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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.
y Modern Commodity 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.
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.
Agricultural Products
Corn, Oats, Rough Rice, Soybeans, Rapeseed, Soybean Meal, Soybean Oil, Wheat, Cocoa, Coffee C, Cotton No.2, Sugar No.11, Sugar No.14.
Energy
WTI Crude Oil, Brent Crude, Ethanol, Natural Gas, Heating Oil, Gulf Coast Gasoline, RBOB Gasoline, Propane, Uranium.
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 Commodity Exchange y Dubai Mercantile Exchange y Intercontinental Exchange y Minneapolis Grain Exchange y Multi Commodity Exchange y National Commodity and Derivatives Exchange y National Multi-Commodity Exchange of India Ltd y New York Mercantile Exchange y New York Board of Trade y London Metal Exchange y Winnipeg Commodity Exchange
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Basics of Futures Trading
Perhaps 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 good 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 sellers 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 bonefied 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 quickly, but do not guarantee a favorable price. This order should be used when time is more valuable than price.
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 order better means higher, for buy limit orders better 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 stop loss should the market go against a traders 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 til 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 firms 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
THE FIELD
NCDEX is regulated by Forward Markets Commission in respect of futures trading in commodities. Besides, NCDEX 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, soy bean, soy bean oil, rapeseed-mustard seed, expeller rapeseed-mustard seed oil, and RBD palmolein, crude Palm oil and cotton, Medium and long staple varieties, At subsequent phases trading in more commodities would be facilitated.
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 bring professionalism and transparency into commodity trading. y To inculcate best international practices like de. Modularization, technology platforms, low cost 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. These include the 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. This unique parentage enables it to offer a variety of benefits which are currently in short supply in the commodity markets. The four institutional promoters of NCDEX are prominent players in their respective fields and bring with them institution building experience, trust, nationwide reach, technology and risk management skills.
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, partnerships, cooperative societies, companies etc. that fulfills the eligibility criteria set by the exchange. All the members of the exchange have to register themselves with the competent authority before commencing their operations. The members of NCDEX fall into two categories, trading cum Clearing Members (TCM) and Professional Clearing Members (PCM)
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Table 3.2 Fee/ deposit structure and net worth requirement: PCM
particulars Interest free cash security deposit Collateral security deposit Annual subscription charges Advance minimum transaction charges Net worth requirement
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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 (BMC) 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: This can be deposited by issuing a cheque/ demand draft payable at Mumbai in favour of National Commodity & Derivatives Exchange Limited.
Bank guarantee: Bank guarantee in favour of NCDEX as per the specified format from approved banks. The minimum term of the bank guarantee should be 12 months.
Fixed deposit receipt: Fixed deposit receipts (FDRs) issued by approved banks are accepted. The FDR should be issued for a minimum period of 36 months from any of the approved banks.
Government of India securities: National Securities Clearing Corporation Limited (NSCCL) is the approved custodian for acceptance of Government of India securities. The securities are valued on a daily basis and a haircut of 25% is levied.
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Members are required to maintain minimum level of security deposit i.e. Rs.15 Lakh 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, NCDEX 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 capital in the form of cash, bank guarantee, fixed deposit receipts or Government of India securities.
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TRADING
The trading system on the NCDEX 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 lot size and tick size for each of the contracts traded from time to time. When any order enters the trading system, it is an active order. It tries to find a match on the other side of the book. If it finds a match, a trade is generated. If it does not find a match, the order becomes passive and gets queued in the respective outstanding order book in the system. Time stamping is done for each trade and provides the possibility for a complete audit trail if required.
NCDEX trades commodity futures contracts having one Month, two Month and three month expiry cycles. All contracts expire on the 20th of the expiry month. Thus a January expiration contract would expire on the 20th of January and a February expiry contract would cease trading on the 20th of February. If the 20th of the expiry month is a trading holiday, the contracts shall expire on the previous trading day. New contracts will be introduced on the trading day following the expiry of the near month contract.
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CLEARING
National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of trades executed on the NCDEX. 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. Unmatched positions have to be settled in cash. The cash settlement is only for the incremental gain/ loss as determined on the basis of final settlement price.
SETTLEMENT
Futures contracts have two types of settlements, the MTM settlement which happens on a continuous basis at the end of each day, and the final settlement which happens on the last trading day of the futures contract. On the NCDEX, daily MTM settlement and final MTM settlement in respect of admitted deals in futures contracts are cash settled by debiting/ crediting the clearing accounts of CMs with the respective clearing bank. All positions of a CM, either brought forward, created during the day or closed out during the day, are market to market
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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 NCDEX for all open positions for a commodity for all constituents individually. NCDEX 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 assayer. The commodities have to meet the contract specifications with allowed variances. If the commodities meet the specifications, the warehouse accepts them. Warehouse then ensures that the receipts get updatedin the depository system giving a credit in the depositor's electronic account. The seller then gives the invoice to his clearing member, who would courier the same to the buyer's clearing member. On an appointed date, the buyer goes to the warehouse and takes physical possession of the commodities.
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We have a brief look at the various commodities that trade on the NCDEX and look at some commodity specific issues. The commodity markets can be classified as markets trading the following types of commodities.
AGRICULTURAL COMMODITIES
The NCDEX offers futures trading in the following agricultural commodities. Refined soy oil, mustard seed, expeller mustard oil, RBD palmolein, crude palm oil, medium staple cotton and long staple cotton. Of these we study cotton in detail and have a quick look at the others
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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. The market size of raw cotton in India is over Rs.130 billion. The average monthly fluctuation in prices of cotton traded across India has been at around 4.5% during the last three years. The maximum fluctuation has been as high as 11%. Historically, cotton prices in India have been fluctuating in the range of 3-6% on a monthly basis.
Cotton is among the most important nonfood crops. It occupies a significant position, both from agricultural and manufacturing sectors' points of view. It is the major source of a basic human need, Clothing, apart from other fibred sources like jute, silk and synthetic. Today, cotton occupies a significant position in the Indian economy on all fronts as a commodity that forms a means of livelihood to over millions of cotton cultivating farmers at the primary agricultural sector. It is also a source of direct employment to over 35 million people in the secondary manufacturing textile industry that contributes to 14% of the country's industrial production, 27.30% of the country's export earnings and 4% of its GDP.
