartsrus.com

y

www.mongabay.com

y

www.djindexes.com

y

Dow Jones Industrial Average Historical Prices / Charts

Trend and other information: y

www.crnindia.com

y

www.indiamart.com

y

www.ncdex.com





















A Project on Commodity Trading

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