Nayan Final Commodity Project

A

PROJECT REPORT

ON

Indian Commodities Market

Post Graduation Diploma Management (PGDM)

SUBMITTED TO

Atharva School of Business

Charkop Naka Mumbai-400095

UNDER THE GUIDANCE OF

PROF. Manisha Sanghvi

SUBMITTED BY

Nayan. N. Kedia

2010-2012

Indian Commodities market

Declaration

I Nayan.N.Kedia a student of Atharva School of Business studying in PGDM

SEMESTER-3 hereby declare that I have completed the project on ‘Indian Commodities

Market’ in the academic year 2010-2012 as a part of the course requirement.

The information submitted is true and original to the best of my knowledge.

Date: _____________

Place: ____________ Signature

__________________

2


Nayan.N.Kedia

Certificate

This is to certify Nayan.N.Kedia has successfully completed the project work as a part of

academic year a part of academic fulfillment of Post Graduation Diploma in Management

(PGDM) semester 3

____________________________________

Name & Signature of Project Guide

Date:___________

Director

Atharva School Of Business

Mumbai

3


ACKNOWLEDGEMENT

Written words have an unfortunate tendency to convert genuine gratitude into stilled

formality. However, I feel this is the best way to express my appreciation concerned.

Working on the project on Indian Commodities Market has been an incredible experience

for me. For this wonderful experience I would like to thank a lot of people without whose co-

operation and support working on the project would not have been so pleasurable and interesting.

Firstly, I would like to thank Prof. Manisha Sanghvi for guiding me through out this

wonderful opportunity to do this project because of which I have deprived a vast treasure of

knowledge. I would also like to thank my parents, my classmates, the library staff,

These acknowledgments are the one way where I can actually thank these people who

have been instrumental in the making of this project. Without their help and guidance it would be

a very difficult task for me to try and plan this project and actually make it.

4


INDEX

Chapter Topic Page No.

1 Introduction to commodity markets

2 Commodity markets in India

3 Commodity exchanges across the world

4 Trading at commodity markets

5 Old exchanges in India

6 New exchanges in India

7 Exchanges worldwide

8 Beginners guide to commodity future trading in India

9 Role and Importance of commodity market

10 Benefits of commodity market

11 Criticism of commodity market

12 Volumes in commodity futures may overtake Stock Market

13 Some commodities

14 Conclusion

5


LITERATURE REVIEW

The history of organized commodity derivatives in India goes back to the nineteenth century

when the Cotton Trade Association started futures trading in 1875, barely about a decade after

the commodity derivatives started in Chicago. Over time the derivatives market developed in

several other commodities in India. Following cotton, derivatives trading started in oilseeds in

Bombay (1900), raw jute and jute goods in Calcutta (1912), wheat in Hapur (1913) and in

Bullion in Bombay (1920). However, many feared that derivatives lead to unnecessary

speculation in essential commodities, and were harmful to the healthy functioning of the markets

for the underlying commodities, and also to the farmers. With a view to restricting speculative

activity in cotton market, the Government of Bombay prohibited options business in cotton in

1939. Later in 1943, forward trading was prohibited in oilseeds and some other commodities

including food-grains, spices, vegetable oils, sugar And cloth. After Independence, the

Parliament passed Forward Contracts (Regulation) Act, 1952 which Regulated forward contracts

in commodities all over India. The Act applies to goods, which are defined as any movable

property other than security, currency and actionable claims. The Act prohibited Options trading

in goods.

This decade is termed as Decade of Commodities. Prices of all commodities are heading

northwards due to rapid increase in demand for commodities. Developing countries like China

are voraciously consuming the commodities. That’s why globally commodity market is bigger

than the stock market.

India is one of the top producers of 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 seems to have finally arrived now. The market has made enormous progress

in terms of Technology, transparency and trading activity. Interestingly, this has happened only

after the Government protection was removed from a number of Commodities, and market force

was allowed to play their role. This should act as a major lesson for 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

6


going to assume even greater importance in future with the promotion of free trade and removal

of trade barriers in the world

As majority of Indian investors are not aware of organized commodity market; their perception

about is of risky to very risky investment. Many of them have wrong impression about

commodity market in their minds. It makes them specious towards commodity market.

Concerned authorities have to take initiative to make commodity trading process easy and

simple. Along with Government efforts NGO’s should come forward to educate the people about

commodity markets and to encourage them to invest in to it. There is no doubt that in near future

commodity market will become Hot spot for Indian farmers rather than spot market. And

producers, traders as well as consumers will be benefited from it. But for this to happen one has

to take initiative to standardize and popularize the Commodity Market.

7


OBJECTIVE OF PROJECT

To understand what is commodity market

When commodity market started in India

How is different than stock market

What is minimum deposit needed to trade in commodity

What are necessary documents

How can one minimize the risk of trading

To get an insight to the working / operations of an online brokerage firm

8


RESEARCH METHODOLOGY

Market surveys have been conducted to know the scenario of market regarding measures to

increase retail investor’s confidence in Indian commodity market. Project study is done with a

systematic approach. So while doing a research I have followed certain steps, which are as

follows: -

COLLECTION OF BACKGROUND INFORMATION

OBJECTIVES

DEVELOPING AND VALIDATING RESEARCH

COLLECTING THE INFORMATION

ANALYSING THE INFORMATION

PRESENTING THE FINDINGS

DESIGNING A RESEARCH PLAN

For the purpose of getting proper information and then further analysis the research plan was

efficiently and effectively designed. Various decisions were taken related to

Data sources

Research approaches

9


Research instruments

DATA SOURCES:

There are two types of sources for the collection of data

Primary data

Secondary data

Primary data

Primary data have been collected through employees of BMA WEALTH CREATORS OF

GOREGAON BRANCH.(where my training has been conducted),by sharing there knowledge

and learning.

Secondary data

Secondary data has been collected through Internet, books, journals and newspapers, etc.

RESEARCH APPROACHES

Conducting a research a variety of approaches are used :-

Observation

This involves watching how people react to commodity market’s fluctuation and how satisfied

are they with the returns on the various investments they have made.

RESEARCH INSTRUMENTS

Verbal Interaction

10


Practically looking at their work.

INTRODUCTION OF BMA GROUP

In the 1920s, Mr Bhuramal Agarwalla, founder of the BMA Group, had made a foray into the

obscure energy industry with a mission to assume eminence in the coal mining business. With

his vision and character, he managed to place the business on a higher pedestal. By adhering to

bi-pronged philosophy of risk-taking and fostering an ethic-based environment, he cautiously

promoted excellence through quality to meet the expectations of both domestic and international

clients. Taking inspiration from this, the group has scaled many heights venturing into

Refractories, Smelting, Ferrous Alloys, Coke and is leading by example.

In the age of Second Generation Reforms, the company has successfully passed down its mantle

to the Fourth Generation. The group has successfully fused traditional methods with modern

mantra of management to come out with flying colors. The group has taken multifarious

initiatives, some of which have already yielded dividends. We are manufacturers and exporters

of ferrous alloys, refractories etc. The holistic production process combines a perfect balance

between product availability, manufacturing procedure, quality supply chain and a geographical

dispersion of marketing and operations. Over the years the BMA Group has become a single

reliable source for resources and a Group you can count on for delivery and quality. Service to

the customer goes beyond the sale of products by providing technical advice for economic and

efficient applications and maintenance for products supplied by the group companies.

Group companies are:

National Refractories (Prop. Snowtex

Udyog Ltd) Refractories Unit West Bengal

The Behar Potteries Ltd. Refractories Unit West Bengal

Anjanery Ferro Alloys Ltd. Ferro Alloys Unit Jharkhand

11


Maithan Alloys Ltd. Ferro Alloys Unit West Bengal

Maithan Smelters Ltd. Ferro Alloys Unit Meghalaya

Premium Fuels Metallurgical Coke Unit West Bengal

BMAWEALTH CREATORS Financial Sector Mumbai

Corporate Social Responsibility should be the inherent motive of every business house. The

Group BMA takes its commitment seriously and has imbibed this responsibility into its mission.

It actively participates in community development through three ways: philanthropy, civic

leadership & public policy and grass root efforts. The company provides generous support &

leadership to a wide range of organizations that cater to cultural, civic, environmental, health and

human services. .

We have substantially contributed to the constructions of the following:

¤ Health center in Barakar (W.B)

¤ Sri Marwari Vidyala, Barakar (W.B)

¤ Sanskrit Vidyala, Vrindavan (U.P)

¤ Guru Gangeshwar Bhuramal Nishulk Chikitsa Seva Sansthan, Vrindavan (U.P)

¤ Shri Gopalrai Harsukdas Vidya Mandir, Loyal (Rajasthan)

INTRODUCTION TO BMA WEALTH CREATORS

BMA Financial Services primarily focuses on offering diversified financial planning services to

corporate & individuals. Our spectrum of services include financial planning, advising,

executing, monitoring of investments & more. With our team of financial consultants & experts

we ensure to deliver customized solution to all our clients.

BMA Wealth Creators - The A to Z of Wealth Creation Techniques

As Wealth Creators, we work towards understanding your financial goals and risk profile. Our

expertise combined with thorough understanding of the financial markets results in appropriate

12


investment solutions for you.

Extending our expertise, to fulfill all your investment needs.

We offer a wide range of financial services and solutions through our varied services.

Wealth Management Services

Investment Advisory Services

Securities Broking Equities and

Derivatives

Distribution of Financial Products

Marketing of Equity and Mutual Fund

IPO

Commodities Broking

Our expertise in each of these areas, help you achieve your financial objectives.

We provide full service functions, which include:

Planning

Advising

Executing

Monitoring your investments

Our corporate entities are represented by -

BMA Stock Broking Pvt. Ltd.

It holds corporate membership in National Stock Exchange Ltd, Bombay Stock Exchange Ltd.

and Central Depositories Securities Ltd.

BMA Commodities Pvt. Ltd.

13


It holds corporate membership in commodities exchange of NCDEX and MCX. It is also is SEBI

approved AMFI registered Mutual Fund advisory and intermediary.

Time to shed your worries.

In the present day scenario, there are way too many options that can be rather confusing. The key

is to decide well. Making the correct choice will ensure the realization of all your dreams. With

BMA, you can at least forget about your financial worries. We with the correct knowledge of the

market and years of experience behind us will help you invest your money in the right avenues.

So that you can rest assured as your money grows.

All you have to worry about now is ways to utilize the wealth and create the perfect picture of

happiness for you and your loved ones.

Just one thing Start early. And start right. With BMA Wealth Creators.

MISSION

To be a premier financial supermarket providing integrated investment services

VISION

To provide integrated financial services building investor wealth and confidence.

14


INTRODUCTION TO COMMODITY MARKETS

Definition of a “Commodity”:

Any product that can be used for commerce or an article of commerce which is traded on an

authorized commodity exchange is known as commodity. The article should be movable of

value, something which is bought or sold and which is produced or used as the subject or barter

or sale. In short commodity includes all kinds of goods. Forward Contracts (Regulation) Act

(FCRA), 1952 defines “goods” as “every kind of movable property other than actionable claims,

money and securities”.

In current situation, all goods and products of agricultural (including plantation), mineral and

fossil origin are allowed for commodity trading recognized under the FCRA. The national

commodity exchanges, recognized by the Central Government, permits commodities which

include precious (gold and silver) and non-ferrous metals; cereals and pulses; ginned and un-

ginned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and gur; potatoes and

onions; coffee and tea; rubber and spices. Etc.

Different dictionary define “commodities” as under:

Any item that can be bought and sold. Taken to refer to Exchange – traded items including sugar,

wheat, soya beans, coffee and tin.

15


That which affords convenience, advantage, or profit, especially in commerce, including

everything movable that is bought and sold (except animals), -- goods, wares, merchandise,

produce of land and manufactures, etc.

In the world of business, a commodity is an undifferentiated product whose market value arises

from the owner’s right to sell rather than to use. Example commodities from the financial world

include oil (sold by the barrel), wheat, bulk chemicals such as sulfuric acid and even pork-

bellies.