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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 crushed yields 6 tons of oil (including the kernel oil, which is used both for edible and industrial purposes). Crude palm oil (CPO), crude palmolein, RBD (refined, bleached, deodorized) palm oil, RBD palmolein and crude palm kernel oil (CPKO) are the various forms of palm oil traded in the market
RBD PALMOLEIN
The RBD (refined, bleached and deodorized) palmolein is the derivative of crude palm oil (CPO), which is obtained from the crushing of Fresh Fruit-bunches (FFBs) harvested from oil palm plantations. When CPO is subjected to refinement, RBD palm oil and fatty acids are obtained. Fractionation of RBD palm oil yields RBD palmolein along with stearin, which is a white solid at room temperature. While Oil is a stable derivative saturated fat, solid at room temperature), Olein is relatively unstable (unsaturated fat, liquid at room temperature, but low cholesterol). The whole quantity of CPO that is produced and used for human consumption is in the form of RBD palmolein. Cropping of growth patterns of CPO has been already covered.
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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 being as high as 17% during the period. Historically, soy oil prices in the major spot markets across the country have been fluctuating in the range of 4.5.8.5%. This offers immense opportunity for the investors to profitably deploy their funds in this sector apart from those actually associated with the value chain of the commodity, which could use soy oil futures contract as the most effective hedging tool to minimize price risk in the market. Soy oil is the derivative of soybean. On crushing mature beans, 18% oil and 78.80% meal is obtained. While the oil is mainly used for human consumption, meal serves as the main source of protein in animal feeds. Soy oil is the leading vegetable oil traded in the international markets, next only to palm. Palm and soy oils together constitute around 68% of global edible oil export trade volume, with soy oil constituting 22.85%. It accounts for nearly 25% of the world's total oils and fats production. Increasing price competitiveness, and aggressive cultivation and promotion from the major producing nations have given way to widespread soy oil growth both in terms of production as well as consumption.
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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.
SOYBEAN
The market size of the popularly known miracle bean in India is over Rs.5000 crore. With an annual production of 5.0.5.4 million tons, soybean constitutes nearly 25% of the country's total oilseed production. The average monthly fluctuation in prices of soybean traded at one of the active soybean spot market at Indore (Madhya Pradesh) has been at 10.07% during the past two years, the maximum monthly fluctuation being as high as 24.30% during the period. Historically, soybean prices in the major spot markets across the country have been fluctuating in the range of 5.9%. Soybean is the single largest oilseed produced in the world. The commodity has been commercially exploited for its utility as edible oil and animal feed. On crushing mature beans, around 18% oil could be obtained; the rest being the oil cake/ meal, which forms the primesource of protein in animal feeds.
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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 average monthly fluctuation in prices of rapeseed traded at one of the active rapeseed spot market at Jaipur (Rajasthan) has been at 9.8% during the past two years (July 2001 to July 2003), the maximum monthly fluctuation being as high as 23.4% during the period. Rapeseed/ Mustard/ Canola is a traditionally important oilseed. China, Canada and India are the major producers of this commodity. The other major producers are Germany, France, Australia, Pakistan and Poland. The commodity has been commercially exploited in the form of seeds, oil (seed to oil recovery is 39.40%) and meal.
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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 of jewellery, which is generally predominated by women. The Indian demand to the tune of 800 tons per year is making it the largest market for gold followed by USA, Middle East and China. About 80% of the Physical gold is consumed in the form of jewellery while bars and coins occupy not higher than 10% of the gold consumed. If we include jewellery ownership, then India is the largest repository of gold in terms of total gold within the national boundaries.
Regarding pattern of demand, there are no authentic estimates, the available evidence shows that about 80% is for jewellery fabrication for domestic demand, and 15% is for investor demand (which is relatively elastic to gold-prices, real estate prices, financial markets, tax policies, etc.). Barely 5% is for industrial uses. The demand for gold jewellery is rooted in societal preference for a variety of reasons. religious, ritualistic, a preferred form of wealth for women, and as a hedge against inflation. It will be difficult to prioritize them but it may be reasonable to conclude that it is a combined effect, and to treat any major part as exclusively a store of value or hedging instrument would be unrealistic. It would not be realistic to assume that it is only the affluent that creates demand for gold. There is reason to believe that a part of investment demand for gold assets is out of black money.
Rural India continues to absorb more than 70% of the gold consumed in India and it has its own role to fuel the barter economy of the agriculture community. The yellow metal used to play an important role in marriage and religious festivals in India. In the Hindu, Jain and Sikh community, where women did not inherit landed
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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 changeover hands of gold at the time of marriage are from few grams to kgs. The gold also occupies a significant position in the temple system where gold is used to prepare idol and devotees offer gold in the temple. These temples are run in trust and gold with the trust rarely comes into re-circulation. The existing social and cultural system continues to cause net gold buyer market and the government policies have to take note of the root cause of gold demand, which lies in the social and cultural system of India. The annual consumption of gold, which was estimated at 65 tons in 1982, has increased to more than 700 tons in late 90s. Although it is likely that, with prosperity and enlightenment, there may be deceleration in demand, particularly in urban areas, it would be made good by growing demand on account of prosperity in rural areas. In the near future, therefore, the annual demand will continue to be over 600 tons per year.
SUPPLY
Indian gold holding, which are predominantly private, is estimated to be in the range of 10000- 13000 tons. One fourth of world gold production is consumed in India and more than 60% of Indian consumption is met through imports. The domestic production of the gold is very limited which is around 9 tons in 2002 resulting more dependence on imported gold. The availability of recycled gold is price sensitive and as such the dominance of the gold supply through import is in existence. The fabricated old gold scraps is price elastic and was estimated to be near 450 tons in 2002. It rose almost more than 40% compared to the previous year because of rise in gold price by more than 15%. The demand- Supply for gold in India can be summed up thus:
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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.
