CHAPTER I

1. INTRODUCTION TO THE STUDY

India, a commodity based economy where two-third of the one billion

population depends on agricultural commodities, surprisingly has an under

developed commodity market. Unlike the physical market, futures markets

trades in commodity are largely used as risk management (hedging)

mechanism on either physical commodity itself or open positions in

commodity stock. For instance, a jeweler can hedge his inventory against

perceived short-term downturn in gold prices by going short in the future

markets.

The article aims at know how of the commodities market and how the

commodities traded on the exchange. The idea is to understand the

importance of commodity derivatives and learn about the market from Indian

point of view. In fact it was one of the most vibrant markets till early 70s. Its

development and growth was shunted due to numerous restrictions earlier.

Now, with most of these restrictions being removed, there is tremendous

potential for growth of this market in the country.

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 and Securities.

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.

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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, 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 an annual

turnover of Rs 1,40,000 crore (Rs 1,400 billion). With the introduction of

futures trading, the size of the commodities market grows many folds here on.

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,

cotton etc. are traded. It is important to develop a vibrant, active and liquid

commodity market. This would help investors hedge their commodity risk,

take speculative positions in commodities and exploit arbitrage opportunities

in the market.

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2. COTTON PROFILE

Cotton had been used to make fine, lightweight clothing since a long time. As

cotton clothes are not meant for wearing in the cold areas, clothing for the tropical

areas of the world had been provided by cotton for over years now. The cotton plant

originated as a wild plant but the human beings had understood its importance

much late. Some researchers assume that the Egyptians started using cotton in

clothes as early as 12000 BC. But the actual evidence of cotton cloth was found in

the Mexican cave that is considered to be 7000 years back. One more evidence of

cotton cloth was discovered from the archeological site of Mohenjo –Daro that is

considered to be as old as the previous evidence. This makes it clear that the wild

cotton was actually domesticated in Southern America and India only. In fact the

earliest descriptions of this plant came from the Indian subcontinent in the Rig Veda

in 1500BC that says that India has been producing the crop for more than 6000

years. Herodotus, a Greek historian, also wrote about the Indian cotton, when he

came to India in around the year 500AD.

In the 16th century, when the Spaniards came Peru just after the discovery of

America, they found that the native people had already been growing cotton and

wearing cotton clothes. They took this fiber to their homeland and it was then, when

cotton was introduced to the rest of the world. With time, it grew popular and

cultivation of cotton spread to the warmer places on the earth.

Until the start of the 18th century, cotton became the main constituent of the

clothing of the world. When Britain emerged as a super power at that time, it banned

the import of cotton and cotton clothes into its colonies so as protect its sheep and

wool industry. But the ban was lifted soon. With time the cotton textile industry

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encountered various technologies with the help of which it grew and developed to

reach its current position.

2.1 DESCRIPTION

Cotton is a creamy white soft fiber that is primarily used to manufacture

textile and garments throughout the world. Cotton is derived from around the seeds

of the cotton plant that comes from the genus of Gossypium and family Malvaceae.

This plant is somewhat bushy in appearance and grows well in tropical and semi-

tropical climates. The plant has leaves divided in three parts and capsule shaped

seeds around which the soft white fiber grows.

Cotton fiber obtained from the plant is first processed to remove proteins

from it. The remainder left is a natural polymer having characteristics like strong,

durable and absorbent and it is spun into threads for further use.

2.2 OVERVIEW

Cotton is considered a very important crop, as it is the major source of clothing

to the world. Besides this use of cotton, it is also used in various industrial

applications. Hence, it is ranked among the most cultivated and traded commodities

on the planet. Cotton and its various by-products are traded in the market and are

looked upon as an important means of investment. The by-products of cotton

include cottonseed, staple cotton, and cotton yarn and cottonseed oilcake. The

details about these by products is given below

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1. Cottonseed - Cottonseed is an oilseed that places 2nd in the list of largest

produced oilseeds in the world. It has a vast number of uses as it provides

food for humans, feed for animals, fertilizer for plants, padding fiber and also

used in explosives and computer chip boards.

2. Cottonseed oil - Cottonseed oil is produced by crushing the cottonseeds.

During the processing of cottonseed with the use solvent or mechanical

methods, hull and cottonseed meal are also produced. This oil makes healthy

and cholesterol free edible oil that is consumed in the Western countries.

3. Staple cotton - The cotton fiber is ginned in different lengths before it is

brought for selling into the market and this ginned cotton is known as staple

cotton. Long staple cotton is ginned cotton with length of 27-29 mm. Medium

staple cotton is ginned cotton with a length 24-26 mm. The ginned cotton

below this length is called short staple cotton.

4. Cotton yarn - Cotton yarn is made by processing the cotton fibers and is used

for producing a wide range of textiles, apparel and other products. Cotton

yarns are spun with the help of spinners, which are getting more and more

developed capacity wise with the improvement in technology. The other

major processors through which cotton is spun are filament yarns and

nonwovens.

Cotton is basically produced in the areas having tropical climatic conditions.

China is the largest producer of cotton in the world followed by United States of

America and India. The world’s total produce of cottonseed hovers around 35 million

tons. It is grown over 31 million hectares of land all around the globe. But the

production of this crop has shown a fluctuating trend of production over the recent

years due to various factors like crop failures etc. The world trade in cottonseed is

relatively low as compared to its oil’s trade. From among these 35 million tons of

cotton produced in the world, only 8 million tons of it is traded in its original form.

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The rest of cottonseeds are crushed to make oil. Cottonseed oil production

figures up to around 4.5 million tons and of cottonseed meal is around 16 million

tons annually. Spun cotton yarns’ world production figures reach around 28 million

tons an year. Talking about the consumption pattern, cotton contributes to around

37% of the total fiber usage of the world. Cottonseed, generally, is consumed within

which the country it is produced to make its oil. The major consumers of cottonseed

are

China

India

Uzbekistan

United States

Turkey

Pakistan

The first three countries consume almost all the cottonseed produced in the

countries. United States of America’s consumption figures are around 2.5 million

tons i.e. approximately 45% of the total cottonseed production. Even most of the

cottonseed oil cake is consumed at the place of its origin only. This also affects the

trade of oil cakes in the world. The trend of consumption of cotton and its by-

products is also fluctuating since the past years.

United States dominates the world trade situation in cottonseed and its by-

products context. It is the largest exporter of cottonseed in the world with Australia

exporting around 2 to 3 lakh tons per year. The total cottonseed oil meal traded in

the world sums up to a mere 5 to 6 lakh tons annually. China is the largest exporter

of this by-product of cotton with the exports of around 1.2 lakh tons. The major

importers of cottonseed in the world are Japan, Mexico, European union, Canada,

Turkey, Indonesia and India.

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2.3 CULTIVATION PATTERN

Cotton is a tropical crop as it thrives on hot and humid climatic conditions.

