Commodity Markets

Presented By-
Sourabh Kulkarni(7331)
Kumar Gautam(7332)
Puneet Potnis(7346)
 An Overview
A commodity may be defined as an article, a product or
material that is bought and sold. It can be classified as
every kind of movable property, except Actionable
Claims, Money & Securities.
 Commodity market is an important constituent of the
financial markets of any country. It is the market where a
wide range of products, viz., precious metals, base metals,
crude oil, energy and soft commodities like palm oil,
coffee etc. are traded.
 Of the country’s GDP of 906 billion $ (approx)
commodities related (and dependent) industries constitute
about 58 per cent.
 Evolution of commodity derivative
market in India
 The first organized futures market was however established in
1875 under the aegis of the Bombay Cotton Trade Association
to trade in cotton contracts. Derivatives trading were then
spread to oilseeds, jute and food grains.
 The derivatives trading in India however did not have
uninterrupted legal approval. By the Second World War, i.e.,
between the 1920’s &1940’s, futures trading in organized form
had commenced in a number of commodities such as – cotton,
groundnut, groundnut oil, raw jute, jute goods, castor seed,
wheat, rice, sugar, precious metals like gold and silver. During
the Second World War futures trading was prohibited under
Defence of India Rules.
 Evolution of commodity derivative
market in India
 After independence, the subject of futures trading was
placed in the Union list, and Forward Contracts
(Regulation) Act, 1952 was enacted. Futures trading in
commodities particularly, cotton, oilseeds and bullion,
was at its peak during this period.
 Deregulation and liberalization following the forex crisis
in early 1990s, also triggered policy changes leading to re-
introduction of futures trading in commodities in India.
 In April, 1999 the Government took a landmark decision
to remove all the commodities from the restrictive list.
Food-grains, pulses and bullion were not exceptions
 Evolution of commodity derivative
market in India
 Government allowed setting up of new modern, demutualised
Nation-wide Multi-commodity Exchanges with investment
support by public and private institutions.
 National Multi Commodity Exchange of India Ltd. (NMCE)
was the first such exchange to be granted permanent
recognition by the Government.
Top Commodities futures traded
across exchanges
Commodity Value of futures traded (Rs crore)
Guar seed 123,522.980
Silver 116,267.66
Soy oil 62,784.85
Gold 62,784.85
Mustard seed 19,422.46
Castor seed 14,327.34
Guar gum 13,412.08
Pepper 8,334.28
Gur 7,891.49
Rubber 2,745.84
Crude oil 1,900.14
Cotton 779.16
Other metals 618.22
Jute 91.74
 The Global commodity Derivative Industry
COUNTRY EXCHANGE
United States of America Chicago Board of Trade (CBOT)
Chicago Mercantile Exchange
Minneapolis Grain Exchange
New York Cotton Exchange
New York Mercantile Exchange
Kansas Board of Trade
New York Board of Trade
The Winnipeg Commodity Exchange
Canada The Winnipeg Commodity Exchange
Brazil Brazilian Futures Exchange Commodities
and Futures Exchange
Australia Sydney Futures Exchange Ltd.
People’s Republic Of China Beijing Commodity Exchange Shanghai
Metal Exchange
Hong Kong Hong Kong Futures Exchange
Japan Tokyo International Financial Futures Exchange
Kansai Agricultural Commodities Exchange
Tokyo Grain Exchange
Malaysia Kuala Lumpur commodity Exchange
New Zealand New Zealand Futures& Options Exchange Ltd.
Singapore Singapore Commodity Exchange Ltd.
France Le Nouveau Marche MATIF
The Global commodity Derivative Industry
COUNTRY EXCHANGE
France Le Nouveau Marche MATIF
Italy Italian Derivatives Market