SILVER
The dictionary describes it as a white metallic element, sonorous, ductile, very malleable and capable of high degree of polish. It also has the highest thermal and electrical conductivity of any substance. Silver is somewhat harder than gold and is second only to gold in malleability and ductility. Silver remains one of the most prominent candidates in the metals complex as far as futures' trading is concerned. Thanks to its unique volatility, silver has remained a hot favorite speculative vehicle for the small time traders. Though futures trading were banned in India since late sixties, parallel futures markets are still very active in Delhi and Indore.
Speculative interest in the white metal is so intense that it is believed that combined volume of Indian punters represent almost 40 percent of volume traded at New York Commodity Exchange. Delhi, Rajasthan, MP and UP are the active pockets for the silver futures. Until recently, Rajkot and Mathura were conducting futures but now players have diverted toward comex trade. Most of the world's silver is mined in the US, Australia, Mexico, Peru, and Canada. Cash markets remain highly unorganized in the silver and impurity and excessive speculation remain key issue for the trade. Taking cue from gold, government of India is planning to introduce hallmarking in silver which is likely to address quality and credibility of Indian silverware and jeweler industry. The unique properties of silver restrict its substitution in most applications.
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DEMAND
Demand for silver is built on three main pillars; industrial and decorative uses, photography andjewelry & silverware. Together, these three categories represent more than 95 percent of annual silver consumption. In recent years, the main world demand for silver is no longer monetary, but industrial. With the growing use of silver in photography and electronics, industrial demand for silver accounts for roughly 85% of the total demand for silver. Jewelry and silverware is the second largest component, with more demand from the flatware industry than from the jewelry industry in recent years. India, the largest consumer of silver, is gearing up to start hallmarking of the white precious metal by April. India annually consumes around 4,000 tons of silver with the rural areas accounting for the bulk of the sales. India's demand for silver increased by 177 per cent over the past 10 years as compared to 517 tons in 1991. According to GFMS, India has emerged as the third largest industrial user of silver in the world after the US and Japan.
SUPPLY
The supply of silver is based on two facts, mine production and recycled silver scraps. Mine production is surprisingly the largest component of silver supply. It normally accounts for a little less than 2/3 rd of the total (last year was slightly higher at 68%). Fifteen countries produce roughly 94 percent of the worlds silver from mines. The most notable producers are Mexico, Peru, the United States, Canada and Australia. Mexico, the largest producer of silver from mines. Peru is the worlds second largest producer of silver. Silver is often mined as a byproduct of other base metal operations, which accounts for roughly four-fifths of the mined
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silver supply produced annually. Known reserves, or actual mine capacity, is evenly split along the lines of production. The mine production is not the sole source. Others being scrap, disinvestments, government sales and producers hedging. Scrap is the silver that returns to the market whenrecovered from existing manufactured goods or waste. Old scrap normally makes up around a fifth of supply. Scrap supply increased marginally last year up by 1.2%. The other major source of silver is from refining, or scraps recycling. Because silver is used in the photography industry, as well as by the chemical industry, the silver used in solvents and the like can be removed from the waste and recycled. The United States recycles the most silver in the world, accounting for roughly 43.6 million ounces. Japan is the second largest producer of silver from scrap and recycling, accounting for roughly 27.8 million troy ounces in 1997. In the United States and Japan, three-quarters of all the recycled silver comes from the photographic scrap, mainly in the form of spent fixer solutions and old X-ray films.
THE STUDY
I.OBJECTIVES OF THE STUDY
PRIMARY OBJ ECT IVE 1) To underst and realist ically t he pat t ern of fluct uat ions o f pr ice indices of t wo agricult ural co mmodit ies and t he fact ors behind t hat
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2) To study the operation of commodity trading in india and assess its importance 3) To provide a trend analysis of the current MCX & NCDEX indices
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DEFINITION
Research is an organized, systematic, data-based, critical, scientific inquiry into a specific problem that needs a solution. Scientific research has the goal of solving problems and establishing a step-by-step logical, organized, and rigorous method to identify problems, gathers data, analyses the data, and draw valid conclusions there from.
The research undertaken in this problem is descriptive in nature. Descriptive study attempts to obtain a complete and accurate descriptive of situation, formal design is required to ensure that the description covers all phases desired. Precise statement at problem indicates what than be designed provides for collection of this information under the study. 2. NEED OF T HE ST UDY The emp ir ical analys is shows t hat cycles in eco no mic act ivit y ar e majo r det er minant s o f t he short -run behavior o f shipping fre ight rat es in t he year 1850 and Wo r ld War I. Co nsist ent wit h t he econo mic t heor y, t her e is a st r ik ing asymmet r y bet ween t he peaks and t roughs of shipping cycles. However, t here is a clo se t iming relat io nship bet ween t he upper t urning po int s o f t he bus iness cycle, co mmodit y pr ices and freight rat es which is part icular ly shown in t he peak years 1875,1889,1900,1912. So t his st udy on co mmodit y indices and pr ices, t o an ext ent would not only help us in underst anding t he eco no my o f t he co unt r y, t he growt h dr iving co mmodit ies favor ing EXIM t rade but also fo r bet t er under st and ing t he fr eight market changes and behavior for t he fut ure.
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SECONDARY DATA Company records, magazines, journals and websites were made use to collect secondary data regarding indices, operations of commodity market and growth patterns
A) STATISTICAL TOOLS: The statistical tools that were used for the study is as follows: 1. Weighted Average and 2. Technical analysis
WEIGHTED AVERAGE: The weighted average stands for the relative importance of the different items. The formula for comparing weighted mean is XW =? Xw/w X is the variables values i.e., X1, X2..Xn. W represents the weights attached to values.
TECHNICAL ANALYSIS:
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It is important to note that the Technical Analysis Overview provided does not attempt to be a comprehensive treatment of Charting or Technical Analysis methods. There are numerous, wellwritten books on Chart Interpretation and Technical Analysis. Brief and simplistic reviews of some basic charting concepts are provided for reference or to stimulate further study. Please contact your broker for a recommended reading list on Charting and Technical Analysis.