These conditions are present in the areas close to the equator like southern part of

North America, Northern Africa and Asia. It generally needs a long duration period

to grow and get mature i.e. 5 to 6 months. Also it needs a dry weather at the time of

harvesting to get an exceedingly good yield. There are a whole lot of methods

present to protect the cotton crops from weeds and diseases. The various methods

include spraying of herbicide, use of cultivator, rotary hoe, flame cultivator etc.

Harvesting is done with the help of spindle type pickers or strippers.

The planting time of cotton crops in the world varies vastly from February to

June. In India, the crop is cultivated as a khariff crop as it is sown in the months of

March to September. The mature crop is harvested in the months of November to

March. The crop starts reaching to the Indian markets from the months of November

to March.

2.4 COTTON PRODUCING COUNTRIES

Cotton as a crop is produced all around the world but mostly in the warmer

regions of the world. It does not grow wild as earlier but it is commercially and

strategically produced now. The total production of cottonseed in the world marks at

around 35 million tons per annum. Other by-products of cotton like cottonseed oil

and cottonseed oilcake have their production figures hovering around 4.5 million

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tons and 16 million tons respectively. Spun cotton yarns also make one of an

important by-product of cotton having an output of around 28 million tons.

The major producer countries of cotton and it’s by products along with their

production figures of cottonseed are

China (8.67 million tons)

United States of America (6.07 million tons)

India (5.68 million tons)

Pakistan (3.4 million tons)

Brazil (2.13 million tons)

Uzbekistan (1.59 million tons)

Turkey (1.3 million tons)

European Union (0.71 million tons)

Australia (0.4 million tons)

China leads the list of the cottonseed producing nations as well as cottonseed oil

meal in the world. But, though it is the largest producer of cotton in the world it is

also the largest consumer of the fiber and the large production figure is insufficient

for satisfying the domestic consumption demand in there. That is why the second

largest producer of cotton i.e. USA acts as the major player in the world market.

The trend of production has ever been fluctuating over the past years. Cotton is

grown over around 31 million hectares land around the world with India leading the

list in this context

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2.5 WORLD DEMAND AND SUPPLY SITUATION

Quantity in million Metric tons

Year

Beginning

August 1

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

World

Beginning

stock

11.97 9.29 8.83 11.86 12.52 12.70

World Cotton

Production19.31 21.13 27.07 25.53 26.74 25.99

World Cotton

Consumption21.53 21.66 23.69 24.97 26.64 27.14

World Cotton

Exports6.67 7.24 7.76 9.73 8.12 8.76

World

Ending

stocks

10.06 8.83 11.86 12.52 12.70 11.55

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2.6 PRODUCTION OF COTTON IN INDIA

India is the third largest producer of cotton and its derivatives in the world. The

country is responsible for the origination and domestication of the cotton crop. India

has the maximum area under cotton cultivation estimating up to around 9.50 million

tons i.e. 21% share in the world. A number of varieties of cotton are cultivated in the

country like Bengal Deshi, V-797, Jayadhar, etc and also the cotton fibers are

graded into three major grades i.e. ‘Short’, ’Medium’ and ‘Elongated’. The northern

areas in the country provide with mostly short and medium staple cotton, central

areas provide with long and medium staple cotton and the southern areas largely

with long staple cotton. The quantity of production of cottonseeds in India is around

5.68 million tons. The states in India producing cotton crop are

Maharashtra

Gujarat

Andhra Pradesh

Haryana

Punjab

Rajasthan

Karnataka

Tamil Nadu

Madhya Pradesh

The above-mentioned states cover around 95% area under cotton cultivation as

well as output in India. Maharashtra followed by Andhra Pradesh and Haryana are

the largest cotton producing states of the country. Regarding the cottonseed oil,

around 80% of the cottonseed produced in the country is crushed to obtain oil.

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The meal produced after the extraction of oil from the seeds sums up to around

2 million tons. Like the fluctuations in the world production of cottonseed, Indian

production also fluctuates every year. Also, the productivity of cotton in India is quite

low as compared to the productivity of the crop in the rest of the world. World

average productivity of the crop is around 500 kg per hectare but Indian productivity

just reaches 300 kg per hectare.

2.7 INDIAN COTTON MARKET

Cotton has been a traditional crop in India as it has been grown here since it

has been domesticated. It constitutes to around 60% of the fiber consumed in the

textile sector of the country. This sector is also very important for the country as it

provides a large number of employment opportunities and also contributes

significantly to the Gross Domestic product of the country. The country stands first

among the countries having the maximum area under cultivation of cotton and place

third in the list of cotton producing countries.

India produces around 35 million tons of cottonseed in a year. Maharashtra is

the leading cotton producing state in the country with a production of around 6 lakh

tons. The cottonseed meal is produced in the country to the context of 2 million

tons. The area on which cotton is produced is around 9.50 million hectares in India.

The yield per hectare in India is very low as compared to the other producing

countries of the world. The country consumes all of the cotton produced in the

country and ranks among the largest cotton consuming countries.

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The main demand comes from the textile sector. Regarding the Indian

scenario in the world trade, India hasn’t been a significant player in the world

market. India sometimes exports cotton and its by-products and some times acts as

an importer to satisfy its huge domestic consumption demand. Cotton earns the

Indian economy the maximum foreign exchange among the exported commodities.

India is the largest exporter of cotton yarn in the world accounting up to 450 million

kg i.e. 17% market share. The countries to which India exports cotton yarn are

China

Korea

Bangladesh

Egypt

Taiwan

Hong Kong

Turkey

Japan

But it also adds on to the list of expenses in the budget of the economy as large

amounts of cotton are imported due to the superior quality of foreign cotton. India

imports around 22 lakhs bales of cotton, which is same as the 12% of the domestic

productions. Also the rate of imports is overtaking the rate of exports in the country

making it a net importer of cotton. Also cotton sector in India is largely unorganized

but several associations are trying to change the scenario.

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2.8 INDIA IN THE WORLD COTTON

India is the third largest producer of cotton in the world after China and USA

accounting for about 14% of the world cotton production.  It has the distinction of

having the largest area under cotton cultivation in the world ranging between 8.00

million to 9.00 million hectares and constituting about 26% of the world area under

cotton cultivation. The yield per hectare is however, the lowest against the world

average, but over the last two years have shown a promising potential to reach near

the world average production level in near future.

