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Chapter - I
Chapter - I
INTRODUCTION
INTRODUCTION
A commodity may be defined as an article, a product or material that is bought and sold.
It can be classified as every kind of movable property, except Actionable Claims, Money
& Securities. Commodities actually offer immense potential to become a separate asset
class for market-savvy investors, arbitrageurs and speculators. Retail investors, who
claim to understand the equity markets, may find commodities an unfathomable market.
But commodities are easy to understand as far as fundamentals of demand and supply are
concerned. Retail investors should understand the risks and advantages of trading in
commodities futures before taking a leap.
Bombay Cotton Trade Association Ltd., set up in 1875, was the first organized futures
market. Bombay Cotton Exchange Ltd. was established in 1893 following the widespread
discontent amongst leading cotton mill owners and merchants over functioning of
Bombay Cotton Trade Association. The Futures trading in oilseeds started in 1900 with
the establishment of the Gujarati Vyapari Mandali, which carried on futures trading in
groundnut, castor seed and cotton. Futures' trading in wheat was existent at several places
in Punjab and Uttar Pradesh. But the most notable futures exchange for wheat was
chamber of commerce at Hapur set up in 1913. Futures trading in bullion began in
Mumbai in 1920. Calcutta Hessian Exchange Ltd. was established in 1919 for futures
trading in raw jute and 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 the East India Jute & Hessian Ltd. to conduct organized
trading in both Raw Jute and Jute goods. Forward Contracts (Regulation) Act was
enacted in 1952 and the Forwards Markets Commission (FMC) was established in 1953
under the Ministry of Consumer Affairs and Public Distribution. In due course, several
other exchanges were created in the country to trade in diverse commodities.
World-over one will find that a market exits for almost all the commodities known to us.
These commodities can be broadly classified into the following:
The commodities market exits in two distinct forms namely the Over the Counter
(OTC) market and the Exchange based market. Also, as in equities, there exists the
spot and the derivatives segment. The spot markets are essentially over the counter
markets and the participation is restricted to people who are involved with that
commodity say the farmer, processor, wholesaler etc. Derivative trading takes place
through exchange-based markets with standardized contracts, settlements etc.
Some of the leading exchanges of the world are New York Mercantile Exchange
(NYMEX), the London Metal Exchange (LME) and the Chicago Board of Trade
(CBOT).
The government has now allowed national commodity exchanges, similar to the BSE &
NSE, to come up and let them deal in commodity derivatives in an electronic trading
environment. These exchanges are expected to offer a nation-wide anonymous, order
driven, screen based trading system for trading. The Forward Markets Commission
(FMC) will regulate these exchanges.
Volatile markets are characterized by wide spread fluctuations and heavy trading undertaken in
short span of time. Volatility estimation is important for several reasons and for different people
in the market. Pricing of underlying commodity is supposed to be dependent on volatility of
commodity market. Thus, investors always find various ways to protect themselves from the
volatility on the commodity price inflation.
Based on the volatility of spot price in commodity market future contracts are determined by the
traders for hedging.
A commodity can be bought either in commodity market or physical market. In commodity
market it is based on the spot price determined. Where as in physical market price determined
due to demand factors and supply factors of the commodity and Government intervention.
The relationship between spot price determined in commodity market and the price in
physical market.
Commodity market’s spot price is more volatile or physical market price is more volatile.
1.5 Need and Importance of study
In India agriculture has traditionally been an area with heavy government intervention.
Government intervenes by trying to maintain buffer stocks, they try to fix prices, and they have
import-export restrictions and a host of other interventions.
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. Spot trading normally
involves visual inspection of the commodity or a sample of the commodity, and is carried out in
markets such as wholesale markets. Commodity markets, on the other hand, require the existence
of agreed standards so that trades can be made without visual inspection.
This study focuses on knowing whether commodity market is more volatile or physical market.
The price in physical market is determined through various factors and measures.where as spot
price in commodity market is
Spot Prices
NCDEX will announce / disseminate spot prices for Wheat relating to the designated
delivery center and specified grade/ quality parameters determined through the process
of polling a set of market participants representing different segments of the value chain
such as traders, importers / exporters, processors etc.