Technical Analysis makes the assumption that history repeats itself. Any trading method or system that works well on a broad sample of historical data may have validity when applied to future trading environments. One should keep in mind that the markets are dynamic. The forces that motivate price movement are dynamic, and the participants are dynamic. Therefore any system which has performed well on past historic data may decline in value as the evolving dynamics of the markets change over time. The assumption is made that trading results can be improved when trading skills are improved. This requires practice! Surely any time spent learning to trade on past historical data will not be wasted when it comes to preparing to trade for the future.
1) The research holds validity for the particular period only. 2) The research is extended to particular commodities only.
3)
SUGAR
A sweet white (or brownish yellow) crystalline substance, of a sandy or granular consistency, obtained by crystallizing the evaporated juice of certain plants, as the sugar cane, sorghum, beet root, sugar maple, etc. It is used for seasoning and preserving many kinds of food and drink. Ordinary sugar is essentially sucrose.
Varieties of Sugar
y y y y y y y y y y y y
White, refined sugar Caster sugar Icing sugar Icing mixture Brown sugar Dark brown sugar Raw sugar Golden demerara Golden syrup Treacle Molasses Caramel
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Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa, Punjab, Rajasthan, Tamilnadu, Uttar Pradesh and West Bengal.
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20000
10000
5000
Price Refinery activity Consumer income Candy and confectionery sales Changing eating habits Sugars use in new technologies, such as ethanol production for automobile fuel.
Brazil
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y y y y y y y
INTERNATIONAL TRADE
Over the past fifty years, especially, the international trade in sugar has changed dramatically. Since it is either imported or exported by every country on earth, sugar has become an integral component of the economic relationships among nations. Because of that unique position, the trade in sugar has both reflected-and been affected by-a wide range of divergent forces, including global politics, health consciousness, the emergence of developing nations as suppliers and consumers, and many others.
Perhaps the greatest change in the international sugar trade has been the trend toward price stabilization. Historically at the mercy of everything from war to weather, the price of sugar has always been extremely volatile. The International Sugar Trade contains the most essential and up-to-date information currently available. It includes numerous tables and graphs describing production, consumption, and trade for nearly every country.
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U.S cents / Kg
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Apr Jun:Resistance
A horizontal ceiling where the pressure to sell is greater than the pressure to buy. Therefore, an increase in price is reversed and prices revert downward. Typically resistance can be located on a chart by a previous set of high
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CONCLUSION
Despite the economic recession world over, sugar consumption growth was less impacted and remained positive. The supply-demand disequilibrium has been caused essentially by the strident slippage in Indian production, exacerbated by the decline in EU and other Asian countries. The correction after surging surplus for two years in a row has come as good relief to sugar producers world over. Such tightness in supply is sure to be witnessed during 2009-10 as well. Brazils share in world export is expected to overshoot the half way mark to 53% this year as against 29% a decade ago.
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Delivery month Jan 2010 Mar 2010 May 2010 July 2010 Mar 2011 Mar 2012
World production is now expected to be 4.274 mln tons lower than world consumption as against 3.626 mln tons projected in November. Consequently, the statistical outlook for the market till the end of the season in September 2009 remains constructive and supportive to the market values. The ISO puts world export availability for 2008/09 at 49.608 mln tons raw value, as against 46.25 mln tons in the previous crop cycle Smaller output in importing countries and in India, in particular, is expected to trigger additional import demand which is expected to reach 49.621 mln tons, up 3.673 mln tons
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WHEAT
Wheat is a cereal grain that belongs to the grass family of the genus Triticum. A dry, one seeded fruit named kernel is obtained from this spiky grass like grain, which is ground to make flour and is consumed throughout the world as one of the most important staple food. It is the second largest cereal grain consumed on earth and that is why it is widely cultivated in more than 30000 varieties. Wheat is important especially for making breads and other bakery products as it has got the maximum number of glutens as compared to any other grain. This crop is also grown as a forage crop for the livestock
Overview
Wheat is a very important edible cereal grain crop. As already mentioned, it is the second largest grain crop consumed after rice. The cultivation of wheat has its own advantages like it has a very good yield per unit area, has a relatively short growing duration period and the production of wheat is comparatively easier than the other grain crops as it grows well in the temperate regions. That is why it serves as a very good cash crop and proves its dominance in the world commerce. Gluten, which is a primary constituent in raised bread, is found in wheat and that is why most of the bakery products are made from wheat only. The world production of wheat figures over 585 million tons annually. The largest producer of wheat in the world is the European Union followed by China, India and United States of America. The total wheat production of the world is slightly concentrated is clear from the fact that these four producers contribute to around 60% of the total production. The consumption of wheat in the world is a huge 580 million tons but is successfully kept satisfied with an equally high production figures. Consumption has been constantly increasing during the last 10 years with the increase in population, and alarmingly, the consumption is prepared to shoot up further and is expected to reach up to 775 million tons in 2020. Wheat is consumed all through the globe and the leading countries in this list are European Union, China
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y y y y
The above list makes it clear that the largest producers of wheat in the world are also the largest consumers of the world, which means, most of the wheat production is consumed at the place of production. The export market of wheat is getting competitive with the new entrants like India into it and the export figures hover around 200 million tons. The major exporting countries of this crop are: y y y y y
The imports of wheat are done by the countries, which have a high domestic demand and a fluctuating production level. That is why the countries shuffle in the list of highest wheat importing countries. The world import figures sum up to 100 million tons and are currently done by more than 100 countries. The major countries are
y y y y y y y y y y
European Union China Egypt Japan Brazil Mexico Indonesia Algeria Philippines Iraq
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Cultivation pattern
Wheat was one of the first crops that were cultivated in the world thanks to its adaptability to wider range of climatic conditions and soils making it a very easy to produce crop in that time when man didnt even know the basics of living. Wheat requires a cooler weather and a good level of moisture in the early plantation period and once the grain is formed, it needs a warmer weather to dry up. That is why the best-suited climate needed for the wheat crop to prosper is the temperate climate. In USA, the wheat seeds are sown in the months of September and October. After February, when the snow in those areas starts to melt, the wheat crop starts to shoot up and during summers it is left to develop and finally it is harvested in the months of June, July and September. In India, wheat is cultivated as a Rabi crop and it is planted in the month of October. It is harvested in the months April and May.
