A Project on Commodity Market
Transcript of A Project on Commodity Market
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COMMODITY MARKET
Commodity markets are markets where raw or primary products are exchanged. It
covers physical product (food, metals, and electricity) markets but not the ways
that services, including those of governments, nor investment nor debt, can be seen
as a commodity.
HISTORY OF COMMODITY MARKET
Modern Commodity Market have their roots in the trading of agriculturalproducts.
heat and corn, cattle and pigs, were widely tradedusing standard
instruments in the !"th century in the#nited $tates.
%istorically, in ancient times $umerian 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 moresmooth and predictable.
SIZE OF THE MARKET
&he trading of commodities includes physical tradingof food items, 'nergy
and Metals, etc. and trading ofderivatives.
In the five years up to *, the values of global physical exports of
commodities increased by !*+ while the notional value outstanding of
commodity. &C derivatives increased more than -+ andcommodity
derivative trading on exchanges morethan +.
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gricultural contracts trading grew by /+ in *, energy "+ and
industrial metals by /+.
0recious metals trading grew by /+, with higher volume in 1ew 2ork being
partially offset by declining volume in &okyo.
&C trading accounts for the ma3ority of trading in gold and silver.
LIST OF TRADED COMMODITY
gricultural (4rains, and 5ood and 5iber)
6ivestock 7 Meat
'nergy
0recious metals
Industrial metals
Agricultural Products
Corn, ats, 8ough 8ice, $oybeans, 8apeseed, $oybean Meal, $oybean il,
heat, Cocoa, Coffee C, Cotton 1o., $ugar 1o.!!, $ugar 1o.!9.
Livestock and meat
6ean %ogs, 5ro:en 0ork ;ellies, 6ive Cattle, 5eeder Cattle.
Energy
&I Crude il, ;rent Crude, 'thanol, 1atural 4as, %eating il, 4ulf Coast
4asoline, 8;; 4asoline, 0ropane, #ranium.
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6ondon Metal 'xchange
innipeg Commodity 'xchange
RECENT TRENDS IN COMMODITYMARKET
&he ? global boom in commodity prices @ for everything from coal to
corn @ was fueled by heated demand from the likes of China and India.
$peculation in forward markets.
5armers are expected to face a sharp drop in crop prices as a result of bad
rainfall.
ther commodities, such as steel, are also expected to fall due to lower
demand.
Basics of Futures Trai!"
0erhaps the biggest advantage to trading futures contracts is the leverage provided
by the exchange. %owever, controlling large contracts with relatively low amounts
of capital can create high levels of volatility. s a result, many traders will argue
that leverage is actually a disadvantage. 8egardless of your opinion on leverage
and margin reAuirements, it is important that you fully understand the concepts.
;efore a customer can establish a position he is reAuired to make a minimum
Bgood faith deposit, or margin, to assure the performance of his obligations.
margin deposit is, in essence, a performance bond, which is usually between -+
and !+ of the underlying contract value. good faith deposit indicates the buyer
or sellerDs willingness and capability to compensate the opposite party to a
transaction
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;ecause margin reAuirements 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 Auantities to put up !+ of thevalue of the hedged commodity. &he exchange grants margin discounts to those
that are deemed to be Bbonefied hedgers, due to the fact that the underlying cash
position is seen as collateral to secure the capital risked in the futures market.
6ow margins make speculation in the futures markets very attractive, without the
advantage of leverage the rate of return on most commodities would be marginal.
&he exchanges are responsible for setting margin reAuirements, but brokerage
firms have discretion to reAuire higher deposits. 4enerally, the initial margin is
sufficient to cover the maximum daily price fluctuations. It is not uncommon for
margin reAuirements to fluctuate with the volatility of the market. maintenance
level is established below the initial margin, usually *-+ of the initial
margin. nce a traderEs good faith deposit falls below this threshold additional
funds must be deposited or positions must be liAuidated. &his is known as a margin
call.
rders
&here are several types of orders that can be placed. In order to maximi:e
efficiency and profitability, traders must be comfortable in executing each of the
following options.
Market rderF &he purpose of a market order is to execute a trade immediately at
the best possible price. $uch orders give traders the ability to enter or exit a trade
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Auickly, but do not guarantee a favorable price. &his order should be used when
time is more valuable than price.
6imit rderF 6imit 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. 5or a sell limitorder Bbetter means higher, for buy limit orders Bbetter means lower.
$top rderF &his type of order is usually placed to close a positionG its name is
derived from the fact that, if placed properly, it will Bstop loss should the market
go against a traderDs position. Most traders chose to place a stop order at the time
that they enter a position. ;y definition, a sell stop will be placed below the market
while a buy stop will be placed above. ll orders are day orders unless specified
otherwise and are canceled at the end of the trading day. ;y entering the order
4&C (good Htil canceled), the order will be working in each trading session until
canceled by the trader.
Execution
Many beginning traders are unaware of the mechanics of executing a futures trade.hen you call your broker, an order ticket is completed and time stamped in order
to keep accurate track of the time and specifics of each order. &he broker then
transmits the order to his firmDs trading desk located on the floor of the exchange
either by a computeri:ed trading platform or by phone. &he order clerk then fills
out an order cardG time stamps it, and hands it to a runner who will take it directly
to a broker in the pit. &he pit broker will execute the order by open outcry and
record the execution on the card before it is given back to the runner. &he runner
takes the executed order back to the desk where the order clerk time stamps the
card one more time before the fill is reported to your broker
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THE FIELD
I#BACKGRO$ND OF THE IND$STRY
THE NCDEX PLATFORM
1ational Commodity and >erivatives 'xchange 6td (1C>') is a technology
driven commodity exchange. It is a public limited company registered under the
Companies ct, !"-J with the 8egistrar of Companies, Maharashtra in Mumbai on
pril /, /. It has an independent ;oard of >irectors and professionals not
having any vested interest in commodity markets. It has been launched to provide a
worldKclass commodity exchange platform for market participants to trade in a
wide spectrum of commodity derivatives driven by best global practices,
professionalism and transparency.
1C>' is regulated by 5orward Markets Commission in respect of futures trading
in commodities. ;esides, 1C>' is sub3ected to various laws of the land like the
Companies ct, $tamp ct, Contracts ct, 5orward Commission (8egulation) ct
and various other legislations, which impinge on its working. It is located in
Mumbai and offers facilities to its members in about "! cities throughout India at
the moment.1C>' currently facilitates trading of ten commodities K gold, silver,
soy bean, soy bean oil, rapeseedKmustard seed, expeller rapeseedKmustard seed oil,
and 8;> palmolein, crude 0alm oil and cotton, Medium and long staple varieties,
t subseAuent phases trading in more commodities would be facilitated.
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STRUCTURE OF NCDEX
1C>' has been formed with the following ob3ectivesF
&o create a world class commodity exchange platform for the market
participants.
&o bring professionalism and transparency into commodity trading.
&o inculcate best international practices like de. Modulari:ation, technology
platforms, low cost
$olutions and information dissemination without noise etc. into the trade.
&o provide nationwide reach and consistent offering.
&o bring together the entities that the market can trust
PROMOTERS
1C>' is promoted by a consortium of institutions. &hese include the ICICI ;ank
6imited (ICICI ;ank), 6ife Insurance Corporation of India (6IC), 1ational ;ank
for griculture and 8ural >evelopment (1;8>) and 1ational $tock 'xchange
of India 6imited (1$'). 1C>' is the only commodity exchange in the country
promoted by national level institutions. &his uniAue parentage enables it to offer a
variety of benefits which are currently in short supply in the commodity markets.
&he four institutional promoters of 1C>' are prominent players in their
respective fields and bring with them institution building experience, trust,
nationwide reach, technology and risk management skills.