History of commodity markets in India:

Ever since the dawn of civilization commodities trading have become an integral part in the lives of

mankind. The very reason for this lies in the fact that commodities represent the fundamental elements

of utility for human beings. The term commodity refers to any material, which can be bought and sold.

Commodities in a market's context refer to any movable property other than actionable claims, money

and securities. Over the years commodities markets have been experiencing tremendous progress,

which is evident from the fact that the trade in this segment is standing as the boon for the global

economy today. The promising nature of these markets has made them an attractive investment avenue

for investors.

In the early days people followed a mechanism for trading called Barter System, which involves

exchange of goods for goods. This was the first form of trade between individuals. The absence

of commonly accepted medium of exchange has initiated the need for Barter System. People

used to buy those commodities which they lack and sell those commodities which are in excess

with them. The commodities trade is believed to have its genesis in Sumeria. The early

commodity contracts were carried out using clay tokens as medium of exchange. Animals are

believed to be the first commodities, which were traded, between individuals. The

internationalization of commodities trade can be better understood by observing the commodity

market integration occurred after the European Voyages of Discovery. The development of

international commodities trade is characterized by the increase in volumes of trade across the

nations and the convergence and price related to the identical commodities at different markets.

The major thrust for the commodities trade was provided by the changes in demand patterns,

scarcity and the supply potential both within and across the nations.

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Market Development:

In the context of the development of commodities markets, integration plays a pivotal role in

surmounting the barriers of trade. The development of trading mechanisms in the commodities

market segment largely helped the integration of commodities markets. The major thrust for the

integration of commodities trading was given by the European discoveries and the march of the

world trade towards globalization. The commodities trade among different countries was

originated much before the voyages of Columbus and Da Gama.

FIRST HALF OF SECOND MILLENIUM:

During the first half of the second millennium India and China had trading arrangements with

Southeast Asia, Eastern Europe, the Islamic countries and the Mediterranean. The advancements

in shipping and other transport technologies had facilitated the growth of the trade in this

segment. The unification of the Eurasian continent by the Mongols led to a wide transmission of

people, ideas and goods. Later, the Black Death of 1340s, the killer plague that reduced the

population of Europe and Middle East by one-third, has resulted in more per capita income for

individuals and thus increased the demand for Eastern luxuries like precious stones, spices,

ceramics and silks. This has augmented the supply of precious metals to the East. This entire

scenario resulted in the increased reliance on Indian Ocean trade routes and stimulated the

discovery of sea route to Asia.

SECOND HALF OF SECOND MILLENIUM:

The second half of the second millennium is characterized by the connectivity of the markets

related to the Old and the New worlds. In the year 1571, the city of Manila was found, which

linked the trade between America, Asia, Africa ad Europe. During the initial stages, because of

the high transportation costs, preference of trade was given to those commodities, which had

high value to weight ratio. In the aftermath of the discoveries huge volumes of silver was

17


pumped into world trade. With the discovery of the Cape route, the Venetian and Egyptian

dominance of spice exports was diluted. The introduction of new world crops into China has lead

to the increased demand for silver and a growth in exports of tea and silk. Subsequently,

Asia has become the prime trader of spices and silk and Americas became the prominent

exporter of silver.

Earlier investors invested in those companies, which specialized in the production of

commodities. This accounted for the indirect investments in commodity assets. But with the

establishment of commodity exchanges, a shift in the investment patterns of individuals has

occurred as investors started recognizing commodity investments as an alternative investment

avenue. The establishment of these exchanges has benefited both the producers and traders in

terms of reaping high profits and rationalizing transaction costs. Commodity exchanges play a

vital role in ensuring transparency in transactions and disseminating prices. The commodity

exchanges ensured the standard of trading by maintaining settlement guarantee funds and

implementing stringent capital adequacy norms for brokers. In the light of these developments,

various commodity based investment products were created to facilitate trading and risk

management. The commodity based products offer a huge array of benefits that include offering

risk-return trade-offs to investors, providing information on market trends and assisting in

framing asset allocation strategies. Commodity investments are always considered as defensive

because during the times of inflation, which adversely affects the performance of stocks and

bonds, commodities provide a defense to investors, maintaining the performance of their

portfolios.

18 TH AND 19 TH CENTURIES :

The commodities trade in the 18th and 19th centuries was largely influenced by the shifts in

macro economic patterns, the changes in government regulations, the advancement in

technology, and other social and political transformations around the world. The 19th century

has seen the establishment of various commodities exchanges, which paved the way for effective

transportation, financing and warehousing facilities in this arena. In a new era of trading

18


environment, commodities exchanges offer innumerable economic benefits by facilitating

efficient price discovery mechanisms and competent risk transfer systems.

Derivatives:

Commodities whose value is derived from the price of some underlying asset like securities,

commodities, bullion, currency, interest level, stock market index or anything else are known as

“Derivatives”.

In simpler form, derivatives are financial security such as an option or future whose value is

derived in part from the value and characteristics of another security, the underlying asset.

It is a generic term for a variety of financial instruments. Essentially, this means you buy a

promise to convey ownership of the asset, rather than the asset itself. The legal terms of a

contract are much more varied and flexible than the terms of property ownership. In fact, it’s this

flexibility that appeals to investors.

When a person invests in derivative, the underlying asset is usually a commodity, bond, stock, or

currency. He bet that the value derived from the underlying asset will increase or decrease by a

certain amount within a certain fixed period of time.

‘Futures’ and ‘options’ are two commodity traded types of derivatives. An ‘options’ contract

gives the owner the right to buy or sell an asset at a set price on or before a given date. On the

other hand, the owner of a ‘futures’ contract is obligated to buy or sell the asset.

The other examples of derivatives are warrants and convertible bonds (similar to shares in that

they are assets). But derivatives are usually contracts. Beyond this, the derivatives range is only

limited by the imagination of investment banks. It is likely that any person who has funds

invested, an insurance policy or a pension fund that they are investing in, and exposed to,

derivatives – wittingly or unwittingly.

Shares or bonds are financial assets where one can claim on another person or corporation; they

will be usually being fairly standardized and governed by the property of securities laws in an

appropriate country.

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On the other hand, a contract is merely an agreement between two parties, where the contract

details may not be standardized

Derivatives securities or derivatives products are in real terms contracts rather than solid as it

fairly sounds

Another major leap in the development of commodities markets is the growth in commodities

derivative segment. Derivatives are instruments whose value is determined based on the value of

an underlying asset. Forwards, futures and options are some of the well-known derivatives

instruments widely used by the traders in commodities markets.

History of derivatives trading:

A derivative trading has a long history. The first recorded incident of commodities trade was

traced back to the times of ancient Greece. In the year 1688 De la Vega reported the trading in

'time bargains' which were the then commonly used terms for options and futures. Though the

first recorded futures trade was found to have happened in Japan during the 17th century,

evidences reveal that the trading in rice futures was existent in China, 6000 years ago.

Derivatives are useful for both the producers and the traders for the mitigation of risk in their

business. Trading in futures is an outcome of the mankind's efforts towards maintaining the

supply balance of seasonal commodities throughout the year. Farmers derived the real benefits of

derivatives contracts by assuring the prices they want to procure on their products. The volatility

of prices has made the commodity derivatives not only significant risk hedging instruments but

also strategic exchange traded assets. Slowly, traders and speculators, who never intended to take

the delivery of goods, entered this segment. They traded in these instruments and made their

margins by taking the advantage of price volatility in commodity markets.

The dawn of the 21st century brought back the good times for commodity markets. With the end

of a 20 year bear market for commodities, following the global economic recovery and increased

demand from China and other developing nations, has revitalized the charisma of commodities

markets. According to the forecasts given by experts commodities markets are likely to

20


experience a bright future with the depreciation in the value of financial assets. Furthermore,

increasing global consumption, declining U.S. Dollar value, rising factor-input costs and the

recent recovery of the market from the clutches of bear trend are considered to be the positive

symptoms, which contribute to the acceleration of growth in commodity markets segment.

India Connection:

Coming to the Indian scenario, despite a long history of commodity markets, commodity markets

in India are still in their initial stages of development. The essential contributors of this scenario

include stringent regulatory restrictions, intermediate ban on commodity trading and policy

interventions by the government. Commodity markets have a huge potential in the Indian context

particularly because of the agri-based economy. With the government's initiative for agricultural

liberalization, commodities' trading in India has gained increased momentum in activities. To

increase the efficiency of the markets the Forward Markets Commission (FMC), the governing

body of commodities trading in India has taken several initiatives for the establishment of

national level multi-commodity exchanges in India. These exchanges serve as platforms for

facilitating transparent trading, trading in multiple commodities, electronic delivery systems and

efficient regulatory mechanisms, creating a world class environment for Indian traders. In order

to sustain the increasing volumes in commodities trade, the need for proper clearing and

settlement systems, warehousing facilities and efficient pricing mechanisms has been identified.

With the recent boom in commodities markets, Indian participants are gearing up for exploiting

the potential opportunities in the future.

Commodity markets are of great help not only for their participants but also the economy as a

whole. The twenty year bear market for commodities has drastically reduced the prices of many

commodities to their lowest levels. The present shift in trend in commodity trading

complimented by the global increase in demand will certainly hold a promising future for the

investments in this segment. This provides the impetus for the readers to understand the

evolution and development of commodities markets and their significance in the arena of

strategic investments.

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Commodity trading in India is regulated by the Forward Markets Commission (FMC)

headquartered at Mumbai; it is a regulatory authority which is overseen by the Ministry of

Consumer Affairs and Public Distribution, Govt. of India. It is a statutory body set up in 1953

under the Forward Contracts (Regulation) Act, 1952.

After equity trading, commodity trading is going to be the next big thing for investors. In India

people have a love for Gold and Silver, trading is also going to pick up in Gold and Silver.

Globally, the commodity trade market is about three times the size of equities trade market. In

India, presently, the commodities market is still in a nascent stage and is gradually picking up

taking a cue from global markets.

Any goods that are unbranded and are commonly traded in the market come under commodities.

Commodities trading:

Commodity markets are quite like equity markets. The commodity market also has two

constituent’s i.e. spot market and derivative market. In case of a spot market, the commodities

are bought and sold for immediate delivery. In case of a commodities derivative market, various

financial instruments having commodities as underlying are traded on the exchanges. It has been

seen that traditionally in India people have hedged their risks with Gold and Silver.

Commodities future:

Commodity future is a derivative instrument for the future delivery of a commodity on a fixed

date at a particular price. The underlying in this case is a particular commodity.

If an investor purchases an oil future, he is entering into a contract to buy a fixed quantity of oil

at a future date. The future date is called the contract expiry date. The fixed quantity is called the

contract size. These futures can be bought and sold on the commodity exchanges.

The commodities include agricultural commodities like wheat, rice, tea, jute, spices soya,

groundnut, coffee, rubber, cotton, etc, precious metals - gold and silver, base metals - iron ore,

lead, aluminum, nickel, zinc etc, and energy commodities - crude oil and coal.

The number of retail investors participating in the market is increasing gradually after the

22


introduction of commodities futures. The expected growth rate of commodity market is 40

percent annually over the next five years.

COMMODITY MARKETS IN INDIA

List of exchanges and their respective traded commodities is given below:

1 Bhatinda Om & Oil

Exchange Ltd., Batinda.

Gur

2 The Bombay Commodity

Exchange Ltd.Mumbai.

RBD Pamolein, Groundnut Oil, Sunflower Oil, CottonSeed,

Safflower, Groundnut, Castor oil-Int'l, Castorseed, Cottonseed

oil, Sesamum oil, Sesamum OilCake, Safflower, OilCake,

Rice Bran, Rice Bran Oil, Rice Bran OilCake, Safflower Oil,

Crude Palm Oil

3 The Rajkot Seeds oil &

Bullion Merchants`

Association Ltd.

Groundnut Oil, Castorseed

4 The Meerut Agro

Commodities Exchange

Co. Ltd., Meerut.

Gur

5 The Spices and Oilseeds

Exchange Ltd.

Turmeric

6 Ahmedabad Commodity

Exchange Ltd.

CottonSeed

Castorseed

7 Vijay Beopar Chamber

Ltd., Muzaffarnagar.

Gur

Mustard Seed

23


8 India Pepper & Spice

Trade Association,Kochi.