2.9 MAJOR TRADING CENTRES OF COTTON

The major international trading centers in which cotton is traded are:

New York Board of Trade (NYBOT) – New York

Shanghai Commodity Exchange – China

The cotton trading centers in India are:

Akola (Maharashtra)

Parbhani (Maharashtra)

Nagpur (Maharashtra)

Yeotmal (Maharashtra)

Adilabad (Andhra Pradesh)

Karimnagar (Andhra Pradesh)

Dhule (Maharashtra)

Surendranagar (Gujarat)

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Bhavnagar (Gujarat)

Sriganganagar (Rajasthan)

Bhatinda (Punjab)

Hisar (Haryana)

Sirsa (Haryana)

Guntur (Andhra Pradesh)

Kurnool (Andhra Pradesh)

Coimbatore (Tamil Nadu)

Gulbarga (Karnataka)

Ahmednagar (Maharashtra)

Sangli (Maharashtra)

Kota (Rajasthan)

Mumbai (Maharashtra)

Ludhiana (Punjab)

Delhi

Kanpur (Uttar Pradesh)

Bhilwara (Rajasthan)

Ahmedabad (Gujarat)

Surat (Gujarat)

Indore (Madhya Pradesh)

Kolkata (West Bengal)

Tirupur (Tamil Nadu)

Madurai (Tamil Nadu)

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2.10 TYPES OF COTTON PRODUCTS TRADED IN COMMODITY MARKET

Cotton L staple

Cotton M staple

Cotton S staple

Kapas

Cotton yarn

Indian 28 mm cotton

Indian 31 mm cotton

Cotton Seed Oilcake

Medium Staple Cotton

Cotton Seed

Cotton Seed Oil

Raw Jute

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2.11 MARKET INFLUENCING FACTORS FOR COTTON TRADE

Relationship with other competitive fibers

World demand for consumer textile and demand from the cattle-feed industry

in the country

Discovery of new cotton markets

Introduction of new and developed technology

Fluctuations in domestic cotton production

Delays in the arrival of cottonseed for crushing

Price and other policies of the government regarding the cotton sector

Import-export scenario in the country

Fluctuation in currency value

Weather condition during the growth period.

Demand from overseas consuming centers like Nepal and Pakistan.

Quantum and timing of imports from Indonesia, Thailand and Burma.

Government intervention through MSP purchase.

Carryover stocks.

Growth of the Gutkha industry

Government regulations related to gutkha industry.

Only one-third of the area is under irrigation, and this causes the cotton

output to vary considerably from year to year in response to the vagaries of

weather and pest attacks. 

More than 80 percent of the cotton produced is sold out by March 31 every

year and the price starts firming up from April and starts easing only in

September when the new crop starts arriving in the market. 

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The Government of India fixes the Minimum Support Price for cotton and

several Government agencies like Cotton Corporation of India, Maharashtra

State Co-operative Cotton Growers' Marketing Federation procure cotton at

this price. This sets the trend for the price initially. But the industry involves

large number of players and the market forces determine the price soon.

The imports of cotton into the country and exports from the country.

Variations in cotton production and its effect on cottonseed, meal and oil

production in the country. 

The arrival of cottonseed for crushing from the ginning centers of the

country. 

Comparative price with other oilseeds, oil and meal in the domestic market. 

The demand from the cattle-feed industry, which is the major consumer of

cottonseed meal.

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3. COMMODITY MARKET PROFILE

Ever since the dawn of civilization trading has become an integral part in the

life of mankind. The very reason for the 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 year commodities markets have been experiencing tremendous progress,

which is the evident from the fact that the trade in this segment stands as the boon

for the global economy today. The promising nature of the market 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 lake and sell those commodities which are excess with

them.

The commodities trade is believed to have genesis in Sumerian. 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 that occurred after the European

voyages of discovery.

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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 trust for the

commodities trade was provided by the changes in demand patterns, scarcity and

the supply potential both within and across the nations.

The first organized future market in India was established in 1875 under the

aegis of the Bombay Cotton Trade Association to trade in cotton contracts which

was followed by oilseeds and food grains. Before the Second World War, a large

number of commodity exchanges trading futures contracts in several commodities

like cotton, groundnut, groundnut oil, raw jute, jute goods, castor seed, wheat, rice,

sugar, precious metals like gold and silver were flourishing throughout the country.

During the Second World War future trade was prohibited. After

independence, especially in the second half of 1960s, commodity futures trading

picked up. However, due to shortage during the early and mid-sixties futures trading

in most of the commodities was prohibited.

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 inventions by the government.

Commodity markets have a huge potential in the Indian context particularly because

of the agric-based economy. With the government’s initiative for agricultural

liberalization, commodities trading in India have gained increased momentum in

activities.

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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 multiple 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 have been identified. With the recent boom in commodities markets,

Indian participants are gearing up exploiting the potential opportunities in the future.

Commodity markets are of great help not only for the 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.

3.1 MAJOR COMMODITY EXCHANGES IN INDIA

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3.1.1 MULTI COMMODITY EXCHANGE (MCX)

It 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 around

US$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.

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 agricultural products.

COMMODITIES TRADED IN MCX

METAL BULLION

Aluminum, Copper, Lead, Nickel,

Sponge Iron, Steel Long (Bhavnagar),

Steel Long (Govindgarh), Steel Flat,

Tin, Zinc

Gold, Gold HNI, Gold M, i-gold, Silver,

Silver HNI, Silver M

FIBER ENERGY

Cotton L Staple, Cotton M Staple,

Cotton S Staple, Cotton Yarn, Kapas

Brent Crude Oil, Crude Oil, Furnace Oil,

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Natural Gas, M. E. Sour Crude Oil

SPICES PLANTATIONS

Cardamom, Jeera, Pepper, Red Chili Arecanut, Cashew Kernel, Coffee

(Robusta), Rubber

PULSES PETROCHEMICALS

Chana, Masur, Yellow Peas HDPE, Polypropylene(PP), PVC

OIL & OIL SEEDS

Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton Seed, Crude Palm

Oil, Groundnut Oil, Kapasia Khalli, Mustard Oil, Mustard Seed (Jaipur), Mustard

Seed (Sirsa), RBD Palmolein, Refined Soy Oil, Refined Sunflower Oil, Rice Bran

DOC, Rice Bran Refined Oil, Sesame Seed, Soymeal, Soy Bean, Soy Seeds

CEREALS OTHERS

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Maize

Guargum, Guar Seed, Gurchaku,

Mentha Oil, Potato (Agra), Potato

(Tarkeshwar), Sugar M-30, Sugar S-30

3.1.2 NATIONAL COMMODITY AND DERIVATIVES EXCHANGE (NCDEX)

It 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.

NCDEX currently facilitates trading of 56 commodities -

AGRI-BASED COMMODITIES

Castor Seed, Chana, Chilli, Coffee - Arabica, Coffee - Robusta

Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Groundnut (in shell)

Groundnut Expeller Oil, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags

Indian 28 mm Cotton, Indian 31 mm Cotton, Masoor Grain Bold, Medium Staple

Cotton

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

Seed

Pepper, Raw Jute, RBD Palmolein, Refined Soy Oil, Rubber, Sesame Seeds, Soy

Bean

Sugar – Small, Sugar – Medium, Turmeric, Urad (Black Matpe), V-797 Kapas

Yellow Peas, Yellow Red Maize, 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, Polyvinyl Chloride.

