comodity eco system

8/3/2019 Comodity Eco System

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UDAYBHANSINHJI

REGIONAL INSTITUTE OF CO-OPERATIVE MANAGEMENT

AGRI BUSINESS MANAGEMENT

Assignment on

COMMODITY ECO-SYSTEM

Submitted To: SUBBIMTTED By:

Mr.JONSHEN Anamika (1002)

(MANAGER OF KARVI FINANCE) Manoj (1009)

Rinkal (1010)



Commodity Markets Ecosystem

After studying the importance of commodity markets and trading in commodity futures,

it is essential to understand the different components of the commodity markets

ecosystem. The commodity markets ecosystem includes the following components:

1. Buyers/Sellers or Consumers/Producers: Farmers, manufacturers, wholesalers,

distributors, farmers’ co-operatives, APMC mandis, traders, state civil supplies

corporations, importers, exporters, merchandisers, oil refining companies, oil producing

companies, etc.

2. Logistics Companies: Storage and transport companies/operators, quality testing and

certifying companies, valuers, etc.

3. Markets and Exchanges: Spot markets (mandis, bazaars, etc.) and commodity

exchanges (national level and regional level)

4. Support agencies: Depositories/de-materializing agencies, central and state warehousing

corporations, and private sector warehousing companies

5. Lending Agencies: Banks, financial institutions

The users are the producers and consumers of different commodities. They have exposure to

the physical commodities markets, exposing themselves to price risk. In turn, they depend on

logistics companies for transportation of commodities, warehouses for storage, and quality

testing and certification agencies for assessment and evaluation of commodity quality standards.

Commodity derivatives exchanges provide a platform for hedging against price risk for these

users.

Benefits of Trading in Commodity Derivatives

Trading in futures provides two important functions of price discovery and price risk

management. It is useful to all the segments of the economy, particularly to all the constituents of

the commodity market ecosystem. It is important to know how resorting to commodity trading

benefits the constituents.



Benefits to Investors, Producers, Consumers, Manufacturers:

Price risk management: All participants in the commodity markets ecosystem across the

value chain of different commodities are exposed to price risk. These participants buy

and sell commodities and the time lag between subsequent transactions result in exposure

to price risk. Commodity derivatives markets enable these participants to avoid price risk

by utilizing hedging techniques.

Price discovery: This is the mechanism by which a “fair value price” is determined by

the large number of participants in the commodities derivatives markets. This is the

result of automation and electronic trading systems established on the commodities

derivatives exchanges.

High financial leverage: This is possible in commodity markets. For example, trading in

gold calls for only 4% initial margin. Thus, if one gold futures contract (each gold futures

contract lot size is 1 kg) is valued at Rs 900,000, the investor is expected to deposit an

initial margin of only Rs 36,000 to be able to trade. If the price of gold goes up by even

2%, the investor would make a profit of Rs 18,000 on a deposit of Rs 36,000 before the

expiry of the contract. This is the benefit of leveraged trading transactions. With futures

contracts, the investor trades in the expectation of the price at a later date. This is possible

with a margin deposit, which is usually between 5% and 10% of the value of the

commodity. Correspondingly, the margins required for equity futures contracts are

higher, due to higher volatility in equity markets as compared to commodities futures

contracts. The reason for higher volatility in equity markets (especially in India) as

compared to commodities derivatives transactions is due to the fact that delivery is

possible in commodity derivatives transactions.

Commodities as an asset class for diversification of portfolio risk: Commodities have

historically an inverse correlation of daily returns as compared to equities. The skewness

of daily returns favours commodities, thereby indicating that in a given time periodcommodities have a greater probability of providing positive returns as compared to

equities. Another aspect to be noted is that the Sharpe ratio of a portfolio consisting of

different asset classes is higher in the case of a portfolio consisting of commodities as

well as equities. Even with a marginal distribution of funds in a portfolio to include

commodities, the Sharpe ratio is greatly enhanced, thereby indicating a decrease in risk.



Commodity Ecosystem

Commodity Market Structure



Commodity Markets – Overview

Indian commodity market – set for paradigm shift

• Four licenses recently issued by Govt. of India to set-up National Online Multi

Commodity Exchanges – to ensure a transparent price discovery and risk management

mechanism

• List of commodities for futures trade – increased from 11 in 1990 to over 100 in 2003

• Reforms with regard to sale, storage and movement of commodities initiated

• Shift from administered pricing to free market pricing – WTO regime

• Overseas hedging has been allowed in metals

• Petro-products marketing companies have been allowed to hedge prices



Institutionalization of agriculture

About MCX

National Level Online Multi Commodity Futures Exchange

Key Promoters –

Financial Technologies (India) Ltd, State Bank of

India, Union Bank

Corporation Bank, Bank of India,

Canara Bank,

State Bank of Indore Bank of

Baroda

Operations from 300 cities with over 775 members & 3000 TWS

First Indian Exchange to enter into an agreement with an International Exchange

(TOCOM)

Facilitating Cost effective and economic technology.

