Sushant Project.docx

PROJECT DISSERTATION ON COMMODITY TRADING SUBMITTED BY SUSHANT RANA (08516603916) SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF Master of Business Administration (MBA) (2016-18) UNDER THE SUPERVISION OF MS. SINTHIYA ASSISTANT PROFESSOR, USMS, GGSIPU

University School of Management Studies Guru Gobind Singh Indraprastha University Sector16-C, Dwarka, New Delhi-110078

DECLARATION I, Sushant Rana, student of University School of Management Studies, GGSIPU (Batch-2016-18) solemnly declare that the project work contained in the report entitled “ COMMODITY TRADING” submitted to GGSIPU, for the partial fulfilment of the MBA course, is a record of original and independent project work done by me under the guidance and supervision of Dr. Sinthiya. To the best of my knowledge, no part of this work has been presented for award of any other degree. SUSHANT RANA (08516603916)

ACKNOWLEDGEMENT I express my sincere thanks to Dr. Synthia, Assistant Professor, USMS, GGSIPU for his keen interest and valuable guidance at every stage of the project report on “EFFECT OF COMMODITY MARKET ON EXCHANGE RATE””. Last but not the least, I would like to express my gratitude to my friends for their support during the project work. Sushant Rana (09116603916)

CERTIFICATE

FROM

THE

FACULTY

GUIDE This is to certify that the Project Dissertation Report on “ COMMODITY TRADING” is the outcome of the project taken by Sushant Rana (Enrollment No. – 08516603916) and is being submitted to Guru Gobind Singh Indraprastha University under my guidance and supervision for the partial fulfilment of Masters of Business Administration (MBA). ………………….. Dr. Sinthiya Assistant Professor USMS, GGSIPU (Faculty Guide)

Table of Content Chapter 1

2

3

4

5 6

Content

Page no.

Introduction: History of the commodity market Size of the Market List of commodity traded Commodity exchanges Basics of future trading The field: Background of the industry NCDEX System Commodities traded on NCDEX Platform

6-11

12-24

Study : Objectives Research Methodology Limitation Analysis and Interpretation of Data Conclusion of study Modern Commodity exchanges Unresolved Issues and Future Prospects

25-40

Conclusion Bibliography

51 52

45-50

COMMODITY MARKET Commodity markets are markets where raw or primary products are exchanged. It covers physical product (food, metals, and electricity) markets but not the ways that services, including those of governments, nor investment nor debt, can be seen as a commodity.

HISTORY OF COMMODITY MARKET • Modern Commodity Market have their roots in the trading of agricultural products. • Wheat and corn, cattle and pigs, were widely traded using standard instruments in the 19th century in the United States. • Historically, in ancient times Sumerian use of sheep or goats, or other peoples using pigs, rare seashells, or other items as commodity money, have traded contracts in the delivery of such items, to render trade itself more smooth and predictable.

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

LIST OF TRADED COMMODITY • Agricultural (Grains, and Food and Fiber) • Livestock & Meat • Energy • Precious metals • Industrial metals

Agricultural Products Corn, Oats, Rough Rice, Soybeans, Rapeseed, Soybean Meal, Soybean Oil, Wheat, Cocoa, Coffee C, Cotton No.2, Sugar No.11, Sugar No.14.

Livestock and meat Lean Hogs, Frozen Pork Bellies, Live Cattle, Feeder Cattle.

Energy WTI Crude Oil, Brent Crude, Ethanol, Natural Gas, Heating Oil, Gulf Coast Gasoline, RBOB Gasoline, Propane, Uranium.

Precious Metal Gold, Platinum, Palladium, Silver.

Industrial Metals Copper, Lead, Zinc, Tin, Aluminum, aluminum alloy, Nickel, aluminum alloy, Recycled steel.

COMMODITY EXCHANGES • Abuja Securities and Commodities Exchange • Bhatinda Om & Oil Exchange Bathinda • Brazilian Mercantile and Futures Exchange • Chicago Board of Trade • Chicago Mercantile Exchange • Commodity Exchange Bratislava, JSC • Dalian Commodity Exchange • Dubai Mercantile Exchange • Intercontinental Exchange • Minneapolis Grain Exchange • Multi Commodity Exchange • National Commodity and Derivatives Exchange • National Multi-Commodity Exchange of India Ltd • New York Mercantile Exchange • New York Board of Trade • London Metal Exchange • Winnipeg Commodity Exchange

Basics of Futures Trading Perhaps the biggest advantage to trading futures contracts is the leverage provided by the exchange. However, controlling large contracts with relatively low amounts of capital can create high levels of volatility. As a result, many traders will argue that leverage is actually a disadvantage. Regardless of your opinion on leverage and margin requirements, it is important that you fully understand the concepts. Before a customer can establish a position he is required to make a minimum “good faith deposit,” or margin, to assure the performance of his obligations. A margin deposit is, in essence, a performance bond, which is usually between 5% and 10% of the underlying contract value. A good faith deposit indicates the buyer or seller’s willingness and capability to compensate the opposite party to a transaction Because margin requirements are low, hedgers are given the ability to lock in pricing of cash market goods without tying up a lot of capital. It would be counterproductive for a hedger who handles large quantities to put up 100% of the value of the hedged commodity. The exchange grants margin discounts to those that are deemed to be “bonefied” hedgers, due to the fact that the underlying cash position is seen as collateral to secure the capital risked in the futures market.