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GOVERNANCE
1C>' is run by an independent ;oard of >irectors. 0romoters do not participatein the day to day activities of the exchange. &he directors are appointed in
accordance with the provisions of the rticles of ssociation of the company. &he
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. ;oard appoints an executive committee and other
committees for the purpose of managing activities of the exchange.
&he executive committee consists of Managing >irector of the exchange who
would be acting as the Chief 'xecutive of the exchange, and also other members
appointed by the board.
part from the executive committee the board has constitute committee like
Membership committee, udit Committee, 8isk Committee, 1omination
Committee, Compensation Committee and ;usiness $trategy Committee, which,
help the ;oard in policy formulation.
EXCHANGE MEMBERSHIP
Membership of 1C>' is open to any person, association of persons,
partnerships, cooperative societies, companies etc. that fulfills the eligibility
criteria set by the exchange. ll the members of the exchange have to register
themselves with the competent authority before commencing their operations. &he
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members of 1C>' fall into two categories, trading cum Clearing Members
(&CM) and 0rofessional Clearing Members (0CM)
TRADING CUM CLEARING MEMBERS (TCMS)
1C>' invites applications for &rading cum Clearing Members (&CMs) from
persons who fulfill the specified eligibility criteria for trading in commodities. &he
&CM membership entitles the members to trade and clear, both for themselves andL
or on behalf of their clients. pplicants accepted for admission as &CM are
reAuired to pay the reAuired feesL deposits and also maintain net worth as given in&able
Ta%&e 5eeL deposit structure and net worth reAuirementF &CM
particulars 8upees( in lakh)
Interest free cash security deposit !-.
Collateral security deposit !-.
nnual subscription charges .-
dvance minimum transaction charges .-
1et worth reAuirement -.
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PROFESSIONAL CLEARING MEMBERS (PCM)
1C>' also invites applications for 0rofessional Clearing Membership (0CMs)
from persons who fulfill the specified eligibility criteria for trading in
commodities. &he 0CM membership entitles the members to clear trades executed
through &rading cum Clearing Members (&CMs), both for themselves andL or on
behalf of their clients. pplicants accepted for admission as 0CMs are reAuired to
pay the following feeL deposits and also maintain net worth as given in &able
Ta%&e '#( 5eeL deposit structure and net worth reAuirementF 0CM
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particulars 8upees( in lakh)
Interest free cash security deposit -.
Collateral security deposit -.
nnual subscription charges !.
dvance minimum transaction charges !.
1et worth reAuirement -.
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CAPITAL REQUIREMENTS
1C>' has specified capital reAuirements for its members. n approval as amember of 1C>', the member has to deposit ;ase Minimum Capital (;MC)with the exchange. ;ase Minimum Capital comprises of the followingF
!. Interest free cash security deposit
. Collateral security deposit
ll Members have to comply with the security deposit reAuirement before theactivation of their trading terminal
CashF &his can be deposited by issuing a cheAueL demand draft payable at
Mumbai in favour of 1ational Commodity 7 >erivatives 'xchange 6imited.
Bank guaranteeF ;ank guarantee in favour of 1C>' as per the specified
format from approved banks. &he minimum term of the bank guarantee should be! months.
Fixed deposit receiptF 5ixed deposit receipts (5>8s) issued by approved banks
are accepted. &he 5>8 should be issued for a minimum period of /J months from
any of the approved banks.
Government of India securitiesF 1ational $ecurities Clearing Corporation
6imited (1$CC6) is the approved custodian for acceptance of 4overnment of
India securities. &he securities are valued on a daily basis and a haircut of -+ is
levied.
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Members are reAuired to maintain minimum level of security deposit i.e. 8s.!-
6akh in case of &CM and 8s.- 6akh in case of 0CM at any point of time. If the
security deposit falls below the minimum reAuired level, 1C>' may initiate
suitable action including withdrawal of trading facilities as given belowF
If the security deposit shortage is eAual to or greater than 8s. - 6akh, the trading
facility would be withdrawn with immediate effect.
If the security deposit shortage is less than 8s.- 6akh the member would be
given one calendar weeksE 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 4overnment
of India securities.
THE NCDEX SYSTEM
s we saw in the first chapter, every market transaction consists of three
componentsF
&rading
clearing
$ettlement
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&his section provides a brief overview of how transactions happen on the
1C>'Es market.
TRADING
&he trading system on the 1C>' provides a fully automated screen. ;ased
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. &he trade timings of the
1C>' are !. a.m. to 9. p.m. fter hours trading has also been proposed for
implementation at a later stage.
&he 1C>' system supports an order driven market, where orders
match automatically. rder matching is essentially on the basis of commodity, its
price, time and Auantity. ll Auantity fields are in units and price in rupees. &he
exchange specifies the unit of trading and the delivery unit for futures contracts on
various commodities. &he exchange notifies the regular lot si:e and tick si:e for
each of the contracts traded from time to time. hen 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 Aueued in the respective outstanding order book in the system.
&ime stamping is done for each trade and provides the possibility for a complete
audit trail if reAuired.
1C>' trades commodity futures contracts having one Month, two Month and
three month expiry cycles. ll contracts expire on the th of the expiry month.
&hus a =anuary expiration contract would expire on the th of =anuary and a
5ebruary expiry contract would cease trading on the th of 5ebruary. If the th
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of the expiry month is a trading holiday, the contracts shall expire on the previous
trading day. 1ew contracts will be introduced on the trading day following the
expiry of the near month contract.
CLEARING1ational $ecurities Clearing Corporation 6imited (1$CC6) undertakes clearing of
trades executed on the 1C>'. &he settlement guarantee fund is maintained and
managed by 1C>'. nly clearing members including professional clearing
members (0CMs) only are entitled to clear and settle contracts through the clearing
house.
t 1C>', after the trading hours on the expiry date, based on the availableinformation, 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 vaultL warehouse, commodities already deposited and demateriali:ed and
offered for delivery etc., Matching done by this process is binding on the clearing
members. fter completion of the matching process, clearing members are
informed of the deliverableL receivable positions and the unmatched positions.
#nmatched positions have to be settled in cash. &he cash settlement is only for the
incremental gainL loss as determined on the basis of final settlement price.
SETTLEMENT
5utures contracts have two types of settlements, the M&M 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. n the 1C>',
daily M&M settlement and final M&M settlement in respect of admitted deals in
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futures contracts are cash settled by debitingL crediting the clearing accounts of
CMs with the respective clearing bank. ll positions of a CM, either brought
forward, created during the day or closed out during the day, are market to market
at the daily settlement price or the final settlement price at the close of trading
hours on a day. n the date of expiry, the final settlement price is the spot price onthe expiry day. &he 8esponsibility of settlement is on a trading cum clearing
member for all trades done on his own account and his clientEs trades.
professional clearing member is responsible for settling all the participantsD trades
which he has confirmed to the exchange.
n the expiry date of a futures contract, members submit delivery information
through delivery reAuest window on the trader workstations provided by 1C>'
for all open positions for a commodity for all constituents individually. 1C>' on
receipt of such information matches the information and arrives at a delivery
position for a member for a commodity.
&he seller intending to make delivery takes the commodities to the designated
warehouse. &hese commodities have to be assayed by the exchange specified
assayer. &he commodities have to meet the contract specifications with allowed
variances. If the commodities meet the specifications, the warehouse accepts them.
arehouse then ensures that the receipts get updatedin the depository system
giving a credit in the depositorEs electronic account. &he seller then gives the
invoice to his clearing member, who would courier the same to the buyerEs clearing
member. n an appointed date, the buyer goes to the warehouse and takes physicalpossession of the commodities.
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COMMODITIES TRADED ON THE NCDEXPLATFORM
In >ecember /, the 1ational Commodity and >erivatives 'xchange 6td
(1C>') launched futures trading in nine ma3or commodities.
