INTRODUCTION TO COMMODITIES MARKET

- By Evelyn Correia
Commodities- as a term

◻ A Commodity is a marketable item produced to satisfy wants or needs

◻ Physical property of being Tangible and Transferrable.

◻ Commodity Price- is a function of Demand and Supply.

◻ Generally Commodities are Agricultural Products and Basic Resources (classified

into Soft and Hard)
 Commodity Market

◻ Market /Platform where such Commodities are traded.

◻ Prices Discovery of the underlying Asset based on Demand and Supply
◻ It includes physical Trading and Derivatives Trading using- Spot, Forwards, Future
and Option.
◻ Derivatives are either Exchange Traded or Over-the-Counter (OTC) Traded.
◻ Newer trend- Exchange Traded Funds. E.g Gold ETFs
 History to Commodities Market in India

◻ 1875- Commodity Derivatives started at Cotton Trade Association (A decade later

at Chicago-CBOT)

◻ 1900- Oil Seed Trading in Bombay

◻ 1912- Raw Jute and Jute Products Trading at Calcutta.

◻ 1920- Gold Bullions Trading in Bombay.

 Evolution of FMC- Forward Markets Commission

◻ Unnecessary Speculation resulting into banning of commodities option trading, after

independence, in 1952.

◻ The parliament passed the Forward Contracts (Regulation) Act, 1952, which
regulated contracts in Commodities all over the India.

◻ The future market remained dismantled for about four decades.

◻ In 1990’s after Globalisation, Government set up a Committee (Prof. K.N. Kabra) to

examine the role of Futures trading.
 Forward Markets Commission

◻ Statutory body set up under Forward Contracts (Regulation) Act, 1952

◻ The administrative control of the Ministry of Consumer Affairs.

◻ Shri Ramesh Abhishek, IAS is the Chairman and  Its headquarter is in Mumbai.
 Function of FMC

◻ To advise the Central Government in respect of recognition or withdrawal of

association; and other matters regarding administration.
◻ To keep forward markets under observation and take appropriate action in relation
to them;
◻ To collect and publish information regarding trading conditions in respect of goods to
which any of the provisions of the Act is made applicable including information
regarding supply, demand and prices

◻ To submit to Central Government periodical reports on the operation of this Act and
on the working of the forward markets relating to such goods;

◻ To make recommendations to improve the organisation and working of forward

markets;

◻ To undertake inspection of the accounts of recognised associations and/or any

members thereof;

◻ To perform other duties prescribed by the Central Government.

Regulatory Framework in Comm. Mrkt

◻ 3- Tier regulatory System

◻ Forward Market Commission
◻ Need Certificate of registration

Min. of Dept.
Consumer consumer
affairs affairs

Food &n Public

Distribution
Need for regulation
◻ Transparency
◻ Risk Regulation
◻ Fair Trading & Clearing-Settlement
◻ Protect investors & Stakeholders
Pre-requisition for grant to Exchg
◻ Org. Set-up
◻ Capital
◻ Promoters
◻ Infrastructure
◻ Management Structure
◻ Admin Structure
◻ Trading Practices & Byelaws
◻ Margin requirements
Conti..
◻ Clearing & Settlement
◻ Monitoring and Surveillance
◻ Delivery Mechanism
◻ Research & Development
Commodity Exchanges in India.

◻ There are 24 Commodity Exchanges in India currently.

◻ Four leading National Commodities Exchanges
✔ Multi-Commodities Exchange (MCX)
✔ National Commodities and Derivatives Exchange (NCDEX)
✔ Indian Commodity Exchange (ICE)
✔ ACE Derivatives and Commodity Exchange
Commodities Traded on Exchanges

Agricultural Products Non - Agricultural Products

◻ Cereals and Pulses ◻ Precious Metals -Bullions

◻ Fibres (Kapas) ◻ Metals
◻ Guar Complex ◻ Energy
◻ Plantation Products ◻ Weather
◻ Oil n Oil Seeds ◻ Others
◻ Spices
◻ Soft
◻ Others
 Multi- Commodities Exchange (MCX)

◻ Incorporated in April 2002 and Operational since Nov,2003.

◻ First Listed Exchange of India as on Mar, 2012.
◻ Offers a state-of-art Electronic Trading Platform
◻ More than 40 Commodities trading on the platform.
◻ Higher Volumes in Metals and Precious Metals
◻ MCXCOMDEX- Composite Comm. future price Index. Others like: MCXAgri,
MCXEnergy, MCXMetal
◻ Located at Mumbai, Andheri (East)
 NCDEX

◻ NCDEX is a professionally managed on-line multi commodity exchange.

◻ Promoter shareholders: ICICI Bank Limited, LIC, National Bank for Agriculture and
Rural Development (NABARD) and NSE.

◻ NCDEX is incorporated on April 23, 2003 and operational since December 15,
2003.

◻ NCDEX headquarters are located in Mumbai and offers facilities to its members
from the centres located throughout India
 Indian Commodity Exchange

◻ ICEX is a nation-wide screen based on-line derivatives exchange for commodities

◻ It has put in place assaying and warehousing facilities in order to facilitate deliveries

◻ The Exchange is a public-private partnership with Reliance Exchange next Ltd. as

anchor investor and has MMTC Ltd., Indiabulls Financial Services Ltd., Indian Potash
Ltd., KRIBHCO, IDFC and others as its stakeholders.
 ACE Derivatives and Commodities Ex

◻ Ace Commodity Exchange earlier known as Ahmedabad Commodity Exchange has

been in existence for more than 5 decades in Commodity Business

◻ Ace with Kotak Group brings in a new, state-of-the-art trading platform

◻ Key Shareholders being Kotak Group, HAFED (Haryana State Co-op Supply and
Marketing Federation Ltd.)
Participants in the Market

◻ Manufacturers, Traders, Farmers, Exporters and Investors are all market

participating.

They are Classified based on their Activity -

Hedgers
Arbitragers
Speculators
 Hedger

◻ Hedger is the person who basically wants to avoid risk and enters into a contract
with speculator

◻ Hedging means taking a position in the futures or option market that is opposite to a
position in the physical market. It reduces or limits risks associated with unpredictable
changes in price.

◻ The objective behind this mechanism is to offset a loss in one market with a gain in
another.

◻ Eg. stockists, exporters, producers, etc

 Speculator

◻ A trader, who trades or takes position without having exposure in the physical
market, with the sole intention of earning profit is a speculator.

◻ Speculators accept the risk that hedgers seek to avoid.

◻ They provide depth and liquidity to the market.

 Arbitrager

◻ Arbitrage is making purchases and sales simultaneously in two different markets to

profit from the price differences prevailing in those markets

◻ However, arbitrage opportunities are very desirable but not easy to uncover, as they
do not last longer since the prices get adjusted soon with buying and selling
Scenario in Indian Commodity Market till 2012

◻ India could promoted as a major centre for trading of commodity derivatives

◻ India is among top 5 producers of most of the Commodities, in addition to being a
major consumer of bullion and energy products.

◻ Agriculture contributes about 22% GDP of Indian economy. It employees around

57% of the labor force on total of 163 million hectors of land Agriculture sector is
an important factor in achieving a GDP growth of 8-10%.

◻ MCX is currently largest commodity exchange in terms of trade volumes, further it

has even become the third largest in bullion and second largest in silver future
trading in the world.

◻ Incidentally the trends of these commodities are mainly driven by international

futures prices rather than the changes in domestic demand-supply.