Low margins make speculation in the futures markets very attractive, without the advantage of leverage the rate of return on most

commodities would be marginal. The exchanges are responsible for setting margin requirements, but brokerage firms have discretion to require higher deposits. Generally, the initial margin is sufficient to cover the maximum daily price fluctuations. It is not uncommon for margin requirements to fluctuate with the volatility of the market. A maintenance level is established below the initial margin, usually 75% of the initial margin. Once a trader's good faith deposit falls below this threshold additional funds must be deposited or positions must be liquidated. This is known as a margin call.

THE FIELD

I.BACKGROUND OF THE INDUSTRY

THE NCDEX PLATFORM National Commodity and Derivatives Exchange Ltd (NCDEX) is a technology driven commodity exchange. It is a public limited company registered under the Companies Act, 1956 with the Registrar of Companies, Maharashtra in Mumbai on April 23, 2003. It has an independent Board of Directors and professionals not having any vested interest in commodity markets. It has been launched to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency.

NCDEX is regulated by Forward Markets Commission 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. It is located in Mumbai and offers facilities to its members in about 91 cities throughout India at the moment.NCDEX currently facilitates trading of ten commodities - gold, silver, soy bean, soy bean oil, rapeseedmustard seed, expeller rapeseed-mustard seed oil, and RBD

palmolein, crude Palm oil and cotton, Medium and long staple varieties, At subsequent phases trading in more commodities would be facilitated.

STRUCTURE OF NCDEX

NCDEX has been formed with the following objectives: • To create a world class commodity exchange platform for the market participants. • To bring professionalism and transparency into commodity trading. • To inculcate best international practices like de. Modularization, technology platforms, low cost • Solutions and information dissemination without noise etc. into the trade. • To provide nationwide reach and consistent offering. • To bring together the entities that the market can trust

PROMOTERS NCDEX is promoted by a consortium of institutions. These include the ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE).

NCDEX is the only commodity exchange in the country promoted by national level institutions. This unique parentage enables it to offer a variety of benefits which are currently in short supply in the commodity markets. The four institutional promoters of NCDEX are prominent players in their respective fields and bring with them institution building experience, trust, nationwide reach, technology and risk management skills.

GOVERNANCE NCDEX is run by an independent Board of Directors. Promoters do not participate in the day to day activities of the exchange. The directors are appointed in accordance with the provisions of the Articles of Association of the company. The board is responsible for managing and regulating all the operations of the exchange and commodities transactions. It formulates the rules and regulations related to the operations of the exchange. Board appoints an executive committee and other committees for the purpose of managing activities of the exchange. The executive committee consists of Managing Director of the exchange who would be acting as the Chief Executive of the exchange, and also other members appointed by the board.

Apart from the executive committee the board has constitute committee like Membership committee, Audit Committee, Risk Committee, Nomination Committee, Compensation Committee and Business Strategy Committee, which, help the Board in policy formulation.

EXCHANGE MEMBERSHIP Membership of NCDEX is open to any person, association of persons, partnerships, cooperative societies, companies etc. that fulfills the eligibility criteria set by the exchange. All the members of the exchange have to register themselves with the competent authority before commencing their operations. The members of NCDEX fall into two categories, trading cum Clearing Members (TCM) and Professional Clearing Members (PCM)

TRADING CUM CLEARING MEMBERS (TCMS) NCDEX invites applications for Trading cum Clearing Members (TCMs) from persons who fulfill the specified eligibility criteria for trading in commodities. The TCM membership entitles the members to trade and clear, both for themselves and/ or on behalf of their clients. Applicants accepted for admission as TCM are required to pay the required fees/ deposits and also maintain net worth as given in Table

Table Fee/ deposit structure and net worth requirement: TCM Particulars

Rupees( in lakh)

Interest free cash security deposit 15.00 Collateral security deposit

15.00

Annual subscription charges

0.50

Advance minimum transaction 0.50 charges Net worth requirement 50.00

PROFESSIONAL CLEARING MEMBERS (PCM) NCDEX also invites applications for Professional Clearing Membership (PCMs) from persons who fulfill the specified eligibility criteria for trading in commodities. The PCM membership entitles the members to clear trades executed through Trading cum Clearing Members (TCMs), both for themselves and/ or on behalf of their clients. Applicants accepted for admission as PCMs are required to pay the following fee/ deposits and also maintain net worth as given in Table

Table 3.2 Fee/ deposit structure and net worth requirement: PCM Particulars

Rupees( in lakh)

Interest free cash security deposit 25.00 Collateral security deposit

25.00

Annual subscription charges

1.00

Advance minimum transaction 1.00 charges Net worth requirement 5000.00

CAPITAL REQUIREMENTS NCDEX has specified capital requirements for its members. On approval as a member of NCDEX, the member has to deposit Base Minimum Capital (BMC) with the exchange. Base Minimum Capital comprises of the following: 1. Interest free cash security deposit 2. Collateral security deposit All Members have to comply with the security deposit requirement before the activation of their trading terminal Cash: This can be deposited by issuing a cheque/ demand draft payable at Mumbai in favour of National Commodity & Derivatives Exchange Limited.

Bank guarantee: Bank guarantee in favour of NCDEX as per the specified format from approved banks. The minimum term of the bank guarantee should be 12 months. Fixed deposit receipt: Fixed deposit receipts (FDRs) issued by approved banks are accepted. The FDR should be issued for a minimum period of 36 months from any of the approved banks. Government of India securities: National Securities Clearing Corporation Limited (NSCCL) is the approved custodian for acceptance of Government of India securities. The securities are valued on a daily basis and a haircut of 25% is levied.