&o begin with contracts in gold, silver, cotton, soybean, soya oil, rapeL
mustard seed, rapeseed oil, crude palm oil and 8;> palmolein are being
offered.
e have a brief look at the various commodities that trade on the 1C>' and
look at some commodity specific issues. &he commodity markets can be classified
as markets trading the following types of commodities.
!. gricultural products
. 0recious metal
/. ther metals
9. 'nergy
AGRICULTURAL COMMODITIES
&he 1C>' offers futures trading in the following agricultural commodities.
8efined soy oil, mustard seed, expeller mustard oil, 8;> palmolein, crude palm
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oil, medium staple cotton and long staple cotton. f these we study cotton in detail
and have a Auick look at the others
COTTONCotton accounts for *-+ of the fibre consumption in spinning mills in India and
-?+ of the total fibre consumption of its textile industry (by volume). t the
average price of 8s.9-L kg, over !* million bales (average annual consumption, !
bale N !* kg) of raw cotton trade in the country. &he market si:e of raw cotton in
India is over 8s.!/ billion. &he average monthly fluctuation in prices of cotton
traded across India has been at around 9.-+ during the last three years. &he
maximum fluctuation has been as high as !!+. %istorically, cotton prices in India
have been fluctuating in the range of /KJ+ on a monthly basis.
Cotton is among the most important nonfood crops. It occupies a significant
position, both from agricultural and manufacturing sectorsE points of view. It is the
ma3or source of a basic human need, Clothing, apart from other fibred sources like
3ute, silk and synthetic. &oday, 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 /- million people in the secondary
manufacturing textile industry that contributes to !9+ of the countryEs industrial
production, *./+ of the countryEs export earnings and 9+ of its 4>0.
CRUDE PALM OIL
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nnual edible oil trade in India is worth over 8s.99 billion, with the share of C0
being nearly + (8s.?K" billion). &he country is over. >ependent on C0
imports to the extent of over -+ of its annual vegetable oil imports. &here is a
close inter linkage between the various vegetable oils produced, traded and
consumed across the world. &he average monthly fluctuation in prices of importedC0 traded at Oandla (one of the ma3or importing ports in 4u3arat) has been at
".*+ during the past two and a half years, the maximum monthly fluctuation being
as high as -+ during the period.
0alm oil is extracted from the mature fresh fruit bunches (55;s) of oil palm
plantations. ne hectare of oil palm yields approximately 55;s, which when
crushed yields J tons of oil (including the kernel oil, which is used both for edible
and industrial purposes). Crude palm oil (C0), crude palmolein, 8;> (refined,
bleached, deodori:ed) palm oil, 8;> palmolein and crude palm kernel oil (C0O)
are the various forms of palm oil traded in the market
RBD PALMOLEIN
&he 8;> (refined, bleached and deodori:ed) palmolein is the derivative of crude
palm oil (C0), which is obtained from the crushing of 5resh 5ruitKbunches
(55;s) harvested from oil palm plantations. hen C0 is sub3ected to refinement,
8;> palm oil and fatty acids are obtained. 5ractionation of 8;> palm oil yields
8;> palmolein along with stearin, which is a white solid at room temperature.
hile il is a stable derivative saturated fat, solid at room temperature), lein is
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relatively unstable (unsaturated fat, liAuid at room temperature, but low
cholesterol). &he whole Auantity of C0 that is produced and used for human
consumption is in the form of 8;> palmolein. Cropping of growth patterns of
C0 has been already covered.
SOY OIL$oy oil is among the ma3or sources of edible oils in India. f the annual edible oil
trade worth over 8s.99 billion in the country, soy oils share is over .!+ at
8s."." billion in terms of value. ;eing an agricultural commodity, which is often
sub3ected to various production and market related uncertainties, soy oil prices
traded across the world are highly volatile in nature.
&he average fluctuation in spot prices of refined soy oil traded at Mumbai has been
at J.J+ during the past two and a half years, the maximum monthly fluctuation
being as high as !*+ during the period. %istorically, soy oil prices in the ma3or
spot markets across the country have been fluctuating in the range of 9.-.?.-+.
&his 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 minimi:e price risk in the market.
$oy oil is the derivative of soybean. n crushing mature beans, !?+ oil and
*?.?+ meal is obtained. hile the oil is mainly used for human consumption,
meal serves as the main source of protein in animal feeds. $oy oil is the leading
vegetable oil traded in the international markets, next only to palm. 0alm and soy
oils together constitute around J?+ of global edible oil export trade volume, with
soy oil constituting .?-+. It accounts for nearly -+ of the worldEs total oils and
fats production. Increasing price competitiveness, and aggressive cultivation and
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promotion from the ma3or producing nations have given way to widespread soy oil
growth both in terms of production as well as consumption.
RAPESEED OIL
8apeseed (also called mustard or canola) oil is the third largest edible oil produced
in the world, after soy and palm oils. n crushing rapeseed, oil and meal are
obtained. &he average oil recovery from the seed is about //+. &he remaining is
obtained as oil cakeL 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 ma3or production tracts world over.
SOYBEAN
&he market si:e of the popularly known miracle bean in India is over 8s.-
crore. ith an annual production of -..-.9 million tons, soybean constitutesnearly -+ of the countryEs total oilseed production. &he average monthly
fluctuation in prices of soybean traded at one of the active soybean spot market at
Indore (Madhya 0radesh) has been at !.*+ during the past two years, the
maximum monthly fluctuation being as high as 9./+ during the period.
%istorically, soybean prices in the ma3or spot markets across the country have been
fluctuating in the range of -."+. $oybean is the single largest oilseed produced in
the world. &he commodity has been commercially exploited for its utility as edible
oil and animal feed. n crushing mature beans, around !?+ oil could be obtainedG
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the rest being the oil cakeL meal, which forms the primesource of protein in animal
feeds.
RAPESEED
8apeseedL Mustard is one of the ma3or sources of oil and meal to India. It supplies
over !.- million tons of oil (!-.!?+ of IndiaEs annual edible oil reAuirement) and
/./. million tons of oil meal, the ma3or protein source in animal feeds. &he
average monthly fluctuation in prices of rapeseed traded at one of the active
rapeseed spot market at =aipur (8a3asthan) has been at ".?+ during the past two
years (=uly ! to =uly /), the maximum monthly fluctuation being as high as
/.9+ during the period. 8apeseedL MustardL Canola is a traditionally important
oilseed. China, Canada and India are the ma3or producers of this commodity. &he
other ma3or producers are 4ermany, 5rance, ustralia, 0akistan and 0oland. &he
commodity has been commercially exploited in the form of seeds, oil (seed to oil
recovery is /".9+) and meal.
PRECIOUS METALS
GOLD
5or centuries, gold has meant wealth, prestige, and power, and its rarity and natural
beauty have made it precious to men and women alike. wning gold has long been
a safeguard against disaster. Many times when paper money has failed, men haveturned to gold as the one true source of monetary wealth. &oday is no different.
hile there have been fluctuations in every market and decided downturns in
some, the expectation are that gold will hold its own. &here is a limited amount of
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gold in the world, so investing in gold is still a good way to plan for the future.
4old is homogeneous, indestructible and fungible. &hese attributes set gold apart
from other commodities and financial assets and tend to make its returns
insensitive to business cycle fluctuations. 4old is still bought (and sold) by
different people for a wide variety of reasons. as a use in 3ewelry, for industrialapplications, as an investment and so on.
