INTRODUCTION

Modern commodity exchanges date back to the trading of rice futures in the 17th century in Osaka, Japan, although the principles that underpin commodity futures trading and the function of commodity markets are still older. The first recorded account of derivative contracts can be traced to the ancient Greek philosopher Thales of Miletus in Greece, who, during the winter, negotiated what were essentially called options on oil presses for the spring olive harvest. The Spanish dramatist Lope de Vega reported that in the 17th century options and futures were traded on the Amsterdam Bourse soon after it was opened.

Futures’ trading is a natural application to the problems of maintaining a year-round supply of seasonal products like agricultural crops. Exchanging traded futures and options provide several economic benefits, including the ability to shift or otherwise manage the price risk of market or tangible positions. With the liberalization of agricultural trade in many countries, and the withdrawal of Government support to agricultural producers there is a new need for price discovery and even physical trading mechanisms, a need that can often be met by commodity exchanges. Hence, the rapid creation of new commodity exchanges, and the expansion of existing ones have increased over the past decade. At present, there are major commodity exchanges in over twenty countries, including the United States, the United Kingdom, Germany, France, Japan, the Republic of Korea, Brazil, Australia and Singapore. A large number of brand new exchanges have been created during the past decade in developing countries, but many of them have disappeared.

A 'commodity market' is a market that trades in primary rather than manufactured

products. Soft commodities are agricultural products such as wheat, coffee, cocoa and sugar.

Hard commodities are mined, such as gold and oil Investors access about 50 major

commodity markets worldwide with purely financial transactions increasingly outnumbering

physical trades in which goods are delivered. Futures contracts are the oldest way of

investing in commodities. Futures are secured by physical assets. Commodity markets can

include physical trading and derivatives trading using spot prices, forwards, futures,

and options on futures. Farmers have used a simple form of derivative trading in the

commodity market for centuries for price risk management.

A financial derivative is a financial instrument whose value is derived from a commodity

termed an underlie .Derivatives are either exchange-traded or over-the-counter (OTC). An

increasing number of derivatives are traded via clearing houses some with Central

Counterparty Clearing, which provide clearing and settlement services on a futures exchange,

as well as off-exchange in the OTC market.

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Commodity futures markets have a long history in India. The first organised futures market, for various types of cotton, appeared in 1921. In the 1940s, trading in forward and futures contracts as well as options was either outlawed or rendered impossible through price controls. This situation remained until 1952, when the Government passed the Forward Contracts Regulation Act, which to this date controls all transferable forward contracts and futures. During the 1960s, the Indian Government either banned or suspended futures trading in several commodities. The Government policy slackened in the late 1970s and recommendations to revive futures trading in a wide range of commodities were made. With the full convertibility of the rupee, the ongoing process of economic liberalisation and the Indian economy’s opening to the world market, the role of futures markets in India is being reconsidered. Most contracts being traded are unique in the world. Although some are clearly domestic-oriented, others (such as raw jute, pepper, and oilseeds) have the potential to become of regional or even international importance. Two of the better-known commodity exchanges are the Bombay Oilseeds and Oils Exchange, founded in 1950, and the International Peppers Futures Exchange, in 1997.

China’s first commodity exchange was established in 1990 and at least forty had appeared by 1993, as China accelerated the transformation from a centrally planned to a market-oriented economy.

Futures exchanges in Japan have also gone through a process of consolidation since 1993, and only 10 remained in 1999 (down from 17 just five years earlier).. The biggest is The Tokyo Commodity Exchange (TOCOM), created in November 1984.

Malaysia hosts two futures and options exchanges, which hold the 50th and 51st place in the 2000 ranking of world futures exchanges by trading volume. Singapore is home to the Singapore Exchange (SGX), which was formed in 1999 by the merger of two well-established exchanges, the Stock Exchange of Singapore (SES) and Singapore International

The modern commodity market originated during the 19th century when American farmers began using "forward" contracts. These were agreements to deliver agricultural products at a future date in return for a guaranteed price. In the form of standardized futures contracts traded on exchanges like the Chicago Board of Trade, those forward contracts are the primary securities traded on the commodity market.

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OBJECTIVES OF THE STUDY

The main aim of this paper is to seek whether commodity exchanges and their twin tools of Futures and Options can bring about price stabilization in agriculture commodities. It is generally argued that futures trading, among other things, reduces the seasonal price variations in agriculture commodities and also helps in discovery of spot (ready) prices. The cropping pattern and sowing decisions are also said to be influenced by futures trading in commodities.