European Union China India United States of America Russia Canada Australia Pakistan Turkey Argentina Iran
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The largest producer of wheat in the world is European Union that contributes to around 1/4th share to the worlds total production. As it is said that the demand of wheat increases with the increase in population, the nations having the largest population in the world i.e. China and India stand at the 2nd and 3rd position in the largest wheat producing nations list in order to satisfy the domestic consumption demand. These two countries contribute 14 % and 12% respectively in the worlds total production. India has shown a high rise in production of wheat after the green revolution and taken a lead from USA in recent times. Wheat is produced on approximately 2.5 million square kilometers of the world. The maximum area in the total cultivated area of wheat is constituted by India at around 13%. The other major countries that have a significant impact on the total area contributed for wheat production are
y y y y y y y
Production of wheat in India The following areas in India are the major wheat producing areas in the country and contribute to around 92% of the total production in the country
y y y y y y y
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India produces around 75 million tons of wheat every year and stands at the third position in the list of the major wheat producers in the world. 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
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The major importers of Indian wheat are the southeastern Asian countries and the gulf countries. India was an importer of wheat in the 90s as it the domestic demand was too high but now this situation has been overcame and overturned.
Weather conditions Government policies and regulations Prices fluctuations of the competitive and substitute products Season of harvesting and peak season Technological improvements Crop size World demand for wheat
Varieties of Wheat
The three principal types of wheat used in modern food production are:
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Triticumvulgare - it provides the bulk of the wheat used to produce flour for bread making and for cakes and biscuits (cookies).
Triticum durum - Durum is the hardest of all wheat. Its density, combined with its high protein content and gluten strength, make durum the wheat of choice for producing premium pasta products
Triticumcompactum
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Oct Dec
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Bull Flag
A formation consisting of a small number of price bars where the slope of price bar highs and lows are parallel and declining. Bull Flags are identified by their characteristic pattern and by the context of the prior trend. In the case of a Bull Flag the trend leading to the formation of the Bull Flag is up. To trade this formation, place orders on the break up and break down points, leaving your unfilled order as your stop loss
Technical analysis Jan- Mar: 1-2-3 (A-B-C) Bottom Anticipates a change in trend from down to up on a break above the number 2 point
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Jan- Apr:
1-2-3 (A-B-C) Top Anticipates a change in trend from up to down on a break below the number 2 point.
Global Scenario
y
The world wheat production in the recent years has been observed to be hovering between 560-580 million tons a year. The biggest cultivators of wheat are EU-25, China, India, America, Russia, Australia, Canada, Pakistan, Turkey and Argentina. India, EU-25, China, India and US, the four largest producers account for around 58% of the total global production. World wheat consumption is consistently growing with growth in population, as it is one of the major staple foods across the world. The major consuming countries of wheat are EU, China, India, Russia, USA and Pakistan. Around 16-19% of the world wheat production is traded annually between countries. The annual world trade in wheat is to the extent of 102-106 million tons. America, Australia, Canada, EU-25 and Argentina are the five largest exporters of wheat in the world. Major importing countries that tops in the figures are European Union, China, Egypt, Japan, Brazil and European Union. Other importing nations are Mexico, Indonesia, Algeria, Philippines, and Iraq. However the import amount varies year to year depending upon the domestic production.
CONCLUSION
India has the largest area in the world under wheat. However, in terms of production, we are only the third largest behind EU-25 and China. India produces about 65-75 million tons of wheat a year, which is about 35% of India's total food grain production of 210212 million tons. Since wheat and rice are grown in separate seasons, they do not compete for area. The major wheat producing states of India are Uttar Pradesh, Punjab, Haryana, Madhya Pradesh, Rajasthan and Bihar. Which together account for around 93% Analysis of commodity indices in the global shipping trade
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of total production. Wheat is sown during November to January and harvested during March to April. The wheat-marketing season in India is assumed to begin from April every year. Indian wheat is largely soft/medium hard, medium protein, bread wheat. India also produces around 1.5 million tons of durum wheat, mostly in central and western India, which is not segregated and marketed separately .Government, announces Minimum Support Prices (MSP), which is the minimum price at which procurement has to be carried. The total procurement of wheat by Government agencies ranges from 8 to 20 million tons, accounting for only 15-20% of the total production. The support price operation and the Public Distribution Systems (PDS) play a significant role in maintaining reasonable and stable food grain prices in the country for both the producers and consumers. India consumes around 70-72 million tons of wheat a year. Most domestic wheat consumption is in the form of homemade chapatti or rotis using custom milled Atta, although usage of branded packaged atta marketed by large companies is increasing in cities. There are around 200 large flourmills in India, with a milling capacity of around 15 million tons. India exported around 7 million tons subsidized by Govt in 2007-08, as a result of surplus stock. However, current Govt. policies are not in favour of exports. Southeast Asia and Gulf countries are major importers of Indian wheat.
2) To study the operation of commodity trading in india and assess its importance
Introduction
The Indian economy is witnessing a mini revolution in commodity derivatives and risk management. Commodity options trading and cash settlement of commodity futures had been banned since 1952 and until 2002 commodity derivatives market was virtually non-existent,
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except some negligible activity on an OTC basis. Now in September 2005, the country has 3 national level electronic exchanges and 21 regional exchanges for trading commodity derivatives. As many as eighty (80) commodities have been allowed for derivatives trading. The value of trading has been booming and is likely to cross the $ 1 Trillion mark in 2006 and, if all goes well, seems to be set to touch $5 Trillion in a few years.
Chequred History
The history of organized commodity derivatives in India goes back to the nineteenth century when the Cotton Trade Association started futures trading in 1875, barely about a decade after the commodity derivatives started in Chicago. Over time the derivatives market developed in several other commodities in India. Following cotton, derivatives trading started in oilseeds in Bombay (1900), raw jute and jute goods in Calcutta (1912), wheat in Hapur (1913) and in Bullion in Bombay (1920).