Netherlands Amsterdam Exchanges Option Traders

Russia The Russian Exchange

MICEX/ Relis Online St. Petersburg Futures

Exchange
Spain The Spanish Options Exchange

Citrus Fruit and Commodity Futures Market of

Valencia

United Kingdom The London International Financial Futures

Options exchange
The Global commodity production
and India’s share
COMMODITY INDIA(in mt) WORLD(in mt) SHARE RANK
RICE (PADDY) 240 2049 11.71 Third

WHEAT 74 599 12.35 Second

PULSES 13 55 23.64 First
GROUNDNUT 6 35 17.14 Second
RAPSEED 6 40 15.00 Third
SUGARCANE 315 1278 24.65 Second
TEA 0.75 2.99 25.08 First
COFFEE 0.28 7.28 3.85 Eigth
(GREEN)
JUTE AND 1.74 4.02 43.30 Second
JUTE FIBRES
COTTON 2.06 18.84 10.09 Third
(LINT)
Structure of commodity market
National Commodity exchanges in India
 Three such Exchanges, viz, National Multi-Commodity
Exchange of India Ltd., (NMCE), Ahmedabad, National
Commodity & Derivatives Exchange (NCDEX), Mumbai,
and Multi Commodity Exchange (MCX), Mumbai have
become operational.
 “National Status” implies that these exchanges would be
automatically permitted to conduct futures trading in all
commodities subject to clearance of byelaws and contract
specifications by the FMC.
 NMCE, Ahmedabad commenced futures trading in
November 2002, MCX and NCDEX, Mumbai commenced
operations in October/ December 2003 respectively.
 MCX
 MCX (Multi Commodity Exchange of India Ltd.) an
independent and de-mutulised multi commodity exchange has
permanent recognition from Government of India for
facilitating online trading, clearing and settlement operations
for commodity futures markets across the country.
 Headquartered in Mumbai
 Commenced operations in October 2003
 MCX is a state-of-the-art nationwide, digital Exchange,
facilitates online trading, clearing and settlement operations
for a commodities futures trading.
 NMCE
 National Multi Commodity Exchange of India Ltd. (NMCE) was
promoted by Central Warehousing Corporation (CWC), National
Agricultural Cooperative Marketing Federation of India (NAFED),
Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State
Agricultural Marketing Board (GSAMB), National Institute of
Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL).
 Headquartered in Ahmedabad and started in November 2002
 NMCE facilitates electronic derivatives trading through robust and tested
trading platform, Derivative Trading Settlement System (DTSS),
provided by CMC
 It is the only Commodity Exchange in the world to have received ISO
9001:2000 certification from British Standard Institutions (BSI).
 NMCE was the first commodity exchange to provide trading facility
through internet, through Virtual Private Network (VPN).
 NCDEX
 National Commodity and Derivatives Exchange Ltd (NCDEX)
is a technology driven commodity exchange.
 It is located in Mumbai and offers facilities to its members in
more than 390 centres throughout India.
 Commenced operations in December 2003
 NCDEX currently facilitates trading of thirty six commodities
- Cashew, Castor Seed, Chana, Chilli, Coffee, Cotton, Cotton
Seed Oilcake, Crude Palm Oil etc
How to start trading in commodity futures
 Start with any of the three national exchanges MCX, NMCE,
NCDEX
 Choose a broker eg: Refco Sify Securities, SSKI (Sharekhan)
and ICICIcommtrade (ICICIdirect), ISJ Comdesk (ISJ
Securities) etc
 Minimum Investment needed: About Rs 5000
 A separate commodity demat account from the National
Securities Depository Ltd
 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.
 Players in Commodities Market
 Hedger: Hedger is a user of the market, who enters into
futures contract to manage the risk of adverse price fluctuation
in respect of his existing or future asset.
 Arbitragers: Arbitrage refers to the simultaneous purchase
and sale in two markets so that the selling price is higher than
the buying price by more than the transaction cost, so that the
arbitrageur makes risk-less profit.
 Speculators: A trader, who trades or takes position without
having exposure in the physical market, with the sole intention
of earning profit is a speculator.
Working of commodity market
Interpretation of Price charts and tables
 Example: price chart
Interpretation of Price charts and tables
 Opening Price
 Closing Prices
 Highest Price
 Lowest Price
 Settlement Price
 Lifetime high and low
 Open Interest
 Comparative Analysis of Commodity and
Equity Markets
Factors Commodity Markets
Percentage returns Gold gives 10-15 % returns on the
conservative basis.
Initial Margins Lower in the range of 5-6 %
Arbitrage Opportunities Exists on 1-2 month contracts. There
is a small difference in prices, but in
case of commodities, which is in
large tonnage makes a huge
difference.
Price Movements Price movements are purely based on
supply and demand.
Price Changes Price changes are due to policy
changes, changes in tariff and duties.
Future Predictability Predictability of future prices is not in
the control due to factors like failure
of monsoon and formation of Eininos
at pacific.
Volatility Lower Volatility.
Equity Markets
Returns in the range of 15-20 %on
annual basis.
Higher in the range of 25-40 %.
Significant arbitrage opportunities.
Price movements based on the
expectation of future performance.
Price changes can also be due to
corporate actions, dividend
announcement, bonus shares / stock
splits.
Predictability of futures performance
is reasonably high which is
supplemented by the history of
management performance.
Higher Volatility.
Turnover in financial markets and commodity
market (Rs. In cr)
Turnover in financial markets and commodity market (Rs. In cr)
Sr.no Market 2002-03 2003-04 2004-05 (E)
segment
1 Government 1,544,376 (63) 2,518,322 (91.2) 2,827,872 (91)
securities
market
2 Forex market 6,58,035 (27) 2,318,531 (84) 3,867,936 (124.4)
3 Total stock 1,374,405 (56) 3,745,507 (136) 4,160,702 (133.8)
market
turnover (I+II)

