Introduction of Commodity Market in India

Introduction of Commodity Market in India

The History of INDIAN Commodity ExchangesThe evolution of the organized futures market in India commenced in 1875 with the setting up of the Bombay Cotton Trade Association Ltd. Following widespread discontent among leading cotton mill owners and merchants over the functioning of the Bombay Cotton Trade Association, a separate association, Bombay Cotton Exchange Ltd., was constituted in 1983. Futures trading in oilseeds originated with the setting up of the Gujarati Vyapari Mandali in 1900, which carried out futures trading in ground nuts, castor seeds and cotton. The Calcutta Hessian Exchange Ltd. and the East India Jute Association Ltd. were set up in 1919 and 1927 respectively for futures trade in raw jute.

Futures markets in Bullion began in Mumbai in 1920, and later, similar markets were established in Rajkot, Jaipur, Jamnagar, Kanpur, Delhi and Calcutta. In due course, several other exchanges were established in the country, facilitating trade in diverse commodities such as pepper, turmeric, potato, sugar and jaggery.The futures trade in spices was first organised by the India Pepper and Spices Trade Association (IPSTA) in Cochin in 1957. However, in order to monitor the price movements of several agricultural and essential commodities, futures trade was completely banned by the government in 1966.Subsequent to the ban of futures trade, many traders resorted to unofficial and informal trade in futures. However, in Indias liberalization epoch as per the June 1980 Khusro committees recommendations, the government reintroduced futures on selected commodities, including cotton, jute, potatoes, etc.

REGULATING BODYThe commodity futures traded in commodity exchanges are regulated by the Government under the Forward Contracts Regulations Act, 1952 and the Rules framed there under. The regulator for the commodities trading is the Forward Markets Commission, situated at Mumbai, which comes under the Ministry of Consumer Affairs Food and Public Distribution.

Forward Markets Commission (FMC):- It is statutory institution set up in 1953 under Forward Contracts (Regulation) Act, 1952. Commission consists of minimum two and maximum four members appointed by Central Govt. Out of these members there is one nominated chairman. All the exchanges have been set up under overall control of Forward Market Commission (FMC) of Government of India. During Sept 2015, FMC was merged with Stock Market Regulator SEBI.

Snapshot of Indian Commodity Market

Two Major Commodities Exchange in IndiaMCX (Multi Commodity Exchange)NCDEX (National Commodities & Derivatives Exchange

MCX (Multi Commodity Exchange)

Multi Commodity Exchange of India Ltd (MCX) is a state-of-the-art electronic commodity futures exchange. The demutualised Exchange has permanent recognition from the Government of India to facilitate online trading, and clearing and settlement operations for commodity futures across the country.MCX offers more than 40 commodities across various segments such as bullion, ferrous and non-ferrous metals, energy, and a number of agri-commodities on its platform. The Exchange introduces standardized commodity futures contracts on its platform.MCX has been certified to three ISO standards including ISO 9001:2008 Quality Management System standard, ISO 14001:2004 Environmental Management System standard and ISO/IEC 27001:2005 Information Security Management System standard.

National Commodity and Derivatives ExchangeNational Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed on-line multi commodity exchange. The shareholders of NCDEX comprises of large national level institutions, large public sector bank and companies. 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 commenced its operations on December 15, 2003. NCDEX is regulated by Forward Markets Commission. NCDEX is subjected to various laws of the land like the Forward Contracts (Regulation) Act, Companies Act, Stamp Act, Contract Act and various other legislations.

NCDEX headquarters are located in Mumbai and offers facilities to its members from the centers located throughout India.The Exchange, as on February 9, 2012 offered contracts in 34 commodities - comprising 23 agricultural commodities, 6 precious metals, 2 energy, 1 polymer and 2 other metals. The top 5 commodities, in terms of volume traded at the Exchange, were Soya oil, Gaur Seed, Chana, RM seed and Guar gum.NCDEX the country's second largest commodity derivatives exchange, has been listing contracts since 2003.The NCDEX ranked number 32nd in 2010 in the Futures Industry Association's global list of top 53 derivatives exchanges measured by volume, rising 34.16% on 2009 volumeThe exchange posted volume of 40.1 million contracts in 2010, up from 29.9 million in 2009, according to FIA data published in April 2011.

As of 2011, Indias TOP commodity exchanges are:National Multi-Commodity Exchange (NMCE). Multi Commodity Exchange (MCX). Indian Commodity Exchange ICEX. ACE Derivatives and Commodity Exchange ACE

Size of the MarketThe trading of commodities includes physical trading of food items, Energy and Metals, etc. and trading of derivatives.In the five years up to 2007, the value of global physical exports of commodities increased by 17% while the notional value outstanding of commodity OTC derivatives increased more than 500% and commodity derivative trading on exchanges more than 200%.Agricultural contracts trading grew by 32% in 2007,energy 29% and industrial metals by 30%.Precious metals trading grew by 3%, with higher volume in New York being partially offset by declining volume in Tokyo.OTC trading accounts for the majority of trading in gold and silver.

Indian Commodity MarketsCommodity Markets have their presence in country for over 120 yrs.Trade in commodities has been Unorganized in Regional markets & Local Mandis.Trading in Futures Contracts has been permitted in over 120 commodities. Physical commodity market size in India is estimated to be around 25 lakh core per annum.Major commodities traded in India are - Gold, Silver, Crude Oil, Copper, Guar, Chana, Spices, among the few.