Pepper Domestic-MG1

Pepper Domestic-500g/l

Black Pepper Int'l-MLS ASTA

Black Pepper Int'l-VB ASTA

Black pepper Int'l FAQ

Pepper 550 G/L

Rubber RSS4

9 Rajdhani Oils and Oilseeds

Exchange Ltd. Delhi.

Gur

Rapeseed/Mustard seed

10 National Board of Trade.

Indore.


Rapeseed/MustardseedOil

Rapeseed/Mustardseedoil-Cake

Soybean

SoyMeal

SoyOil

Crude Palm Oil

11 The Chamber Of

Commerce., Hapur.

Gur


12 The East India Cotton

Association Mumbai.

Indian Cotton

13 The Central India

Commercial Exchange Ltd,

Gwalior.

Gur


14 The East India Jute &

Hessian Exchange Ltd.

Hessian

Sacking

24


15 First Commodity Exchange

of India Ltd, Kochi.

Copra

Coconut oil

Copra cake

16 Bikaner Commodity

Exchange Ltd., Bikaners.


Rapeseed/Mustard seed Oil

Rapeseed/Mustard seed oil-Cake

Guar seed

Gram

Guar Gum

17 Esugarindia Limited. Sugar Grade - M

Sugar Grade - S

18 National Multi Commodity

Exchange of India Limited.

Gur

RBD Pamolein

Groundnut Oil

Sunflower Oil



Rapeseed/Mustard seed oil-Cake

Soy bean

Soy Oil

Copra

CottonSeed

Safflower

Groundnut

Sugar

Sacking

Coffee-Robusta Cherry AB

Coconut oil

25


Castorseed

Castor-oil

Groundnut oilcakes

Cottonseed oil

Sesamum (Til or Jiljili)

Sesamum oil

Sesamum OilCake

Safflower OilCake

Rice Bran Oil

Safflower Oil

Sunflower OilCake

Sunflower Seed

Pepper

Crude Palm Oil

Guar seed

Castor Oil Cake

Cottonseed - Oilcake

Aluminum Ingots

Nickel

Vanaspati

Soybean Oilcake

Rubber

Copper

Zinc

Lead

Tin

Linseed

Linseed Oil

Linseed Oilcake

Coconut Oilcake

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Gram

Gold

Silver

Rice

Wheat

Cardamom

Kilo - Gold

Masoor

Urad

Tur / Arhar

Moong

Rapeseed - 42

Raw Jute

Coffee-Arabica Plantation A

19 Surendranagar Cotton oil

& Oilseeds Association

Ltd,

Kapas

CottonSeed

Cotton bales

20 Multi Commodity

Exchange of India Ltd.

Gur

RBD Pamolein

Groundnut Oil


Pepper Domestic-MG1

Soy bean

Kapas

Soy Meal

CottonSeed

Turmeric

Castorseed

Castor-oil

27


Crude Palm Oil

Guar seed

Cottonseed - Oilcake

Nickel

Rubber

Copper

Tin

Gram

Sugar Grade - M

Sugar Grade - S

Gold

Silver

Gold-M

Rice

Wheat

Ref Soya oil - Indore

Urad

Tur / Arhar

Guar Gum

Castorseed-5

Silver-M

Steel - Flat

Steel - Long

Yellow Peas

Long Staple Cotton

Medium Stapple Cotton

Castorseed - Disa

Mustard Seed

Guar seed Bandhani

Gold - HNI

28


Silver - HNI

Red Chilly

Maize

Guar Gum Bandhani

CASHEW KERNEL W320

Basmati Rice

Jeera

Mustard Seed Jaipur

Crude Oil

Sarbati Rice

Sesame Seed ( Natural 99.1)

Cotton Long Kadi

Cotton Med Abohar

Cotton Short Stap ,Steel Long Bhavnagar

Mentha Oil

21 National Commodity &

Derivatives Exchange Ltd.

S06 L S Cotton Ahmedabad

J34 M S Cotton Bhatinda

Crude Palm oil - Kandla

RBD P'Olein - Kakinada

EXP R/M oil - Jaipur

Rape/Mustard seed - Jaipur

Ref Soya oil - Indore

Soy bean - Indore

Pure Gold - Mumbai

Pure Silver - New Delhi

Pure Gold - Mumbai - 1 Kg

Pure Silver - New Delhi - 30 Kg (Mega)

Rubber - Kottayam

Pepper - Kochi

Gram(Chana) - New Delhi

29


Guar seed - Jodhpur

Jute (B twill-665 Gms) - Kolkata

Turmeric - Nizamabad

Castorseed - Disa

Raw Jute - Kolkata

Guar Gum - Jodhpur

Sugar M Grade - Muzaffarnagar

Urad - Mumbai

Sugar S Grade - Vashi

Yellow Peas - Mumbai

Wheat - New Delhi SMQ

Soy Meal - Indore

SONA995MUM

CHANDIDEL

CottonKadi

CottonAbohar

Gur-chaku - Muzaffarnagar

Yellow Red Maize - Nizamabad

Grade A Raw Rice Delhi

Grade A Parboiled Rice Delhi

Common Raw Rice Delhi

Common Parboiled Rice Delhi

Mulberry Raw Silk

Mulberry Green Cocoons

Jeera Unjha

Chilli (Paala) Guntur

Mild Steel Ingots - Ghaziabad

Cashews W-320-Kollam

Whitish Sesame Seed - Rajkot

Cotton Seed Oilcake - Akola

30


Lemon Tur - Mumbai

Maharashtra Lal Tur - Akola

Arabica Coffee - Hassan

Robusta Coffee - Kushalnagar

22 Haryana Commodities

Ltd., Hissar.


Rapeseed/Mustard seed Oil.

COMMODITIES EXCHANGES ACROSS THE WORLD

Main commodities exchanges worldwide:

Exchange Abbreviation Location Product Types

Australian Securities Exchange ASX Sydney Agricultural

Brazilian Mercantile and Futures

Exchange

BMF Brazil Agricultural, Biofuels,

Precious Metals

Bursa Malaysia MDEX Malaysia Biofuels

Central Japan Commodity

Exchange

Nagoya Energy, Industrial Metals,

Rubber

Chicago Board of Trade CBOT Chicago Agricultural, Biofuels,

Precious Metals

Chicago Climate Exchange CCX Chicago Emissions

Chicago Mercantile Exchange CME Chicago Agricultural, Biofuels

Dalian Commodity Exchange DCE China Agricultural, Plastics

Dubai Mercantile Exchange DME Dubai Energy

Dubai Gold & Commodities DGCX Dubai Precious Metals

31


Exchange

Euronext Europe Agricultural

European Climate Exchange ECX Europe Emissions

Hedge Street Exchange California Energy, industrial Metals

Intercontinental Exchange ICE Energy, Emissions

Kansai Commodities Exchange KANEX Osaka Agricultural

Kansas City Board of Trade KCBT Kansas City Agricultural

London Metal Exchange LME London Industrial Metals, Plastics

Memphis Cotton Exchange Memphis Agricultural

Minneapolis Grain Exchange Minneapolis Agricultural

Multi Commodity Exchange MCX India

National Commodity Exchange

Limited

NCX Karachi Precious Metals,

Agricultural

National Commodity and

Derivatives Exchange

NCDEX Mumbai All

New York Board of Trade NYBOT New York Agricultural, Biofuels

New York Mercantile Exchange NYMEX New York Energy, Agricultural,

Industrial Metals, Precious

Metals

Risk Management Exchange RMX Agricultural

Shanghai Futures Exchange SFE Shanghai Energy, Industrial Metals,

Rubber

Singapore Commodity Exchange SICOM Singapore Agricultural, Rubber

32


Tokyo Commodity Exchange TOCOM Tokyo Energy, Precious Metals,

Industrial Metals,

Agricultural

U.S. Futures Exchange USFE Chicago Energy

Tokyo Grain Exchange TGE Tokyo Agricultural

Winnipeg Commodity Exchange WCE Winnipeg Agricultural

Zhengzhou Commodity Exchange CZCE China Agricultural

TRADING AT COMMODITY MARKETS

Trading Mechanism:

Benefits of futures market, viz., price discovery and price risk management flow more easily

from an Order-driven system rather than Quote-driven system. NMCE follows the former

system. NMCE does not support any market maker. Traders submit orders and the incoming

orders are matched against the existing orders in the order book. Transactions are cleared and

settled through NMCE’s in-house Clearing and Settlement House, which is connected to all its

Members and the Clearing Banks. Delivery of the underlying commodities is permitted only

through a Central Warehousing Corporation (CWC) receipt, which meets highest contemporary

international standards. Anonymity of trading participants and effective risk management system

strengthens the trust of the participants in the trading system, which is a precondition for

enhancing breadth and depth of the market.

Trading Cum Clearing members( TCM ):

He is one who has the right to execute transactions in addition to a right to clear its transactions

in contracts executed at NMCE either on his own behalf or on behalf of other Trading Members.

33


Trading Member/Brokers:

He is one who has the right to execute transactions in the trading system of the exchange and the

right to have contracts in his own name. The TM can also deal on behalf of clients (Registered

Non Members) or enlist Sub Brokers who may in turn have their own set of clients. TM must

settle all his transactions (and those of Sub Brokers and Registered Non Member) through

Clearing Members (Trading cum Clearing Members or Institutional Clearing Members).

Institutional Clearing Members ( ICM’S ):

They are professional entities providing clearing services to their institutional clients (viz.

Trading Members and their Sub Brokers & Registered Non Members). They however do not

have the right to trade on their own account.

Future Trading Hierarchy:

34


Ministry of Consumer Affairs, Ministry of Consumer Affairs,

Food and Public Food and Public

Distribution(Government of India)Distribution(Government of India)

Forward markets Forward markets

Commission(FMC)Commission(FMC)

National Multi-Commodity National Multi-Commodity

Exchange (NMCE)Exchange (NMCE)

Trading Cum Clearing Trading Cum Clearing

Members (TCM) Members (TCM)

Institutional Clearing Institutional Clearing

Members (ICMs)Members (ICMs)

Client / Non Client / Non

Registered MemberRegistered Member

Trading Members (TM)Trading Members (TM)

TraderTrader

35


OLD EXCHANGES IN INDIA

Bombay Oilseeds & Oils Exchange Limited (BOOE).

Cotton exchange.

Bombay Oilseeds & Oils Exchange Limited (BOOE):

In the year 1900, "Gujarati Vyapari Mandali" was established in Mumbai to regulate oilseeds

futures market. On 19th July, 1926, "The Seeds Traders' Association" was formed in Mumbai,

which took over the oilseeds futures trading activity from "Gujarati Vyapari Mandali". It was

conducting futures trading in groundnut, castorseed and cottonseed since its inception. "The

Seeds Traders' Association Limited" was incorporated as a Company under Indian Companies

Act, 1913 on 12th October, 1938.

In 1943, forward trading in oilseeds was prohibited under the Defense of India Act. Again,

activities started in this arena after enactment of the Bombay Forward Contracts (Control) Act in

1947. The name of this company was changed to "The Bombay Oilseeds & Oils Exchange

Limited" with effect from 27th April, 1950 by order of the Registrar of Companies, Maharashtra.

On 19th September, 1950 the Exchange was recognized under the Bombay Forward Contracts

(Control) Act, 1947 for regulating futures trading in all oilseeds. This date marks the beginning

of the BOOE as it exists today.

During 1955-56, the Exchange launched futures trading in linseed and groundnut oil also apart

from groundnut, castor seed and cottonseed, which were already functional. In 1963, the

Exchange launched futures trading in groundnut oilcake expeller variety. Futures trading in oils

and oilseeds, which was successfully operational, received a severe jolt in mid 1960s, when the

Govt. banned futures trading in all edible oils and its products. Further, in 1971 futures trading in

cottonseed was banned and in 1977, it was banned in respect of castor seed and linseed too.

Hence, there was absolute absence of futures trading in all commodities in BOOE since 1977 to

1985.

36


In 1985, the Govt. again allowed BOOE to launch futures trading in castor seed, which is

operational since then. On 29th January, 1999, the Clearing Corporation under the name and

style of "Prime Commodities Clearing Corporation Limited" was incorporated as a separate

company limited by shares having an Authorized Capital of Rs. 5 crores.