This study is based upon these following objectives

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Awareness-raising: To build awareness of the solutions that commodity exchanges provide, and their track record in doing so, among key national, regional and international stakeholders – including Governments, regulators, the private sector, civil society and the media.

Accumulation of knowledge: To produce a high-quality report that adds to the existing knowledge base – establishing within a coherent framework the enduring impacts that commodity exchanges have made in key markets over time. Promotion of best practice: To identify innovative and effective practices that can be held up as models for – or drivers of – embedding a pro-growth, pro-development symbiosis within exchange and market development

How Seasonal variation in prices of agricultural commodities are reduced by trading at the Commodity exchange

Short-term (weekly or daily) price variations can be reduced by futures and options To know The definite relationship between futures prices and actual commodity

prices (Spot or ready prices) How Futures trading influence the long-term price trend (price stabilization) in any

commodity. How Futures trading influence the sowing decisions and cropping pattern.

Apart from these, the study also traces the problems of Indian Commodity exchanges with respect to non-transparency of prices, product standardization etc. It further attempts to find out the nature and volume of the commodity trading pattern in India is also assessed.

NEEDS OF THE STUDY

First of all this report fulfils the completion of our 2 year full time MFC course Then this report needed to find out how the commodity exchanges play a major role

for facilitating agricultural growth in India. The most important and foremost requirement of this report is to know the different

mechanisms formulated by the commodity exchanges for the benefits of the agricultural sector. And basically the interrelation as well as the interaction between both.

RESEARCH METHODOLOGY

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This chapter deals with the description of the study area, sampling procedure adopted, method of survey, nature and sources of data.

DESCRIPTION OF THE STUDY AREA

The present study pertains to all six nationalised commodity exchanges namely, National Multi-commodity Exchange Ltd.(NMCE), Multi Commodity Exchange Of India Ltd.(MCX), National Commodity and Derivative Exchange Ltd.(NCDEX), Indian Commodity Exchange(ICEX), Universal Commodity Exchange(UCE) and ACE Commodity and Derivative Exchange Ltd(ACE), and different role played by them

SAMPLING DESIGN

For the present study five major agricultural commodities currently traded in the commodity exchanges were selected, namely potato, almond, chana, wheat, soybean. Which were selected on the basis of their volume of trade.

NATURE AND SOURCES OF DATA

Secondary data thus collected from the official websites of different nationalised commodity exchanges and other websites as well as from various text books and magazines, newspapers.

LIMITATION OF THE STUDY

The present study did not consider regional commodity exchanges due to difficulties in obtaining data.

Can be a bifold belted sword. Low allowance requirements can animate poor money management, arch to boundless accident taking. Not alone are profits added but so are losses!

Lack of knowledge among investors. Lack of governance. Insufficient information to interested parties.

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LITERATURE REVIEW

Commodity trading is prevailing in India since mid-19th century. The shape and structure of trading has undergone a sea change in terms of nature of commodities traded, volume of trade, clearing, settlement & guarantee system, transparency in trade, governance and regulation. The commodities trading through exchanges have traditionally been limited to single commodity exchanges until the Union Government decided in favour of national-level multi-commodity exchanges. It has been observed at global level that the commodities have witnessed much more volatile price situations than the prices in the market for financial instruments.

The relationship between spot and futures markets in price discovery has been an important area of research. Garbade & Silber in their article ‘Price movements and price discovery in futures and cash markets’ (1982) tested whether futures prices lead spot prices. Correlation of basis (spot prices futures prices) of the previous time period with spot or futures prices of the current time period was empirically

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tested. If basis innovations forecast futures returns, then the spot market leads the futures market. If basis innovations forecast spot returns, then the futures market leads the spot market. Susan Thomas and Kiran Karande used it for castor seed market in India.

M. Thiripalraju & T.P. Madhusoodanan in their paper “Commodity Futures prices in India: Evidence on Forecast Power, Price Formation and Inter-Market Feedback” found the efficiency of price formation in the Indian commodity futures markets of Pepper and Castor seeds. Susan Thomas of IGIDR, Mumbai has in her paper “Agricultural Commodity Markets in India” shown some evidence of role played by futures market in price stabilisation. Her study is based on Mujaffarnagar jaggery futures market. In her paper with D Balasundaram on “cotton futures” it has been concluded that the futures market benefit the cotton economy by increasing the efficiency of price discovery, in addition to enabling the reduction of price risk.