Members are required to maintain minimum level of security deposit i.e. Rs.15 Lakh in case of TCM and Rs.25 Lakh in case of PCM at any point of time. If the security deposit falls below the minimum required level, NCDEX may initiate suitable action including withdrawal of trading facilities as given below: If the security deposit shortage is equal to or greater than Rs. 5 Lakh, the trading facility would be withdrawn with immediate effect. If the security deposit shortage is less than Rs.5 Lakh the member would be given one calendar weeks' time to replenish the shortages and if the same is not done within the specified time the trading facility would be withdrawn. Members who wish to increase their limit can do so by bringing in additional capital in the form of cash, bank guarantee, fixed deposit receipts or Government of India securities.

THE NCDEX SYSTEM As we saw in the first chapter, every market transaction consists of three components: • Trading • clearing • Settlement

This section provides a brief overview of how transactions happen on the NCDEX's market.

TRADING The trading system on the NCDEX provides a fully automated screen. Based trading for futures on commodities on a nationwide basis as well as an online monitoring and surveillance mechanism. It supports an order driven market and provides complete transparency of trading operations. The trade timings of the NCDEX are 10.00 a.m. to 4.00 p.m. After hours trading has also been proposed for implementation at a later stage.

The NCDEX system supports an order driven market, where orders match automatically. Order matching is essentially on the basis of commodity, its price, time and quantity. All quantity fields are in units and price in rupees. The exchange specifies the unit of trading and the delivery unit for futures contracts on various commodities. The exchange notifies the regular lot size and tick size for each of the contracts traded from time to time. When any order

enters the trading system, it is an active order. It tries to find a match on the other side of the book. If it finds a match, a trade is generated. If it does not find a match, the order becomes passive and gets queued in the respective outstanding order book in the system. Time stamping is done for each trade and provides the possibility for a complete audit trail if required.

NCDEX trades commodity futures contracts having one Month, two Month and three month expiry cycles. All contracts expire on the 20th of the expiry month. Thus a January expiration contract would expire on the 20th of January and a February expiry contract would cease trading on the 20th of February. If the 20th of the expiry month is a trading holiday, the contracts shall expire on the previous trading day. New contracts will be introduced on the trading day following the expiry of the near month contract.

CLEARING National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of trades executed on the NCDEX. The settlement guarantee fund is maintained and managed by NCDEX. Only clearing members including professional clearing members (PCMs) only are entitled to clear and settle contracts through the clearing house. At NCDEX, after the trading hours on the expiry date, based on the available information, the matching for deliveries takes place firstly, on the basis of locations and then randomly, keeping in view the

factors such as available capacity of the vault/ warehouse, commodities already deposited and dematerialized and offered for delivery etc., Matching done by this process is binding on the clearing members. After completion of the matching process, clearing members are informed of the deliverable/ receivable positions and the unmatched positions. Unmatched positions have to be settled in cash. The cash settlement is only for the incremental gain/ loss as determined on the basis of final settlement price.

SETTLEMENT Futures contracts have two types of settlements, the MTM settlement which happens on a continuous basis at the end of each day, and the final settlement which happens on the last trading day of the futures contract. On the NCDEX, daily MTM settlement and final MTM settlement in respect of admitted deals in futures contracts are cash settled by debiting/ crediting the clearing accounts of CMs with the respective clearing bank. All positions of a CM, either brought forward, created during the day or closed out during the day, are market to market at the daily settlement price or the final settlement price at the close of trading hours on a day. On the date of expiry, the final settlement price is the spot price on the expiry day. The Responsibility of settlement is on a trading cum clearing member for all trades done on his own account and his client's trades. A

professional clearing member is responsible for settling all the participants’ trades which he has confirmed to the exchange.

On the expiry date of a futures contract, members submit delivery information through delivery request window on the trader workstations provided by NCDEX for all open positions for a commodity for all constituents individually. NCDEX on receipt of such information matches the information and arrives at a delivery position for a member for a commodity.

The seller intending to make delivery takes the commodities to the designated warehouse. These commodities have to be assayed by the exchange specified assayer. The commodities have to meet the contract specifications with allowed variances. If the commodities meet the specifications, the warehouse accepts them. Warehouse then ensures that the receipts get updated in the depository system giving a credit in the depositor's electronic account. The seller then gives the invoice to his clearing member, who would courier the same to the buyer's clearing member. On an appointed date, the buyer goes to the warehouse and takes physical possession of the commodities.

COMMODITIES TRADED ON THE NCDEX PLATFORM • In December 2003, the National Commodity and Derivatives Exchange Ltd (NCDEX) launched futures trading in nine major commodities. • To begin with contracts in gold, silver, cotton, soybean, soya oil, rape/ mustard seed, rapeseed oil, crude palm oil and RBD palmolein are being offered.

We have a brief look at the various commodities that trade on the NCDEX and look at some commodity specific issues. The commodity markets can be classified as markets trading the following types of commodities.