NON-FERROUS METALS

Aluminum Ingot, Copper Cathode, Nickel Ingot, Zinc Cathode

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3.1.3 NATIONAL MULTI COMMODITY EXCHANGE OF INDIA (NMCE)

In response to the Press Note issued by the Government of India during

May'1999, first state-of-the-art demutualised multi-commodity Exchange, National

Multi Commodity Exchange of India Ltd. (NMCE) was promoted by commodity-

relevant public institutions, viz., 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). While various integral aspects of commodity economy,

viz., warehousing, cooperatives, private and public sector marketing of agricultural

commodities, research and training were adequately addressed in structuring the

Exchange, finance was still a vital missing link. Punjab National Bank (PNB) took

equity of the Exchange to establish that linkage. Even today, NMCE is the only

Exchange in India to have such investment and technical support from the

commodity relevant institutions. These institutions are represented on the Board of

Directors of the Exchange and also on various committees set up by the Exchange

to ensure good corporate governance. Some of them have also lent their personnel

to provide technical support to the Exchange management. The day-to-day

operations of the Exchange are managed by the experienced and qualified

professionals with impeccable integrity and expertise. None of them have any

trading interest. The structure of NMCE is impossible to replicate in India.

NMCE is unique in many other respects. It is a zero-debt company; following

widely accepted prudent accounting and auditing practices. It has robust delivery

mechanism making it the most suitable for the participants in the physical

commodity markets. The exchange does not compromise on its delivery provisions

to attract speculative volume.

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Public interest rather than commercial interest guide the functioning of the

Exchange. It has also established fair and transparent rule-based procedures and

demonstrated total commitment towards eliminating any conflicts of interest. It is the

only Commodity Exchange in the world to have received ISO 9001:2000 certification

from British Standard Institutions (BSI).

NMCE commenced futures trading in 24 commodities on 26th November,

2002 on a national scale and the basket of commodities has grown substantially

since then to include cash crops, food grains, plantations, spices, oil seeds, metals

& bullion among others. Research Desk of NMCE is constantly in the process of

identifying the hedging needs of the commodity economy and the basket of

products is likely to grow even further.  NMCE has also made immense contribution

in raising awareness about and catalyzing implementation of policy reforms in the

commodity sector. NMCE was the first Exchange to take up the issue of differential

treatment of speculative loss. It was also the first Exchange to enroll participation of

high net-worth corporate securities brokers in commodity derivatives market. It was

the Exchange, which showed a way to introduce warehouse receipt system within

existing legal and regulatory framework. It was the first Exchange to complete the

contractual groundwork for dematerialization of the warehouse receipts. Innovation

is the way of life at NMCE.

COMMODITIES TRADED IN NMCE

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Oil Seeds Oils  Oil Cakes

 Castor Seed  Castor Oil  Castor Oilcake

 Copra  Coconut Oil  Coconut Oilcake

 Cotton Seed  Cotton Seed Oil  Cotton Seed Oilcake

 Groundnut  Groundnut Oil  Groundnut Oilcake

 Linseed  Linseed Oil  Linseed Oilcake

Rape/Mustard Seed Rape/Mustard Seed 

 Oil

 Rape/Mustard Seed

Oilcake

 Rape Seed-42  Sesame seed Oil  Sesame Oilcake

 Sesame Seed  Soybean Oil  Soybean Oilcake

 Soybean  Crude Palm Oil  

 RBD Palmolein

 Rice bran Oil

Vanaspati

 Metals  Spices Others

 Aluminium            Pepper          Rubber

 Copper  Ungarbled Pepper  Sacking

 Gold (100 Gms)  Cardamom  Sugar

 Kilo Gold  Cumin Seed  Sugar S-30

 Lead  Turmeric  Gur

 Nickel  Guarseed

 Silver  Guar Gum

 Tin  Wheat

 Zinc Pulses  Rice

 Tur/Arhar Raw Jute 

 Urad Coffee Robusta  

 Moong Coffee Arabica

 Masoor  Menthol

27

 Chana Isabgul Seed

3.2 CONCEPTS IN COMMODITY MARKET

3.2.1 DERIVATIVES

Derivatives are financial contracts, which derive their value from an

underlying asset. The underlying asset can be equity, commodity, foreign exchange,

interest rates, real estate or any other asset. Broadly four types of derivatives are

traded, namely forwards, futures, options and swaps.

Derivative contracts can be traded either in an exchange or over-the-counter. (OTC)

EXCHANGE

Exchange is a central marketplace for buyers and sellers of different asset

classes and financial instruments (contracts) that derive their value from these

assets as the underlying. The contracts are standardized to ensure homogeneity in

the financial instruments traded. The prices in an exchange are determined in the

form of a continuous auction. This auction provides a readily available, widely

accepted reference price for the underlying. This facilitates liquidity in the derivative

instrument being traded due to easy transferability, thereby resulting in price

discovery-the fair value is determined by market participants. For example, all

participants in the futures markets are subject to the same specifications of quality,

quantity (lot size of each futures contract) and delivery terms. It is important to

understand that the exchange neither takes positions in the market nor advises the

market is fair and orderly. The exchange provides “Trade Guarantee” using the

Settlement Guarantee Fund, thereby minimizing counterparty default (credit) risk.

Regulatory bodies are appointed by the government to regulate the functioning of all

exchanges. In India, the Forward Markets Commission (FMC) is the regulatory

28

authority for commodity futures exchanges in India. Members violating the rules of

the exchange and the regulatory body can be penalized.

OVER-THE-COUNTER (OTC)

OTC is an alternative trading platform linked to a network of dealers who do

not physically meet but instead communicate through a network of telephones and

computers. Traders are usually transacted between financial institutions that can

also act as market makers for the traded financial instruments. All the transactions

over telephone are recorded, so that they can be authenticated in case of future

disputes. The buyer and seller can customize the contracts traded to suit their

specific requirements. Hence, the terms of the contracts are not standardized, but

customized to meet specific requirements of the counterparties. The buyer and

seller negotiate and mutually agree to the terms of the contract.

3.3. TYPES OF DERIVATIVES

FORWARD CONTRACT

A forward contract is an agreement between two parties to buy or sell an

asset (which can be of any kind) at a pre-agreed future point in time. Therefore, the

trade date and delivery date are separated. It is used to control and hedge risk, for

example currency exposure risk (e.g., forward contracts on USD or EUR) or

commodity prices (e.g., forward contracts on oil).

One party agrees (obligated) to sell, the other to buy, for a forward price

agreed in advance. In a forward transaction, no actual cash changes hands. If the

transaction is collateralized, exchange of margin will take place according to a pre-

29

agreed rule or schedule. Otherwise no asset of any kind actually changes hands,

until the maturity of the contract.

The forward price of such a contract is commonly contrasted with the spot

price, which is the price at which the asset changes hands (on the spot date, usually

two business days). The difference between the spot and the forward price is the

forward premium or forward discount.