Futures and options market lead to destabilising speculation and malpractice if not properly regulated. The Gupta Commit- tee (1997) on ‘Hedging through international commodity exchanges’ noted:

“The need for regulation of the markets arises when such regulations increase the allocative efficiency of these markets from what would prevail under no regulation at all. Allocative efficiency of the futures and options market is reflected by the ability of these markets to perform their price discovery and risk shifting functions efficiently.”

HISTORY OF COMMODITY MARKET

Commodity-based money and commodity markets in a crude early form are believed to have

originated in Sumer between 4500 BC and 4000 BC. Sumerians first used clay tokens sealed

in a clay vessel, then clay writing tablets to represent the amount—for example, the number

of goats, to be delivered. These promises of time and date of delivery resemble future

contract.

Early civilizations variously used pigs, rare seashells, or other items

as commodity money. Since that time traders have sought ways to simplify and standardize

trade contracts.

Gold and silver markets evolved in classical civilizations. At first the

precious metals were valued for their beauty and intrinsic worth and were associated with

royalty. In time, they were used for trading and were exchanged for other goods and

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commodities, or for payments of labour. Gold, measured out, then became money. Gold's

scarcity, unique density and the way it could be easily melted, shaped, and measured made it

a natural trading asset.

Beginning in the late 10th century, commodity markets grew as a

mechanism for allocating goods, labour, land and capital across Europe. Between the late

11th and the late 13th century, English urbanization, regional specialization, expanded and

improved infrastructure, the increased use of coinage and the proliferation of markets and

fairs were evidence of commercialization. The spread of markets is illustrated by the 1466

installation of reliable scales in the villages of Sloten and Osdorp so villagers no longer had

to travel to Haarlem or Amsterdam to weigh their locally produced cheese and butter.

Indeed, the  Amsterdam Stock Exchange, often cited as the first stock

exchange, originated as a market for the exchange of commodities. Early trading on

the Amsterdam Stock Exchange often involved the use of very sophisticated contracts,

including short sales, forward contracts, and options. "Trading took place at the Amsterdam

Bourse, an open aired venue, which was created as a commodity exchange in 1530 and

rebuilt in 1608. Commodity exchanges themselves were a relatively recent invention, existing

in only a handful of cities.

In 1864, in the United States, wheat, corn, cattle, and pigs were

widely traded using standard instruments on the Chicago Board of Trade (CBOT), the world's

oldest futures and options exchange. Other food commodities were added to the Commodity

Exchange Act and traded through CBOT in the 1930s and 1940s, expanding the list from

grains to include rice, mill feeds, butter, eggs, Irish potatoes and soybeans. Successful

commodity markets require broad consensus on product variations to make each commodity

acceptable for trading, such as the purity of gold in bullion. Classical civilizations built

complex global markets trading gold or silver for spices, cloth, wood and weapons, most of

which had standards of quality and timeliness.

Through the 19th century "the exchanges became effective

spokesmen for, and innovators of, improvements in transportation, warehousing, and

financing, which paved the way to expanded interstate and international trade.

COMMON MISTAKES IN COMMODITY MARKET

1. Trading with lagging indicators.-As a Broker, I get to see the whole range, from traders

making their first trade, to traders making their last trade, and everything in between. The

beginner traders almost always start along the same path. Using MACD, Williams %R,

Stochastic, RSI and most other indicators you can find to predict price is a very common

mistake. These indicators often follow price movement, not predict future price movement.

Sure when looking at a chart in hindsight, they match up great, but in real time they are

lagging. This style of trading will more than likely lead to losses.

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2. Trading Undercapitalized.-This mistake should be placed in the premarket (before opening

an account) because an account shouldn’t even be opened without proper capitalization.

Assuming you did open an account, trade within limits. Each Trader has different risk

tolerance, but across the board, no one should be trading with funds they cannot afford to

lose. When trading with limited funds or overleveraged 1 day can end your trading career

before it began. Cannon offers aggressive day trading margins, as do our competitors, but by

no means do we endorse taking advantage of all that leverage.. When Trader’s take losses

psychology shifts, when a shift in psychology meets lack of funds or overleveraged trading

decisions are affected. Trading on low balance or outside reasonable limits is a sure recipe for

losses.