However, many feared that derivatives fuelled unnecessary speculation in essential commodities, and were detrimental to the healthy functioning of the markets for the underlying commodities, and hence to the farmers. With a view to restricting speculative activity in cotton market, the Government of Bombay prohibited options business in cotton in 1939. Later in 1943, forward trading was prohibited in oilseeds and some other commodities including food-grains, spices, vegetable oils, sugar and cloth.
After Independence, the Parliament passed Forward Contracts (Regulation) Act, 1952 which regulated forward contracts in commodities all over India. The Act applies to goods, which are defined as any movable property other than security, currency and actionable claims. The Act prohibited options trading in goods along with cash settlements of forward trades, rendering a crushing blow to the commodity derivatives market.
Under the Act, only those associations/exchanges, which are granted recognition by the Government, are allowed to organize forward trading in regulated commodities. The Act envisages three-tier regulation: (i) The Exchange which organizes forward trading in commodities can regulate trading on a day-to-day basis; (ii) the Forward Markets Commission
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provides regulatory oversight under the powers delegated to it by the central Government, and (iii) the Central Government - Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution - is the ultimate regulatory authority.
The already shaken commodity derivatives market got a crushing blow when in 1960s, following several years of severe draughts that forced many farmers to default on forward contracts (and even caused some suicides), forward trading was banned in many commodities considered primary or essential. As a result, commodities derivative markets dismantled and went underground where to some extent they continued as OTC contracts at negligible volumes. Much later, in 1970s and 1980s the Government relaxed forward trading rules for some commodities, but the market could never regain the lost volumes.
Commodity futures trading in India remained in a state of hibernation for nearly four decades, mainly due to doubts about the benefits of derivatives. Finally a realization that derivatives do perform a role in risk management led the government to change its stance. The policy changes favoring commodity derivatives were also facilitated by the enhanced role assigned to free market forces under the new liberalization policy of the Government. Indeed, it was a timely
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decision too, since internationally the commodity cycle is on the upswing and the next decade is being touted as the decade of commodities.
It is important to understand why commodity derivatives are required and the role they can play in risk management. It is common knowledge that prices of commodities, metals, shares and currencies fluctuate over time. The possibility of adverse price changes in future creates risk for businesses. Derivatives are used to reduce or eliminate price risk arising from unforeseen price changes. A derivative is a financial contract whose price depends on, or is derived from, the price of another asset.
Two important derivatives are futures and options. (i) Commodity Futures Contracts: A futures contract is an agreement for buying or selling a
commodity for a predetermined delivery price at a specific future time. Futures are standardized contracts that are traded on organized futures exchanges that ensure performance of the contracts and thus remove the default risk. The commodity futures have existed since the Chicago Board
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of Trade (CBOT, www.cbot.com) was established in 1848 to bring farmers and merchants together. The major function of futures markets is to transfer price risk from hedgers to speculators. For example, suppose a farmer is expecting his crop of wheat to be ready in two months time, but is worried that the price of wheat may decline in this period. In order to minimize his risk, he can enter into a futures contract to sell his crop in two months time at a price determined now. This way he is able to hedge his risk arising from a possible adverse change in the price of his commodity.
(ii)
Commodity Options contracts: Like futures, options are also financial instruments used
for hedging and speculation. The commodity option holder has the right, but not the obligation, to buy (or sell) a specific quantity of a commodity at a specified price on or before a specified date. Option contracts involve two parties the seller of the option writes the option in favour of the buyer (holder) who pays a certain premium to the seller as a price for the option. There are two types of commodity options: a call option gives the holder a right to buy a commodity at an agreed price, while a put option gives the holder a right to sell a commodity at an agreed price on or before a specified date (called expiry date). The option holder will exercise the option only if it is beneficial to him; otherwise he will let the option lapse. For example, suppose a farmer buys a put option to sell 100 Quintals of wheat at a price of $25 per quintal and pays a premium of $0.5 per quintal (or a total of $50). If the price of wheat declines to say $20 before expiry, the farmer will exercise his option and sell his wheat at the agreed price of $25 per quintal. However, if the market price of wheat increases to say $30 per quintal, it would be advantageous for the farmer to sell it directly in the open market at the spot price, rather than exercise his option to sell at $25 per quintal.
Futures and options trading therefore helps in hedging the price risk and also provide investment opportunity to speculators who are willing to assume risk for a possible return. Further, futures trading and the ensuing discovery of price can help farmers in deciding which crops to grow. They can also help in building a competitive edge and enable businesses to smoothen their earnings because non-hedging of the risk would increase the volatility of their quarterly earnings. Thus futures and options markets perform important functions that can not be ignored in modern
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business environment. At the same time, it is true that too much speculative activity in essential commodities would destabilize the markets and therefore, these markets are normally regulated as per the laws of the country.
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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 commodity futures markets. Through the integration of dedicated resources, 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: Agro Commodities, Bullion, Metals- Ferrous & Non-ferrous, Pulses, Oils & Oilseeds, Energy, Plantations, Spices and other soft commodities. MCX has built strategic alliances with some of the largest players in commodities eco-system, namely, Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors' Association of India, Pulses Importers Association, ShetkariSanghatana, United Planters Association of India and India Pepper and Spice Trade Association.
Today MCX is offering spectacular growth opportunities and advantages to a large cross section of the participants including Producers / Processors, Traders, Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives, Industry Associations, amongst others MCX being nation-wide commodity exchange, offering multiple commodities for trading with wide reach and penetration and robust infrastructure, is well placed to tap this vast potential.
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(PNB), CRISIL Limited (formerly the Credit Rating Information Services of India Limited), Indian Farmers Fertilizer Cooperative Limited (IFFCO) and Canara Bank by subscribing to the equity shares have joined the 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 offer a bouquet of benefits, which are currently in short supply in the commodity markets. The institutional promoters of NCDEX are prominent players in their respective fields and bring with them institutional building experience, 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 not having any vested interest in commodity markets. It is committed 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 Market Commission in respect of futures trading in commodities. Besides, NCDEX 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
. NCDEX is located in Mumbai and offers 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 bags, Mild Steel Ingot, Mulberry Green Cocoons, Pepper, Rapeseed - Mustard Seed ,Raw Jute, RBD Palmolein, Refined Soy Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow Soybean Meal. At subsequent phases trading in more commodities would be facilitated.