I National 1,057,854 (43) 3,230,002 (117) 3,641,672 (117.1)

stock
exchange
(a+b)
a) cash 316,551 1,099,534 1,147,027
b) derivative 439,865 2,130,468 2,494,645
II Bombay stock 316,551 (13) 515,505 (18.7) 519,030 (16.7)
exchange
(a+b)

a) cash 314,073 503,053 499,503

b) derivative 2,478 12,452 19,527
4 Commodities Na 130,215 (4.7) 500,000 (16.1)
market
Figures in bracket represent % to GDP at market price
 Participants In Futures Market
 Farmers/Producers
 Merchandisers/Traders
 Importers & Exporters
 Consumers/Industry
 Commodity Financers
 Agriculture Credit Providing Agencies
 Corporate having Price Risk Exposure in Commodities
 Benefits of Futures Trading
 Price discovery for commodity players
 A farmer can plan his crop by looking at pieces prevailing in
the futures market.
 Hedging against price risk
 Farmers can sell in futures to ensure remunerative prices
 A manufacturing firm can buy in futures to hedge against
volatile raw material costs
 An exporter can commit to a price to his foreign clients
 A stockists/supplier can hedge his carrying risk to ensure
smooth prices of the seasonal commodities round the year.
 Easy availability of finance
 Based on hedged positions commodity market players
(farmers, processors, manufacturers, exporters) may get easy
financing from the banks
 Benefits of Futures
Trading
 Risk Management
 Growers-short hedge on upcoming produce
 Traders-short hedge on stored quantity
 Manufacturers-long hedge on input cost, short hedge on
finished products
 Any price risk that is not managed is a cost; any cost is a
direct dent on profitability
 Price Discovery
 Futures prices can be used as indicative prices for
negotiating the export prices and also upcountry sales.
 References
 www.nbotind.org
 www.ncdex.com
 www.mcxindia.com
 www.tradingpicks.com
 www.bseindia.com
 www.nmce.com
Thank You!!