3. Overtrading-This mistake is common among beginner and advanced traders. Until it is

overcame, significant profits will be lost to commissions. More importantly, your trading

profit potential will be limited. Whether trading 1 lot or 1000 lots per order there is still only

so many moves a market can make in a given trading period. Intraday trading typically results

in three moves or less. Sure there are days that bounce between the high and the low all day,

but that is one move, sideways. Other days include trend days (one direction), or 3 move

days, which I believe to be most common. A 3 move day is up then down (usually a

retracement) then up, or down then up then down. A two move day would be up then down or

down then up. If most days fall under these formats, what reason would a 1 lot trader have to

make 100 trades? Not a good one, I’ll tell you that.

4. Losing Days-About every Trader has losing days, it is part of the business. The key is to

limit losses, similarly to trading. You should monitor your account balance like you monitor

your trades. When you see it going the wrong way, you should become impatient and look to

cut it short. There are infinite factors why you are having a losing day, the fact is you are and

you need to know in advance where the bleeding stops. Many skilled and professional traders

regularly take profits from the market day in and day out only to blow the account up the one

day the market doesn’t react the way they expect. Often ego or anger can block rational

thoughts and averaging in and reversing is all too easy. Having hard rules like maximum lot

size and maximum daily loss can preserve your capital and prevent losing days from burying

your account.

5. Chasing the market-There are so many mistakes, it is hard to only choose five, but chasing

the market will conclude this list. Markets do not move in straight lines. Aside from major

news there are very few large moves without retracements. Depending on the market a “big”

move can be calculated by taking the average daily range and multiplying by 2 or 3. Market

conditions are constantly changing, but in all circumstances, when a market makes a big

move, it is more likely to retrace or reverse before continuing. Traders that buy the ES after

15 points up or sell gold after a $50 move down are behind the ball and more times than not

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will be stopped out with a loss. Wait for the retracement or play the other side, this will help

limit loses by chasing.

OVERVIEW:-AGRICULTURE

BUDGET 2014-15: THE FINANCE BILL

“Farming as an activity contributes nearly 1/6th to our national GDP and a major portion of our population is dependent on for livelihood. It has risen the challenge of making India largely self sufficient in providing food for a growing population. To make farming competitive and profitable there is an urgent need to step up investment, both public and private, in agro technology development and creation and modernisation of existing agri-business infra. Establishing agricultural research institute in Assam and Jharkhand, in addition to this an amount of Rs.100crores is being set aside for setting of an “Agri-tech Infrastructure Fund”. And also Agricultural Universities along with Horticulture Universities. And a sum of Rs.200crores has been allocated for this.

Deteriorating soil health has been a cause of concern and leads to sub optimal utilisation of farming resources. Government will initiate a scheme to provide to every farmer a soil health card in a mission mode. And a sum of Rs.100crores for this purpose and an additional Rs.56crores to set up 100 “Mobile Soil Testing Laboratories” across the country. There have also been growing concerns about imbalance in the utilisation of different types of fertilizers resulting deteriorating of the soil.”

Other Developmental Steps Include:-

Agricultural Credit: - A target of Rs.8lakh crore has been set for agricultural credit during 2014-15.

Interest Subvention Scheme for Short Term Crop Loans: - Under this scheme, the banks are extending loans to farmers at concessional rate of 7%.

Rural Infrastructure Development Fund (RIDF):- NABARD operates RIDF, out of the priority sector lending shortfall of the banks, which helps in the creation of Infrastructure in agriculture and rural sectors across the country.

Warehouse Infrastructure Fund: - Increasing the warehousing capacity for increasing the shelf life of agricultural produces and there by the earning capacity of the firms is utmost importance. Keeping in view of Scientific Warehousing Infrastructure in the country.

Creation of Long Term Rural Credit Fund (LTRCF):- In order to give a boost to long term credit in agriculture, scheme named LTRCF set up in NABARD for the purpose of refinance support to cooperative banks and Regional Rural Banks.

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Source: - Finance Bill 2014-15, By Mr. ARUN JAITLEY

(Union Finance Minister)

Background of the study

India is predominantly an agrarian economy with very high population dependence on agriculture and allied activities. More than 90% of rural population and about 65% of total population derive their livelihood from agriculture, directly or indirectly. Hence, the price determination and stabilisation in prices of agriculture commodities become very significant for sustainable growth in agriculture. It was in this perspective that the Long-term grain policy of the Govt. of India1 emphasized that the role of public intervention should primarily be to stabilise prices and that any system of price stabilisation must be national in scope. The opening up of agricultural trade has forced farmers to cope with the vagaries and volatility of international market prices.

Apart from the role of public intervention through MSPs (mini- mum support prices) and Procurement Price in price stabilisation of agriculture commodities, commodity exchanges have been an effective tool in price determination and stabilisation of such commodities. While public intervention brings about distortions in efficient price discovery,

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cropping pattern and market mechanism, the role of commodity exchanges is to evolve an efficient price discovery system along with ensuring hedging of price risks.