Real-time price & information dissemination through website and info vendors

MCX Business Associates

• Statutory Auditor - M/s. Deloitte,

Haskins & Sells

• Internal Auditor- M/s V.Shankar

Aiyer & Company

• Network services - HCL Comnet

Ltd.(VSAT)S

VSNL

(Internet)



Tata Tele

(Leased line)

Reliance

gateway ( Wireless )

• Clearing Banks - BOI, HDFC,

IndusInd, UBI & UTI

• Quality Certification SGS,

Geochem , Dr. Amin Lab., Agencies

Rubber Board

• Warehouses – CWC, Gujarat,

Kerala, Tamilnadu and UP

• Bullion Logistics – Group 4 and

Brinks Arya

Salient Futures of MCX

• On-line monitoring at members and contract level - exposure, price, open interest,

quantity, client, etc.

• On-line margin adjustment - Business in relation to deposit

• System driven control and actions

• Electronic fund transfer

• Daily clearing – marked to market

– Pay-in and pay-out: T+1 working day

– Exchange approved depositories



– Seller to submit proof of delivery with proper quality certification to MCX

Participants in Commodity Futures

Farmers/ Producers

Merchandisers/ Traders

Importers

Exporters

Consumers/ Industry

Commodity Financers

Agriculture Credit providing agencies

Corporate having price risk exposure in commodities

Benefits of Futures Trading

• Price discovery for commodity players

– A farmer can plan his crop by looking at prices prevailing in the futures market

• Hedging against price risk

– A farmers can sell in futures to ensure remunerative prices

– A processor/ manufacturing firm can buy in futures to hedge against volatile raw

material costs

– An exporter can commit to a price to his foreign clients

– A stockist can hedge his carrying risk to ensure smooth prices of the seasonal

commodities round the year

• Easy availability of finance

Based on hedged positions commodity market players (farmers, processors, manufacturers,

exporters) may get easy financing from the banks



How Commodity Futures Help

Risk Management

Growers – Short hedge on upcoming produce

Traders – Short Hedge on stored quantity

Manufacturers – Long Hedge on input cost, Short hedge on finished products

Any price risk that is not managed is a cost; any cost is a direct dent on profitability

Price Discovery

Futures prices can be used as indicative prices for negotiating the export prices and also

upcountry sales



Nation-wide Multi Exchanges vis a vis Regional Exchanges

• Better Reach in all parts of the country

• Wider base for speculators from other markets including securities market

• Broad basing of the underlying commodity

• Industry diffused in several parts of the country may also

directly participate

• Few commodities can be projected viable for an international futures

Contract, with participation from global player

• Novation of all open positions in the market by the exchange

• Best management practices, end of day mark to market, online margining and

surveillance, daily pay-in & pay-out are some of the features to woo the players

Key Differentiators of MCX

• Team

– Best Industry Professionals – Technology, Exchange Management and Advisory

Board with 8 Decades of Exchange Management Expertise

– Best Support Agencies – Warehouses, Quality, Banks & Others

– Best Intermediaries across the country & in multiple commodities

• Technology

– State of the art Information Technology

– Real time price and trade information dissemination

– Robust risk management system and controls



• Techniques (Practices)

– Best International practices of Exchange governance

– Competitive membership fee structure and operational cost.

To provide information - international & spot markets and commodity research

What’s in it f or Industry

• Free Markets price commodities best & consistently

• Globalisation & standardisation - global price convergence

• Futures Market - Most efficient Market Place

• Price discovery on futures Exchange with consistent Agriculture policy will give right

direction to market for pricing commodities

• MSP does not serve much purpose in free market regime

• Problems of different sectors in Agriculture need a different policy with a common

direction

Future of Commodity Market

• India - Largest Consumer - Producer - Exporter - Importer

• Large size intermediaries penetrate commodities market

• Banks to Finance commodities – Futures a secured route

• RBI permits Banks to hedge their bullion risk through Futures Exchange – Other

commodities to follow

• Using Exchange Network for various products & Services

• BPO & Trade Interest will attract International players

• Hub for value added services & food processing



• New class of commodity Traders & Value Investors

comodity eco system

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