During 1998, BOOE got approval to launch futures trading in International Castor oil, which was

successfully launched in May 1999. In November 1999, the Exchange got approval from the Govt. to

launch futures trading in RBD Palmolein, Groundnut oil, seed and oilcake, Sunflower oil, seed and

oilcake, Safflower oil, oilseed and oilcake; Sesame oil, seed and oilcake, cottonseed, oil and oilcake

and Rice bran oil, seed and oilcake.

During November 1999 to February 2000 all quality specifications and contract design in

different commodities was finalized after incorporating the views of cross section of people

representing trade and industry. In March 2000 all the Bye-laws containing all such

specifications have been submitted to Forward Market Commission for approval. In August

2000, trading in RBD Palmolein, Groundnut oil and Sunflower oil was launched, while futures

trading in all other commodities will be launched later.

Membership Requirements:

An individual, body-corporate or other entities can become a member of the Exchange, if it

pays the admission fee (Rs. 1 lac*), a security deposit of RS. 50 thousand and an annual

subscription of Rs. 2000.

Besides, according to its class, a member has to comply with following requirements:

Trading-cum-

clearing Members

Institutional

Clearing Members

Designated Clearing

banks

Equity participation

in PCCCI**

Minimum Rs. 50

thousand

Maximum Rs. 20

lacs*

Minimum Rs. 10

lacs*

Maximum Rs. 1

crore*

Rs. 1 crore*

37


Security deposit with

PCCCI**

Minimum Rs. 50

thousand and

thereafter in multiples

of Rs. 50 thousand.

( There is no

maximum limit)

Minimum Rs. 5 lacs

and thereafter in

multiples of Rs. 5

lacs*. (There is no

maximum limit)

Not applicable

Annual Subscription Rs. 500 Rs. 500 Rs. 500

Minimum Net worth

Criteria

Rs. 3 lacs* (In case of

non-corporate entity)

Rs. 10 lacs* (In case

of corporate entity)

Not Applicable Not Applicable

* lacs = 100 000; crore = 1 000 000

** PCCCI = Prime Commodities Clearing Corporation of India Limited.

Cotton Exchange:

Cotton cultivation in the Old World began from India, where cotton

has been grown for more than 6,000 years, since the pre-Harappan period. Cotton from the Harappan

civilization was exported to Mesopotamia during the 3rd millennium BC, and cotton was soon

known to the Egyptians as well. The famous Greek historian Herodotus also wrote about Indian

cotton: "There are trees which grow wild there, the fruit of which is wool exceeding in beauty and

goodness that of sheep. The Indians make their clothes of this tree wool."

38


In Peru, cotton was the backbone of the development of coastal cultures such as the Moshe and

Nazca. Cotton was grown upriver, made into nets and traded with fishing villages along the coast

for large supplies of fish. The Spanish who came to Mexico in the early 1500s found the people

growing cotton and wearing clothing made of it.

During the late medieval period, cotton became known as an imported fiber in northern Europe

without any knowledge of what it came from other than that it was a plant; noting its similarities

to wool, people in the region could only imagine that cotton must be produced by plant-borne

sheep. John Mandeville, writing in 1350, stated as fact the now-preposterous belief: "There

grewthere [India] a wonderful tree which bore tiny lambs on the endes of its branches. These

branches were so pliable that they bent down to allow the lambs to feed when they are hungrie."

This aspect is retained in the name for cotton in many European languages, such as German

Baumwolle, which translates as "tree wool". By the end of the 16th century, cotton was

cultivated throughout the warmer regions in Asia and the Americas.

India's cotton-processing sector gradually declined during British expansion in India and the

establishment of colonial rule during the late 18th and early 19th centuries. This was largely due

to the East India Company's de-industrialization of India, which forced the closing of cotton

processing and manufacturing workshops in India, to ensure that Indian markets supplied only

raw materials and were obliged to purchase manufactured textiles from Britain.

The advent of the Industrial Revolution in Britain provided a great boost to cotton manufacture,

as textiles emerged as Britain's leading export. In 1738 Lewis Paul and John Wyatt, of

Birmingham England, patented the Roller Spinning machine, and the flyer-and-bobbin system

for drawing cotton to a more even thickness using two sets of rollers that travelled at different

speeds. Later, the invention of the spinning jenny in 1764 and Richard Arkwright's spinning

frame (based on the Roller Spinning Machine) in 1769 enabled British weavers to produce cotton

yarn and cloth at much higher rates. From the late eighteenth century onwards, the British city of

Manchester acquired the nickname "cotton polis" due to the cotton industry's omnipresence

within the city, and Manchester's role as the heart of the global cotton trade. Production capacity

was further improved by the invention of the cotton gin by Eli Whitney in 1793. Improving

technology and increasing control of world markets allowed British traders to develop a

commercial chain in which raw cotton fibers were (at first) purchased from colonial plantations,

39


processed into cotton cloth in the mills of Lancashire, and then re-exported on British ships to

captive colonial markets in West Africa, India, and China (via Shanghai and Hong Kong).

By the 1840s, India was no longer capable of supplying the vast quantities of cotton fibers

needed by mechanized British factories, while shipping bulky, low-price cotton from India to

Britain was time-consuming and expensive. This, coupled with the emergence of American

cotton as a superior type (due to the longer, stronger fibers of the two domesticated native

American species, Gossypium hirsutum and Gossypium barbadense), encouraged British traders

to purchase a cotton from plantations in the United States and the Caribbean. This was also much

cheaper as it was produced by unpaid slaves. By the mid 19th century, "King Cotton" had

become the backbone of the southern American economy. In the United States, cultivating and

harvesting cotton became the leading occupation of slaves.

During the American Civil War, American cotton exports slumped due to a Union blockade on

Southern ports, prompting the main purchasers of cotton, Britain and France, to turn to Egyptian

cotton. British and French traders invested heavily in cotton plantations and the Egyptian

government of Viceroy Ismail took out substantial loans from European bankers and stock

exchanges. After the American Civil War ended in 1865, British and French traders abandoned

Egyptian cotton and returned to cheap American exports, sending Egypt into a deficit spiral that

led to the country declaring bankruptcy in 1876, a key factor behind Egypt's annexation by the

British Empire in 1882.

Picking cotton in Oklahoma in 1980’s

During this time cotton cultivation in the British Empire, especially India, greatly increased to

replace the lost production of the American South. Through tariffs and other restrictions the

40


British government discouraged the production of cotton cloth in India; rather the raw fiber was

sent to England for processing.

The Indian patriot Gandhi described the process:

1. English people buy Indian cotton in the field, picked by Indian labour at seven cents a

day, through an optional monopoly.

2. This cotton are shipped on British bottoms, a three weeks journey acrossthe Indian

Ocean, down the Red Sea, across the Mediterranean, through Gibraltar, across the Bay of

Biscay and the Atlantic Ocean to London. One hundred per cent profit on this freight is

regarded as small.

3. The cotton are turned into cloth in Lancashire. You pay shilling wages instead of Indian

pennies to your workers. The English worker not only has the advantage of better wages,

but the steel companies of England get the profit of building the factories and machines.

Wages; profits; all these are spent in England.

4. The finished product is sent back to India at European shipping rates, once again on

British ships. The captains, officers, sailors of these ships, whose wages must be paid, are

English. The only Indians who profit are a few lascars who do the dirty work on the boats

for a few cents a day.

5. The cloth is finally sold back to the kings and landlords of India who got the money to

buy this expensive cloth out of the poor peasants of India who worked at seven cents a

day.

NEW EXCHANGES IN INDIA

Multi Commodity Exchange(MCX).

National Commodity & Derivatives Exchange Limited (NCDEX).

41


National Commodity & Derivatives Exchange Limited(NCDEX).

Multi Commodity Exchange(MCX):

Type- Private

Founded- 2003

Headquarters- 102 A, Landmark, Suren Road, Chakala, Andheri (East), Mumbai; India.

Key people- Jignesh Shah, CEO

Industry- Business Services

Products- Options/Futures exchange

Revenue- Rs 104.39 crore (2005-2006)

Website- www.mcxindia.com

Multi Commodity Exchange (MCX) is an independent commodity exchange based in India. It

was established in 2003 and is based in Mumbai. It has an average daily turnover of

aroundUS$1.55 billion. MCX offers futures trading in Agricultural Commodities, Bullion,

Ferrous & Non-ferrous metals, Pulses, Oils & Oilseeds, Energy, Plantations, Spices and other

soft commodities.

42

http://en.wikipedia.org/wiki/United_States_dollar

http://en.wikipedia.org/wiki/Commodity_exchange

http://www.mcxindia.com/

http://en.wikipedia.org/wiki/Image:Flag_of_India.svg


MCX has also setup in joint venture the National Spot Exchange a purely agricultural

commodity exchange and National Bulk Handling Corporation (NBHC) which provides bulk

storage and handling of agriculture products.

Headquartered in Mumbai Multi Commodity Exchange of India Limited (MCX), is an

independent and de-mutulised 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.

MCX started offering trade in November 2003 and has built strategic alliances with Bombay

Bullion Association, Bombay Metal Exchange, Solvent Extractors’ Association of India, Pulses

Importers Association and Shetkari Sanghatana.

National Commodity & Derivatives Exchange Limited (NCDEX):

National Commodity & Derivatives Exchange Limited (NCDEX) is an online commodity

exchange based in India. It was incorporated as a private limited company incorporated on April

23, 2003 under the Companies Act, 1956. It obtained its Certificate for Commencement of

Business on May 9, 2003. It has commenced its operations on December 15, 2003. NCDEX is a

closely held private company which is promoted by national level institutions and has an

independent Board of Directors and professionals not having vested interest in commodity

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

institutions. It is promoted by ICICI Bank Limited, Life Insurance Corporation of India (LIC),

National Bank for Agriculture and Rural Development (NABARD) and National Stock

Exchange of India Limited (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.

CRISIL Limited ( formerly the Credit Rating Information Services of India Ltd)

Indian Farmers Fertilizer Cooperative Limited ( IFFCO )

Canada bank

43


Goldman Sachs.

NCDEX is regulated by Forward Market Commission (FMC) in respect of futures trading in

commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act,

Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations,

which impinge on its working. On February 3rd, 2006, the FMC found NCDEX guilty of

violating settlement price norms and ordered the exchange to fire one of their executive.

NCDEX is located in Mumbai and offers facilities in more than 500 centers in India.

Commodities Traded:

NCDEX currently facilitates trading of 56 commodities –

Agri-based commodities - Castor Seed, Chana, Chilli, Coffee - Arabica, Coffee - Robusta

Common Parboiled Rice, Common Raw Rice, Cotton Seed Oilcake, Crude Palm Oil, Expeller

Mustard Oil, Groundnut (in shell), Groundnut Expeller Oil, Grade A Parboiled Rice, Grade A

Raw Rice, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Indian 28 mm Cotton , Indian

31 mm Cotton , Lemon Tur, Maharashtra Lal Tur, Masoor Grain Bold, Medium Staple Cotton,

Mentha Oil , Mulberry Green Cocoons , Mulberry Raw Silk , Rapeseed - Mustard Seed, Pepper,

Raw Jute, RBD Palmolein, Refined Soy Oil , Rubber, Sesame Seeds, Soy Bean, Silver, Sugar,

Turmeric, Urad (Black Matpe), V-797 Kapas, Wheat, Yellow Peas, Yellow Red Maize, and

Yellow Soybean Meal.

Bullion - Gold 1 KG, Gold 100gm, Silver 30 KG, Silver 5 KG.

Energy - Brent Crude Oil, Furnace Oil, Light Sweet Crude Oil.

Ferrous Metals - Mild Steel Ingot

Plastics - Polypropylene, Linear Low Density Polyethylene, and Polyvinyl Chloride.

Non-ferrous Metals - Aluminum Ingot,Copper Cathode, Nickel Ingot and Zinc Cathode.