The High-level Committee on long-term grain policy noted:

“Price instability is not merely a matter of concern from the point of view of the welfare of producers and consumers and their incomes. There is very strong evidence from across the world and from India’s own experience in the past that agricultural investment and growth is adversely affected if price instability is high and, in particular, if farmers cannot be reasonably sure that prices will remain above their costs of production

BASICS ABOUT COMMODITY MARKET & EXCHANGES

WHY COMMODITIES MARKET?

India has very large agriculture production in number of agri-commodities, which needs use of futures and derivatives as price-risk management system. Fundamentally price you pay for goods and services depend greatly on how well business handle risk. By using effectively futures and derivatives, businesses can minimize risks, thus lowering cost of doing business. Commodity players use it as a hedge mechanism as well as a means of making money. For e.g. in the bullion markets, players hedge their risks by using futures Euro-Dollar fluctuations and the international prices affecting it. For an agricultural country like India, with plethora of mandis, trading in over 100 crops, the issues in price dissemination, standards, certification and warehousing are bound to occur. Commodity Market will serve as a suitable alternative to tackle all these problems efficiently.

TRADITIONAL COMMODITY MARKETS IN INDIA

Spot trading takes place mostly in regional mandis & unorganised markets. Markets are fragmented and isolated. Reduced Government procurement activity, mostly in cereals through MSP distorts markets in favour of food grains. Mandi trading in India is done in 140 crops through over 7500 Mandis amongst trading Farmers, licensed Traders, Brokers and Wholesale Dealers. Mandi Inspectors issue type & quantity certificate by levying Transaction fee and Taxes that varies between 4% and 12%. State Agricultural Marketing Boards (SAMBs) and Mandi Board (Farmers, Traders, State) govern Mandis.

EVOLUTION OF COMMODITY TRADING IN INDIA The first derivative in the world started with the commodities. Organised

futures trading started in 1865 at the Board of Trade of Chicago, followed by other trading centres such as Kansas, Minneapolis, New York. Futures trading in commodities like rubber, soyabean, black pepper etc. was started in the U.S.A after 1920. Apart from US and UK, India is the only country that had active futures market over a long period of time. A good deal of futures trading in cotton was done at Bombay. Other markets soon developed for oilseeds

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(Gujarat & Punjab), wheat (Hapur, 1913), raw jute (Calcutta, 1912). During WW II, futures trading in many commodities were banned under Defence of India Rules.

Turnaround came in 1952 with the passing of Forward Contracts (Regulation) Act (FCRA, 1952), which led to the establishment of Forward Markets Commission (FMC) in September 1953. FMC, headquartered at Mumbai, is a regulatory authority which is overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. There are 24 commodity exchanges in the country including recently established 4 national-level multi-commodities exchanges.

WHAT IS A COMMODITY FUTURE EXCHANGE?

Exchange is an association of members, which provides all organizational support for carrying out futures trading in a formal environment. These exchanges are managed by the Board of Directors, which is composed primarily of the members of the association. There are also representatives of the government and public nominated by the Forward Markets Commission. The majority of members of the Board have been chosen from among the members of the Association who have trading and business interest in the exchange. The chief executive officer and his team in day-to-day administration assist the Board. There are different classes of members who capitalize the exchange by way of participation in the form of equity, admission fee, security deposits, registration fee etc.

a. Ordinary Members: They are the promoters who have the right to have own –account transactions without having the right to execute transactions in the trading ring. They have to place orders with trading members or others who have the right to trade in the exchange.

OBJECTIVES OF FUTURES TRADING

Leads to price discovery Provides hedging option A smart investment choice Integrates players and markets Improves cropping pattern (in case of commodity futures) Reducing the impact of future uncertainties

WHY IS A COMMODITY EXCHANGE USEFUL? WHAT FUNCTIONS DOES IT PERFORM?

As has been discussed, the usefulness of a commodity exchange lies in its institutional capacity to remove or reduce the high transaction costs often faced by entities along commodity supply chains in developing countries. A commodity exchange reduces transaction costs by offering services at lower cost than that which participants in the

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commodity sectors would incur if they were acting outside an institutional framework. These can include – but are not limited to – the costs associated with finding a suitable buyer or seller, negotiating the terms and conditions of a contract, securing finance to fund the transaction, managing credit, cash and product transfers, and arbitrating disputes between contractual counterparties. Therefore, by reducing the costs incurred by the parties to a potential transaction, a commodity exchange can stimulate trade.