Evolution of Commodity markets in IndiaBan in forward trading from mid-sixties Prior to banThriving commodity exchanges for cotton, gold, edible oils etc.More than 20 regional commodity specific exchangesRecent developmentsBan completely lifted in 2003Emergence of national level de-mutualised online multi-commodity exchanges3 National and 21 regional exchangesTrade in 60 commodities compared with just 8 in 2000Growth exceeds 7-8 times in FY09 over FY10

Benefits of commodity Future Markets. Price Discovery:-Based on inputs regarding specific market information, the demand and supply equilibrium, weather forecasts, expert views and comments, inflation rates, Government policies, market dynamics, hopes and fears, buyers and sellers conduct trading at futures exchanges. This transforms in to continuous price discovery mechanism.Price Risk Management: - Hedging is the most common method of price risk management. It is strategy of offering price risk that is inherent in spot market by taking an equal but opposite position in the futures market. Futures markets are used as a mode by hedgers to protect their business from adverse price change. This could dent the profitability of their business. Hedging benefits who are involved in trading of commodities like farmers, processors, merchandisers, manufacturers, exporters, importers etc.

Import- Export competitiveness: - The exporters can hedge their price risk and improve their competitiveness by making use of futures market. A majority of traders which are involved in physical trade internationally intend to buy forwards. The purchases made from the physical market might expose them to the risk of price risk resulting to losses. Benefits for farmers/Agriculturalists: - Price instability has a direct bearing on farmers in the absence of futures market. There would be no need to have large reserves to cover against unfavorable price fluctuations. This would reduce the risk premiums associated with the marketing or processing margins enabling more returns on produce. Storing more and being more active in the markets. The price information accessible to the farmers determines the extent to which traders/processors increase price to them. Since one of the objectives of futures exchange is to make available these prices as far as possible, it is very likely to benefit the farmers.

GROWTH IN THE COMMODITY MARKET AS COMPARED TO THE EQUITY MARKET

The Indian commodity futures volumes have grown 5.5 times from Rs.20.53 trillion in 2005-06 to Rs.112.52 trillion in 2010-11Currently, the average monthly volume on the Indian commodity exchanges is Rs.6 trillion. MCX leads the industry, followed by NCDEX.MCX is not only number one in India but has achieved some global milestones too. It was the largest exchange in silver (in terms of number of futures contracts traded in 2010), number two in gold, copper and natural gas and number three in crude oil. When we say India is the largest exchange in silver, it is a great achievement for the Multi Commodity Exchange.

Talking about agricultural commodities, the Indian commodities market has futures contracts of commodities such as black pepper, cumin seed, mentha oil and many more which are internationally traded but only listed in India; internationally traders tend to consider these as benchmark rates.Foreign institutional investors, domestic institutions, banks and insurance companies are not allowed to trade on the Indian commodity bourses and a majority of volumes come from jobbers, arbitrageurs, retail traders and small scale enterprises and corporate (for hedging). Even portfolio management services are not permitted.We expect the Indian commodity futures market to reach at least 15x-20x by FY15. With the contribution of Indian physical commodities to GDP being pegged at 45%, even if the commodity futures market trades at 15x-20x, we can imagine the kind of volumes our exchanges will generate.

List of Traded CommodityAgricultural (Grains, and Food and Fiber)Livestock & MeatEnergyPrecious metalsIndustrial metals

Agricultural Products:-Corn, Oats, Rough Rice, Soybeans, Rapeseed, Soybean Meal, Soybean Oil, Wheat, Cocoa, Coffee, Cotton No.2, Sugar No.11,Sugar No.14.Livestock and Meat:- Lean Hogs, Frozen Pork Bellies, Live Cattle, Feeder Cattle.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

Abuja Securities and Commodities ExchangeBhatinda Om & Oil Exchange BathindaBrazilian Mercantile and Futures ExchangeChicago Board of TradeChicago Mercantile ExchangeCommodity Exchange Bratislava, JSCDalian Commodity ExchangeDubai Mercantile ExchangeEuro next lifeIntercontinental Exchange

Minneapolis Grain ExchangeMulti Commodity Exchange National Commodity and Derivatives ExchangeNational Multi-Commodity Exchange of India Ltd National Food Exchange New York Mercantile ExchangeNew York Board of TradeRosario Board of TradeSteelbayKansas City Board of TradLondon Metal ExchangeWinnipeg Commodity Exchange National Spot Exchange

Recent trends in Commodity Market.The 2008 global boom in commodity prices - for everything from coal to corn was fueled by heated demand from the likes of China and India.Speculation in forward markets.Farmers are expected to face a sharp drop in crop prices as a result of bad rainfall.Other commodities, such as steel, are also expected to fall due to lower demand

Future ContractCommodity and Futures contracts are similar as "Forward" Contracts.Early days "future" contracts (agreements to buy now, pay and deliver later) were used as a way of getting products from producer to the consumer.These typically were only for food and agricultural Products. Now it is used for every metal.Future contract for commodity trading and for share trading is all different from one another

CONCLUSIONIndia 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.

THANK YOU.Bibliography:Google. For Images MCX & NCDEX official websites