Facilities Offered:

44


NCDEX also offers as an information product, an agricultural commodity index. This is a

composite index, called NCDEXAGRI that convers 20 commodities currently being offered for

trading by NCDEX. This is a spot-price based index. NCDEX also offers as an information

product, the index futures, called FUTEXAGRI. This is essentially a what-if index. It indicates,

that if futures on the index could be traded, then the current FUTEXAGRI value should be the

no-arbitrage value for the index futures. However, indexes and index futures are not allowed to

be traded under the current regulatory structure.

National Commodity & Derivatives Exchange Limited(NCDEX).

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.

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 produce 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.

A big difference between a typical auction, where a single auctioneer announces the bids and the

Exchange is that people are not only competing to buy but also to sell. By Exchange rules and by

law, no one can bid under a higher bid, and no one can offer to sell higher than someone else’s

lower offer. That keeps the market as efficient as possible, and keeps the traders on their toes to

make sure no one gets the purchase or sale before they do.

Turnover on commodity futures in India

45


EXCHANGES WORLDWIDE

46


London Metal Exchange( LME).

Tokyo Grain Exchange (TGE).

Chicago Board of Trade (CBOT).

New York Mercantile Exchange (NYMEX).

London Metal Exchange( LME):

Established for over 130 years and located in the heart of The City of London, the London Metal

Exchange is the world’s premier non-ferrous metals market. It offers futures and options

contracts for aluminium, copper, nickel, tin, zinc and lead plus two regional aluminium alloy

contracts. In 2005 the Exchange launched the world’s first futures contracts for plastics; for

polypropylene and linear low density polyethylene, with the introduction of regional plastics

contracts in 2007. In addition, it offers LMEminis, which are smaller-sized contracts for copper,

aluminium and zinc plus an index contract (LMEX).

The Exchange provides a transparent forum for all trading activity and as a result helps to

‘discover’ what the price of material will be months and years ahead. This helps the physical

industry to plan forward in a world subject to often severe and rapid price movements. Such is

the liquidity at the Exchange that the prices ‘discovered’ at the LME are recognised and relied

upon by industry throughout the world.

Being a principal-to-principal market, the only organizations able to trade are its member firms,

of which there are various categories. In 2007, the London Metal Exchange celebrates 130 years

since its founding in 1877. The Exchange is forward looking and is in the process of

implementing its “2 by 2” strategy which will see the LME developing two streams of organic

growth from non-ferrous into ferrous metals and from Futures into OTC trading. It is designed to

double trading volumes at the LME within the next three to five years.

47


International trade in metals could be said to have commenced in Britain when the Romans

invaded in AD43 and extracted the large deposits of copper and tin ore in Cornwall and Wales to

satisfy their increasing domestic need for the production of bronze and alloys.

Trading on the LME

Regulation of the market is carried out by the LME while the UK’s Financial Services Authority

is responsible for regulating the business of LME members.

The LME provides the flexibility of three trading platforms; which operate side-by-side:

Ring trading

Open-outcry is the oldest and most popular way of trading on the Exchange. It is central to the

process of ‘price discovery’, a term used to describe the way LME official prices are established.

These prices are derived from the most liquid periods of trading; the short open-outcry ‘ring’

trading sessions, and are most representative of industry supply and demand. The official

settlement price, on which contracts are settled, is determined by the last offer price before the

bell is sounded to mark the end of the official ring.

LME Select

LME Select is the official Exchange-operated electronic trading platform. LME member firms

are connected to the LME Select system which allows accredited traders to execute trades

electronically. It allows for straight-through processing in which LME Select trades are

automatically sent to the matching and clearing systems operated by LCH.Clearnet.

The system also enables LME members to connect their clients directly to the LME Select

trading system via third party applications, a process known as ‘order-routing’.

Telephone trading

48

http://www.lme.com/who_how_interoffice.asp

http://www.lme.com/who_how_interoffice.asp

http://www.lme.com/who_how_select.asp

http://www.lme.com/who_how_ringtrading.asp


24 hours a day

The Exchange also supports an inter-office telephone market between LME members which

operates 24 hours a day.

Tokyo Grain Exchange (TGE):

The first Commodity Exchange in Japan was first established in 1730 when the feudal

government of Tokugawa responded to rice merchants' requests and authorized such transactions

at the Dogma Rice Market in Osaka.

Tokyo, then called Edo in Tokugawa era, followed Osaka in establishing rice marekts in the

towns such as Koami-cho and Kobuna-cho, as well as at the warehouses of feudal domains',

trading futures on rice produced in eastern part of Japan.

The Tokyo Grain Exchange originates from the Kakigaracho Rice Trading Exchange, established

in 1874 by a group of the Chugai Shoko Kaisha. The Exchange then changed it's name to the

Tokyo Rice Trading Exchange, the Tokyo Rice Exchange and, in 1908, to the Tokyo Rice and

Commodities Exchange.

In July 1939, however, the economic control under the World War II forced the Exchange to

close. It was not until September, 1952, the Exchange was reestablished as the trading facility

listing futures contracts on agricultural commodities, in response to the government lifting the

policy of grain control in the previous year.

Since the reopening in October 10, 1952, the reestablished exchange was housed in the same

building it occupied in pre-war era, until it was newly constructed in November, 1987.

Though there were only 3 futures contracts ( Domestic Soybean, Azuki Bean, Potato Starch) at

the reopening, the Exchange has widened the listings over the years to include Corn, Non-GMO

and regular Soybean, Arabica Coffee Beans and other products.

Chicago Board of Trade (CBOT):

49


The Chicago Board of Trade (CBOT ), established in 1848, is a leading futures and futures-

options exchange. More than 3,600 CBOT member/stockholders trade 50 different futures and

options products at the CBOT by open auction and electronically. Volume at the Exchange in

2006 surpassed 805 million contracts, the highest yearly total recorded in its history.

In its early history, the CBOT traded only agricultural commodities such as corn, wheat, oats and

soybeans. Futures contracts at the Exchange evolved over the years to include non-storable

agricultural commodities and non-agricultural products. In October 2005, the CBOT marked the

30th anniversary of the the Exchange's first financial futures contract, based on Government

National Mortgage Association mortgage-backed certificates. Since that introduction, futures

trading has been initiated in many financial instruments, including U.S. Treasury bonds and

notes, 30-Day Federal Funds, stock indexes, and swaps, to name but a few.

Another market innovation, options on futures, was introduced in 1982. The CBOT added a new

category to its diverse product mix in 2001 with the launch of 100 percent electronic Gold and

Silver futures contracts. Additionally, South American Soybean futures and Ethanol futures, the

Exchange’s newest products, were introduced in 2005 in response to shifting trends in the global

agricultural economy.

For decades, the primary method of trading at the CBOT was open auction, which involved

traders meeting face-to-face in trading pits to buy and sell futures contracts. But to better meet

the needs of a growing global economy, the CBOT successfully launched its first electronic

trading system in 1994. During the last decade, as the use of electronic trading has become more

prevalent, the Exchange has upgraded its electronic trading system several times. Most recently,

on October 12, 2005, the CBOT successfully launched its newly enhanced electronic trading

platform, e-cbot, powered by LIFFE CONNECT, by introducing a major API upgrade.

New York Mercantile Exchange NYMEX:

The New York Mercantile Exchange, Inc., is the world's largest physical commodity futures

exchange and the preeminent trading forum for energy and precious metals.

50


The Exchange has stood for market integrity and price transparency for more than 130 years.

Transactions executed on the Exchange avoid the risk of counterparty default because the

Exchange clearinghouse acts as the counterparty to every trade. Trading is conducted through

two divisions, the NYMEX Division, home to the energy, platinum, and palladium markets; and

the COMEX Division, on which all other metals trade.

The Exchange pioneered the development of energy futures and options contracts 26 years ago

as means of bringing price transparency and risk management to this vital market.

The Exchange plays a vibrant role in the commercial, civic, and cultural life of New York. It

provides thousands of jobs in the financial services and allied industries and, through the New

York Mercantile Exchange Charitable Foundation, supports cultural and social service programs

in the downtown community as well as broader charitable endeavors in the metropolitan area.

BEGINNERS GUIDE TO COMMODITIES FUTURES TRADING IN INDIA

Indian markets have recently thrown open a new avenue for retail investors and traders to

participate: commodity derivatives. To diversify portfolios beyond shares, bonds and real estate,

commodities is the best option.

Till some months ago, this wouldn't have made sense. For retail investors could have done very

little to actually invest in commodities such as gold and silver -- or oilseeds in the futures market.

This was nearly impossible in commodities except for gold and silver as there was practically no

retail avenue for punting in commodities.

However, with the setting up of three multi-commodity exchanges in the country, retail investors

can now trade in commodity futures without having physical stocks!

Commodities actually offer immense potential to become a separate asset class for market-savvy

investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity

markets may find commodities an unfathomable market. But commodities are easy to understand

as far as fundamentals of demand and supply are concerned. Retail investors should understand

the risks and advantages of trading in commodities futures before taking a leap. Historically,

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pricing in commodities futures has been less volatile compared with equity and bonds, thus

providing an efficient portfolio diversification option.

In fact, the size of the commodities markets in India is also quite significant. Of the country's

GDP of Rs 13,20,730 crore (Rs 13,207.3 billion), commodities related (and dependent)

industries constitute about 58 per cent.

Currently, the various commodities across the country clock has an annual turnover of Rs

1,40,000 crore (Rs 1,400 billion).

The market mediates between buyers and sellers of commodities, and facilitates decisions

related to storage and consumption of commodities. In the process, they make the underlying

market more liquid.

Here's how a retail investor can get started:

Where do I need to go to trade in commodity futures?

You have three options - the National Commodity and Derivative Exchange, the Multi

Commodity Exchange of India Ltd and the National Multi Commodity Exchange of India Ltd.

All three have electronic trading and settlement systems and a national presence.

How do I choose my broker?

Several already-established equity brokers have sought membership with NCDEX and MCX.

The likes of Refco Sify Securities, SSKI (Sharekhan) and ICICIcommtrade (ICICIdirect),BMA

Wealth Creators, ISJ Comdesk (ISJ Securities) and Sunidhi Consultancy are already offering

commodity futures services. Some of them also offer trading through Internet just like the way

they offer equities. You can also get a list of more members from the respective exchanges and

decide upon the broker you want to choose from.

What is the minimum investment needed?

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You can have an amount as low as Rs 5,000. All you need is money for margins payable upfront

to exchanges through brokers. The margins range from 5-10 per cent of the value of the

commodity contract. While you can start off trading at Rs 5,000 with ISJ Commtrade other

brokers have different packages for clients.

For trading in bullion, that is, gold and silver, the minimum amount required is Rs 650 and Rs

950 for on the current price of approximately Rs 65,00 for gold for one trading unit (10 gm) and

about Rs 9,500 for silver (one kg).

The prices and trading lots in agricultural commodities vary from exchange to exchange (in kg,

quintals or tonnes), but again the minimum funds required to begin will be approximately Rs

5,000.

Do I have to give delivery or settle in cash?

You can do both. All the exchanges have both systems - cash and delivery mechanisms. The

choice is yours. If you want your contract to be cash settled, you have to indicate at the time of

placing the order that you don't intend to deliver the item.

If you plan to take or make delivery, you need to have the required warehouse receipts. The

option to settle in cash or through delivery can be changed as many times as one wants till the

last day of the expiry of the contract.

What do I need to start trading in commodity futures?

As of now you will need only one bank account. You will need a separate commodity demat

account from the National Securities Depository Ltd to trade on the NCDEX just like in stocks.

What are the other requirements at broker level?

You will have to enter into a normal account agreements with the broker. These include the

procedure of the Know Your Client format that exist in equity trading and terms of conditions of

the exchanges and broker. Besides you will need to give you details such as PAN no., bank

account no, etc.

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What are the brokerage and transaction charges?

The brokerage charges range from 0.10-0.25 per cent of the contract value. Transaction charges

range between Rs 6 and Rs 10 per lakh/per contract. The brokerage will be different for different

commodities. It will also differ based on trading transactions and delivery transactions. In case of

a contract resulting in delivery, the brokerage can be 0.25 - 1 per cent of the contract value. The

brokerage cannot exceed the maximum limit specified by the exchanges.

Where do I look for information on commodities?