FUTURES CONTRACT

A futures contract is a standardized contract, traded on a futures exchange,

to buy or sell a certain underlying instrument at a certain date in the future, at a

specified price. The future date is called the delivery date or final settlement date.

The pre-set price is called the futures price. The price of the underlying asset on the

delivery date is called the settlement price.

A futures contract gives the holder the obligation to buy or sell, which differs

from an options contract, which gives the holder the right, but not the obligation. In

other words, the owner of an options contract may exercise the contract, but both

parties of a "futures contract" must fulfill the contract on the settlement date. The

seller delivers the commodity to the buyer, or, if it is a cash-settled future, then cash

is transferred from the futures trader who sustained a loss to the one who made a

profit. To exit the commitment prior to the settlement date, the holder of a futures

position has to offset their position by either selling a long position or buying back a

short position, effectively closing out the futures position and its contract obligations.

30

Futures contracts, or simply futures, are exchange traded derivatives. The

exchange's clearinghouse acts as counterparty on all contracts, sets margin

requirements, etc.

OPTION

An option gives the right but not the obligation to the option owner, to buy or

sell an underlying asset at a specific price at a specific time period in the future.

There are two types of OPTIONS

CALL OPTION

A call option is an option contract that gives the owner of the option, the right,

but not the obligation to buy the underlying asset on or before a specific date and at

a specific price

PUT OPTION

A put option is an option contract that gives the option owner the right, but

not the obligation to sell the underlying asset on or before a specific date and at a

specific price.

SWAPS

A swap is an agreement between two parties to exchange different stream of

cash flows in future according to predetermined terms. It is a recent innovation. The

basic idea is that the counter-parties agree to swap two different types of payments.

31

A payment is either fixed or is designed to float according to an underlying interest

rate, exchange rate, index or the price of a security or commodity. When the

payments are to be executed in the same currency, then only the net amount of

payments are made. The World Bank and IBM entered into the first ever swap

contract in August 1981.

3.4 ADVANCED CONCEPT IN COMMODITY MARKETS

3.4.1 HEDGING

Hedging means taking a position in the futures market that is opposite to a

position in the physical market with the objective of reducing or limiting risks

associated with price changes. Hedging is two-step process. For instance, if the

hedger is going to buy a commodity in the cash market at a future date, he buys the

futures contract now and when he buys the commodity in the cash market, the

futures contract is squared off to reduce or limit the risk of the purchase price. If the

hedger is going sell a commodity in the cash market in the future, he sells the

futures contract is squared off to reduce or limit the risk of the sales price.

3.4.2 SPECULATION

Speculation means anticipating future price movements to make profits from

it. The main objective of speculation in a commodity futures market is to take risks

and profit from anticipated price changes in the futures price of an asset. A

speculator will buy futures contracts (long position) if he anticipates an increase in

the price of the commodity in future and he will sell futures contracts (short position)

if he anticipates a fall in the price of the commodity in future.

32

3.4.3 ARBITRAGE

Arbitrage means locking in a profit by simultaneously entering into

transactions in two or more markets. If the relationship between spot prices and

futures prices in terms of basis or between prices of two futures contracts in terms

of spread changes, it gives rise to arbitrage opportunities. Difference in the

equilibrium prices determined by he demand and supply at two different markets

also gives opportunities arbitrage. The futures price must be equal to the spot price

plus cost of carrying the commodity to the futures delivery date else arbitrage

opportunity arises.

33

CHAPTER II

4. OBJECTIVES OF THE STUDY

To analyze online trading mechanism of the commodity market

To find the major factors that influence cotton items trading in the commodity

market

To identify the cotton industries performance related to commodity market

To evaluate the risks involved in cotton trading in the commodity market

To give suggestion to overcome the risk involved in cotton trading in the

commodity market

34

5. LIMITATIONS OF THE STUDY

The study is carried out with in a short period of time

This study has certain limitations, as it is restricted to only one area i.e.

Coimbatore.

It is not possible to expect 100% accuracy in cotton trading in the commodity

market.

Primary data is collected only through questionnaire and there is no interview

session with the cotton industry traders because of time constraints

The sample respondents are restricted to 50 only which may leads to some

discrepancies in conclusion.

35

6. RESEARCH METHODOLOGY

Research in common parlance refers to a search for knowledge. It is

systematic method of enunciating the problems, formulating a hypothesis, collecting

the facts or data, analyzing the facts and reaching certain conclusions. It is a

‘search for knowledge’.

6.1 RESEARCH DESIGN

In this research design, the researcher has focused on the cotton traders in

the commodity market. The researcher already knows the research questions

should be addressed. The research is based on descriptive research

6.2 SAMPLE UNIT

The sample unit in this project consists of the cotton industries and cotton

traders in Coimbatore

6.3 SAMPLE SIZE

36

Total sample respondents for study are restricted to 50. The samples were

collected only from Coimbatore city. Major respondents were cotton industries and

cotton traders in Coimbatore.

6.4 SAMPLING METHOD

The sampling technique adopted for the study was non-probability

convenience sampling .It was very easy to locate the cotton traders in the

Coimbatore. So the respondents were chosen on the basis of this sampling method.

6.5 DATA COLLECTION METHOD

The data collection method includes both primary and secondary data

A) PRIMARY DATA

The primary data is collected by meeting various Cotton Industries and

Cotton Traders Coimbatore. The primary data collection is done by collecting

questionnaire from the Cotton Industries and Cotton Traders.

B) SECONDARY DATA

37

Secondary data includes data, which exist already and are directly applied to

the study. Secondary data was collected from the literature published by various

books and related websites.

6.6 STATISTICAL TOOLS

Simple percentage method is used in this study to carry out the percentage

analysis.

CHAPTER III

7. ANALYSIS AND INTERPRETATION

7.1 AWARENESS OF COTTON ITEMS TRADED IN COMMODITY MARKET

To find the cotton industries might aware about the cotton items traded in the

commodity market.

TABLE NO: 1

The table showing respondents’ opinion about awareness of cotton items

traded in commodity market

38

S.NO TYPE NO OF

RESPONDENTS

PERCENTAGE

1 Aware 36 72

2 Unaware 14 28

Total 50 100

INFERENCE

From the above table 72% of cotton industries aware about the cotton item

traded in the commodity market and 28% are not aware about the commodity

market

CHART: 1

The chart showing respondents’ opinion about awareness of cotton items

traded in commodity market

39

36

14

0

5

10

15

20

25

30

35

40

No

of

Res

po

nd

ents

Aware

Unaware

7.2 TRADE IN COTTON ITEMS IN COMMODITY MARKET

To find the number of traders in the cotton items in the commodity market

40

TABLE NO: 2

The table showing respondents’ opinion about trade in cotton items in

commodity market

S.NO TYPE NO OF

RESPONDENTS

PERCENTAGE

1 Traded 13 26

2 Not Traded 37 74

Total 50 100

INFERENCE

It is inferred from the above table there are 26% of cotton items trader are

available in the commodity market and 37% are not traded in the cotton items in the

commodity market.