DEMAND
&he Consumer demand for gold is more than /9 tons per year making it
whopping P9 billion worth. More than ?+ of the gold consumed is in the form
of 3ewellery, which is generally predominated by women. &he Indian demand tothe tune of ? tons per year is making it the largest market for gold followed by
#$, Middle 'ast and China. bout ?+ of the 0hysical gold is consumed in the
form of 3ewellery while bars and coins occupy not higher than !+ of the gold
consumed. If we include 3ewellery ownership, then India is the largest repository
of gold in terms of total gold within the national boundaries.
8egarding pattern of demand, there are no authentic estimates, the available
evidence shows that about ?+ is for 3ewellery fabrication for domestic demand,
and !-+ is for investor demand (which is relatively elastic to goldKprices, real
estate prices, financial markets, tax policies, etc.). ;arely -+ is for industrial uses.
&he demand for gold 3ewellery 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 prioriti:e them but it may be reasonable to
conclude that it is a combined effect, and to treat any ma3or part as exclusively a
store of value or hedging instrument would be unrealistic. It would not be realistic
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price sensitive and as such the dominance of the gold supply through import is in
existence. &he fabricated old gold scraps is price elastic and was estimated to be
near 9- tons in . It rose almost more than 9+ compared to the previous year
because of rise in gold price by more than !-+.
&he demandK $upply for gold in India can be summed up thusF
>emand for gold has an autonomous character. $upply follows demand.
>emand exhibits income elasticity, particularly in the rural and semiKurban
areas.
0rice differential creates import demand, particularly illegal import prior to the
commencement of liberali:ation in !"".
SILVER
&he 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. $ilver is somewhat harder than gold and is
second only to gold in malleability and ductility. $ilver remains one of the most
prominent candidates in the metals complex as far as futuresE trading is concerned.
&hanks to its uniAue volatility, silver has remained a hot favorite speculative
vehicle for the small time traders. &hough futures trading were banned in India
since late sixties, parallel futures markets are still very active in >elhi and Indore.
$peculative interest in the white metal is so intense that it is believed that
combined volume of Indian punters represent almost 9 percent of volume traded
at 1ew 2ork Commodity 'xchange. >elhi, 8a3asthan, M0 and #0 are the active
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&he 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 L/ rd of the total (last year was slightly
higher at J?+). 5ifteen countries produce roughly "9 percent of the worldDs silver
from mines. &he most notable producers are Mexico, 0eru, the #nited $tates,
Canada and ustralia. Mexico, the largest producer of silver from mines. 0eru is
the worldDs second largest producer of silver. $ilver is often mined as a byproduct
of other base metal operations, which accounts for roughly fourKfifths of the mined
silver supply produced annually. Onown reserves, or actual mine capacity, is
evenly split along the lines of production. &he mine production is not the solesource. thers being scrap, disinvestments, government sales and producers
hedging. $crap is the silver that returns to the market whenrecovered from existing
manufactured goods or waste. ld scrap normally makes up around a fifth of
supply. $crap supply increased marginally last year up by !.+. &he other ma3or
source of silver is from refining, or scraps recycling. ;ecause 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. &he #nited
$tates recycles the most silver in the world, accounting for roughly 9/.J million
ounces. =apan is the second largest producer of silver from scrap and recycling,
accounting for roughly *.? million troy ounces in !""*. In the #nited $tates and
=apan, threeKAuarters of all the recycled silver comes from the photographic scrap,
mainly in the form of spent fixer solutions and old Kray films.
THE ST$DY
I#OB)ECTI*ES OF THE ST$DY
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+RIMARY OB)ECTI*E
!) &o understand real ist ical ly the pattern of f luctuations of price indices
of two agricultural commodities and the factors behind that
SECONDARY OB)ECTI*E
2) To study the operation of commodity trading in india and assess
its importance
3) To provide a trend analysis of the current MCX & NCDEX indices
II# SCO+E OF THE ST$DY
rgani:ed commodity derivatives in India started as early as !?*-, barely about a decade after
they started in Chicago. %owever, many feared that derivatives fuelled unnecessary speculation
and were detrimental to the healthy functioning of the markets for the underlying commodities.
s a result, after independence, commodity options trading and cash settlement of commodity
futures were banned in !"-. further blow came in !"Js when, 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.
ConseAuently, the commodities derivative markets dismantled and remained dormant for about
four decades until the new millennium when the 4overnment, in a complete change in policy,
started actively encouraging the commodity derivatives market. $ince , the commodities
futures market in India has experienced an unprecedented boom in terms of the number of
modern exchanges, number of commodities allowed for derivatives trading as well as the value
of futures trading in commodities, which might cross the P ! &rillion mark in J.
%owever, there are several impediments to be overcome and issues to be decided for sustainable
development of the market. &his paper attempts to answer Auestions such asF
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%ow do price indices fluctuate so easily and how to understand themQ
Is this progress sustainable and what are the obstacles that need urgent attention if the
market is to reali:e its full potentialQ
hy are commodity derivatives important and what could other emerging economies
learn from the Indian mistakes and experienceQ
III# RESEARCH METHODOLOGY
DEFINITION
8esearch is an organi:ed, systematic, dataKbased, critical, scientific inAuiry into a specific
problem that needs a solution. $cientific research has the goal of solving problems and
establishing a stepKbyKstep logical, organi:ed, and rigorous method to identify problems, gathers
data, analyses the data, and draw valid conclusions there from.
,# TY+E OF RESEARCH $SED
&he research undertaken in this problem is descriptive in nature. >escriptive study attempts to
obtain a complete and accurate descriptive of situation, formal design is reAuired to ensure that
the description covers all phases desired. 0recise statement at problem indicates what than be
designed provides for collection of this information under the study
(# NEED OF THE ST$DY
&he empir ica l analys is shows tha t cyc les in economic ac tivi ty a re ma3or
determinants of the shortKrun behavior of shipping freight rates in the year !?-and or ld ar I . Cons is tent with the economic theory, there i s a s tr ik ing
asymmetry between the peaks and troughs of shipping cycles. %owever, there is
a close t iming relat ionship between the upper turning points of the bus iness
cycle, commodi ty pr ices and f reight rates which is par t icular ly shown in the
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peak years !?*-,!??",!",!"!. $o this study on commodity indices and
prices, to an extent would not only help us in understanding the economy of the
country, the growth driving commodities favoring 'IM trade but also for better
understanding the freight market changes and behavior for the future.
'# SO$RCES OF DATA
The data !as collected through
" #econdary data
SECONDARY DATA
Company records$ maga%ines$ ournals and !e'sites !ere made use to collect secondary data
regarding indices$ operations of commodity mar(et and gro!th patterns
A- STATISTICAL TOOLS.
The statistical tools that !ere used for the study is as follo!s
" *eighted +verage and
2 Technical analysis
/EIGHTED A*ERAGE.
The !eighted average stands for the relative importance of the different items The formula for
comparing !eighted mean is
X* ,- X!.!
X is the varia'les values ie$ X"$ X2/Xn
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* represents the !eights attached to values
TECHNICAL ANALYSIS.
It is important to note that the &echnical nalysis verview provided does not attempt to be a
comprehensive treatment of Charting or &echnical nalysis methods. &here are numerous, wellK
written books on Chart Interpretation and &echnical nalysis. ;rief and simplistic reviews of
some basic charting concepts are provided for reference or to stimulate further study. 0lease
contact your broker for a recommended reading list on Charting and &echnical nalysis.
&echnical nalysis makes the assumption that history repeats itself. ny
trading method or system that works well on a broad sample of historical data may have validity
when applied to future trading environments. ne should keep in mind that the markets are
dynamic. &he forces that motivate price movement are dynamic, and the participants are
dynamic. &herefore any system which has performed well on past historic data may decline in
value as the evolving dynamics of the markets change over time.
&he assumption is made that trading results can be improved when trading skills are improved.
&his reAuires practiceR $urely any time spent learning to trade on past historical data will not be
wasted when it comes to preparing to trade for the future.