1. Agricultural products 2. Precious metal 3. Other metals 4. Energy

AGRICULTURAL COMMODITIES The NCDEX offers futures trading in the following agricultural commodities. Refined soy oil, mustard seed, expeller mustard oil, RBD palmolein, crude palm oil, medium staple cotton and long staple cotton. Of these we study cotton in detail and have a quick look at the others

 COTTON  CRUDE PALM OIL  RBD PALMOLEIN  SOY OIL  RAPESEED OIL

 SOYBEAN  RAPESEED

PRECIOUS METALS  GOLD  SILVER

THE STUDY I. OBJECTIVES OF THE STUDY PRIMARY OBJECTIVE • To understand realistically the pattern of fluctuations of price indices of two agricultural commodities and the factors behind that

SECONDARY OBJECTIVE • To study the operation of commodity trading in india and assess its importance 3) To provide a trend analysis of the current MCX & NCDEX indices

II. SCOPE OF THE STUDY Organized commodity derivatives in India started as early as 1875, barely about a decade after they started in Chicago. However, many feared that derivatives fuelled unnecessary speculation and were detrimental to the healthy functioning of the markets for the underlying commodities. As a result, after independence, commodity options trading and cash settlement of commodity futures were banned in 1952. A further blow came in 1960s when, following several years of severe draughts that forced many farmers to default on forward contracts (and even caused some suicides), forward trading was banned in many commodities considered primary or essential. Consequently, the commodities derivative markets dismantled and remained dormant for about four decades until the new millennium when the Government, in a complete change in policy, started actively encouraging the commodity derivatives market. Since 2002, the

commodities futures market in India has experienced an unprecedented boom in terms of the number of modern exchanges, number of commodities allowed for derivatives trading as well as the value of futures trading in commodities, which might cross the $ 1 Trillion mark in 2006. However, there are several impediments to be overcome and issues to be decided for sustainable development of the market. This paper attempts to answer questions such as: • How do price indices fluctuate so easily and how to understand them? • Is this progress sustainable and what are the obstacles that need urgent attention if the market is to realize its full potential? • Why are commodity derivatives important and what could other emerging economies learn from the Indian mistakes and experience?

III. RESEARCH METHODOLOGY

DEFINITION

Research is an organized, systematic, data-based, critical, scientific inquiry into a specific problem that needs a solution. Scientific research has the goal of solving problems and establishing a step-by-step logical, organized, and rigorous method to identify problems, gathers data, analyses the data, and draw valid conclusions there from.

1. TYPE OF RESEARCH USED

The research undertaken in this problem is descriptive in nature. Descriptive study attempts to obtain a complete and accurate descriptive of situation, formal design is required to ensure that the description covers all phases desired. Precise statement at problem indicates what than be designed provides for collection of this information under the study. 2. NEED OF THE STUDY The empirical analysis shows that cycles in economic activity are major determinants of the short -run behavior of shipping freight rates in the year 1850 and World War I. Consistent with the economic theory, there is a striking asymmetry between the peaks and troughs of shipping cycles. However, there is a close timing relationship between the upper turning points of the business cycle, commodity prices and freight rates which is particularly shown in the peak years 1875,1889,1900,1912. S o this study on commodity indices and prices, to an extent would not only help us in understanding the economy of the country, the growth driving commodities favoring EXIM trade but also for better understanding the freight market changes and behavior for the future.

3. SOURCES OF DATA The data was collected through • Secondary data. SECONDARY DATA Company records, magazines, journals and websites were made use to collect secondary data regarding indices, operations of commodity market and growth patterns

A) STATISTICAL TOOLS: The statistical tools that were used for the study is as follows: •

Weighted Average and

•

Technical analysis

WEIGHTED AVERAGE: The weighted average stands for the relative importance of the different items. The formula for comparing weighted mean is XW =? Xw/w X is the variables values i.e., X1, X2…..Xn. W represents the weights attached to values. TECHNICAL ANALYSIS:

It is important to note that the Technical Analysis Overview provided does not attempt to be a comprehensive treatment of Charting or Technical Analysis methods. There are numerous, well- written books on Chart Interpretation and Technical Analysis. Brief and simplistic reviews of some basic charting concepts are provided for reference or to stimulate further study. Please contact your broker for a recommended reading list on Charting and Technical Analysis. Technical Analysis makes the assumption that history repeats itself. Any trading method or system that works well on a broad sample of historical data may have validity when applied to future trading environments. One should keep in mind that the markets are dynamic. The forces that motivate price movement are dynamic, and the participants are dynamic. Therefore any system which has performed well on past historic data may decline in value as the evolving dynamics of the markets change over time.

B) LIMITATIONS OF THE STUDY

•

The research holds validity for the particular period only.

•

The research is extended to particular commodities only.

ANALYSIS AND INTERPRETATION OF DATA To understand realistically the pattern of fluctuations of price indices of two agricultural commodities and the factors behind that

SUGAR A sweet white (or brownish yellow) crystalline substance, of a sandy or granular consistency, obtained by crystallizing the evaporated juice of certain plants, as the sugar cane, sorghum, beet root, sugar maple, etc. It is used for seasoning and preserving many kinds of food and drink. Ordinary sugar is essentially sucrose.

Varieties of Sugar • White, refined sugar • Caster sugar • Icing sugar • Icing mixture • Brown sugar • Dark brown sugar • Raw sugar

• Golden demerara • Golden syrup • Treacle • Molasses • Caramel

Sugar producing areas in India In India the major sugar cane producing areas are Andhra Pradesh, Assam, Bihar, Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa, Punjab, Rajasthan, Tamilnadu, Uttar Pradesh and West Bengal.

INDIA’S SUGAR AND SUGARCANE PRODUCTION SUGAR PRICES IN DELHI MARKET FACTORS INFLUENCING SUGAR MARKETS • Price • Refinery activity • Consumer income • Candy and confectionery sales • Changing eating habits • Sugars use in new technologies, such as ethanol production for automobile fuel.