Moreover, properly functioning commodity exchanges can promote more efficient production, storage, marketing and agro-processing operations, and improved overall agriculture sector performance. It is precisely because of these benefits that transition and developing economies with large agricultural sectors have embraced commodity exchanges in recent years (Seeger, 2004).

Specifically, a commodity exchange can perform one or more of a range of potential functions – exactly which functions will depend on the nature of the exchange and the local context in which it operates. For exchanges that offer spot trade or supporting activities, the institutional function is to facilitate trade – bringing together buyers and sellers of commodities, and then imposing a framework of rules that provides the confidence to transact.

Robust procedures for overseeing these transactions can also trigger improvements in the efficiency and infrastructure of commodity cash markets – for example, through the upgrading of exchange-accredited warehousing and logistics infrastructure, the acceptance among market participants of exchange-defined product quality specifications, and the reduction of default levels, through intermediation by the exchange in the processing (or “clearing”) and settling of contracts.

Commodity exchanges offering trade in instruments such as forwards and futures contracts also provide sector participants with a means of managing exposure to commodity-price volatility. This is important, as world commodity prices are often highly volatile over short time periods – sometimes fluctuating by over 50 per cent within a year. These “hedging” instruments can bring producers greater certainty over the planting cycle, while enabling processors, traders and purchasers to lock in a margin that can secure them a positive return. This allows those active in the commodity sector to commit to investments that yield longer-term gains, and also makes it more viable for farmers to plant higher-risk but higher-revenue crops.

Finally, where spot, forwards and futures transactions take place on a commodity exchange, the price information those results from this trade – the so-called “price discovery” mechanism – also performs a vital economic function. As exchange prices come to reflect the information known about the market, they provide an accurate reflection of the actual supply/demand situation. This provides important signals that market participants can use to make informed production, purchasing and investment decisions. Furthermore, the availability of a neutral and authoritative price reference can overcome information asymmetries that have often disadvantaged smaller or less well-connected sector participants in the past.

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TYPES OF COMMODITIES

METAL Aluminum, Copper, Lead, Nickel, Sponge Iron, Steel Long (Bhavnagar), Steel Long (Govindgarh), Steel Flat, Tin, Zinc

BULLION Gold, Gold HNI, Gold M, i-gold, Silver, Silver HNI, Silver M FIBER Cotton L Staple, Cotton M Staple, Cotton S Staple, Cotton Yarn,

KapasENERGY Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E.

Sour Crude OilSPICES Cardamom, Jeera, Pepper, Red ChiliPLANTATIONS Areca nut, Cashew Kernel, Coffee (Robusta), RubberPULSES Chana, Masur, Yellow PeasPETROCHEMICALS

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 MaizeOTHERS Guargum, Guar Seed, Gurchaku, Mentha Oil, Potato (Agra),

Potato (Tarkeshwar),

COMMODITY EXCHANGES IN INDIA

The government of India has allowed national commodity exchanges, similar to the BSE & NSE, to come up and let them deal in commodity derivatives in an electronic trading environment. These exchanges are expected to offer a nation-wide anonymous, order driven; screen based trading system for trading. The Forward Markets Commission (FMC) will regulate these exchanges.

Consequently four commodity exchanges have been approved to commence business in this regard. They are:

S.NO COMMODITY MARKET IN INDIA

1 Multi Commodity Exchange (MCX), Mumbai

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2 National Commodity and Derivatives Exchange Ltd (NCDEX), Mumbai

3 National Board of Trade (NBOT), Indore

4 National Multi Commodity Exchange (NMCE), Ahmadabad

5 ACE ( Ace Derivatives and Commodity Exchange Limited)

6 UCX (Universal Commodity Exchange Limited)

NMCE :( National Multi Commodity Exchange of India Ltd.)

NMCE is the first demutualised electronic commodity exchange of India granted the National exchange on Govt. of India and operational since 26th Nov, 2002.

Promoters of NMCE are, 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 Ltd. (NOL). Main equity holders are PNB. The

Head Office of NMCE is located in Ahmadabad. There are various commodity trades on NMCE Platform including Agro and non-agro commodities.

NCDEX (National Commodity & Derivates Exchange Ltd.)