B-LIMITATIONS OF THE ST$DY
") The research holds validity for the particular period only
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2) The research is e0tended to particular commodities only
ANALYSIS AND INTER+RETATION OF DATA
3) To understand realist ical ly the pattern of f luctuations of pr ice indices
of t!o agricultural commodities and the factors 'ehind that
S$GAR
sweet white (or brownish yellow) crystalline substance, of a sandy or granular consistency,
obtained by crystalli:ing the evaporated 3uice 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.
rdinary sugar is essentially sucrose.
*arieties of Su"ar
hite, refined sugar
Caster sugar
Icing sugar
Icing mixture
;rown sugar
>ark brown sugar
8aw sugar
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4olden demerara
4olden syrup
&reacle
Molasses
Caramel
Decoratio! a! s0ecia&t1 su"ars
Ma3ority of the sugarcane produced in India is of the following hybrid varietiesF $ $inense, $.
;arberi, CK!/, C /, C /!, C /!/, C 9!", C !!9?, C *9 and C$ *J*
Su"ar 0rouci!" areas i! I!ia
In India the ma3or sugar cane producing areas are ndhra 0radesh, ssam, ;ihar, 4u3arat,
%aryana, Oarnataka, Oerala, Madhya 0radesh, Maharashtra, rissa, 0un3ab, 8a3asthan,
&amilnadu, #ttar 0radesh and est ;engal.
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INDIA2S S$GAR AND S$GARCANE +ROD$CTION
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S$GAR +RICES IN DELHI MARKET
FACTORS INFL$ENCING S$GAR MARKETS
0rice 8efinery activity
Consumer income
Candy and confectionery sales
Changing eating habits
$ugars use in new technologies, such as ethanol production for automobile fuel.
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IM+ORTANT /ORLD S$GAR MARKETS
;ra:il
ustralia
#.$
Cuba
0hilippines
China
;angladesh
Iran
INTERNATIONAL TRADE
ver the past fifty years, especially, the international trade in sugar has changed dramatically.
$ince it is either imported or exported by every country on earth, sugar has become an integral
component of the economic relationships among nations. ;ecause of that uniAue position, the
trade in sugar has both reflectedKand been affected byKa wide range of divergent forces, including
global politics, health consciousness, the emergence of developing nations as suppliers and
consumers, and many others.
0erhaps the greatest change in the international sugar trade has been the trend toward price
stabili:ation. %istorically at the mercy of everything from war to weather, the price of sugar has
always been extremely volatile. &he International $ugar &rade contains the most essential and
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&echnical analysis
!an- MarF
Su00ort
+ hori%ontal floor !here interest in 'uying a commodity is strong enough to overcome
the pressure to sell Therefore a decrease in price is reversed and prices rise once
again Typically$ support can 'e identified on a chart 'y a previous set of lo!s
A"r # !un$
Resista!ce
+ hori%ontal ceiling !here the pressure to sell is greater than the pressure to 'uy
Therefore$ an increase in price is reversed and prices revert do!n!ard Typically
resistance can 'e located on a chart 'y a previous set of high
!uly - %e"
Su00ort
+ hori%ontal floor !here interest in 'uying a commodity is strong enough to overcome
the pressure to sell Therefore a decrease in price is reversed and prices rise once
again Typically$ support can 'e identified on a chart 'y a previous set of lo!s
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ct # Dec
I!c&i!i!"
The inclining channel is a formation !ith parallel price 'arriers along 'oth the price
ceiling and floor 1nli(e the side!ays channel the inclining channel has an increase in'oth the price ceiling and price floor
S$GAR +RICES (335
&echnical analysis
!an- MarF
Brea6a7a1 Ga0s
ccur !hen prices gap higher or lo!er out of a congestion pattern in the direction of the
prevailing trend
A"r # !un$
Measuri!" or Ru!!i!" Ga0s
Difficult to identify$ 'ut usually occur at the midpoint in a price rally or decline
!uly # %e"
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Fa&&i!" or Dec&i!i!"
This formation occurs !hen the slope of price 'ar highs and lo!s oin at a point forming
an declining !edge The slope of 'oth lines is do!n !ith the upper line 'eing steeper
than the lo!er one To trade this formation$ place an order on a 'rea( up and out of the
!edge or a sell order on a 'rea( do!n and out the !edge alling !edges$ !ith a prior
uptrend$ are anticipated to 'rea( up and out$ rather than do!n and out
ct # Dec
Tri0&e Botto8
+nticipates a change in trend from do!n to up
S$GAR +RICES (339
!an- MarF
Dec&i!i!"
The declining channel is a formation !ith parallel price 'arriers along 'oth the price
ceiling and floor 1nli(e the side!ays channel the declining channel has a decrease in
'oth the price ceiling and price floor
A"r # !un$
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Asce!i!" Tria!"&e
+ formation in !hich the slope of price highs and lo!s come together at a point outlining
the pattern of a 4ight Triangle The hypotenuse in an +scending Triangle should 'e
sloping from lo!er to higher and from left to right To trade this formation$ place a 'uy
order on a 'rea( up and out of the triangle or a sell order on a 'rea( do!n and out of
the triangle +scending triangles$ !ith a prior do!ntrend$ are anticipated to 'rea(
do!n and out$ rather than up and out
!uly # %e"
+e!!a!ts
#imilar to a #ymmetrical Triangle 'ut generally stu''ier or not as elongated+ formation
in !hich the slope of price 'ar highs and lo!s are converging to a point so as to outline
the pattern in a symmetrical triangle To trade this formation$ you can place orders at
'oth the 'rea( up and out of the pennant and 'rea(
do!n and out of the pennant
ct # Dec
Tri0&e Botto8
+nticipates a change in trend from do!n to up
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S$GAR +RICES (33:
!an- MarF
Measuri!" or Ru!!i!" Ga0s
Difficult to identify$ 'ut usually occur at the midpoint in a price rally or decline
A"r # !un$
+e!!a!ts
#imilar to a #ymmetrical Triangle 'ut generally stu''ier or not as elongated+ formation
in !hich the slope of price 'ar highs and lo!s are converging to a point so as to outline
the pattern in a symmetrical triangle To trade this formation$ you can place orders at'oth the 'rea( up and out of the pennant and 'rea(
do!n and out of the pennant
!uly # %e"
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Desce!i!" Tria!"&e
+ formation in !hich the slope of price highs and lo!s come together at a point outlining
the pattern of a 4ight Triangle The hypotenuse in an Descending Triangle should 'e
sloping from higher to lo!er and left to right To trade this formation$ place a 'uy order
on a 'rea( up and out of the triangle or a sell order on a 'rea(do!n and out of the
triangle Descending triangles$ !ith a prior uptrend$ are anticipated to 'rea( up and out$
rather than do!n and out
ct # Dec
Dec&i!i!"
The declining channel is a formation !ith parallel price 'arriers along 'oth the price
ceiling and floor 1nli(e the side!ays channel the declining channel has a decrease in
'oth the price ceiling and price floor
S$GAR +RICES (33;
!an- MarF Hori
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+ hori%ontal or side!ays is a formation that features 'oth resistance and support
#upport forms the lo! price 'ar$ !hile resistance provides the price ceiling
A"r # !un$Resista!ce
+ hori%ontal ceiling !here the pressure to sell is greater than the pressure to 'uy
Therefore$ an increase in price is reversed and prices revert do!n!ard Typically
resistance can 'e located on a chart 'y a previous set of high
!uly # %e"
Asce!i!" Tria!"&e
+ formation in !hich the slope of price highs and lo!s come together at a point outlining
the pattern of a 4ight Triangle The hypotenuse in an +scending Triangle should 'e
sloping from lo!er to higher and from left to right To trade this formation$ place a 'uy
order on a 'rea( up and out of the triangle or a sell order on a 'rea( do!n and out of
the triangle +scending triangles$ !ith a prior do!ntrend$ are anticipated to 'rea( do!n
and out$ rather than up and out
ct # Dec
Hea a! S=ou&ers Botto8
+nticipates a rise in prices on a 'rea( a'ove the Nec(line
CONCL$SION
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>espite the economic recession world over, sugar consumption growth was less impacted and
remained positive. &he supplyKdemand diseAuilibrium has been caused essentially by the strident
slippage in Indian production, exacerbated by the decline in '# and other sian countries.