IMPORTANT WORLD SUGAR MARKETS • Brazil • Australia • U.S • Cuba • Philippines • China • Bangladesh • Iran

INTERNATIONAL TRADE Over the past fifty years, especially, the international trade in sugar has changed dramatically. Since it is either imported or exported by every country on earth, sugar has become an integral component of the economic relationships among nations. Because of that unique position, the trade in sugar has both reflectedand been affected by-a wide range of divergent forces, including global politics, health consciousness, the emergence of developing nations as suppliers and consumers, and many others. Perhaps the greatest change in the international sugar trade has been the trend toward price stabilization. Historically at the mercy of everything from war to weather, the price of sugar has always been extremely volatile. The International Sugar Trade contains the most essential and up-to-date information currently available. It includes numerous tables and graphs describing production, consumption, and trade for nearly every country.

SUGAR PRICES 2013

Technical analysis Jan- Mar: Support A horizontal floor where interest in buying a commodity is strong enough to overcome the pressure to sell. Therefore a decrease in price is reversed and prices rise once again. Typically, support can be identified on a chart by a previous set of lows

Apr – Jun: Resistance A horizontal ceiling where the pressure to sell is greater than the pressure to buy. Therefore, an increase in price is reversed and prices revert downward. Typically resistance can be located on a chart by a previous set of high

July - Sep Support

A horizontal floor where interest in buying a commodity is strong enough to overcome the pressure to sell. Therefore a decrease in price is reversed and prices rise once again. Typically, support can be identified on a chart by a previous set of lows

Oct – Dec Inclining The inclining channel is a formation with parallel price barriers along both the price ceiling and floor. Unlike the sideways channel the inclining channel has an increase in both the price ceiling and price floor.

SUGAR PRICES 2014

Technical analysis Jan- Mar: Breakaway Gaps Occur when prices gap higher or lower out of a congestion pattern in the direction of the prevailing trend

Apr – Jun:

Measuring or Running Gaps Difficult to identify, but usually occur at the midpoint in a price rally or decline.

July – Sep Falling or Declining This formation occurs when the slope of price bar highs and lows join at a point forming an declining wedge. The slope of both lines is down with the upper line being steeper than the lower one. To trade this formation, place an order on a break up and out of the wedge or a sell order on a break down and out the wedge. Falling wedges, with a prior uptrend, are anticipated to break up and out, rather than down and out

Oct – Dec Triple Bottom Anticipates a change in trend from down to up.

SUGAR PRICES 2015

Jan- Mar: Declining The declining channel is a formation with parallel price barriers along both the price ceiling and floor. Unlike the sideways channel the declining channel has a decrease in both the price ceiling and price floor.

Apr – Jun: Ascending Triangle A formation in which the slope of price highs and lows come together at a point outlining the pattern of a Right Triangle. The hypotenuse in an Ascending Triangle should be sloping from lower to higher and from left to right. To trade this formation, place a buy order on a break up and out of the triangle or a sell order on a break down and out of the triangle. Ascending triangles, with a prior downtrend, are anticipated to break down and out, rather than up and out.

July – Sep Pennants Similar to a Symmetrical Triangle but generally stubbier or not as elongated. A formation in which the slope of price bar highs and lows are converging to a point so as to outline the pattern in a symmetrical

triangle. To trade this formation, you can place orders at both the break up and out of the pennant and break down and out of the pennant.

Oct – Dec Triple Bottom Anticipates a change in trend from down to up

SUGAR PRICES 2016

Jan- Mar: Measuring or Running Gaps Difficult to identify, but usually occur at the midpoint in a price rally or decline.

Apr – Jun: Pennants Similar to a Symmetrical Triangle but generally stubbier or not as elongated. A formation in which the slope of price bar highs and lows are

converging to a point so as to outline the pattern in a symmetrical triangle. To trade this formation, you can place orders at both the break up and out of the pennant and break down and out of the pennant.

July – Sep Descending Triangle A formation in which the slope of price highs and lows come together at a point outlining the pattern of a Right Triangle. The hypotenuse in an Descending Triangle should be sloping from higher to lower and left to right. To trade this formation, place a buy order on a break up and out of the triangle or a sell order on a breakdown and out of the triangle. Descending triangles, with a prior uptrend, are anticipated to break up and out, rather than down and out.

Oct – Dec Declining The declining channel is a formation with parallel price barriers along both the price ceiling and floor. Unlike the sideways channel the declining channel has a decrease in both the price ceiling and price floor.

SUGAR PRICES 2017

Jan- Mar: Horizontal or Sideways A horizontal or sideways is a formation that features both resistance and support. Support forms the low price bar, while resistance provides the price ceiling

Apr – Jun: Resistance A horizontal ceiling where the pressure to sell is greater than the pressure to buy. Therefore, an increase in price is reversed and prices revert downward. Typically resistance can be located on a chart by a previous set of high

July – Sep Ascending Triangle A formation in which the slope of price highs and lows come together at a point outlining the pattern of a Right Triangle. The hypotenuse in an Ascending Triangle should be sloping from lower to higher and from left to right. To trade this formation, place a buy order on a break up and out of the triangle or a sell order on a break down and out of the triangle. Ascending triangles, with a prior downtrend, are anticipated to break down and out, rather than up and out.