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Sr. no
16 Mar 08 to 31 Mar 08
16 Jun 08 to 30 Jun 08
16 Sep 08 to 30 Sep 08
$m4,603.69
$m5123.76
$m11,042.25
$m235.74
$m143.34
$m 106.85
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Ahmedabad 3 4 National Commodity &Derivatives Exchange Limited, Mumbai Total of three exchanges $m7360.45 $m12199.88 $m8740.49 $m14007.59 $m10,694.29 $m21,843.39
Note: The original data in local currency Indian Rupee (INR) was obtained from the website of 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. 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 for the three two-weekly periods above shows that 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 added up to $21.84 billion for a fortnight in September 2008 or $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 the 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 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 done.
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y y y y y y y y y
Gold - 4,082.15 Silver - 3,869.36 Crude oil - l3, 380.13 Chana (chick peas) - 2,100.15 Urad (Black Legume) - 624.71 Soy oil - 478.28 Gur (Jaggery: cane sugar) - 369.72 Guar Gum - 345.08 Tur (Lentils) - 329.35
a. Commodity Options: Trading in commodity options contracts has been banned since 1952. The market for commodity derivatives cannot be called complete without the presence of 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 movements, it does not allow him to reap the benefits of an increase in prices. No doubt there is an immediate need to bring about the necessary legal and regulatory changes to introduce commodity options trading in the country. The matter is said to be under the active consideration of the Government and the options trading may be introduced in the near future.
b. The Warehousing and Standardization: For commodity derivatives market to work efficiently, it is necessary to have a sophisticated, cost-effective, reliable and convenient warehousing system in the country. The Habibullah (2003) task force admitted, A sophisticated
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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 Plan) has been introduced to construct new and expand the existing rural godowns. Large scale privatization of state warehouses is also being examined.
c. Cash 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 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 (SEBI) that regulates the securities markets. Unlike SEBI which is an independent body, the Forwards Markets Commission (FMC) is under the Department of Consumer Affairs (Ministry of Consumer Affairs, Food and Public Distribution) and depends on it for funds. It is imperative that the Government should grant more powers to the FMC to ensure an orderly development of the commodity markets. The SEBI and FMC also need to work closely with each other due to the inter-relationship between the two markets.
e. Lack of Economy of Scale: There are too many (3 national level and 21 regional) commodity exchanges. Though over 80 commodities are allowed for derivatives trading, in practice
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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: There are at present restrictions on the movement of certain goods from one state to another. These 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 all states.
Conclusion
India is one of the top producers of a large number of commodities, and also has a long history of trading in commodities and related derivatives. The commodities derivatives market has seen ups and downs, but seem to have finally arrived now. The market has made enormous progress in terms of technology, transparency and the trading activity. Interestingly, this has happened only after the Government protection was removed from a number of commodities, and market forces were allowed to play their role. This should act as a major lesson for the policy makers in developing countries, that pricing and price risk management should be left to the market forces rather than trying to achieve these through administered price mechanisms. The management of
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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.
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 105.6 106.9 352.35 354.05 16805 16875 17316 28646 28803 104.9 107.95 1145.6 1147 176 182.4 -
Aluminium (May) Aluminium (June) Aluminium (July) Copper (June) Copper (August) Gold (June0 Gold (August) Gold (Oct) Silver (July) Silver (Sept) Silver (Dec) Zinc (May) Zinc (June) Zinc (July) Nickel (May) Nickel (June) N gas (May) N gas (June) N gas (July)
5/28/2010 6/30/2010 7/30/2010 6/30/2010 8/31/2010 6/5/2010 8/5/2010 10/5/2010 7/5/2010 9/4/2010 12/4/2010 5/28/2010 6/30/2010 7/30/2010 5/28/2010 6/30/2010 5/25/2010 6/25/2010 7/27/2010
94.65 95.6 96.25 317.3 319.3 17940 18021 18085 28572 28747 28952 95.3 95.95 96.7 1017.2 1018.5 182.4 188.2 193.3
94.5 95.55 96.85 316.9 318.7 17940 18031 18085 28646 28803 28960 95.05 95.5 96.2 1019.8 1021.8 181.2 187 193.4
Down Down Down Down Down Up Up Up Down Down Down Down Down Down Down Down Down Down Down
Date when the trend changed 4/20/2010 4/20/2010 4/10/2010 4/10/2010 4/24/2010 4/24/2010 5/4/2010 5/7/2010 5/7/2010 4/27/2010 4/21/2010 4/27/2010 4/27/2010 4/30/2010 4/30/2010 -
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Brent crude (May) Brent crude (June) Brent crude (July) Silver (May) Silver (June) Silver (July)
Trend of Commodities in National Commodity & Derivatives Exchange (for 10th May 2010)
Commodity name Expiry date Today's closing Yesterday's Trend closing Date when the trend changed Rate at which the trend changed
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Channa (Sept) Castorseed (May) Castorseed (June) Castorseed (July) Castorseed (August) Chilli (June) Chilli (July) Chilli (August) Guarseed (May) Guarseed (June) Guarseed (July) Guarseed(aug) GuarGum (May) GuarGum (June) GuarGum (July) GuarGum (August) Gur (July) Gur (Sept) Jeera (May) Jeera (June) Jeera (July) Maize (May) Maize (June) Maize (July) Maize (August)
9/20/2010 5/20/2010 6/18/2010 7/20/2010 8/20/2010 6/18/2010 7/20/2010 8/20/2010 5/20/2010 6/18/2010 7/20/2010 8/20/2010 5/20/2010 6/18/2010 7/20/2010 8/20/2010 7/20/2010 9/20/2010 5/20/2010 6/18/2010 7/20/2010 5/20/2010 6/18/2010 7/20/2010 8/20/2010 Expiry date
2383 3100 530.9 3242.5 3309 4452 4600 4744 2386 2399 2419 2441 4650 5200 5267 5291
2372 Down 3109.5 Up Down 3214.5 Up 3261.5 Up 4448 4580 4693 2377 2392 2403 2440 4615 5157 5224 5332 Down Down Down Down Down Down Down Up Up Up Down Up Down Down Up Up Down Down Down Down Trend