&he correction after surging surplus for two years in a row has come as good relief to sugar
producerDs world over. $uch tightness in supply is sure to be witnessed during "K! as well.
;ra:ilDs share in world export is expected to overshoot the half way mark to -/+ this year as
against "+ a decade ago.
1ew 2ork raw sugar futures as on th1ovember "
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>elivery month Close price #$ cLlb
=an ! .
Mar ! .*9
May ! !.?J
=uly ! .9/
Mar !! !".//
Mar ! !J.J/
orld production is now expected to be 9.*9 mln tons lower than world consumption as against
/.JJ mln tons pro3ected in 1ovember. ConseAuently, the statistical outlook for the market till
the end of the season in $eptember " remains constructive and supportive to the market
values. &he I$ puts world export availability for ?L" at 9".J? mln tons raw value, as
against 9J.- mln tons in the previous crop cycle $maller output in importing countries and in
India, in particular, is expected to trigger additional import demand which is expected to reach
9".J! mln tons, up /.J*/ mln tons
/HEAT
heat is a cereal grain that belongs to the grass family of the genus H&riticumD. 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
/ varieties.
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heat 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. &his crop is also grown as a forage
crop for the livestock
O>er>ie7
heat is a very important edible cereal grain crop. s already mentioned, it is the second largest
grain crop consumed after rice. &he 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. &hat is why it serves as a very good cash crop and proves its dominance in the world
commerce. 4luten, 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.
&he world production of wheat figures over -?- million tons annually. &he largest producer of
wheat in the world is the 'uropean #nion followed by China, India and #nited $tates of
merica. &he total wheat production of the world is slightly concentrated is clear from the fact
that these four producers contribute to around J+ of the total production. &he consumption of
wheat in the world is a huge -? million tons but is successfully kept satisfied with an eAually
high production figures. Consumption has been constantly increasing during the last ! years
with the increase in population, and alarmingly, the consumption is prepared to shoot up further
and is expected to reach up to **- million tons in . heat is consumed all through the globe
and the leading countries in this list are 'uropean #nion, China
India
8ussia
#nited $tates of merica
0akistan
&he 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. &he export market of wheat is getting competitive with the new entrants like India
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into it and the export figures hover around million tons. &he ma3or exporting countries of
this crop areF K
#nited $tates of merica
ustralia
Canada
'uropean #nion
rgentina
&he imports of wheat are done by the countries, which have a high domestic demand and a
fluctuating production level. &hat is why the countries shuffle in the list of highest wheat
importing countries. &he world import figures sum up to ! million tons and are currently done
by more than ! countries. &he ma3or countries are
'uropean #nion
China
'gypt
=apan
;ra:il
Mexico
Indonesia
lgeria
0hilippines IraA
Cu&ti>atio! 0atter!
heat was one of the first crops that were cultivated in the world thanks to its adaptability to
wider range of climatic conditions and soils making it a very easy to produce crop in that timewhen man didnDt even know the basics of living. heat reAuires a cooler weather and a good
level of moisture in the early plantation period and once the grain is formed, it needs a warmer
weather to dry up. &hat is why the bestKsuited climate needed for the wheat crop to prosper is the
temperate climate.
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In #$, the wheat seeds are sown in the months of $eptember and ctober. fter 5ebruary,
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 =une, =uly and $eptember. In India,
wheat is cultivated as a 8abi crop and it is planted in the month of ctober. It is harvested in the
months pril and May.
/=eat 0rouci!" cou!tries
&he world production of wheat sums up to over -?- million tons annually. s mentioned above,
the production of wheat is slightly concentrated in the hands of a few countries as the top four
producers of the world contribute around J+ of the worldDs total production. &he productionK
wise list of the ma3or producers of wheat is given below
'uropean #nion
China
India
#nited $tates of merica
8ussia
Canada
ustralia
0akistan
&urkey
rgentina
Iran
&he largest producer of wheat in the world is 'uropean #nion that contributes to around !L9th
share to the worldDs total production. s it is said that the demand of wheat increases with the
increase in population, the nations having the largest population in the world i.e. China and India
stand at the nd and /rd position in the largest wheat producing nationsD list in order to satisfy
the domestic consumption demand. &hese two countries contribute !9 + and !+ respectively in
the worldDs total production. India has shown a high rise in production of wheat after the green
revolution and taken a lead from #$ in recent times.
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heat is produced on approximately .- million sAuare kilometers of the world. &he maximum
area in the total cultivated area of wheat is constituted by India at around !/+. &he other ma3or
countries that have a significant impact on the total area contributed for wheat production are
'uropean #nion
8ussia
China
#$
ustralia
Canada
Oa:akhstan
Production of wheat in India
&he following areas in India are the ma3or wheat producing areas in the country and contribute to
around "+ of the total production in the country
#ttar 0radesh
%aryana
0un3ab
8a3asthan
Madhya 0radesh
4u3arat
;ihar
India produces around *- million tons of wheat every year and stands at the third position in the
list of the ma3or wheat producers in the world. India also stands at the top in the world in terms
of area covered in production of wheat. #ttar 0radesh is the leading producer state in India
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followed by 0un3ab and %aryana. heat occupies a ma3or share of /-+ production in the total
production of crops cultivated and J-+ of total cropped area in the country. &his share in
production and area covered of the crop has increased since independence and is also constantly
rising. &he yield of wheat in kilograms per hectare has also risen significantly from - kgLha in
!"-L-! to !JkgLha in !""?L""
I!ia! 7=eat 8ar6et
India is the third largest producer of the wheat crop. It has been successfully fulfilling its large
domestic consumption demand in the past few years and has been exporting the surpluses to give
the ma3or exporters of the world a good competition. India produces an average of *- million
tons wheat each year but the production of this crop is generally fluctuating due to the
uncertainty of the rainfall. &he state of #ttar 0radesh leads the production in the country. 5or
selfKconsumption purposes, the farmers retain around 9?+ of their production and hence it is not
entered into the total production figures of the country.
Indian wheat is generally medium hard bread wheat. It is a staple food of this country. &hat is
why almost all of the wheat produced is consumed. India holds the third position in the ma3or
wheat consumerDs list after 'uropean #nion and China consuming around * million tons of
wheat. &he demandKsupply flows with in the country are largely interfered by the government of
the country so as to make sure that the grain supplies be stable and prices do not get affected.
ith the introduction of the new technologies in the agricultural sector, there has been a constant
increase in the productivity of wheat produced and hence there has been a growth in the surplus
level of the country and conseAuently a rising trend in the wheat export. orld market sees a
dependable supplier of wheat in the form of India. &he ma3or exporters of the world namely #$
and ustralia have lost their share in the worldDs export with the coming of India in the exporting
scenario. &he export figures of India in /K9 were - million tons.
&he ma3or importers of Indian wheat are the southeastern sian countries and the gulf countries.
India was an importer of wheat in the "s as it the domestic demand was too high but now this
situation has been overcame and overturned.
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Mar6et i!f&ue!ci!" factors
eather conditions
4overnment policies and regulations
0rices fluctuations of the competitive and substitute products
$eason of harvesting and peak season
&echnological improvements
Crop si:e
orld demand for wheat
*arieties of /=eat
&he three principal types of wheat used in modern food production areF
&riticumvulgare K it provides the bulk of the wheat used to produce flour for bread
making and for cakes and biscuits (cookies).