The polled prices shall be input to a normalizing algorithm (like ‘bootstrapping’
technique) to arrive at a representative, unbiased and clean ‘benchmark’ spot price for
Wheat. The security of data and randomness of polling process will ensure transparency
and correctness of prices. The Exchange has absolute right to modify the process of
determination of spot prices at any time without notice
Source:-www.NCDEX.com
So this study tries to determine about the spot price which is determined from various
physical market does represent any relationship.
As the Spot price in commodity market is determined from various physical markets
through “bootstrapping“technique there has to be a positive correlation.
1.6 Objectives of the study
The basic objective of this study is to analyze spot price volatility in commodity
market and Mandi price volatility in physical market.
To understand the relationship between spot price volatility in the commodity
market and compare it with the physical market price volatility.
CHAPTER – II
LITERATURE
REVIEW
Commodity market
There was a significant upsurge in prices of some of the agri-commodities from the middle of
2006 to the first quarter of 2007, though the contribution of agricultural commodities,
particularly ‘food grains’, in WPI inflation was small due to relatively low weight. This spurt in
prices of essential commodities and increasing inflation was, according to one school of thought,
caused by the excess speculation in commodity futures trade and had become an issue of concern
for the government as well as people. In response to the public outcry against futures markets
and their perceived role in causing inflationary trends in the prices of essential commodities, on
January 23, 2007, the FMC de-listed two commodities - urad and tur, both pulses from trading
on futures exchanges out of concern about rising food prices which was perceived as caused by
speculation in the futures markets. Later, on February 27, 2007, FMC limited the trading in
wheat and rice futures to squaring off until the expiration of running contracts, for similar
reasons. Essential commodities impact of commodity futures on spot price volatility, to
understand the problems in physical delivery procedure and farmers and traders views on
commodity futures trading.
The world production of wheat figures over 680 million tons (2009-10 figures)
annually. The largest producer of wheat in the world is the European Union followed by China,
India and United States of America. These four producers contribute to around 60% of the total
production. The consumption of wheat in the world is a huge 650 million tons (2009-10 figures)
but is successfully kept satisfied with an equally high production figures.
India produces around 75-80 million tons of wheat every year. India also stands at the top in the
world in terms of area covered in production of wheat. Uttar Pradesh is the leading producer
state in India followed by Punjab and Haryana. Wheat occupies a major share of 35% production
in the total production of crops cultivated and 65% of total cropped area in the country. This
share in production and area covered of the crop has increased since independence and is also
constantly rising. The yield of wheat in kilograms per hectare has also risen significantly from
522 kg/ha in 1950/51 to 1620kg/ha in 1998/99.
Indian wheat is generally medium hard bread wheat. It is a staple food of this country. The
demand-supply flows with in the country are largely interfered by the government of the country
so as to make sure that the grain supplies be stable and prices do not get affected.
The ban was lifted after the wheat prices in the country became stable by 2009, as also
because various studies revealed that futures markets could not be held responsible for creating
inflationary pressures in the economy (Sharma 2009). Interestingly, the ban on futures trading in
rice has not yet been lifted, despite the fact that futures trading in wheat and rice were banned on
the same day when the Union Budget for 2007-08 was presented. The reason given is that rice,
as a commodity, might not succeed in the futures market in attracting either trading volume or
open interests, so as to enable the futures platform to perform the functions of price discovery
and price risk management.
Wheat price risks include
. Increase in purchase cost vis-à-vis commitment on sales price
. Decrease in sales price at the time of harvest / arrival pressure
. Change in value of inventory
. Counterparty party risk translating into commodity price risk
National Commodity & Derivatives Exchange Limited (NCDEX) is an online multi commodity
exchange promoted by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India
(LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock
Exchange of India Limited (NSE). NCDEX is the only commodity exchange in the country
promoted by national level institutions. It is likely 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 located in Mumbai and offers
facilities to its members in about 91 cities throughout India
The primary function of NCDEX is to provide a electronic online trading platform where the
wheat growers, traders, arthiyas, commission agents, exporters, millers, bread manufacturers will
act on his or her wheat knowledge can make bids and asks.