4/20/2010 5/8/2010 3/19/2008 5/7/2010 5/7/2010 4/17/2010 4/14/2010 5/3/2010 5/3/2010 5/3/2010 5/3/2010 4/6/2010 5/7/2010 5/7/2010 5/3/2010 5/8/2010 5/6/2010 5/8/2010 4/22/2010 4/21/2010 5/3/2010 5/3/2010 5/3/2010 4/20/2010 Date when the trend changed -
2520 3100 546.3 3242.5 3309 4808 5073 2368 2381 2396 2436 1192 1239 5224 5054 961 935.8 12529 11921 12319 877 897 918.5 946.5 Rate at which the trend changed 792.8 795.7 798.7 801.9 15479 15929 16070 16252
961 958.2 930 928.8 12529 12480 12735 12685 13002 12950 880.5 879.5 904 900.5 916 921 924 925.5 Today's Yesterday's closing closing
Commodity name Mentha (May) Mentha (June) Mentha (July) Mentha (August) Pepper (May) Pepper (June) Pepper (July) Pepper (August) 5/31/2010 6/30/2010 7/30/2010 8/31/2010 5/20/2010 6/18/2010 7/20/2010 8/20/2010 772.4 775.2 778.1 781.1 15479 16540 16803 16952 775.5 778.4 781.2 784.3 15111 16359 16614 16806 Down Down Down Down Down Up Up Up 5/3/2010 5/3/2010 5/3/2010 5/3/2010 4/23/2010 4/23/2010 4/23/2010
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Pepper (Sept) Pepper (Oct) Ref Soy (May) Ref Soy (June) Ref Soy (July) Sugar (May) Sugar (June) Sugar (July) Sugar (August) Turmeric (May) Turmeric (June) Turmeric (July)
9/20/2010 10/20/2010 5/20/2010 6/18/2010 7/20/2010 5/20/2010 6/18/2010 7/20/2010 8/20/2010 5/20/2010 6/18/2010 7/20/2010
17363 17525 586 450.8 452.4 3526 2892 2892 2892 15121 14989 14903
17279 17491 591.25 449.05 450.35 3517 2866 2866 2866 14824 14695 14610
4/23/2010 4/24/2010 12/15/2007 5/4/2010 5/4/2010 9/26/2009 9/26/2009 9/26/2009 4/26/2010 4/27/2010 4/27/2010
16461 16930 547.35 445.55 446.6 3526 2895 2895 2895 13343 13694 13499
Conclusion:
There is significant relation between the indices value of various commodities to the current and future prices of those commodities
India is one of the top producers of a large number of commodities, and also has a long history of trading in commodities and related derivatives.The market has made enormous progress in terms of technology, transparency and the trading activity. Interestingly, this
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has happened only after the Government protection was removed from a number of commodities, and market forces were allowed to play their role.
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.
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.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.
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 in India.
The international trade in sugar has changed dramatically. Perhaps the greatest change in the international sugar trade has been the trend toward price stabilization. Historically at the mercy of everything from war to weather, the price of sugar still has always been extremely volatile.
Despite the economic recession world over, sugar consumption growth was less impacted and remained positive. The supply-demand disequilibrium has been caused essentially by the strident slippage in Indian production, exacerbated by the decline in EU and other Asian countries.
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The statistical outlook for the market till the end of the season in September 2009 for sugar remains constructive and supportive to the market values.
Wheat farmers have little impact on demand, but putting all the heads together 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.
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 typical seasonality in the production cycle.
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 such as grains
Wheat anticipates a change in trend from up to down on a break from the month of May 2010.
Commodity Options The Warehousing and Standardization Cash versus Physical Settlement The Regulator Lack of Economy of Scale Tax and Legal bottlenecks
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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 the increasing importance of 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.
CONCLUSION
Did the prices of a
While almost all agricultural product prices increased at least in nominal terms, the rate of increase varied significantly from one commodity to another. In particular, international prices of basic foods, such as cereals, oilseeds and dairy products, increased far more dramatically than the prices of tropical products, such as coffee and cocoa, and raw materials, such as cotton or rubber.
Therefore, developing countries dependent on exports of these latter products found that while their export earnings might have been increasing this was at a slower rate than the cost of their food imports. As many developing countries are net food importers, this imposed a serious
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balance of payments problem. The 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 agreements.
For some analysts, the increases or signaled the end of the long-term decline in real agricultural commodity prices, with The Economist (2007) announcing the 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 prices often tend to be short-lived compared with low prices, which persist for longer periods.
What has distinguished this episode was the concurrence of the hike in world prices of not just a few but of nearly all major food and feed commodities and the possibility that the prices may remain high after the effects of short- term shocks dissipate In the first four months of 2008, volatility in wheat and rice prices approached record highs (volatility in wheat prices was twice the level of the previous year while rice price volatility was five times higher). The increase in volatility was not confined to cereals vegetable oils, livestock products and sugar all witnessed much larger price swings than in the recent past. High volatility means uncertainty, which complicates decision-making for buyers and sellers. Greater uncertainty limits opportunities for producers to access credit markets and tends to result in the adoption of low-risk production technologies at the expense of innovation and entrepreneurship. In addition, the wider and more unpredictable the price changes in a commodity are, the greater is the possibility of realizing large gains by speculating on future price movements of that commodity.
BIBLIOGRAPHY
Magazines
y ISO February outlook 2009
Internet
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Charts: y y y y y www.barcharts.com www.chartsrus.com www.mongabay.com www.djindexes.com Dow Jones Industrial Average Historical Prices / Charts
BOOKS
y y y y Futures, options and swaps by Robert W. Kolb. Derivative markets in India 2003 edited by Susan Thomas. Options, futures and other derivatives by John Hull. Thomas Susan (2003): Agricultural Commodity Markets in India; Policy Issues for Growth,Indira Gandhi Institute for Development Research, Mumbai.
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