&riticum durum K >urum is the hardest of all wheat. Its density, combined with its high
protein content and gluten strength, make durum the wheat of choice for producing
premium pasta products
&riticumcompactum
T=e %asics of 7=eat eco!o8ics
hen supplies of a commodity are excessive, prices decline. hen demand for the commodity
increases, so does the price. &ypically, companies invest from -+ to *+ of their gross revenues
to product promotion.
Individually, wheat farmers have little impact on demand, but putting all the heads together can
make a significant difference in product demand and market price. nd that leads to the ultimate
goal of the improved income for wheat producers.
/HEAT +RICES (339
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&echnical analysis
!an- MarF
Hori
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No!?S188etrica&
formation in which the slope of price highs and lows are converging to a point so as to
outline the pattern in a nonK symmetrical triangle. &o trade this formation, place a buy order on a
break up and out of the triangle or a sell order on a break down and out of the triangle
ct # Dec
Asce!i!" Tria!"&e
+ formation in !hich the slope of price highs and lo!s come together at a point outlining
the pattern of a 4ight Triangle The hypotenuse in an +scending Triangle should 'e
sloping from lo!er to higher and from left to right To trade this formation$ place a 'uy
order on a 'rea( up and out of the triangle or a sell order on a 'rea( do!n and out of
the triangle +scending triangles$ !ith a prior do!ntrend$ are anticipated to 'rea(
do!n and out$ rather than up and out
/HEAT +RICES (33:
&echnical analysis
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!an- MarF
Risi!" or I!c&i!i!"
This formation occurs !hen the slope of price 'ar highs and lo!s oin at a point forming
an inclining !edge The slope of 'oth lines is up !ith the lo!er line 'eing steeper than
the higher one To trade this formation$ place an order on a 'rea( up and out of the
!edge or a sell order on a 'rea( do!n and out the !edge 4ising !edges$ !ith a prior
do!ntrend are anticipated to 'rea( do!n and out$ rather than up and out
A"r # !un$
S188etrica&
+ formation in !hich the slope of price highs and lo!s are converging to a point so as to
outline the pattern in a symmetrical triangle To trade this formation place a 'uy order
on a 'rea( up and out of the triangle or a sell order on a 'rea( do!n and out of the
triangle
!uly # %e"
+e!!a!ts
#imilar to a #ymmetrical Triangle 'ut generally stu''ier or not as elongated+ formation
in !hich the slope of price 'ar highs and lo!s are converging to a point so as to outline
the pattern in a symmetrical triangle To trade this formation$ you can place orders at
'oth the 'rea( up and out of the pennant and 'rea( do!n and out of the pennant
Oct @ Dec
Bu&& F&a"
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+ formation consisting of a small num'er of price 'ars !here the slope of price 'ar
highs and lo!s are parallel and declining 5ull lags are identified 'y their characteristic
pattern and 'y the conte0t of the prior trend 6n the case of a 5ull lag the trend leading
to the formation of the 5ull lag is up To trade this formation$ place orders on the 'rea(
up and 'rea( do!n points$ leaving your unfilled order as your stop loss
/HEAT +RICES (33;
&echnical analysis
!an- MarF
,?(?' A?B?C- Botto8
+nticipates a change in trend from do!n to up on a 'rea( a'ove the
num'er 2 point
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A"r # !un$
Measuri!" or Ru!!i!" Ga0s
Difficult to identify$ 'ut usually occur at the midpoint in a price rally or decline
!uly # %e"
Desce!i!" Tria!"&e
+ formation in !hich the slope of price highs and lo!s come together at a point outlining
the pattern of a 4ight Triangle The hypotenuse in an Descending Triangle should 'e
sloping from higher to lo!er and left to right To trade this formation$ place a 'uy order
on a 'rea( up and out of the triangle or a sell order on a 'rea( do!n and out of the
triangle Descending triangles$ !ith a prior uptrend$ are anticipated to 'rea( up and out$
rather than do!n and out
Oct @ Dec
Tri0&e To0
+nticipates a change in trend from up to do!n
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/HEAT +RICES (3,3
!an- A"rF
,?(?' A?B?C- To0
+nticipates a change in trend from up to do!n on a 'rea( 'elo! the num'er 2 point
G&o%a& Sce!ario &he world wheat production in the recent years has been observed to be hovering
between -JK-? million tons a year.
&he biggest cultivators of wheat are '#K-, China, India, merica, 8ussia, ustralia,
Canada, 0akistan, &urkey and rgentina. India, '#K-, China, India and #$, the fourlargest producers account for around -?+ of the total global production.
orld wheat consumption is consistently growing with growth in population, as it is one
of the ma3or staple foods across the world. &he ma3or consuming countries of wheat are'#, China, India, 8ussia, #$ and 0akistan.
round !JK!"+ of the world wheat production is traded annually between countries. &he
annual world trade in wheat is to the extent of !K!J million tons. merica, ustralia,Canada, '#K- and rgentina are the five largest exporters of wheat in the world.
Ma3or importing countries that tops in the figures are 'uropean #nion, China, 'gypt,
=apan, ;ra:il and 'uropean #nion. ther importing nations are Mexico, Indonesia,
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lgeria, 0hilippines, and IraA. %owever the import amount varies year to year dependingupon the domestic production.
CONCL$SION
India has the largest area in the world under wheat. %owever, in terms of production, we
are only the third largest behind '#K- and China. India produces about J-K*- million
tons of wheat a year, which is about /-+ of IndiaEs total food grain production of !K
! million tons. $ince wheat and rice are grown in separate seasons, they do not
compete for area. &he ma3or wheat producing states of India are #ttar 0radesh, 0un3ab,
%aryana, Madhya 0radesh, 8a3asthan and ;ihar. hich together account for around "/+
of total production. heat is sown during 1ovember to =anuary and harvested during
March to pril. &he wheatKmarketing season in India is assumed to begin from pril
every year.
Indian wheat is largely softLmedium hard, medium protein, bread wheat. India also
produces around !.- million tons of durum wheat, mostly in central and western India,
which is not segregated and marketed separately .4overnment, announces Minimum
$upport 0rices (M$0), which is the minimum price at which procurement has to be
carried. &he total procurement of wheat by 4overnment agencies ranges from ? to
million tons, accounting for only !-K+ of the total production. &he support price
operation and the 0ublic >istribution $ystems (0>$) play a significant role in
maintaining reasonable and stable food grain prices in the country for both the producers
and consumers. India consumes around *K* million tons of wheat a year. Most
domestic wheat consumption is in the form of homemade chapatti or rotiDs using custommilled tta, although usage of branded packaged atta marketed by large companies is
increasing in cities. &here are around large flourmills in India, with a milling
capacity of around !- million tons.
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India exported around * million tons subsidi:ed by 4ovt in *K?, as a result of surplus
stock. %owever, current 4ovt. policies are not in favour of exports. $outheast sia and
4ulf countries are ma3or importers of Indian wheat.
2) To study the operation of commodity trading in india and assess its
importance
Introduction
&he 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 !"- and until commodity derivatives market was virtually nonKexistent,
except some negligible activity on an &C basis. 1ow in $eptember -, the country has /
national level electronic exchanges and ! regional exchanges for trading commodity
derivatives. s many as eighty (?) commodities have been allowed for derivatives trading. &he
value of trading has been booming and is likely to cross the P ! &rillion mark in J and, if all
goes well, seems to be set to touch P- &rillion in a few years.