Oct – Dec Head and Shoulders Bottom Anticipates a rise in prices on a break above the Neckline

CONCLUSION Despite the economic recession world over, sugar consumption growth was less impacted and remained positive. The supply-demand disequilibrium has been caused essentially by the strident slippage in Indian production, exacerbated by the decline in EU and other Asian countries. The correction after surging surplus for two years in a row has come as good relief to sugar producer’s world over. Such tightness in supply is sure to be witnessed during 2017-18 as well. Brazil’s share in world export is expected to overshoot the half way mark to 53% this year as against 29% a decade ago. New York raw sugar futures as on 20th November 2017 Delivery month

Close price US c/lb

Jan

22.20

Mar

22.74

May

21.86

July

20.43

Mar

19.33

Mar

16.63

World production is now expected to be 4.274 mln tons lower than world consumption as against 3.626 mln tons projected in November. Consequently,

the statistical outlook for the market till the end of the season in September 2017 remains constructive and supportive to the market values. The ISO puts world export availability for 2016/17 at 49.608 mln tons raw value, as against 46.25 mln tons in the previous crop cycle Smaller output in importing countries and in India, in particular, is expected to trigger additional import demand which is expected to reach 49.621 mln tons, up 3.673 mln tons

• To study the operation of commodity trading in india and assess its importance Introduction The Indian economy is witnessing a mini revolution in commodity derivatives and risk management. Commodity options trading and cash settlement of commodity futures had been banned since 1952 and until 2002 commodity derivatives market was virtually non-existent, except some negligible activity on an OTC basis. Now in September 2005, the country has 3 national level electronic exchanges and 21 regional exchanges for trading commodity derivatives. As many as eighty (80) commodities have been allowed for derivatives trading. The value of trading has been booming and is likely to cross the $ 1 Trillion mark in 2006 and, if all goes well, seems to be set to touch $5 Trillion in a few years.

Chequred History 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

fuelled

unnecessary

speculation in essential commodities, and were detrimental to the healthy functioning of the markets for the underlying commodities, and hence 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 along with cash settlements of forward trades, rendering a crushing blow to the commodity derivatives market.

Under the Act, only those associations/exchanges, which are granted recognition by the Government, are allowed to organize forward trading in regulated commodities. The Act envisages three-tier regulation: (i) The Exchange which organizes forward trading in commodities can regulate trading on a day-to-day basis; (ii) the Forward Markets Commission provides regulatory oversight under the powers delegated to it by the central Government, and (iii) the Central Government - Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution - is the ultimate regulatory authority.

The already shaken commodity derivatives market got a crushing blow when in 1960s, following several years of severe draughts that forced many farmers to default on forward contracts (and even caused some suicides), forward trading was banned in many commodities considered primary or essential. As a result, commodities derivative markets dismantled and went underground where to some extent they continued as OTC contracts at negligible volumes. Much later, in 1970s

and 1980s the Government relaxed forward trading rules for some commodities, but the market could never regain the lost volumes.

Change in Government Policy After the Indian economy embarked upon the process of liberalization and globalization in 1990, the Government set up a Committee in 1993 to examine the role of futures trading. The Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17 commodity groups. It also recommended strengthening of the Forward Markets Commission, and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing options trading in goods and registration of brokers with Forward Markets Commission. The Government accepted most of these recommendations and futures trading were permitted in all recommended commodities.

Commodity futures trading in India remained in a state of hibernation for nearly four decades, mainly due to doubts about the benefits of derivatives. Finally a realization that derivatives do perform a role in risk management led the government to change its stance. The policy changes favoring commodity derivatives were also facilitated by the enhanced role assigned to free market forces under the new liberalization policy of the Government. Indeed, it was a timely decision too, since internationally the commodity cycle is on the upswing and the next decade is being touted as the decade of commodities.

Why are Commodity Derivatives Required? India is among the top-5 producers of most of the commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% to the GDP of the Indian economy. It employees around 57% of the labor force on a total of 163 million hectares of land. Agriculture sector is an important factor in achieving

a GDP growth of 8-10%. All this indicates that India can be promoted as a major center for trading of commodity derivatives. It is unfortunate that the policies of FMC during the most of 1950s to 1980s suppressed the very markets it was supposed to encourage and nurture to grow with times. It was a mistake other emerging economies of the world would want to avoid. However, it is not in India alone that derivatives were suspected of creating too much speculation that would be to the detriment of the healthy growth of the markets and the farmers. Such suspicions might normally arise due to a misunderstanding of the characteristics and role of derivative product.

It is important to understand why commodity derivatives are required and the role they can play in risk management. It is common knowledge that prices of commodities, metals, shares and currencies fluctuate over time. The possibility of adverse price changes in future creates risk for businesses. Derivatives are used to reduce or eliminate price risk arising from unforeseen price changes. A derivative is a financial contract whose price depends on, or is derived from, the price of another asset. Two important derivatives are futures and options. •

Commodity Futures Contracts: A futures contract is an agreement for buying

or selling a commodity for a predetermined delivery price at a specific future time. Futures are standardized contracts that are traded on organized futures exchanges that ensure performance of the contracts and thus remove the default risk. The commodity futures have existed since the Chicago Board of Trade (CBOT, www.cbot.com) was established in 1848 to bring farmers and merchants together. The major function of futures markets is to transfer price risk from hedgers to speculators. For example, suppose a farmer is expecting his crop of wheat to be ready in two months’ time, but is worried that the price of wheat may decline in this period. In order to minimize his risk, he can enter into a futures contract to sell his crop in two months’ time at a price determined now. This way he is able to hedge his risk arising from a possible adverse change in the price of his commodity.