Spot Price Dissemination
The exchange will be disseminating the spot prices for Wheat three times a day from the
locations given below to its trader workstation, its website and to various data vendors like
Telerate
Volatility - A statistical measure of a market or a security's price movements over time and is
calculated by using standard deviation. Associated with high volatility is a high degree of risk.
In the spot market, prices can be affected by current supply and demand, which tends to make
the prices more volatile. Another factor that affects spot market prices is whether the
commodity is perishable or non-perishable. A non-perishable commodity such as gold or silver
will sell at a price which reflects future price movements.
CHAPTER – III
METHODOLOGY
3.1 Type of Research
In this case, the focus is on to compare and analyse the spot price of commodity with physical
market’s modal price. The term descriptive research refers to the type of research question,
design, and data analysis that will be applied to a given topic. Descriptive statistics tell what is,
while inferential statistics try to determine cause and effect. Descriptive studies report summary
data such as measures of central tendency including the mean, median, mode, deviance from the
mean, variation, percentage, and correlation between variables.
NR : Not Reported
Arrivals Minimum Maximum Modal
Marke
Arrival Date (Tonnes Variety Price(Rs./Quin Price(Rs./Quintal Price(Rs./Quintal
t
) tal) ) )
Narela 1/1/2010 59.6 Mexican 1302 1412 1380
2/1/2010 65 Mexican 1275 1408 1388
3/1/2010 37.5 Mexican 1325 1416 1402
4/1/2010 11.8 Mexican 1390 1418 1410
5/1/2010 32.5 Mexican 1381 1447 1410
7/1/2010 81.1 Mexican 1330 1448 1365
8/1/2010 31.1 Mexican 1351 1450 1385
9/1/2010 47.5 Mexican 1340 1480 1380
10/1/2010 48.1 Mexican 1421 1451 1435
11/1/2010 50.2 Mexican 1341 1425 1382
12/1/2010 33.1 Mexican 1351 1460 1435
14/01/2010 17.6 Mexican 1425 1455 1431
15/01/2010 52.5 Mexican 1200 1505 1425
16/01/2010 72.7 Mexican 1395 1480 1420
17/01/2010 47.5 Mexican 1340 1480 1380
18/01/2010 38.5 Mexican 1300 1425 1412
19/01/2010 50.3 Mexican 1396 1453 1410
21/01/2010 22.6 Mexican 1345 1450 1400
22/01/2010 31.1 Mexican 1341 1441 1378
23/01/2010 27.4 Mexican 1281 1401 1394
24/01/2010 34.4 Mexican 1300 1461 1345
25/01/2010 41.1 Mexican 1248 1452 1386
28/01/2010 29 Mexican 1201 1400 1335
29/01/2010 50.5 Mexican 1300 1400 1330
30/01/2010 47.9 Mexican 1293 1448 1330
31/01/2010 81.7 Mexican 1262 1431 1431
NR : Not Reported
Date Wise Prices for Specified Commodity on June, 2010
Commodity : Wheat, State : NCT of Delhi
NR : Not Reported
Arriv
Minimum Maximum Modal
Marke als
Arrival Date Variety Price(Rs./Quint Price(Rs./Quintal Price(Rs./Quint
t (Tonn
al) ) al)
es)
Narela 1/6/2010 451.3 Mexican 1075 1250 1220
