Commodity Markets

Made by :-

1. Nikita Karekar 412. Devashree Mansukh 513. Hemangi Gaud 254. Sanaya Kalambe 365. Aditi Dongre 196. Malvika Mohanty 57

What is commodity?

A commodity is any good or service produced by human labour and offered as a product for general sale on the market. Some other priced goods are also treated as commodities.

What is market?

Market is the world of commercial activity where goods and services are bought and sold “but without competition there would be no market"

What is Commodity Market?

• Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.

Introduction to Commodity Market

India, a commodity based economy where two-third of the one billion population depends on agricultural commodities, surprisingly has an under developed commodity market. The idea is to understand the importance of commodity derivatives and to learn about the market from Indian point of view. In fact it was one of the most vibrant markets till early 70s. Its development and growth was shunted due to numerous restrictions earlier, but now with most of these restrictions being removed, there is tremendous potential for growth of this market in the country.

History of Commodity Market

Commodity markets have existed for centuries around the world because producers and buyers of foodstuffs and other items have always needed a common place to trade. Cash transactions were most common, but sometimes “forward” agreements were also made – deals to deliver and pay for something in the future at a price agreed upon in the present. There are records, for example, of “forward” agreements related to the rice markets in seventeenth century.

Evolution of Commodity Market in India

• In 1875, the first organized futures market, Bombay Cotton Trade Association Ltd., was being set up.

• Bombay Cotton Exchange Ltd. was established in 1893 following the widespread discontent amongst leading cotton mill owners and merchants over functioning of Bombay Cotton Trade Association.

• The Futures trading in oilseeds started in 1900 with the establishment of the Gujarati Vyapari Mandali, which carried on futures trading in groundnut, castor seed and cotton.

• The most notable futures exchange for wheat was chamber of commerce at Hapur set up in 1913.

• Calcutta Hessian Exchange Ltd. was established in 1919 for futures trading in raw jute and jute goods. 

• Futures trading in bullion began in Mumbai in 1920.  organized futures trading in raw jute began only in 1927 with the establishment of East Indian Jute Association Ltd. These two associations amalgamated in 1945 to form the East India Jute & Hessian Ltd. to conduct organized trading in both Raw Jute and Jute goods.

• Forward Contracts (Regulation) Act was enacted in 1952 and the Forwards Markets Commission (FMC) was established in 1953 under the Ministry of Consumer Affairs and Public Distribution.

Structure of Commodity Market

Different types of commodities Traded

World-over one will find that a market exists for almost all the commodities known to us.

These commodities can be broadly classified into the following:

• Precious Metals: Gold, Silver, Platinum etc 

• Other Metals: Nickel, Aluminium, Copper etc

• Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds. 

• Soft Commodities: Coffee, Cocoa, Sugar etc 

• Live-Stock: Live Cattle, Pork Bellies etc

• Energy: Crude Oil, Natural Gas, Gasoline etc

Top 10 commodities and its turnover

1. Guar seed 4432.712. Gold 4082.153. Silver 3869.864. Crude oil 3380.135. Chana (chick peas) 2100.156. Urad (black legume) 624.717. Soy oil 478.288. Gur (jaggery) 369.72 9. Guar gum 345.0810. Tur (lentils) 329.35*all the figures are in million$

Different segments in Commodities market

• The commodities market exits in two distinct forms namely the Over the Counter (OTC) market and the Exchange based market.

•  Also, as in equities, there exists the spot and the derivatives segment.

• The spot markets are essentially over the counter markets and the participation is restricted to people who are involved with that commodity say the farmer, processor, wholesaler etc.

• Derivative trading takes place through exchange-based markets with standardized contracts, settlements etc.

Indian Commodity Market• India commodity market consists

of both the retail and the wholesale market in the country.

• The commodity market in India facilitates multi commodity exchange within and outside the country based on requirements.

• Commodity trading is one facility that investors can explore for investing their money.

• The Indian Commodity market has undergone lots of changes due to the changing global economic scenario; thus throwing up many opportunities in the process.

• Demand for commodities both in the domestic and global market is estimated to grow by four times than the demand currently is by the next five years.

• In India we have a number of small / regional exchanges for trading in different commodities and at national level we have three commodity exchanges.

• The commodities are traded both in cash market and in futures markets.

• It is the futures markets that take lead in commodity trading as compared to cash markets.