Daily financial newspapers carry spot prices and relevant news and articles on most

commodities. Besides, there are specialised magazines on agricultural commodities and metals

available for subscription. Brokers also provide research and analysis support.

But the information easiest to access is from websites. Though many websites are subscription-

based, a few also offer information for free. You can surf the web and narrow down you search.

Who is the regulator?

The exchanges are regulated by the Forward Markets Commission. Unlike the equity markets,

brokers don't need to register themselves with the regulator.

The FMC deals with exchange administration and will seek to inspect the books of brokers only

if foul practices are suspected or if the exchanges themselves fail to take action. In a sense,

therefore, the commodity exchanges are more self-regulating than stock exchanges. But this

could change if retail participation in commodities grows substantially.

Who are the players in commodity derivatives?

The commodities market will have three broad categories of market participants apart from

brokers and the exchange administration - hedgers, speculators and arbitrageurs. Brokers will

intermediate, facilitating hedgers and speculators.

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Hedgers are essentially players with an underlying risk in a commodity - they may be either

producers or consumers who want to transfer the price-risk onto the market.

Producer-hedgers are those who want to mitigate the risk of prices declining by the time they

actually produce their commodity for sale in the market; consumer hedgers would want to do the

opposite.

For example, if you are a jewellery company with export orders at fixed prices, you might want

to buy gold futures to lock into current prices. Investors and traders wanting to benefit or profit

from price variations are essentially speculators. They serve as counterparties to hedgers and

accept the risk offered by the hedgers in a bid to gain from favourable price changes.

In which commodities can I trade?

Though the government has essentially made almost all commodities eligible for futures trading,

the nationwide exchanges have earmarked only a select few for starters. While the NMCE has

most major agricultural commodities and metals under its fold, the NCDEX, has a large number

of agriculture, metal and energy commodities. MCX also offers many commodities for futures

trading.

Do I have to pay sales tax on all trades? Is registration mandatory?

No. If the trade is squared off no sales tax is applicable. The sales tax is applicable only in case

of trade resulting into delivery. Normally it is the seller's responsibility to collect and pay sales

tax. The sales tax is applicable at the place of delivery. Those who are willing to opt for physical

delivery need to have sales tax registration number.

What happens if there is any default?

Both the exchanges, NCDEX and MCX, maintain settlement guarantee funds. The exchanges

have a penalty clause in case of any default by any member. There is also a separate arbitration

panel of exchanges.

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Are any additional margin/brokerage/charges imposed in case I want to take delivery of

goods?

Yes. In case of delivery, the margin during the delivery period increases to 20-25 per cent of the

contract value. The member/ broker will levy extra charges in case of trades resulting in delivery.

Is stamp duty levied in commodity contracts? What are the stamp duty rates?

As of now, there is no stamp duty applicable for commodity futures that have contract notes

generated in electronic form. However, in case of delivery, the stamp duty will be applicable

according to the prescribed laws of the state the investor trades in. This is applicable in similar

fashion as in stock market.

How much margin is applicable in the commodities market?

As in stocks, in commodities also the margin is calculated by (value at risk) VaR system.

Normally it is between 5 per cent and 10 per cent of the contract value.

The margin is different for each commodity. Just like in equities, in commodities also there is a

system of initial margin and mark-to-market margin. The margin keeps changing depending on

the change in price and volatility.

Are there circuit filters?

Yes the exchanges have circuit filters in place. The filters vary from commodity to commodity

but the maximum individual commodity circuit filter is 6 per cent. The price of any commodity

that fluctuates either way beyond its limit will immediately call for circuit breaker.

ROLE AND IMPORTANCE OF COMMODITY MARKETS

What makes commodity trading attractive?

* A good low-risk portfolio diversifier

* A highly liquid asset class, acting as a counterweight to stocks, bonds and real estate.

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* Less volatile, compared with, equities and bonds.

* Investors can leverage their investments and multiply potential earnings.

* Better risk-adjusted returns

* A good hedge against any downturn in equities or bonds as there is little correlation with

equity and bond markets.

* High co-relation with changes in inflation

* No securities transaction tax levied.

. Tradable Commodities:

World-over one will find that a market exits for almost all the commodities. These commodities

can be broadly classified into the following:

Precious Metals: Gold, Silver, Platinum etc.

Other Metals: Nickel, Aluminum, Copper etc.

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

Soft Commodities: Coffee, Cocoa, Sugar etc

Live Stock: Live Cattle, Pork Bellies etc. Energy: Crude Oil, Natural Gas, Gasoline etc.

Returns from Commodity trading:

Absolute returns from stocks and bonds are definitely higher than pure commodities. But

commodity trading carries a lower downside risk than other asset classes, as pricing in

commodity future is less volatile compared to equities and bonds. While the average annual

volatility is 25-30% in benchmark equity indices like the BSE Sensex or NSE's Nifty, it is 12-

18% in gold, 15-25% in silver, 10-12% in cotton and 5-10% in government securities.

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According to study, if an investor had put his money only in silver and bonds from 1997-2003,

his absolute returns would above been 24%. Commodities are also good bets to hedge against

inflation. Gold offers good protection against exchange rate fluctuations, and, in particular,

against fluctuations in the value of the US dollar against other leading currencies.

However, unlike stocks, commodity prices are dependent on their demand-supply position,

global weather patterns, government policies related to subsidies and taxation and international

trading norms as guided by the World Trade Organisation (WTO).

Growth of commodity trading:

A soft interest rat regime and a weak US dollar has increased the demand for the commodities.

In a short span of over a year, online commodity markets are witnessing good growth in India.

The daily volume of trading of Rs.2500 crore at NCDEX alone has surpassed that of Rs.2000

crore on the Bombay Stock Exchange (BSE). It registered a record daily traded volume of

Rs.2617 crore on 8 December 2004. Commodities like chana, urad, soya bean oil, sugar, pepper,

mustard seeds and wheat contributed to the balance trading volume. MCX, on the other hand,

has achieved a peak daily turnover of Rs.1889 crore. Though the most popular commodities for

trading in India are gold, silver, soya bean and guar gum, the market is divided equally between

bullion and agricultural commodities in terms of trading volumes.

Expecting the turnover on the three online commodity exchanges to spurt to Rs.10000 crore per

day, banks are keen to tap the commodity trade-financing front. Commercial banks are chasing

the commodity industry with attractive lending rates between 8% and 8.5% as against the normal

lending rate between 11% and 14%.

ROLE OF COMMODITIY IN GROWING FUTURE

Just before the Union Budget 2007, the inflation every week was galloping like this … 5% …

5.5% ... 6% … 6.5% … & then just before the Budget we see leading business dailies flashing

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headlines "India bans futures trading in farm products", "High food prices threaten India's

politicians and its futures markets" & so on.

But the big question that every trader asked was is this proper way to strangulate the inflation?

The unanimous answer here was a stupendous NO. Everyone thought that instead of ban in

Commodity Futures market, why doesn't the government look at the supply-side constraints?

This paper highlights the importance of Commodity Futures in a growing economy like India &

why India should go a step forward in introducing the Commodity Options.

History of Futures Market in India:

History of futures market in India suggests that futures trading started in India with an

independent institution named "Bombay Cotton Exchange" in 1890. Hence needless to say that

cotton as the first commodity to be traded in futures market. This was followed up by oilseeds,

wheat, raw jute, Hessian & others.

It is noteworthy to state that the current ban on Commodity Futures is not the first one from the

Government. The futures market for selected commodities was banned in 1963 & again in 1965.

Co-incidentally, the reasons for those bans were similar to the current ban. The ruling

Government at those times also thought that futures market helped in artificially jacking up

prices of essential commodities.

Futures Market – A Perspective:

Put simply – a futures market is a market where, a seller & buyer enter into a transaction but it is

settled a predefined future date & price. Hence future trading is all about planning. Depending on

the price agreed upon, the seller can plan about production without worrying about the

fluctuation in prices. This is not possible in spot market thanks to the design of this market prices

of commodities can be rigged by a handful of persons like middlemen.

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There are a few arguments against the futures market. Let me examine them & see if they hold

true.

1. Futures Trading drives up prices:

This is primary argument against this market. Critics say that in case of some bad news about the

future, the speculators start hoarding the commodities & hence artificially driving up the prices.

But common sense says that in case of some negative news about future, the prices are going to

go up irrespective of whether futures market is there or not.

2. Futures Trading drives up volatility:

There no evidence to support this view. On the contrary, A.S Naik, in her book "Effect of

Futures Trading on Prices" clearly shows that the fluctuation in prices of commodities was

higher when there was no futures’ trading as compared to prices when there was futures trading.

3. Futures Market are not transparent:

Traditionally, poor Indian farmer is exploited by bigger & richer farmers by buying their produce

at sub-market level prices. But a futures market ensures that he knows the market prices

prevailing of his produce & can directly sell in the market at those prices.

BENEFITS OF COMMODITIES MARKETS

To producer: A producer of a commodity can sell the futures of the commodity, thereby

ensuring that he can sell a particular quantity of his commodity at a particular price at a

particular date.

To investors: An investor has alternative investment instruments where he can take a position as

to future price and the spot price at a particular date in future and buys and sells options. He is

not interested in taking deliveries of the commodities.

The futures market in commodities offers both cash and delivery-based settlement. Investors can

choose between the two. If the buyer chooses to take delivery of the commodity, a transferable

receipt from the warehouse where goods are stored is issued in favour of the buyer. On

producing this receipt, the buyer can claim the commodity from the warehouse. All open

contracts not intended for delivery are cash-settled. While speculators and arbitrageurs generally

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prefer cash settlement, commodity stockists and wholesalers go for delivery. The option to

square off the deal or to take delivery can be changed before the last day of contract expiry. In

the case of delivery-based trades, the margin rises to 0-25% of the contract value and the seller is

required to pay sales tax on the transaction. Trading in any contract month will open on the

twenty first day of the month, three months prior to the contract month.

For example, the December 2011 contracts open on 21 September 2011 and the due date is the

20-day of the delivery month. All contracts settling in cash will be settled on the following day

after the contract expiry date. Commodity trading follows a T+1 settlement system, where the

settlement date is the next working day after expiry. However, in case of delivery-based traders,

settlement takes place five to seven days after the expiry.

To commodity trader : A commodity trader can use these to ensure that he is protected against

any adverse changes in the prices. He can enter into a futures contract for purchase of a certain

quantity of the underlying at a particular price on a particular date, or he can enter into a futures

contract for sale of a particular quantity on a particular date at a particular price and be assured of

the margins because both his purchase price as well as the sale price are fixed. Traders do a good

arbitrage in Gold and Silver. Whenever they find Gold moving up, they short silver and similarly

whenever they find silver moving up and gold likely to move down, they hedge.

To exporters : Future trading is very useful to the exporters as it provides an advance indication

of the price likely to prevail and thereby help the exporter in quoting a realistic price and thereby

secure export contract in a competitive market. Having entered into an export contract, it enables

him to hedge his risk by operating in futures market.

CRITISIMS OF COMMODITIES MARKET

The biggest danger to the galloping trading business in commodities is poor supervision. Even

though the commodity futures market is regulated by Forward market Commission, a proper

regulatory system to supervise trades needs to be implemented. This is because FMC, which

functions under the administrative control of the Ministry of Food and Consumer Affairs, has no

hands-on experience in monitoring electronic trading and detecting market manipulation. For

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this reason, it was caught unawares earlier this year when a rubber dealer made several shady

deals.

In June 204, the rubber dealer, registered with the Rubber Board, is understood to have entered a

series of shady circular transactions with a sister firm on NMCE, creating a hefty difference of

Rs.10 per kg between cash and futures prices. FMC neither noticed the huge gap between cash

and future prices nor bothered to investigate thereby signaling a relaxed regulatory regime in the

commodities market, giving way to arbitrageurs and speculators.

NCDEX is also understood to have pressed for an amendment to the Banking Regulation Act to

allow several branches of banks to act as intermediaries to enable farmers to insulate fro price

fluctuations through futures trading. Another herculean task in commodity trading is that of

creating awareness and providing a transparent and user-friendly trading platform to investors.