3/6/2010 531.9 Mexican 1115 1340 1218
4/6/2010 314 Mexican 1115 1292 1220
5/6/2010 419.4 Mexican 1110 1269 1230
6/6/2010 398.5 Mexican 1050 1274 1225
7/6/2010 331.9 Mexican 1140 1255 1215
8/6/2010 548.9 Mexican 1191 1239 1230
10/6/2010 685.9 Mexican 1091 1342 1230
11/6/2010 561.9 Mexican 1190 1293 1240
12/6/2010 86 Mexican 1170 1321 1240
13/06/2010 384.9 Mexican 1177 1277 1248
14/06/2010 432 Mexican 1075 1295 1245
15/06/2010 464.1 Mexican 1175 1307 1255
17/06/2010 834.7 Mexican 1151 1302 1245
18/06/2010 543.3 Mexican 1000 1274 1240
19/06/2010 580 Mexican 1170 1350 1246
20/06/2010 718.7 Mexican 1065 1255 1240
21/06/2010 458.3 Mexican 1140 1248 1245
22/06/2010 404.2 Mexican 1170 1292 1245
24/06/2010 859.3 Mexican 1100 1292 1240
25/06/2010 448.6 Mexican 1100 1240 1231
26/06/2010 519.1 Mexican 1140 1268 1237
27/06/2010 337.9 Deshi 1845 1895 1895
Mexican 1130 1245 1230
28/06/2010 259 Mexican 1145 1245 1225
29/06/2010 181.5 Mexican 1110 1261 1218
Date Wise Prices for Specified Commodity on July, 2010
Commodity : Wheat, State : NCT of Delhi
NR : Not Reported
Arriva
Minimum Maximum Modal
ls
Market Arrival Date Variety Price(Rs./Q Price(Rs./Quintal Price(Rs./Quintal
(Tonn
uintal) ) )
es)
Narela 1/7/2010 352.1 Mexican 1121 1240 1214
2/7/2010 379 Mexican 1160 1227 1215
3/7/2010 561.5 Mexican 1125 1245 1170
4/7/2010 33 Mexican 1140 1216 1200
6/7/2010 104.5 Mexican 1190 1241 1217
8/7/2010 68 Mexican 1170 1221 1200
9/7/2010 146.2 Mexican 1125 1270 1170
10/7/2010 84 Mexican 1125 1281 1170
11/7/2010 109.5 Mexican 1110 1270 1200
12/7/2010 163 Mexican 1140 1236 1170
13/07/2010 135.5 Mexican 1050 1215 1190
15/07/2010 282.2 Mexican 1065 1264 1215
16/07/2010 352 Mexican 1150 1245 1170
17/07/2010 113 Mexican 1065 1250 1215
18/07/2010 224.6 Mexican 1142 1235 1215
19/07/2010 46.8 Mexican 1141 1332 1205
20/07/2010 26 Mexican 1155 1230 1155
22/07/2010 102 Mexican 1075 1201 1175
23/07/2010 66 Mexican 1135 1210 1180
24/07/2010 179.4 Mexican 1111 1224 1190
25/07/2010 81 Mexican 1165 1270 1190
26/07/2010 91 Mexican 1140 1238 1188
27/07/2010 45 Mexican 1065 1194 1065
30/07/2010 131.5 Mexican 1080 1250 1192
31/07/2010 64.5 Mexican 1065 1226 1168
Date Wise Prices for Specified Commodity on August, 2010
Commodity : Wheat, State : NCT of Delhi
NR : Not Reported
Arrival
Minimum Maximum Modal
s
Market Arrival Date Variety Price(Rs./Qui Price(Rs./Qui Price(Rs./Quin
(Tonne
ntal) ntal) tal)
s)
Narela 1/8/2010 75 Mexican 1100 1201 1185
2/8/2010 38 Mexican 1101 1209 1203
3/8/2010 116.5 Mexican 1100 1218 1195
5/8/2010 103 Mexican 1075 1205 1190
6/8/2010 60 Mexican 1105 1216 1185
7/8/2010 49 Mexican 1121 1239 1200
8/8/2010 53 Mexican 1165 1258 1200
9/8/2010 113 Mexican 1122 1242 1200
10/8/2010 96.5 Mexican 1070 1231 1200
12/8/2010 5 Mexican 1100 1100 1100
13/08/2010 84.5 Mexican 1100 1210 1200