Turnover on Commodity Futures Markets

    (Rs. In Cores)

Exchange 54011 2004-05 FIRST Half

NCDEX 51038 54011

NBOT 30695 51038

MCX 7943 30695

NMCE 170720 7943

ALL EXCHANGES 129364 170720

Global Commodity Market

• Today commodity markets are situated throughout the world.

• In many cases, the markets deal in specialized commodities.

• Notable among them are, Chicago Board of Trade in U.S.A., London Commodity Exchange in U.K., Sydney Futures Exchange in Australia, Tokyo Commodity Exchange in Japan and Singapore International Monetary Futures Exchange in Singapore.

• Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX), the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT).

Commodity Exchanges

• National Commodity & Derivatives Exchange Limited (NCDEX)

• Multi Commodity Exchange of India Limited (MCX) • National Multi-Commodity Exchange of India Limit

ed (NMCEIL)

All the exchanges have been set up under overall control of Forward Market

Commission (FMC) of Government of India.

• Commodity exchange in India plays an important role where the prices of any commodity are not fixed, in an organized way.

• Earlier only the buyer of product and its seller in the market judged upon the prices. Others never had a say.

• Today, commodity exchanges are purely speculative in nature. Before discovering the price, they reach to the producers, end-users, and even the retail investors, at a grassroots level.

• It brings a price transparency and risk management in the vital market.

NCDEX• National Commodity & Derivatives Exchange Limited

(NCDEX) located in Mumbai is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956 and had commenced its operations on December 15, 2003.

• This is the only commodity exchange in the country promoted by national level institutions.

• It is promoted by ICICI Bank Limited, LIC, NABARD & NSE. • It is a professionally managed online multi commodity

exchange. • NCDEX is regulated by Forward Market Commission and is

subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations.

MCX• Mumbai Multi Commodity Exchange of India Limited (MCX) is headquartered

in Mumbai, is an independent and de-mutilated exchange with a permanent recognition from Government of India.

• Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, Union Bank of India, Corporation Bank, Bank of India and Canara Bank.

• MCX facilitates online trading, clearing and settlement operations for commodity futures markets across the country.

NMCEIL

• National Multi Commodity Exchange of India Limited (NMCEIL) is the first de- mutualized, Electronic Multi-Commodity Exchange in India.

• On 25th July, 2001, it was granted approval by the Government to organize trading in the edible oil complex. It has operationalised from November 26, 2002.

• It is being supported by Central Warehousing Corporation Ltd., Gujarat State Agricultural Marketing Board and Neptune Overseas Limited. It got its recognition in October 2002.

India’s share in global commodity markets

• At present, India's share in the global commodity markets - both agricultural and industrial, especially of energy products and base metals - is not big enough to make a major impact on international prices.

• India currently accounts for only around 3% of the global oil demand and 2% of the global copper demand.

• In case of agricultural commodities, India’s production base is large.

• India is the world's largest producer of World’s second largest producer of rice.

• Despite a modest share in the industrial products market, the prospects for growth for the industrial commodities in India are considerable.

• Despite a slowdown in industrial production at times, the overall domestic economy in India continues to grow while imports and growth in demand for corporate borrowing also indicate a positive outlook.

• In addition, large infrastructure works are being undertaken across the country, covering rail, road, energy and sports.

Scope of Commodity Market

• Investment in commodity markets has been very popular and rewarding for investors in U.K. and U.S.A.

• For investors looking for diversification beyond stock markets, commodity markets offer another investment option.

• The commodity market’s activities, volume and players have multiplied in the recent past.

• In India, although the trading in commodity markets and commodity exchanges is booming, it has to cross few more hurdles like permitting fills, banks and other financial institutions to operate in these markets.

• The reason why investors may look for opportunities in commodity markets may take us to the basic tenets of risk and return theory i.e. expected return and risk.

• Normally it is a risk - reward relationship. The higher the risk higher is the expected return and vice versa.

Limitations of Commodity Market

Commodity markets, like any other markets, have their own limitations too. Some of them are:

• Commodity market prices can fluctuate wildly depending on the factors, which are sometimes beyond human control (floods, storms, natural calamities like earthquakes, etc. can create temporary shortages of commodities and hence result in drastic changes in their prices in a very short time).

• Forward / futures trading involve a passage of time between entering into a contract and its performance making thereby the contracts susceptible to risks, uncertainties, etc.

Hence, it is necessary that the investors/players in the commodity markets understand the functioning of commodity markets, mechanism of commodity Exchanges properly and study the factors that can affect the commodity prices carefully.

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 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.

Thank you