CHART: 2

The chart showing respondents’ opinion about traded in cotton items in

commodity market

41

13

37

0

5

10

15

20

25

30

35

40

No

of

Res

po

nd

ents

Traded

Not Traded

7.3 COTTON ITEMS TRADING SUITABLE FOR LONG TERM TRADE

To find the cotton items trade in the commodity market should be suitable for

long term trade

TABLE NO: 3

42

The table showing respondents’ opinion about cotton items trading suitable

for long term trade

S.NO TYPE NO OF

RESPONDENTS

PERCENTAGE

1 Yes 19 38

2 No 31 62

Total 50 100

INFERENCE

From the above table it shows that 38% of the cotton traders are favorable

for long term trade and 62% of the cotton traders are not favorable for long term

trade.

CHART: 3

The chart showing respondents’ opinion about cotton items trading suitable

for long term trade

43

19

31

0

5

10

15

20

25

30

35

No

of

Res

po

nd

ents

Yes

No

7.4 COMMODITY MARKET OFFERS BETTER QUALITY COTTON MATERIALS

To find the commodity market offers the good quality of cotton materials to

cotton traders in the commodity market.

44

TABLE NO: 4

The table showing respondents’ opinion about commodity market offers

better quality cotton materials

S.NO TYPE NO OF

RESPONDENTS

PERCENTAGE

1 Yes 23 46

2 No 27 54

Total 50 100

INFERENCE

From the above table 46% of cotton traders are agree the cotton commodity market

offer good quality cotton materials and 54% of cotton traders are not agree the

cotton commodity market offer the good quality cotton materials

CHART: 4

The chart showing respondents’ opinion about commodity market offers

better quality cotton materials

45

23

27

21

22

23

24

25

26

27

28

No

of

Res

po

nd

ents

Yes

No

7.5 REASONS FOR TRADING COTTON ITEMS IN THE COMMODITY MARKET

There are three basic reasons for trading in the cotton items in the

commodity market those are Standardization, Price, and Delivery and to find the

cotton traders reason for trading in the cotton commodity market.

46

TABLE NO: 5

The table showing respondents’ opinion about reasons for trading cotton

items in the commodity market

S.NO TYPE NO OF

RESPONDENTS

PERCENTAGE

1 Standardization 15 30

2 Price 16 32

3 Delivery 2 4

4 No Answer 17 34

Total 50 100

INFERENCE

From the above table it shows that 30% of cotton traders are favorable for

standardization and 32% of cotton traders is favorable for price and 4% cotton

traders is favorable for delivery and 34% of cotton traders are not specify the

reason.

CHART: 5

The chart showing respondents’ opinion about reasons for trading cotton

items in the commodity market

47

1516

2

17

0

2

4

6

8

10

12

14

16

18

No

of

Res

po

nd

ents

Standardization

Price

Delivery

No Answer

7.6 SPECIFICATION OF THE COMMODITY EXCHANGE NAME THOSE WHO

TRADE

To know the cotton traders in which commodity exchange those who trade

cotton items in the commodity market.

TABLE NO: 6

48

The table showing respondents’ opinion about specification of the commodity

exchange name those who trade

S.NO TYPE NO OF

RESPONDENS

PERCENTAGE

1 MCX 13 26

2 NCDEX 0 0

3 Others 37 74

Total 50 100

INFERENCE

From the above table 26% of cotton traders are trade only in MCX and there

is no cotton traders are trade in NCDEX

CHART: 6

The chart showing respondents’ opinion about specification of the

commodity exchange name those who trade

49

13

0

37

0

5

10

15

20

25

30

35

40

No

of

Res

po

nd

ents

MCX

NCDEX

Others

7.7 TRADING YEARS OF THE PERSON TRADE IN COTTON ITEMS IN THE

COMMODITY MARKET

To know the No of years of cotton traders make a trade in cotton items in the

commodity market.

50

TABLE NO: 7

The table showing respondents’ opinion about trading years of the person

trade in cotton items in the commodity market

S.NO TYPE NO OF

RESPONDENS

PERCENTAGE

1 Less than one

Year

8 16

2 1 to 5 years 5 10

3 More than 5 Years 0 0

4 Others 37 74

Total 50 100

INFERENCE

It is inferred from the above table there are 16% of cotton traders are trade

below one year and 10% of cotton traders are trade between 1 to 5 years and no

person trade more than 5 years.

CHART: 7

The chart showing respondents’ opinion about trading years of the person

trade in cotton items in the commodity market

51

8

5

0

37

0

5

10

15

20

25

30

35

40

No

of

Res

po

nd

ents

Less than one Year

1 to 5 years

More than 5 Years

Others

7.8 BASIS OF TRADE COTTON ITEMS IN THE COMMODITY MARKET

There are two basis of trade of cotton items in the commodity market those

are one day trader and more than a day trader.

52

TABLE NO: 8

The table showing respondents’ opinion about basis of trade cotton items in

the commodity market

S.NO TYPE NO OF

RESPONDENS

PERCENTAGE

1 Daily Trader 1 2

2 More than a Day 12 24

3 Others 37 74

Total 50 100

INFERENCE

It is inferred from the above table only 2% of trader is done one day trade

and 24% of cotton traders are done more than a day trade.

CHART: 8

The chart showing respondents’ opinion about basis of trade cotton items in

the commodity market

53

1

12

37

0

5

10

15

20

25

30

35

40

No

of

Res

po

nd

ents

Daily Trader

More than a Day

Others

7.9 FLUCTUATION PRICE OF COTTON ITEMS IN THE COMMODITY MARKET

To find the level of fluctuation price in cotton items in the commodity market.

TABLE NO: 9

54

The table showing respondents’ opinion about fluctuation price of cotton

items in the commodity market

S.NO TYPE NO OF

RESPONDENS

PERCENTAGE

1 High 4 8

2 Medium 7 14

3 Low 2 4

4 Others 37 74

Total 50 100

INFERENCE

From the above table 8% of cotton traders are favorable for high fluctuation

price and 14% of cotton traders are favorable for medium level and 4% cotton

traders are favorable for low level fluctuation price of cotton items in the commodity

market.

CHART: 9

The chart showing respondents’ opinion about fluctuation price of cotton

items in the commodity market

55

4

7

2

37

0

5

10

15

20

25

30

35

40

No

of

Res

po

nd

ents

High

Medium

Low

Others

7.10 COTTON ITEMS IN THE COMMODITY MARKET IS CONVENIENT FOR

BULK PURCHASE

To know the cotton items trade in the commodity market is suitable for bulk

purchase.