14/08/2010 65.5 Mexican 1065 1200 1190
16/08/2010 101 Mexican 1100 1230 1180
17/08/2010 66.5 Mexican 1100 1250 1190
19/08/2010 37.5 Mexican 1170 1217 1205
20/08/2010 4.5 Mexican 985 1180 1150
21/08/2010 21 Mexican 1121 1210 1180
22/08/2010 29.5 Mexican 1200 1295 1210
23/08/2010 16.4 Mexican 1190 1190 1190
24/08/2010 9 Mexican 1195 1195 1195
26/08/2010 76 Mexican 1073 1219 1200
27/08/2010 137 Mexican 1075 1251 1200
28/08/2010 123 Mexican 1092 1255 1219
29/08/2010 283 Mexican 1075 1235 1218
30/08/2010 161 Mexican 1061 1256 1221
31/08/2010 142 Mexican 1050 1235 1215
Date Wise Prices for Specified Commodity on September, 2010
Commodity : Wheat, State : NCT of Delhi
NR : Not Reported
Arrival
Minimum Maximum Modal
Marke s
Arrival Date Variety Price(Rs./Q Price(Rs./Quintal Price(Rs./Quintal
t (Tonn
uintal) ) )
es)
Narela 2/9/2010 50 Mexican 1140 1211 1200
3/9/2010 60 Mexican 1017 1215 1190
4/9/2010 140 Mexican 1145 1220 1200
5/9/2010 83 Mexican 1130 1222 1200
6/9/2010 78 Mexican 1165 1236 1221
7/9/2010 138.5 Mexican 1061 1230 1190
9/9/2010 28 Mexican 1110 1241 1199
10/9/2010 NR Mexican 1115 1235 1200
11/9/2010 48 Mexican 1185 1228 1210
12/9/2010 35.5 Mexican 1180 1325 1195
13/09/2010 43.5 Mexican 1160 1230 1210
14/09/2010 52 Mexican 1150 1250 1221
16/09/2010 201.5 Mexican 1070 1261 1235
17/09/2010 253.5 Mexican 1150 1280 1225
18/09/2010 170.5 Mexican 1143 1236 1225
19/09/2010 42.5 Mexican 1150 1212 1211
20/09/2010 69 Deshi 1550 1550 1550
Mexican 1200 1221 1220
21/09/2010 63 Mexican 1056 1262 1221
23/09/2010 48 Mexican 1125 1241 1220
24/09/2010 143.5 Mexican 1070 1259 1220
25/09/2010 200 Mexican 1130 1271 1220
26/09/2010 222.5 Mexican 1085 1266 1215
27/09/2010 204.5 Mexican 1126 1248 1235
28/09/2010 223.5 Mexican 1161 1238 1218
30/09/2010 120.3 Mexican 1125 1275 1210
Date Wise Prices for Specified Commodity on October, 2010
Commodity : Wheat, State : NCT of Delhi
NR : Not Reported
Arrival
Minimum Maximum Modal
s
Market Arrival Date Variety Price(Rs./Quin Price(Rs./Quin Price(Rs./Quin
(Tonne
tal) tal) tal)
s)
Narela 1/10/2010 100.2 Mexican 1121 1268 1240
4/10/2010 276.5 Mexican 1084 1330 1230
5/10/2010 218.3 Mexican 1100 1311 1239
7/10/2010 199.5 Mexican 1106 1300 1240
8/10/2010 234.1 Mexican 1132 1315 1240
9/10/2010 103 Mexican 1160 1265 1235
10/10/2010 138.8 Mexican 1100 1257 1252
11/10/2010 115.6 Mexican 1170 1267 1250
12/10/2010 134.6 Mexican 1031 1338 1250
15/10/2010 291.9 Mexican 1200 1295 1264
16/10/2010 173.8 Mexican 1155 1290 1260
17/10/2010 145.4 Mexican 1140 1270 1258
18/10/2010 131 Mexican 1061 1304 1260
19/10/2010 124.6 Mexican 1101 1291 1265
21/10/2010 186.6 Mexican 1125 1351 1268
22/10/2010 203.6 Mexican 1060 1271 1250
23/10/2010 140.9 Mexican 1180 1262 1251
25/10/2010 224.9 Mexican 1100 1270 1200
26/10/2010 178.4 Mexican 1110 1270 1258
