Comm

Commodity Markets Presented BySourabh 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 reintroduction 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 Guar seed Silver Soy oil Gold Mustard seed Castor seed Guar gum Pepper Gur Rubber Crude oil Cotton Other metals Jute

Value of futures traded (Rs crore) 123,522.980 116,267.66 62,784.85 62,784.85 19,422.46 14,327.34 13,412.08 8,334.28 7,891.49 2,745.84 1,900.14 779.16 618.22 91.74

The Global commodity Derivative Industry COUNTRY United States of America

Canada Brazil Australia People’s Republic Of China Hong Kong Japan

EXCHANGE 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 The Winnipeg Commodity Exchange Brazilian Futures Exchange Commodities and Futures Exchange Sydney Futures Exchange Ltd. Beijing Commodity Exchange Shanghai Metal Exchange Hong Kong Futures Exchange

Malaysia

Tokyo International Financial Futures Exchange Kansai Agricultural Commodities Exchange Tokyo Grain Exchange Kuala Lumpur commodity Exchange

New Zealand Singapore France

New Zealand Futures& Options Exchange Ltd. Singapore Commodity Exchange Ltd. Le Nouveau Marche MATIF

The Global commodity Derivative Industry COUNTRY France Italy

EXCHANGE Le Nouveau Marche MATIF Italian Derivatives Market

Netherlands Russia

Amsterdam Exchanges Option Traders The Russian Exchange

Spain

MICEX/ Relis Online St. Petersburg Futures Exchange 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

1.74

4.02

43.30

Second

2.06

18.84

10.09

Third

(GREEN) JUTE AND JUTE FIBRES COTTON (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 Percentage returns

Commodity Markets

Equity Markets

Gold gives 10-15 % returns on the conservative basis. Lower in the range of 5-6 %

Returns in the range of 15-20 %on annual basis. Higher in the range of 25-40 %.

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 are purely based on supply and demand. Price changes are due to policy changes, changes in tariff and duties.

Significant arbitrage opportunities.

Future Predictability

Predictability of future prices is not in the control due to factors like failure of monsoon and formation of Eininos at pacific.

Predictability of futures performance is reasonably high which is supplemented by the history of management performance.

Volatility

Lower Volatility.

Higher Volatility.

Initial Margins Arbitrage Opportunities

Price Movements Price Changes

Price movements based on the expectation of future performance. Price changes can also be due to corporate actions, dividend announcement, bonus shares / stock splits.

Turnover in financial markets and commodity market (Rs. In cr) Turnover in financial markets and commodity market Sr.no 1 2

Market segment Government securities market Forex market

(Rs. In cr)

2003-04

2002-03

2,518,322

2004-05 (E)

1,544,376

(63)

(91.2)

2,827,872

6,58,035

(27)

2,318,531

(84)

3,867,936

(124.4) (133.8)

3

Total stock 1,374,405 market turnover (I+II)

(56)

3,745,507

(136)

4,160,702

I

National stock exchange (a+b) a) cash

(43)

3,230,002

(117)

3,641,672

II

316,551

1,099,534

1,147,027

2,130,468

2,494,645

b) derivative

439,865

Bombay stock exchange (a+b)

316,551

a) cash

314,073

503,053

499,503

2,478

12,452

19,527

b) derivative 4

1,057,854

(13)

Commodities Na market Figures in bracket represent % to GDP at market price

515,505

130,215

(18.7)

(4.7)

519,030

500,000

(91)

(117.1)

(16.7)

(16.1)

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 



Hedging against price risk    



A farmer can plan his crop by looking at pieces prevailing in the futures market. 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!!