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NCDEX is a public limited co. incorporated on April 2003 under the Companies Act, 1956; it obtained its certificate for commencement of Business on May 9, 2003. It commenced its operational on Dec 15, 2003. Promoters’ shareholders are:

Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India (NSE)

other shareholder of NCDEX are: Canara Bank, CRISIL limited, Goldman Sachs, Intercontinental Exchange (ICE), Indian farmers fertilizer corporation Ltd (IFFCO) and Punjab National Bank (PNB).

NCDEX is located in Mumbai and currently facilitates trading in 57 commodities mainly in Agro product.

MCX (Multi Commodity Exchange of India Ltd.)

Headquartered in Mumbai, MCX is a demutualised nationwide electronic commodity future exchange. Set up by Financial Technologies (India) Ltd. permanent recognition from government of India for facilitating online trading, clearing and settlement operations for future market across the country. The exchange started operation in Nov, 2003.

MCX equity partners include, NYSE, Euro next, State Bank of India and it’s associated, NABARD NSE, SBI Life Insurance Co. Ltd., Bank of India, Bank of Baroda, Union Bank of India, Corporation Bank, Canara Bank, HDFC Bank, etc.

MCX is well known for bullion and metal trading platform.

ICEX (Indian Commodity Exchange Ltd.)

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ICEX is latest commodity exchange of India Started Function from 27 Nov, 09. It is jointly promote by Indiabulls Financial Services Ltd. and MMTC Ltd. and has Indian Potash Ltd. KRIBHCO and IFC among others, as its partners having its head office located at Gurgaon (Haryana).

ACE ( Ace Derivatives and Commodity Exchange Limited)

Organization Profile

As India has entered a new phase wherein its markets are opening up more, allowing participants to be exposed to global commodity risk, there is a growing need to bridge the current gap through more entrants in the Indian commodity exchange space. 

Kotak Anchored, Ace Derivatives and Commodity Exchange Limited is a screen based online derivatives exchange for commodities in India. Ace Commodity Exchange earlier known as Ahmedabad Commodity Exchange has been in existence for more than 5 decades in Commodity Business, bringing in the best and transparent Business Practices in the Indian commodity space. The Kotak group brings in more than 25 years of financial expertise and has pioneered many business practices existing in the financial services industry. With Ace, Kotak Group brings to the commodity market a new, state-of-the-art trading platform which combines the operational efficiency of global exchanges with deep domain expertise in each commodity vertical.

 

KEY SHAREHOLDERS

Kotak Mahindra Group

A legacy built over 2 decades, Kotak Mahindra is one of India’s leading banking and financial services organizations, offering a wide range of financial services that encompass every sphere of life. From commercial banking, to stock broking, to mutual funds, to life insurance, to investment banking, the group caters to the diverse financial needs of individuals and corporate sector.

HAFED

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The Haryana State Cooperative Supply & Marketing Federation Ltd. (HAFED) is an apex State Co-operative service and marketing institution, under the patronage and sponsorship of the Government of Haryana (India).

Other Key Shareholders 

Bank of Baroda Corporation Bank Union Bank

UCX (Universal Commodity Exchange Limited)

Overview Universal Commodity Exchange Limited is the next generation national level commodity exchange for derivatives market across all commodity segments. UCX is headquartered in the financial capital of India, Mumbai with presence in all major trading destinations across the country. 

It aims to be one of the largest commodity derivatives exchanges ensuring price transparency and a robust risk management & surveillance system for facilitating online trading, clearing & settlement operations for the market across the country.Universal Commodity Exchange Ltd. has received a permanent and perpetual recognition from Govt. of India (Ministry of Consumer Affairs, Food & Public Distribution) under the provision of FC(R)A.

KEY SHAREHOLDERS

National Bank for Agriculture and Rural Development ( NABARD)National Bank for Agriculture and Rural Development ( NABARD)  is an apex institution accredited with all matters related to policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas. It  promotes research in the fields of rural banking, agriculture and rural development. Over the last 3 decades of operations NABARD has played a pivotal role towards inclusive growth of rural areas & promoting developmental activities.

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Indian Farmers Fertiliser Cooperative Limited (IFFCO)IFFCO is the largest producer and marketer of fertilizers having thousands of co-operative societies; represent millions of farmers across the country.  

IDBI BankIDBI Bank is India's leading public sector bank which has played a pioneering role in laying the foundations of some of the world class institutions such as National Stock Exchange (NSE), National Securities Depository Services Ltd (NSDL), Stock Holding Corporation India Ltd (SHCIL) and others.