56

TABLE NO: 10

The table showing respondents’ opinion about cotton items in the commodity

market is convenient for bulk purchase

S.NO TYPE NO OF

RESPONDENS

PERCENTAGE

1 Yes 10 20

2 No 3 6

3 Others 37 74

Total 50 100

INFERENCE

From the above table 20% of cotton traders are favorable for bulk purchase

and 6% of cotton traders are not favorable for bulk purchase of cotton items in the

commodity market.

CHART: 10

The chart showing respondents’ opinion about cotton items in the commodity

market is convenient for bulk purchase

57

10

3

37

0

5

10

15

20

25

30

35

40

No

of

Res

po

nd

ents

Yes

No

Others

7.11 DELIVERY OF COTTON ITEMS IN THE COMMODITY MARKET

To know the cotton traders those who take any delivery of cotton items in the

commodity market.

58

TABLE NO: 11

The table showing respondents’ opinion about delivery of cotton items in the

commodity market

S.NO TYPE NO OF

RESPONDENS

PERCENTAGE

1 Yes 0 0

2 No 13 36

3 Others 37 74

Total 50 100

INFERENCE

From the above table there are no person take deliveries of cotton items in

the commodity market.

CHART: 11

The chart showing respondents’ opinion about delivery of cotton items in the

commodity market

59

0

13

37

0

5

10

15

20

25

30

35

40

No

of

Res

po

nd

ents

Yes

No

Others

7.12 COTTON VARIETIES CAN BE ADDED IN THE COMMODITY MARKET

There are some cotton items traded in the commodity market if there is any

need for include of cotton items in the commodity market.

TABLE NO: 12

60

The table showing respondents’ opinion about cotton varieties can be added

in the commodity market

S.NO TYPE NO OF

RESPONDENS

PERCENTAGE

1 Yes 2 4

2 No 11 22

3 Others 37 74

Total 50 100

INFERENCE

It is inferred from the above table there are 4% of cotton traders are wanted

to include some cotton items in the commodity market and 22% of cotton traders

are not need to include of cotton items in the commodity market.

CHART: 12

The chart showing respondents’ opinion about cotton varieties can be added

in the commodity market

61

2

11

37

0

5

10

15

20

25

30

35

40

No

of

Res

po

nd

ents

Yes

No

Others

7.13 PROBLEMS OF COTTON ITEMS TRADING IN THE COMMODITY MARKET

To find the problems of cotton items trade in the commodity market.

TABLE NO: 13

62

The table showing respondents’ opinion about problems of cotton items

trading in the commodity market

S.NO TYPE NO OF

RESPONDENS

PERCENTAGE

1 Quality 2 4

2 Price 1 2

3 Delivery 10 20

4 Others 37 74

Total 50 100

INFERENCE

From the above table 4% of cotton traders are faces the problem of quality

and 2% of cotton traders are faces the problem of price variations and 20% of

cotton traders are faces the problem in taking delivery of cotton items in the

commodity market.

CHART: 13

The chart showing respondents’ opinion about problems of cotton items

trading in the commodity market

63

2 1

10

37

0

5

10

15

20

25

30

35

40

No

of

Res

po

nd

ents

Quality

Price

Delivery

Others

7.14 CHEAPEST MODE FOR PURCHASING COTTON ITEMS

There are two types of market one is spot market and another one is

commodity market. According to those markets which market gives cheapest mode

for purchasing cotton items in the commodity market.

64

TABLE NO: 14

The table showing respondents’ opinion about cheapest mode for purchasing

cotton items

S.NO TYPE NO OF

RESPONDENS

PERCENTAGE

1 Spot Market 37 74

2 Commodity

Market

13 26

Total 50 100

INFERENCE

From the above table 74% of cotton traders found spot market is the

cheapest mode for purchasing cotton and 26% of cotton traders are favorable for

cotton items in the commodity market are cheapest mode for purchasing cotton.

CHART: 14

The chart showing respondents’ opinion about cheapest mode for purchasing

cotton items

65

37

13

0

5

10

15

20

25

30

35

40

No

of

Res

po

nd

ents

Spot Market

Commodity Market

7.15 DISCOUNT RATE OF PURCHASING COTTON ITEMS

There are two types of market one is spot market and another one is

commodity market. In above two markets which market gives more discount rate for

purchasing of cotton items in the commodity market.

66

TABLE NO: 15

The table showing respondents’ opinion about discount rate of purchasing

cotton items

S.NO TYPE NO OF

RESPONDENS

PERCENTAGE

1 Spot Market 37 74

2 Commodity

Market

13 26

Total 50 100

INFERENCE

It is inferred from the above table there are 74% of cotton traders are

favorable for spot market and 26% of cotton traders are favorable for commodity

market.

CHART: 15

The chart showing respondents’ opinion about discount rate of purchasing

cotton items

67

37

13

0

5

10

15

20

25

30

35

40

No

of

Res

po

nd

ents

Spot Market

Commodity Market

7.16 INTRODUCING THE OPTIONS FOR TRADING OF COTTON ITEMS IN THE

COMMODITY MARKET

The one concept of commodity market is OPTIONS this choice will be

introduce in future market is that helpful for cotton items trade in the commodity

market.

68

TABLE NO: 16

The table showing respondents’ opinion about introducing the options for

trading of cotton items in the commodity market

S.NO TYPE NO OF

RESPONDENS

PERCENTAGE

1 Yes 11 22

2 No 2 4

3 Others 37 74

Total 50 100

INFERENCE

From the above table 22% of cotton traders are willing to introduce the

OPTIONS choice in the commodity market and 4% percentage of cotton traders are

not willing to introduce the OPTIONS choice in the commodity market.

CHART: 16

The chart showing respondents’ opinion about introducing the options for

trading of cotton items in the commodity market

69

11

2

37

0

5

10

15

20

25

30

35

40

No

of

Res

po

nd

ents

Yes

No

Others

7.17 TAX REDUCTION IN TRADING OF COTTON ITEMS IN THE COMMODITY

MARKET

For cotton traders in the commodity market does have any tax reduction for

their trade of cotton items in the commodity market.

70

TABLE NO: 17

The table showing respondents’ opinion about tax reduction in trading of

cotton items in the commodity market

S.NO TYPE NO OF

RESPONDENS

PERCENTAGE

1 Yes 9 18

2 No 4 8

3 Others 37 74

Total 50 100

INFERENCE

From the above table 18% of cotton traders got the tax reduction of trade of

cotton items in the commodity market and 8% of cotton traders not got any tax

reduction for their trade of cotton in the commodity market.

CHART: 17

The chart showing respondents’ opinion about tax reduction in trading of

cotton items in the commodity market

71

9

4

37

0

5

10

15

20

25

30

35

40

No

of

Res

po

nd

ents

Yes

No

Others

7.18 RECOMMENDATION FROM COMMODITY BROKER FOR TRADING OF

COTTON ITEMS

The cotton traders get some recommendation from their commodity broker

72

TABLE NO: 18

The table showing respondents’ opinion about recommendation from

commodity broker for trading of cotton items

S.NO TYPE NO OF

RESPONDENS

PERCENTAGE

1 Yes 13 26

2 No 0 0

3 Others 37 74

Total 50 100

INFERENCE

From the above table 36% of cotton traders got recommendation for the

trade of cotton items in the commodity market.

