Commodity Business: An

Introduction

Rahul Singh, India

 Introduction
 A bulk good such as an agricultural product, food, natural
resource or metal that is traded on an exchange in bulk
quantities.

 A commodity is any homogenous item which may be

freely bought and sold. The term typically refers to
products such as coffee, cocoa and soyabeans (soft
commodities) or gold, aluminium and platinum (hard
commodities). Commodities typically are bought and sold
in futures markets where producers combine with
manufacturers and speculators to create a smoothly
functioning market.
 Commodity Market
 Commodity market is a place where trading in
commodities takes place. These are the markets where raw
and primary products are exchanged.
 These raw commodities are traded on regulated
commodity exchanges, in which they are bought and sold
in standardised contracts. It is similar to an equity market,
but instead of buying or selling shares one buys or sells
commodities.
 The commodities markets are one of the oldest prevailing
markets in the human history. In fact, derivatives trading
started off in commodities with the earliest records being
traced back to the 17th century when rice futures were
traded in Japan.
 Global Classification
 Precious Metals: Gold, Silver, Platinum, etc.
 Other Metals: Nickel, Aluminum, Copper, Zinc, etc.
 Agro-Based Commodities: Wheat, Rice, Corn, Cotton,
Oils, Oilseeds, etc.
 Soft Commodities: Coffee, Cocoa, Sugar, etc.
 Petrochemicals: High Density Polyethylene,
Polypropylene.
 Live-Stock: Live Cattle, Pork Bellies, etc.
 Energy: Crude Oil, Natural Gas, Gasoline, etc.
 How is Indian Market Moving?
 Turnover in agriculture grew 375 per cent over the past two years.
 There are 18 commodity exchanges in India.
 Multi Commodity Exchange of India Ltd (MCX), located at Mumbai.
 National Commodity and Derivatives Exchange Ltd (NCDEX), located at
Mumbai.
 National Board of Trade (NBOT), located at Indore.
 National Multi Commodity Exchange (NMCE), located at Ahmedabad.
 Trading in country’s commodity exchanges totalled $460 billion in
the financial year ended 2005, a four-fold jump from the year
before.
 Currently, the commodity market in India clocks a daily average
turnover of Rs 14,000-16,000 crore.
 Only 4 commodities out of the 94 allowed for trading account for
over 70 per cent of the total turnover. This does not speak highly
about the commodity futures market in terms of its width and depth.
 How is Indian Market Moving?
 The Survey has admitted that gold and crude oil account
for the major part of the total transactions in the futures
market at present.
 During 2005-06, the total value of commodity futures
trade was Rs. 21.34 lakh crore as compared to Rs. 5.71
lakh crore during 2004-05 showing an increase of 274%.
 The volume of trade has also gone up to 6685 lakh tonnes
during 2005-06 as compared to 1942 lakh tonnes during
2004-05. The trade volume has also gone up by 244%
during 2005-2006.
 Mega Trends in Commodity
 Reduction of government intervention
 Globalisation (competition vs. market
 opportunities)
 Technology revolution: information and
bio-sciences
 The consumer as queen
 New “corporate” business models
 Indian Market
 64% of pop. Works in agriculture=35 % GNI.
 It now accounts for approx. 23 % of GDP compared to 50
% in 1947.
 Economy potentially very strong, large industrial output,
technological knowledge and extensive reservoir of
skilled manpower.
 Exports: cotton goods, iron, jute products, coffee,
electrical goods, leather, handicrafts, diamonds,
chemicals, auto and software.
 Imports are machinery, petroleum, chemicals, cereals,
copper, and zinc.
Fraction of Agriculture in National GDP
 Market Structure: Spot

 Minimum Support Price (MSP)

 Mandis
 Product – primary and non-primary, Participants,
Trading, Clearance, Settlement, Governance
 Problems:
 Pricedissemination
 Lack of standards
 Market Structure: Spot
 Price discovery
 Contract design, trading system, clearing system,
settlement, participants, regulations and
governance
 Problems:
 Lack of price transparency
 Lack of contract size
 Lack of regulatory compliances
 Some Recent Facts
 There are 18 existing commodity exchanges in
India offering domestic contracts in 8 commodities
and 2 exchanges that have permission to conduct
trading in international (USD denominated)
contracts.
 There are around 1,700 brokerages in India today,
many of which are single proprietary concerns.
 Trade Concessions
Country # Products Depth of
concessions
Bangladesh 572 10% -15%
Bhutan 266 10-20%
India 2402 10-100%
Maldives 390 5-15%
Nepal 425 10-15%
Pakistan 685 10-30%
Sri Lanka 211` 10-75%
TOTAL 4951
 Top Traded Futures Contracts
PRODUCTS EXCHANGES VOLUMES
Mungbean Zhengzhou
Commodity Exchange People
Republic of China 47,422,496
Coffee China Commodity Futures Exchange of
Hainan 20,590,058
Corn CBOT 16,984,951
Tokyo Grain Exchange 13,840,721
Green Bean Beijing Commodity Exchange 15,152,960
Ruber China Commodity Futures Exchange 14,587,546
TOCOM 4,758,390
Red Bean Tainjin United Futures Exchange 11,234,681
American Soyabean TGF 9,966,257
Soyabean Meal CBOT 6,424,945
Sugar Coffee, Sugar, Cocoa Exchange, US 5,284,971
Plywood Shanghai Commodity Exchange 2,897,746
Cotton New York Cotton Exchange 2,837,280