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Commodity Options contracts: Like futures, options are also financial

instruments used for hedging and speculation. The commodity option holder has the right, but not the obligation, to buy (or sell) a specific quantity of a commodity at a specified price on or before a specified date. Option contracts involve two parties – the seller of the option writes the option in favour of the buyer (holder) who pays a certain premium to the seller as a price for the option. There are two types of commodity options: a ‘call’ option gives the holder a right to buy a commodity at an agreed price, while a ‘put’ option gives the holder a right to sell a commodity at an agreed price on or before a specified date (called expiry date).

The option holder will exercise the option only if it is beneficial to him; otherwise he will let the option lapse. For example, suppose a farmer buys a put option to sell 100 Quintals of wheat at a price of $25 per quintal and pays a ‘premium’ of $0.5 per quintal (or a total of $50). If the price of wheat declines to say $20 before expiry, the farmer will exercise his option and sell his wheat at the agreed price of $25 per quintal. However, if the market price of wheat increases to say $30 per quintal, it would be advantageous for the farmer to sell it directly in the open market at the spot price, rather than exercise his option to sell at $25 per quintal.

Futures and options trading therefore helps in hedging the price risk and also provide investment opportunity to speculators who are willing to assume risk for a possible return. Further, futures trading and the ensuing discovery of price can help farmers in deciding which crops to grow. They can also help in building a competitive edge and enable businesses to smoothen their earnings because non-hedging of the risk would increase the volatility of their quarterly earnings. Thus futures and options markets perform important functions that can not be ignored in modern business environment. At the same time, it is true that too much speculative activity in essential commodities would destabilize the markets and therefore, these markets are normally regulated as per the laws of the country.

Modern Commodity Exchanges

MULTI-COMMODITY EXCHANGE OF INDIA LIMITED (MCX) MCX an independent and de-mutualized 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. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, NABARD, NSE, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank Of India, Bank Of Baroda, Canara Bank, Corporation Bank. Headquartered in Mumbai, MCX is led by an expert management team with deep domain knowledge of the commodity futures markets. Through the integration of dedicated resources, robust technology and scalable infrastructure, since inception MCX has recorded many first to its credit. Inaugurated in November 2003 by Shri Mukesh Ambani, Chairman & Managing Director, Reliance Industries Ltd, MCX offers futures trading in the following commodity categories: Agro Commodities, Bullion, Metals- Ferrous & Non-ferrous, Pulses, Oils & Oilseeds, Energy, Plantations, Spices and other soft commodities. MCX has built strategic alliances with some of the largest players in commodities eco-system, namely, Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors' Association of India, Pulses Importers Association, Shetkari Sanghatana, United Planters Association of India and India Pepper and Spice Trade Association.

Today MCX is offering spectacular growth opportunities and advantages to a large cross section of the participants including Producers / Processors, Traders, Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives, Industry Associations, amongst others MCX being nation-wide commodity exchange, offering multiple commodities for trading with wide reach and penetration and robust infrastructure, is well placed to tap this vast potential.

National Commodity & Derivatives Exchange Limited (NCDEX) National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed online multi commodity exchange promoted by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). Punjab National Bank (PNB), CRISIL Limited (formerly the Credit Rating Information Services of India Limited), Indian Farmers Fertilizer Cooperative Limited (IFFCO) and Canara Bank by subscribing to the equity shares have joined the initial promoters as shareholders of the Exchange. NCDEX is the only commodity exchange in the country promoted by national level institutions. This unique parentage enables it to offer a bouquet of benefits, which are currently in short supply in the commodity markets. The institutional promoters of NCDEX are prominent players in their respective fields and bring with them institutional building experience, trust, nationwide reach, technology and risk management skills . NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It has commenced its operations on December 15, 2003. NCDEX is a nation-level, technology driven de-mutualized on-line commodity exchange with an independent Board of Directors and professionals not having any vested interest in commodity markets. It is committed to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. NCDEX is regulated by Forward Market Commission 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.

. NCDEX is located in Mumbai and offers facilities to its members in more than 390 centers throughout India. The reach will gradually be expanded to more centers. NCDEX currently facilitates trading of thirty six commodities - Cashew, Castor Seed, Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry Green Cocoons, Pepper, Rapeseed - Mustard Seed ,Raw Jute, RBD Palmolein, Refined Soy Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow Soybean Meal. At subsequent phases trading in more commodities would be facilitated.

UNRESOLVED ISSUES AND FUTURE PROSPECTS Even though the commodity derivatives market has made good progress in the last few years, the real issues facing the future of the market have not been resolved. Agreed, the number of commodities allowed for derivative trading have increased, the volume and the value of business has zoomed, but the objectives of setting up commodity derivative exchanges may not be achieved and the growth rates witnessed may not be sustainable unless these real issues are sorted out as soon as possible. Some of the main unresolved issues are discussed below.

a. Commodity Options: Trading in commodity options contracts has been banned since 1952. The market for commodity derivatives cannot be called complete without the presence of this Important derivative. Both futures and options are necessary for the healthy growth of the market. While futures contracts help a participant (say a farmer) to hedge against downside price movements, it does not allow him to reap the benefits of an increase in prices. No doubt there is an immediate need to bring about the necessary legal and regulatory changes to introduce commodity options trading in the country. The matter is said to be under the active consideration of the Government and the options trading may be introduced in the near future.