28/10/2010 141.5 Mexican 1099 1260 1240
29/10/2010 117.2 Mexican 1100 1300 1250
30/10/2010 103.7 Mexican 1180 1305 1225
31/10/2010 112.5 Mexican 1128 1300 1245
Date Wise Prices for Specified Commodity on November, 2010
Commodity : Wheat, State : NCT of Delhi
NR : Not Reported
Arrival
Minimum Maximum Modal
s
Market Arrival Date Variety Price(Rs./Qui Price(Rs./Qui Price(Rs./Qui
(Tonne
ntal) ntal) ntal)
s)
Narela 1/11/2010 116.8 Mexican 1100 1361 1225
2/11/2010 87.1 Mexican 1162 1260 1246
4/11/2010 130.4 Mexican 1100 1269 1240
5/11/2010 NR Mexican 1180 1280 1234
6/11/2010 41.7 Mexican 1150 1280 1253
7/11/2010 92.3 Mexican 1100 1301 1250
8/11/2010 81.2 Mexican 1116 1310 1262
9/11/2010 86.2 Mexican 1131 1290 1250
11/11/2010 137.1 Mexican 1151 1290 1260
12/11/2010 117.5 Mexican 1140 1290 1270
13/11/2010 115.6 Mexican 1220 1294 1284
14/11/2010 184.9 Mexican 1110 1311 1275
15/11/2010 147.9 Mexican 1125 1425 1275
16/11/2010 111.6 Mexican 1230 1381 1281
18/11/2010 121.1 Mexican 1160 1352 1294
19/11/2010 130.3 Mexican 1111 1335 1304
20/11/2010 156.7 Mexican 1162 1341 1300
21/11/2010 225.1 Mexican 1150 1400 1300
22/11/2010 166.1 Mexican 1101 1461 1296
23/11/2010 114.6 Mexican 1151 1340 1293
25/11/2010 95.1 Mexican 1115 1326 1290
26/11/2010 147.9 Mexican 1175 1400 1300
27/11/2010 120 Mexican 1150 1331 1294
28/11/2010 222.4 Mexican 1171 1331 1290
29/11/2010 104.7 Mexican 1101 1317 1290
30/11/2010 186.9 Mexican 1152 1332 1285
Date Wise Prices for Specified Commodity on December, 2010
Commodity : Wheat, State : NCT of Delhi
NR : Not Reported
Arrivals Minimum Maximum Modal
Marke
Arrival Date (Tonnes Variety Price(Rs./Qui Price(Rs./Quintal Price(Rs./Quintal
t
) ntal) ) )
Narela 2/12/2010 252.7 Mexican 1100 1371 1280
3/12/2010 166.2 Mexican 1110 1308 1270
4/12/2010 146.5 Deshi 1950 1950 1950
Mexican 1180 1326 1250
5/12/2010 202.4 Mexican 1145 1291 1240
6/12/2010 101.3 Mexican 1100 1275 1245
7/12/2010 106.4 Mexican 1150 1301 1245
9/12/2010 97.1 Mexican 1161 1289 1240
10/12/2010 90.3 Mexican 1183 1277 1260
11/12/2010 98.9 Mexican 1160 1290 1245
12/12/2010 158.9 Deshi 2015 2115 2115
Mexican 1150 1292 1280
13/12/2010 126 Mexican 1131 1351 1280
14/12/2010 82.2 Mexican 1151 1300 1280
16/12/2010 93.3 Mexican 1225 1291 1284
17/12/2010 97.2 Mexican 1191 1297 1290
18/12/2010 161.4 Mexican 1201 1330 1290
19/12/2010 173.5 Mexican 1200 1301 1290
20/12/2010 171.5 Mexican 1200 1400 1290
21/12/2010 82.8 Mexican 1131 1295 1290
23/12/2010 130.3 Mexican 1220 1359 1290
24/12/2010 103.9 Mexican 1260 1318 1292
25/12/2010 131.4 Mexican 1200 1301 1293
26/12/2010 120.4 Mexican 1250 1300 1293
27/12/2010 81.3 Mexican 1260 1322 1290
28/12/2010 94.3 Mexican 1262 1300 1290
30/12/2010 53.9 Mexican 1170 1281 1280
31/12/2010 54.9 Mexican 1215 1297 1295
CHAPTER – IV
PRESENTATION
AND ANALYSIS OF
DATA AND
INTERPRETATION