CHART: 18

The chart showing respondents’ opinion about recommendation from

commodity broker for trading of cotton items

73

13

0

37

0

5

10

15

20

25

30

35

40

No

of

Res

po

nd

ents

Yes

No

Others

7.19 RECOMMENDATIONS IS HELPFUL FOR TRADE OF COTTON ITEMS IN

THE COMMODITY MARKET

The recommendations from their commodity broker are that helpful for trade

of cotton items in the commodity market.

74

TABLE NO: 19

The table showing respondents’ opinion about recommendations is helpful

for trade of cotton items in the commodity market

S.NO TYPE NO OF

RESPONDENS

PERCENTAGE

1 Yes 6 12

2 No 7 14

3 Others 37 74

Total 50 100

INFERENCE

From the above table shows that 12% of cotton traders are favorable for the

recommendation of their commodity broker and 14% of cotton traders are not

favorable for the recommendation of their commodity broker for the trade of cotton

items in the commodity market.

CHART: 19

The chart showing respondents’ opinion about recommendations is helpful

for trade of cotton items in the commodity market

75

6 7

37

NO OF RESPONDENS

No

of

Res

po

nd

ents

Yes

No

Others

8. FINDINGS

India is the third largest producer of cotton in the world after China and USA

accounting for about 14% of the world cotton production. 

76

India produces around 35 million tons of cotton seed in a year. India is the

largest exporter of cotton yarn in the world accounting up to 450 million kg

i.e. 17% market share.

All agricultural commodities in India trade in wholesale market or mandis

where the price of a commodity is determined by free market forces of

demand and supply.

The Indian commodity market has failed to focus on the cotton industries and

most of the cotton industries are not traded in the commodity market

Hedging mechanism is available for all commodities

The commodity market offers the good standardization and certification of

cotton materials rather than the spot market

Comparing to the spot market, delivery procedure of cotton items in the

commodity market follows many legal rules and regulations.

The cheapest mode for purchasing cotton items is spot market.

If OPTIONS will be introduced in the commodity market, the investor’s risks

will be minimized.

9. SUGGESTIONS

Forward Market Commission (FMC) should allocate funds to educate the

investors about cotton as a commodity that can be traded in the commodity

market.

77

If OPTIONS are introduced in the future market most of the investors will get

benefited by trading.

Delivery procedure should be minimized for all type of commodities in the

commodity market.

Government may fix the rate of the purchase of cotton items in the

commodity market

To avoid artificial demand created by commodity market should be controlled

by government or regulatory authority.

The cotton association in India should give the knowledge to cotton

industries, about the standardization, quality and price etc offer by the

commodity market and their features.

10. CONCLUSION

The various organization and association are focused to develop the cotton

trade in the commodity market as well as in the spot market. Particularly in

Coimbatore city have south India cotton association (SICA) plays a very major role

for the development of the cotton items trade in the commodity market and also spot

market in the Coimbatore.

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The commodity exchanges in India plays vital role in the trade of cotton items

in the commodity market and all controls of the commodity exchanges comes under

the Forward Market Commission (FMC).

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 unfavorable 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, pricing in commodities futures has been less

volatile compared with equity and bonds, thus providing an efficient portfolio

diversification option.

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,

cotton etc. are traded. It is important to develop a vibrant, active and liquid

commodity market. This would help investors hedge their commodity risk,

take speculative positions in commodities and exploit arbitrage opportunities

in the market.

11. BIBLIOGRAPHY & WEBLIOGRAPHY

BOOKS

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C.R. Kothari (2002) ‘Research Methodology’, Wishwa Prakashan, New Delhi

2nd Edition.

Reference Material ‘MCX certified commodity professional (MCCP)’

Commodity & Derivatives (Issue No: 8 August 2007)

Philip Kotler & Gary Armstrong, Principles of Marketing, ed7, Prentice-Hall of

India,

New Delhi, 1997.

REPORTS

Government of India 1997 : Economic Survey 1996-97, p15.

International Monetary Fund, International Financial Statistics (various

issues, Washington DC.

Cotton Corporation of India – Annual Reports 2006 to 2007.

NEWSPAPERS

The Economic Times, 12th January 2008, p7.

Business Line, 15th January 2008, p5 and 11th February 2008, p9.

WEBSITES

www.mcxindia.com

www.ncdex.com

www.nmce.com

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www.google.com

www.wikepedia.com

www.cotcorp.gov.in

www.commodityindia.com

12. APPENDIX

“A STUDY ON COTTON TRADING IN COMMODITY MARKET WITH

SPECIAL REFERENCE TO COIMBATORE“

Company Name :

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1) Are you aware of the cotton items traded in the commodity market?

□ Aware □ Unaware

If UNAWARE please specify the any of the following reasons given below:

□ Lack of awareness□ Lack of standards□ Price dissemination□ Future risk□ Deliver basis procedures□ Any other reason please specify ………………..

2) Have you traded cotton items in the commodity market?

□ Traded □ Not Traded

3) Is cotton items trading suitable for long term trade?

□ Yes □ No

4) Does the commodity market offer better quality cotton materials?

□ Yes □ No

5) Reasons for trading cotton items in the commodity market?

□ Standardization □ Price □ Delivery

If any other reason……………….

6) Specify the name of the commodity exchange through whom you trade?

□ MCX □ NCDEX □ Others

7) How long have you been trading with cotton items in the commodity

Market?

□ Less than one year □ 1 to 5 year □ More than 5 year

8) In what basis do you trade cotton items in the commodity market?

□ Daily Trader □ More than a Day

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9) How is the fluctuation in the price of cotton items in the commodity market?

□ High □ Medium □ Low

10) The commodity market transactions are convenient for bulk purchase?

□ Yes □ No

11) Have you taken any delivery of cotton in the commodity market?

□ Yes □ No

12) Do you think any more cotton varieties can be added in the commodity

market?

□ Yes □ No

13) What are the problems faced in commodity market while you trading in cotton?

□ Quality □ Price □ Delivery

14) According to you which is the cheapest mode for purchasing cotton items?

□ Spot market □ commodity market

15) Which market gives you more discount rate while purchasing cotton items?

□ Spot market □ commodity market

16) If OPTIONS will introduce in commodity market is useful for trading the cotton

items?

□ Yes □ No

17) Are you availing any tax reduction in transaction of cotton items in the

commodity market?

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□ Yes □ No

18) Did you got any recommendations from your commodity broker?

□ Yes □ No

19) The recommendation is helpful for your trade?

□ Yes □ No

20) Suggestion for improving cotton items in the commodity market?

a) .........................

b) ……………….

c) ……………….

d) ……………….

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