b. The Warehousing and Standardization: For commodity derivatives market to work efficiently, it is necessary to have a sophisticated, cost-effective, reliable and convenient warehousing system in the country. The Habibullah (2003) task force admitted, “A sophisticated warehousing industry has yet to come about”. Further,

independent labs or quality testing centers should be set up in each region to certify the quality, grade and quantity of commodities so that they are appropriately standardized and there are no shocks waiting for the ultimate buyer who takes the physical delivery. Warehouses also need to be conveniently located. Central Warehousing Corporation of India (CWC: www.fieo.com) is operating 500 Warehouses across the country with a storage capacity of 10.4 million tons. This is obviously not adequate for a vast country. To resolve the problem, a Gramin Bhandaran Yojana (Rural Warehousing Plan) has been introduced to construct new and expand the existing rural godowns. Large scale privatization of state warehouses is also being examined.

c. Cash versus Physical Settlement: It is probably due to the inefficiencies in the present warehousing system that only about 1% to 5% of the total commodity derivatives trades in the country are settled in physical delivery. Therefore the warehousing problem obviously has to be handled on a war footing, as a good delivery system is the backbone of any commodity trade. A particularly difficult problem in cash settlement of commodity derivative contracts is that at present, under the Forward Contracts (Regulation) Act 1952, cash settlement of outstanding contracts at maturity is not allowed. In other words, all outstanding contracts at maturity should be settled in physical delivery. To avoid this, participants square off their positions before maturity. So, in practice, most contracts are settled in cash but before maturity. There is a need to modify the law to bring it closer to the widespread practice and save the participants from unnecessary hassles. d. The Regulator: As the market activity pick-up and the volumes rise, the market will definitely need a strong and independent regular; similar to the Securities and Exchange Board of India (SEBI) that regulates the securities markets. Unlike SEBI which is an independent body, the Forwards Markets Commission (FMC) is under the Department of Consumer Affairs (Ministry of Consumer Affairs, Food and Public Distribution) and depends on it for funds. It is imperative that the Government should grant more powers to the FMC to

ensure an orderly development of the commodity markets. The SEBI and FMC also need to work closely with each other due to the inter-relationship between the two markets.

e. Lack of Economy of Scale: There are too many (3 national level and 21 regional) commodity exchanges. Though over 80 commodities are allowed for derivatives trading, in practice derivatives are popular for only a few commodities. Again, most of the trade takes place only on a few exchanges. All this splits volumes and makes some exchanges unviable. This problem can possibly be addressed by consolidating some exchanges. Also, the question of convergence of securities and commodities derivatives markets has been debated for a long time now. The Government of India has announced its intention to integrate the two markets. It is felt that convergence of these derivative markets would bring in economies of scale and scope without having to duplicate the efforts, thereby giving a boost to the growth of commodity derivatives market. It would also help in resolving some of the issues concerning regulation of the derivative markets. However, this would necessitate complete coordination among various regulating authorities such as Reserve Bank of India, Forward Markets commission, the Securities and Exchange Board of India, and the Department of Company affairs etc.

f. Tax and Legal bottlenecks: There are at present restrictions on the movement of certain goods from one state to another. These need to be removed so that a truly national market could develop for commodities and derivatives. Also, regulatory changes are required to bring about uniformity in octroi and sales taxes etc. VAT has been introduced in the country in 2005, but has not yet been uniformly implemented by all states.

CONCLUSION Did the prices of a

While almost all agricultural product prices increased at least in nominal terms, the rate of increase varied significantly from one commodity to another. In particular, international prices of basic foods, such as cereals, oilseeds and dairy products, increased far more dramatically than the prices of tropical products, such as coffee and cocoa, and raw materials, such as cotton or rubber. Therefore, developing countries dependent on exports of these latter products found that while their export earnings might have been increasing this was at a slower rate than the cost of their food imports. As many developing countries are net food importers, this imposed a serious balance of payments problem. The leap in food prices was in sharp contrast to the secular downward trend and the prolonged slump in commodity prices from 1995 to 2002, which even prompted calls for the revival of international commodity agreements. What has distinguished this episode was the concurrence of the hike in world prices of not just a few but of nearly all major food and feed commodities and the possibility that the prices may remain high after the effects of short- term shocks dissipate In the first four months of 2008, volatility in wheat and rice prices approached record highs (volatility in wheat prices was twice the level of the previous year while rice price volatility was five times higher). The increase in volatility was not confined to cereals – vegetable oils, livestock products and sugar all witnessed much larger price swings than in the recent past. Greater uncertainty limits opportunities for producers to access credit markets and tends to result in the adoption of low-risk production technologies at the expense of innovation and entrepreneurship. In addition, the wider and more unpredictable the price changes in a commodity are, the greater is the possibility of realizing large gains by speculating on future price movements of that commodity.

BIBLIOGRAPHY Magazines • ISO February outlook 2017

Internet Charts: • www.barcharts.com • www.chartsrus.com • www.mongabay.com • www.djindexes.com • Dow Jones Industrial Average Historical Prices / Charts Trend and other information: • www.crnindia.com • www.indiamart.com • www.ncdex.com • www.fmc.gov.in

BOOKS • Futures, options and swaps by Robert W. Kolb. • Derivative markets in India 2011 edited by Susan Thomas. • Options, futures and other derivatives by John Hull. •

Thomas Susan (2013): Agricultural Commodity Markets in India; Policy Issues for Growth, Indira Gandhi Institute for Development Research, Mumbai.