VOLUMES IN COMMODITIES FUTURES MAY OVERTAKE STOCK MARKET'

TRADING in online commodities futures may overtake trading volumes on the stock markets over the next few years since the country depends largely on agriculture, which offers a range of commodities for trading, a senior executive of Geojit Financial Services Ltd has said.

According to Mr K.V. Sanilkumar, Assistant Vice-President, GFSL (Chennai), within two or

three years, commodity volumes will be 10 times higher than that of the stock markets. He based

his optimism on the fact that the risk of trading in commodities market was less and that India

was largely dependent on agriculture. Trading in commodities futures offered the advantage of

just paying a 10 per cent margin and taking position rather than hunting for warehouses to store

the goods, he said.

Geojit Financial entered commodities futures trading through a wholly owned subsidiary, Geojit

Infofin Technologies Ltd, a year ago. The company plans to open 60 more offices in Tamil Nadu

alone during the current financial year in view of the potential in commodities futures trading,

Mr Sanilkumar said.

Speaking to Business Line here, he said Tamil Nadu accounted for about 20 per cent of

commodities futures trading through GFSL terminals. The daily trading in the State was about

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Rs 25 crore to Rs 30 crore out of the national daily business (through Geojit terminals) of around

Rs 150 crore-Rs 200 crore. The company plans to increase daily trading volume to about Rs 500

crore.

Mr Sanilkumar said Geojit's subsidiary had tied up with National Multi Commodity Exchange

(NMCE), National Commodity and Derivatives Exchange (NCDE) and Multi-Commodity

Exchange (MCE) to facilitate trading in commodities. Apart from metals such as gold and silver,

the commodities traded through the exchanges included rubber, pepper, cardamom, turmeric,

pulses and oil. He said the potential for specific commodities varied from centre to centre. While

he saw "excellent" potential for gold and silver futures trading in Chennai and Bangalore, in

other locations in Tamil Nadu (Coimabtore, Erode and Madurai), there was good potential for

futures trading in agricultural products such as pepper, turmeric and pulses, apart from edible oil

and coconut oil. In Kerala, the potential was for rubber, pepper and cardamom while in Andhra,

it was rice.

Mr Sanilkumar said the advantage of futures trading in commodities, which Geojit entered about

a year ago, was that it provided hedging facility to investors, who were mostly those associated

with commodities as cultivators or dealers. Whenever the stock market witnessed a downturn,

part of speculative activity shifted to commodities trading.

On ensuring transparency in trading and ensuring informed trading in commodities, he said

trading in commodities was like trading on either the BSE or the NSE; it was screen-based

trading and the company offered research inputs.

In Kerala, Geojit had conducted 1,000 investor meets and it planned to conduct 500 investor

meets in Tamil Nadu this year to educate them about trading in commodities futures.

SOME COMMODITIES

CHANA.

CRUDE OIL.

GOLD.

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RED CHILLE.

TURMERIC.

STEEL.

WHEAT.

CHANA:

Light-brown beans with a nutty flavor belonging to the chickpea family. Chickpeas, sometimes

also known as garbanzo beans, are believed to have originated in North Africa, the Middle East

and India. They are a spring-seeded, annual legume that needs no nitrogen fertilizer. They have

excellent drought tolerance due to their two to six foot long tap root. Chickpeas have

indeterminate growth which means they continue flowering until stress such as drought or frost

stops growth and begins pod-set. Chickpeas are well adapted to the drier parts of the brown and

dark brown soil zones of the Prairies. They do not tolerate poorly drained or saline soils.

Types of Chana

Desi - main type grown in India. Desi types are small-seeded varieties requiring 95 to 105 days

to mature on the Prairies. They make up 85 to 90 per cent of world chickpea production.

Kabuli - Kabuli types are large-seeded varieties that require 100 to 110 days to reach maturity.

Kabulis only make up 10% to 15% of world production.

Chana producing countries:

Desi

o India

o Pakistan

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o Burma

o Bangladesh

o Australia

Kabuli

o Turkey

o Syria

o Iran

o Mexico

o Ethiopia

Sowing period : October and November

Harvesting period : March and April

Export, import and price:

World exports during the past 10 years were variable, but trending upwards. Exports ranged from

a low of 313,000 tonnes (t) in calendar year 1995 to a high of 993,000 t in 2001.

In 2002, the latest year for which world trade statistics are available, exports were 743,000 t.

India is the largest importer of chickpeas. India accounts for over 30% of all imports, almost all

desis. Pakistan, Spain, and Bangladesh are the other three major importers.

India and surrounding countries import mainly the desi type, while countries in North and South

America, Europe, the Middle East and Africa import mainly the kabuli type.

The price difference between desis and kabulis is partly related to the end user market. Kabulis

tend to be used in relatively more affluent countries. Desis are primarily consumed on the Indian

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sub-continent where purchasing power isn't as great. Desi prices generally track edible yellow

pea prices but at a considerable premium.

World Production:

India accounted for 60-70% of world production during this period. Production in India was

variable, which was the main reason for the large range in world production.

On average, world production consisted of about 75% desi type and 25% kabuli type. Production

of the kabuli type is more dispersed and therefore less variable than for the desi type.

CRUDE OIL :

A mineral oil consisting of a mixture of hydrocarbons of natural origin, yellow to black in color,

of variable specific gravity and viscosity; often referred to simply as crude.

OR

A fossil fuel formed from plant and animal remains many million of years ago. It comprises

organic compounds built up from hydrogen and carbon atoms and is, accordingly, often referred

to as hydrocarbons. Crude oil is occasionally found in springs or pools but is usually drilled from

wells beneath the earth's surface.

Varieties of crude oil:

The petroleum industry often characterizes crude oils according to their geographical source,

e.g., Alaska North Slope Crude. Oils from different geographical areas have unique properties;

they can vary in consistency from a light volatile fluid to a semi-solid.

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The classification scheme provided below is more useful in a response scenario.

Class A: Light, Volatile Oils - These oils are highly fluid, often clear, spread rapidly on

solid or water surfaces, have a strong odor, a high evaporation rate, and are usually

flammable. They penetrate porous surfaces such as dirt and sand, and may be persistent

in such a matrix.Class A oils may be highly toxic to humans, fish, and other biota. Most

refined products and many of the highest quality light crudes can be included in this

class.

Class B: Non-Sticky Oils - These oils have a waxy or oily feel. Class B oils are less toxic

and adhere more firmly to surfaces than Class A oils, although they can be removed from

surfaces by vigorous flushing. As temperatures rise, their tendency to penetrate porous

substrates increases and they can be persistent. Evaporation of volatiles may lead to a

Class C or D residue. Medium to heavy paraffin-based oils fall into this class.

Class C: Heavy, Sticky Oils - Class C oils are characteristically viscous, sticky or tarry,

and brown or black. Flushing with water will not readily remove this material from

surfaces, but the oil does not readily penetrate porous surfaces. The density of Class C

oils may be near that of water and they often sink. Weathering or evaporation of volatiles

may produce solid or tarry Class D oil. Toxicity is low, but wildlife can be smothered or

drowned when contaminated. This class includes residual fuel oils and medium to heavy

crudes.

Class D: Nonfluid Oils - Class D oils are relatively non-toxic, do not penetrate porous

substrates, and are usually black or dark brown in color. When heated, Class D oils may

melt and coat surfaces making cleanup very difficult. Residual oils, heavy crude oils,

some high paraffin oils, and some weathered oils fall into this class.

These classifications are dynamic for spilled oils; weather conditions and water temperature

greatly influence the behavior of oil and refined petroleum products in the environment. For

example, as volatiles evaporate from a Class B oil, it may become a Class C oil. If a significant

temperature drop occurs (e.g., at night), a Class C oil may solidify and resemble a Class D oil.

Upon warming, the Class D oil may revert back to a Class C oil.

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India in World Crude Oil Industry:

Petroleum and Natural Gas: The recent exploration and production activities in the country have

led to a dramatic increase in the output of oil. The country currently produces 35 million tonnes

of crude oil, two-thirds of which is from offshore areas, and imports another 27 million tonnes.

Refinery production in terms of crude throughput of the existing refineries is about 54 million

tonnes.

Natural gas production has also increased substantially in recent years, with the country

producing over 22,000 million cubic metres. Natural gas is rapidly becoming an important

source of energy and feedstock for major industries. By the end of the Eighth Five-Year Plan,

production was likely to reach 30 billion cubic metres.

Factors Influencing Crude Oil Markets:

Shortage of oil supplies

Taxation - When oil taxes are raised, end consumers often mistakenly blame the oil

producers, but it is really their own governments that are responsible.

Balance of demand and supply in the short term

Rate of investment in the longer term

Accidents

Bad weather

Increasing demand

Halting transport of oil from producers

Labour disputes

Causes of low Oil Prices:

- Imbalance between supply and demand.

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- If oil production rises faster than demand.

- If the oil industry is unprofitable and discourages investors.

Causes of high oil prices:

Shortage of oil supplies

Balance of demand and supply in the short term

Rate of investment in the longer term

If traders in the oil market believe there will be a shortage of oil supplies, they may raise

prices before a shortage occurs

War

Natural disasters

Crude oil reserves:

World crude oil reserves are estimated at more than one trillion barrels, of which the 11 OPEC

Member Countries hold more than 75 per cent. OPEC's Members currently produce around 27

million to 28 million barrels per day of oil, or some 40 per cent of the world total output, which

stands at about 75 million barrels per day.

Crude Oil Units (average gravity):

1 US barrel = 42 US gallons

1 US barrel = 158.98 litres

1 tonne = 7.33 barrels

1 short ton = 6.65 barrels

Note: barrels per tonne vary from origin to origin.

GOLD:

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Gold is a brilliant yellow precious metal that is resistant to air and water corrosion. It is a very

soft and pure metal (24 Kt.). Prior to 1962, India was the world's largest gold market and the

main trading center was Bombay. In 1962, the government enacted the Gold Control Act, which

prohibited the citizens of India from holding pure gold bars and coins due to loss of reserves

during the indo-china war. It was declared that the old holdings in pure gold had to be

compulsorily converted into jewelry. Pure gold bars and coins were to be dealt only by licensed

dealers.

In 1990, India was on averge of default of external liabilities as it had a major foreign exchange

problem. It had to give up the concept of controlling and licensing as it led to nothing more than

corruption and shortages. As a result, the Indian government pledged 40 tonnes from their gold

reserves with the Bank of England. India had to adopt the concept of liberalization. The

government abolished the 1962 Gold Control Act in 1992 and liberalized the import of gold in

India for a duty payment of Rs. 250 per 10 grams. The government made up for the foreign

exchange problem by allowing free imports and earning the taxes. This step expanded the gold

market and it also waved off the unofficial trade i.e. smuggling and black marketing. This makes

India the most price-sensitive market for gold in the world.

Production of gold in India:

Gold holdings in India are estimated to be in the range of 10000-13000 tonnes and are

predominantly private.

India’s gold consumption is 25% of world’s total gold production.

India has a very limited gold production of around 9 tonnes in 2002The domestic

production of the gold is very limited which is around 9 tonnes in 2002 including 2.940

tonnes from mines and 6.203 tonnes from Birla Copper

More than 60% of Indian consumption is met through imports

The availability of recycled Gold is price sensitive and the fabricated old Gold scraps is

price elastic and was estimated to be near 450 tonnes in 2002 rose almost more than 40%.

Indian gold market:

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Gold comes second after bank deposits when it comes to the preference for investment in India

and considered a savings and investment vehicle. India is the world's largest consumer of gold in

jewelry as investment. The commercial banks were authorized to import gold from jewelers and

exporters for sale or loan in 1997 by the RBI. In India 13 banks are involved in the imports of

gold currently. As a result the difference in international and domestic prices is reduced from

57% during 1986 to 1991 to 8.5 percent in 2001. In Indian society the gold hoarding tendency is

well ingrained. Monsoon, harvest and marriage season dictates the domestic consumption. Indian

jewelry is highly volatile and sensitive. Stock market and a wide range of consumer goods are

providing competition to gold in cities. As compared to the rest of the world, facilities for

refining, assaying, making them into standard bars in India, are insignificant, both qualitatively

and quantitatively.

Market Moving Factors:

Reclaimed scrap and official gold loans (Above ground supply from sales by central

banks)

Producer / miner hedging interest.