Che&ured 'istory
&he history of organi:ed commodity derivatives in India goes back to the nineteenth century
when the Cotton &rade ssociation started futures trading in !?*-, barely about a decade after
the commodity derivatives started in Chicago. ver time the derivatives market developed in
several other commodities in India. 5ollowing cotton, derivatives trading started in oilseeds in
;ombay (!"), raw 3ute and 3ute goods in Calcutta (!"!), wheat in %apur (!"!/) and in
;ullion in ;ombay (!").
%owever, 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. ith a view to restricting speculative activity
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in cotton market, the 4overnment of ;ombay prohibited options business in cotton in !"/".
6ater in !"9/, forward trading was prohibited in oilseeds and some other commodities including
foodKgrains, spices, vegetable oils, sugar and cloth.
fter Independence, the 0arliament passed 5orward Contracts (8egulation) ct, !"- which
regulated forward contracts in commodities all over India. &he ct applies to goods, which are
defined as any movable property other than security, currency and actionable claims. &he ct
prohibited options trading in goods along with cash settlements of forward trades, rendering a
crushing blow to the commodity derivatives market.
#nder the ct, only those associationsLexchanges, which are granted recognition by the
4overnment, are allowed to organi:e forward trading in regulated commodities. &he ct
envisages threeKtier regulationF (i) &he 'xchange which organi:es forward trading incommodities can regulate trading on a dayKtoKday basisG (ii) the 5orward Markets Commission
provides regulatory oversight under the powers delegated to it by the central 4overnment, and
(iii) the Central 4overnment K >epartment of Consumer ffairs, Ministry of Consumer ffairs,
5ood and 0ublic >istribution K is the ultimate regulatory authority.
&he already shaken commodity derivatives market got a crushing blow
when in !"Js, 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. s a result, commodities derivative markets
dismantled and went underground where to some extent they continued as &C contracts at
negligible volumes. Much later, in !"*s and !"?s the 4overnment relaxed forward trading
rules for some commodities, but the market could never regain the lost volumes.
Change in (overnment Policy
fter the Indian economy embarked upon the process of liberali:ation and globali:ation in !"",
the 4overnment set up a Committee in !""/ to examine the role of futures trading. &he
Committee (headed by 0rof. O.1. Oabra) recommended allowing futures trading in !*
commodity groups. It also recommended strengthening of the 5orward Markets Commission,
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and certain amendments to 5orward Contracts (8egulation) ct !"-, particularly allowing
options trading in goods and registration of brokers with 5orward Markets Commission. &he
4overnment accepted most of these recommendations and futures trading were permitted in all
recommended commodities.
Commodity futures trading in India remained in a state of hibernation for nearly four decades,
mainly due to doubts about the benefits of derivatives. 5inally a reali:ation that derivatives do
perform a role in risk management led the government to change its stance. &he policy changes
favoring commodity derivatives were also facilitated by the enhanced role assigned to free
market forces under the new liberali:ation policy of the 4overnment. Indeed, it was a timelydecision too, since internationally the commodity cycle is on the upswing and the next decade is
being touted as the decade of commodities.
)hy are Commodity Derivatives *e&uired+
India is among the topK- producers of most of the commodities, in addition to being a ma3or
consumer of bullion and energy products. griculture contributes about + to the 4>0 of the
Indian economy. It employees around -*+ of the labor force on a total of !J/ million hectares of
land. griculture sector is an important factor in achieving a 4>0 growth of ?K!+. ll this
indicates that India can be promoted as a ma3or center for trading of commodity derivatives.
It is unfortunate that the policies of 5MC during the most of !"-s to !"?s suppressed the very
markets it was supposed to encourage and nurture to grow with times. It was a mistake other
emerging economies of the world would want to avoid. %owever, it is not in India alone that
derivatives were suspected of creating too much speculation that would be to the detriment of the
healthy growth of the markets and the farmers. $uch suspicions might normally arise due to a
misunderstanding of the characteristics and role of derivative product.
It is important to understand why commodity derivatives are reAuired and the role they can play
in risk management. It is common knowledge that prices of commodities, metals, shares and
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currencies fluctuate over time. &he possibility of adverse price changes in future creates risk for
businesses. >erivatives are used to reduce or eliminate price risk arising from unforeseen price
changes. derivative is a financial contract whose price depends on, or is derived from, the
price of another asset.
&wo important derivatives are futures and options.
(i) Commodity Futures Contracts$ futures contract is an agreement for buying or selling a
commodity for a predetermined delivery price at a specific future time. 5utures are standardi:ed
contracts that are traded on organi:ed futures exchanges that ensure performance of the contracts
and thus remove the default risk. &he commodity futures have existed since the Chicago ;oard
of &rade (C;&, www.cbot.com) was established in !?9? to bring farmers and merchants
together. &he ma3or function of futures markets is to transfer price risk from hedgers to
speculators. 5or example, suppose a farmer is expecting his crop of wheat to be ready in two
monthsD time, but is worried that the price of wheat may decline in this period. In order to
minimi:e his risk, he can enter into a futures contract to sell his crop in two monthsD time at a
price determined now. &his way he is able to hedge his risk arising from a possible adverse
change in the price of his commodity.
(ii) Commodity Options contracts: 6ike futures, options are also financial instruments used
for hedging and speculation. &he commodity option holder has the right, but not the obligation,
to buy (or sell) a specific Auantity of a commodity at a specified price on or before a specified
date. ption 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. &here are
two types of commodity optionsF a HcallD option gives the holder a right to buy a commodity at an
agreed price, while a HputD option gives the holder a right to sell a commodity at an agreed price
on or before a specified date (called expiry date).
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&he option holder will exercise the option only if it is beneficial to himG otherwise he will let the
option lapse. 5or example, suppose a farmer buys a put option to sell ! Suintals of wheat at a
price of P- per Auintal and pays a HpremiumD of P.- per Auintal (or a total of P-). If the price
of wheat declines to say P before expiry, the farmer will exercise his option and sell his wheat
at the agreed price of P- per Auintal. %owever, if the market price of wheat increases to say P/
per Auintal, 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 P- per Auintal.
5utures 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. 5urther, futures
trading and the ensuing discovery of price can help farmers in deciding which crops to grow.
&hey can also help in building a competitive edge and enable businesses to smoothen theirearnings because nonKhedging of the risk would increase the volatility of their Auarterly earnings.
&hus futures and options markets perform important functions that can not be ignored in modern
business environment. t the same time, it is true that too much speculative activity in essential
commodities would destabili:e the markets and therefore, these markets are normally regulated
as per the laws of the country.
Modern Commodity Exchanges
&o make up for the loss of growth and development during the four decades of restrictive
government policies, 5MC and the 4overnment encouraged setting up of the commodity
exchanges using the most modern systems and practices in the world. $ome of the main
regulatory measures imposed by the 5MC include daily mark to market system of margins,
creation of trade guarantee fund, backKoffice computeri:ation for the existing single commodity
'xchanges, online trading for the new 'xchanges, demutuali:ation for the new 'xchanges, and
oneKthird representation of independent >irectors on the ;oards of existing 'xchanges etc.
8esponding positively to the favourable policy changes, several 1ationKwide MultiKCommodity
'xchanges (1MC') have been set up since , using modern practices such as electronic
trading and clearing. $elected Information about the two most important commodity exchanges
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in India TMultiKCommodity 'xchange of India 6imited (MC), and 1ational MultiKCommodity
7 >erivatives 'xchange of India 6imited (1C>')U is given in 'xhibitK! and 'xhibitK.
M,LI-CMMDI. E/C'AN(E 0 INDIA LIMIED
1MC/2
MC an independent and deKmutuali:ed multi commodity exchange has permanent recognition
from 4overnment of India for facilitating online trading, clearing and settlement operations for
commodity futures markets across the country. Oey shareholders of MC are 5inancial
&echnologies (India) 6td., $tate ;ank of India, 1;8>, 1$', %>5C