World macro-economic factors - US Dollar, Interest rate.

Comparative returns on stock markets

Domestic demand based on monsoon and agricultural output.

In India, gold is traded in Mumbai and Ahmedabad. It is also traded in three of India’s major

commodity exchanges namely National Commodity & Derivatives Exchange ltd, Multi

Commodity Exchange of India ltd and National Multi Commodity Exchange of India ltd.

RED CHILLI :

Similar in size and shape to the green chilly, but with more sting to its flavor. Good idea to mix

the red and green chillies together in any dish.

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Chilli is sharp, hot, stimulating, and helps in digestion, It develops blood and causes the

formation of bile in the body, it is a recommended diet in cholera it also eliminates worms in the

intestines and causes inflammation. It destroys phlegm, and gives relief from pain. It is beneficial

in loose motion. Dry chilli is considered to be an eliminator of flatulence.

The hottest part of the chilli is the membrane and the seeds attached to it. You can remove these

to reduce the 'heat'. If it's too late for that and your mouth is burning, don't be tempted to drink

water as this can intensify the effect in the short term. Instead, breathe through your nose, not

your mouth, as this tends to "irritate".

Common name: Lal Mirch

Position of India in Chilli production

Chillies are grown in most of the state in India. Rajasthan is one of the major producers and it

occupied the 6th/7th position in the country. During 2000-2001 Rajasthan produced around

33023 M.T. of chillies in 30987 hects.

Chillies are exported in bulk, in powder form, and as oleoresin colour and pengency are

important characters and there are wide variations in demand by various countries. the food

habits of arab's are similar to that of India and they require pungent chillies. in contrast European

countries are more interested in colour and less in pungency. in the food industries of these

countries it is used in oleoresin form. now there is a demand of powder of green chillies in

European countries and there is a need to exploit this demand.

It shall have a mild odor and a perceptible secense of pungeny. It is being sold in whole, cracked

and powder form. Chilly powder packed in Consumer pack is preferred.

Main growing District

in Rajasthan

Jodhpur, Ajmer, Bhilwara, Pali, Sikar, Bharatpur,

Swaimadhopur

Area under cultivation 1999-00 2000-01 2001-02 2002-03 2003-04

38003 30987 32694 20412 25278

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in Hectares

Production(M.T.) 44548 33023 49089 15003 29680

Sowing Time February-March and June-July

Harvesting Time Round the year, Main Crop - Nov-Jan

Domestic Marketing

Centres

Jaipur, Jodhpur, Ajmer, Tonk, Bharatpur, Udaipur, Bikaner,

Jaitaran, Pratapgarh, Dholpur, Alwar, Sawai Madhopur

Export Markets USA, E.U., Middle East, South East Asia

Uses Commonly used in Kitchen

Uses of Red Chilli

1. If powdered red chilli is applied to the part affected by a dog bite, immediately it

minimizes the affect of the poison. It also acts as an antiseptic by preventing the

formation of puss in the wound.

2. Boil water, mixed with one spoonful of powdered chilli and one spoonful of salt in it. If

this hot solution is drunk, it is beneficial in cholera.

3. Boil water, in which powdered red chilli has been mixed, sprinkle this water on those

areas where bed bugs are present, bed bugs will be eliminated.

4. When seeds of chillies are swallowed with hot water, then the stomachache due to cold,

gets vanished.

TURMERIC:

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A yellow spice with a warm and mellow flavor, turmeric is related to ginger. Turmeric is used in

prepared mustard and curry powder, and it's a popular ingredient in Middle Eastern cooking.

Turmeric is a spice derived from a rhizome (a type of root) native to India and Southeast Asia.

Turmeric was prized as a dye for centuries, thanks to its power to tint fabric--or food--a brilliant

yellow-gold. The dried, powdered rhizome is used in curry powder, some types of pickles, and

prepared mustard, and is used as a natural food coloring, in cheese, for instance. Turmeric is

sometimes substituted for saffron (which is far more expensive); but aside from their color, the

two spices have little in common. Turmeric's flavor has been described as peppery and somewhat

bitter, so it's important to be judicious when adding this spice to foods.

Hindi Name : Haldi

Botanical name : Curcuma longa

Family name : Zingiberaceae

Varieties of turmeric:

There are two main types of turmeric

Alleppey - It is deeper in color and more flavorful, is the type most likely to be found in

American markets.

Madras

Top exporters:

India (largest exporter of spices)

Thailand and other Southeast Asian countries

Various Pacific islands

Central and Latin American countries

Taiwan

Top importers:

Japan

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Sri Lanka

Iran

North African countries

Middle Eastern countries

Ethiopia

United States

United Kingdom

Indian Scenario:

India has 185.32 lakh hectares under turmeric cultivation with a total production of

701.66 lakh tonnes. Andhra Pradesh topped both in area and production with 73.93 lakh

hectares and 375.77 lakh tonnes respectively. Tamil Nadu follows with 33 lakh hectares

with 158.64 lakh tonnes (As per latest Statistics). Productivity was highest in Tamil Nadu

6118 Kg/ha.

Turmeric is a seasonal product which is available in the market mainly in two seasons,

commencing in mid February to May and second season is mid August to October. .

The important varieties used in India are: 'Alleppey Finger' (Kerala) and 'Erode and

Salem turmeric' (Tamil Nadu), 'Rajapore' and 'Sangli turmeric' (Maharashtra) and

'Nizamabad Bulb' (Andhra Pradesh). In Tamilnadu, the important varieties cultivated are

Erode local, BSR-1, PTS-10, Roma, Suguna, Sudarsana and Salem local. Among these

varieties, 70-75% is occupied by the local varieties. .

Some of the important turmeric varieties exported from India are Allepey Finger

Turmeric, Rajapuri, Madras and Erode variety. The processed forms of turmeric exported

are dry turmeric, fresh turmeric, turmeric powder and oleoresin. · India in 2003-04 is

estimated to have exported 34500 tons of turmeric, valued at Rs. 127.5 crores. .

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United Arab Emirates (UAE) is the major importer accounting for 24.06 % of the total

exports followed by United States of America (USA) with 12.93 %. The other leading

importers are Japan, United Kingdom and Sri Lanka. The quality stipulation followed by

USA is considered to be more important for export of turmeric.

Global Scenario:

India is the largest producer, consumer and exporter of turmeric. .

Other producers in Asia include Bangladesh, Pakistan, Sri Lanka, Taiwan, China, Burma

(Myanmar), and Indonesia. Turmeric is also produced in the Caribbean and Latin

America: Jamaica, Haiti, Costa Rica, Peru, and Brazil. The use of the spice spread widely

in Oceania, but it is not used as a condiment in Melanesia and Polynesia..

Major importers are the Middle East and North African countries, Iran, Japan and Sri

Lanka. These importing countries represent 75% of the turmeric world trade, and are

mostly supplied by the Asian producing countries..

Europe and North America represent the remaining 15%, and are supplied by India and

Central and Latin American countries. Taiwan exports mostly to Japan. The United States

imports of turmeric come from India at 97%, and the rest is supplied by the islands of the

Pacific, and Thailand..

The total yearly consumption of Turmeric all around the globe is approximately 38 Lakh

bags to 40 Lakh bags depending on the rates.

STEEL:

An alloy of iron with small amounts of carbon; widely used in construction; mechanical

properties can be varied over a wide range.

Exports from India:

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The iron and steel sector in India was set up to meet her domestic needs and support

infrastructure development of the nation. Iron and steel exports from India started after 1964, the

first time India's supply dominated her domestic needs. Though the Indian exports are quite

vulnerable to domestic demand conditions, the export market has been doing reasonably well in

the past few years, with FY03 seeing an increase of more than 100% over the previous year. The

increase in exports to Asia (approx. 227%) and America (105%) has contributed to this massive

growth. In spite of the fact that India has done well, it still faces stiff competition, holding the

twenty-fifth rank in the global export markets for iron and steel and the twentieth position for

iron and steel articles in FY03. Also, the share of India is very low in most of its major markets

(around 3%).

The largest importer of iron and steel from India is China and that for iron and steel articles is

USA. It is interesting to note that whereas China holds the top position in the Indian iron and

steel export markets, it doesn't even figure in the top fifteen destinations for iron and steel

articles exports from India.

Observers:

In India, apparent steel consumption increased by 6.5% in 1999 and a further increase of 7% is

expected in 2000. Activity in steel consuming sectors like consumer durable goods, automobile

and industrial machinery are growing a rates between 11.5 and 13.6% this year, while activity in

the construction sector, which is the single largest consumer of all steel products, is expected to

grow by 7%. Crude steel production that increased by 10.8% in 1999 should continue to grow

another 10% in 2000. Steel exports should increase by 15%, and. total steel imports are expected

to increase by 10%.

WHEAT:

The grain of a cereal grass used in the form of flour for white bread, cakes, pastries, etc.; the

plant which bears the edible grain in dense spikes.

There are over 30,000 varieties of this ubiquitous grain. Cultivated for over 6,000 years, wheat is

second only to rice as a grain staple. Wheat contains more gluten than other cereals, making it an

excellent choice for breadmaking.

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Varieties of Wheat;

The three principal types of wheat used in modern food production are:

Triticum vulgare - it provides the bulk of the wheat used to produce flour for bread

making and for cakes and biscuits (cookies).

Triticum durum - Durum is the hardest of all wheats. Its density, combined with its high

protein content and gluten strength, make durum the wheat of choice for producing

premium pasta products

Triticum compactum

India in World Wheat Industry;

India is looking to a larger wheat production of 75 million tonnes this year compared to 72

million tonnes in 2004. Markfed is one of the largest wheat exporters in the country. In 2003-04,

it had exported 2.65 million tonnes of wheat.

Factors Influencing Wheat Markets:

Crop size

Crop conditions

The level of surplus or shortfall

Agricultural and economic policies in the country and abroad

Worldwide demand for wheat

Domestic flour milling nee

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CONCLUSION

After almost two years that commodity trading is finding favor with Indian investors and is been

seen as a separate asset class with good growth opportunities. For diversification of portfolio

beyond shares, fixed deposits and mutual funds, commodity trading offers a good option for

long-term investors and arbitrageurs and speculators. And, now, with daily global volumes in

commodity trading touching three times that of equities, trading in commodities cannot be

ignored by Indian investors.

Online commodity exchanges need to revamp certain laws governing futures in commodities to

make the markets more attractive. The national multi-commodity exchanges have unitedly

proposed to the government that in view of the growth of the commodities market, foreign

institutional investors, too, should be given the go-ahead to invest in commodity futures in India.

Their entry will deepen and broad base the commodity futures market. As a matter of fact,

derivative instruments, such as futures, can help India become a global trading hub for select

commodities.

Commodity trading in India is poised for a big take-off in India on the back of factors like global

economic recovery and increasing demand from China for commodities. Considering the huge

volatility witnessed in the equity markets recently with the Sensex touching 6900 level

commodities could add the required zing to investors' portfolio. Therefore, it won't be long

before the market sees the emergence of a completely redefined set of retail investors.

Commodity market in India is still in a nascent stage. It should be given a helping hand by the

concerned authorities to increase its depth. The infrastructure facilities like warehouses,

transportation etc. should be improved so that the genuine buyers can take physical delivery of

goods instead of settling transaction in cash. This may also control speculation to an extent.

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There is also an urgent need for an independent regulator for these markets. Instead of

bureaucratic Ministry of Consumer Affairs & Food, professional agency like Forwards Market

Commission (FMC) needs to be at the helm.

Apart for these more products like Commodity Options need to be introduced. This will further

help deepen the market & would help in increasing the popularity of such exchanges. This will

finally lead to a wider investor base & lesser power in the hands of ruthless traders &

speculators.

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REFRENCES

WEBSITES

www.mcxindia.com

www.ncdex.com

www.ncx.com

www.lme.com

www.cbot.com

www.tokyo.com

www.nymex.com

www.rkannan.com

BOOKS

COMMODITY MARKETS AN INTRODUCTION– By N JANARDHAN RAO

Published By- The ICFAI University Press

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Nayan Final Commodity Project

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Transcript of Nayan Final Commodity Project