Rural Electrification Corporation Limited (REC)REC is a Navratna Central Public Sector Enterprise under Ministry of Power, was incorporated on July 25,1969 under the Companies Act,1956. It is one of India's leading Public Financial Institutions operating in Power Infrastructure space. It has established itself as a strategic player in financing of entire Power Infrastructure space which includes financing for generation, transmission, distribution and rural electrification projects, across the country.REC was accorded the coveted "Navratna" status by Govt. of India in 2008. 

Commex TechnologyCommex Technology is a technology and consulting service provider in commodity & capital markets. Their domain expertise and management bandwidth is poised to cater to the various initiatives planned by the exchange.UCX's business strategies along with the active support from its strategic partners in the Bullion & Agri segments, should lead to a convergence of large-scale processors, traders, producers & co-operative societies along with banks in the long run and in the process- assist in the development of the Indian commodity futures market.

AGRICULTURE IN INDIA

2nd largest agricultural land

At 179.9 million hectares, India holds the second largest agricultural land in the world.

Favourable climatic conditions

• With 20 agri-climatic regions, all 15 major climates in the world exist in India. The country also possesses 46 of the 60 soil types in the world.

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Record production of food grains

• Total food grains production in India reached an all-time high of 259.32 million tonnes in FY12. Rice and wheat production in the country stood at 105.3 and 94.9 million tonnes, respectively.

Largest producer of major agricultural and horticulture crops

• India is the largest producer of pulses, milk, tea, cashew and jute; and the second largest producer of wheat, rice, fruits and vegetables, sugarcane, cotton and oilseeds.

Increasing farm mechanisation

• India is one of the largest manufacturers of various farm equipments like tractors, harvesters and tillers. India manufactures one-third of tractors in the world; the number of tractors in the country is estimated to reach 16 million by 2030 from 4 million in 2012.

Agricultural advantages of India

In 1960–6:-1 Food grain production: 69.3 million tonne

In 2011–12 Food grain production: 259.3 million tonnes

Robust demand

• A large population is the key driver of demand for agricultural products

• Rising urban and rural incomes have also aided demand growth

• External demand has also been growing especially from key markets like the Middle East

Attractive opportunities

• Increasing demand for agricultural inputs such as hybrid seeds and fertilisers

• Promising opportunities in storage facilities; potential storage capacity expansion of 35 million tonnes under the 12th Five Year Plan

Competitive advantages

• High proportion of agricultural land (54.7 per cent or 179.9 million hectares)

• Leading producer of jute, pulses; second-largest producer of wheat, paddy, fruits and vegetables

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Policy support

• Government is increasing Minimum Support Prices (MSPs) to ensure higher crop production

• Schemes like Rashtriya Krishi Vikas Yojana (RKVY) incentivises states to increase private investment in agriculture and allied sectors

• Launched National Food Security Mission (NFSM) to increase production of rice, wheat and pulse

MANDI HOUSE FOR AGGRI COMMODITY

Mandi in Hindi language means market place. Traditionally, such market places were for food and aggri-commodities. However, over time the coverage of mandis got widened to include trading hubs for grains, vegetables, timber, gems and diamonds; almost every tradable was included. Mandis for animals like cattle, goats, horses, mules, camels and buffaloes, and poultry are often organised as fairs. Thus the word mandi assumes the contours of a catch-all market place where anything is bought and sold.

In a still predominantly rural India, mandis form part of the life-line infrastructure for the people. In most of the states/provinces in India, the Agricultural Produce Marketing Committee(APMC) operates the wholesale market for agri-products. Wholesale markets are segregated depending on the type of commodity handled: for instance, for grains, pulses, vegetables, potato and onion, spices and condiments, fruits. The growing disenchantment with the functioning of APMCs has led to relaxation of the APMC Rules and the emergence of direct marketing in agri-commodities. These are often called farmers markets: inthe state of Andhra Pradesh they are called ‘Rythu bazaar’ and in Tamil Nadu ‘Uzhavar Sandhai’ .These markets enable the farmer to sell his produce directly to the consumers without the middlemen in the APMCs. Minimising intermediation and the creation of a national common market are long cherished policy goals of the government.

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Tezi mandi or Futures markets

India is known for commodity forward and futures markets that existed for centuries though standardised, regulated futures trading has a history of over a century only. Unregulated futures markets are often called Satta Bazar.

Futures markets are auction markets in which participants buy and sell futures contracts for delivery on a specified future date. Trading used to be carried out through open outcry- yelling and hand signals- in a trading pits .However, since the early 2000s most of the commodity futures exchanges have migrated to the new technology platform of online or electronic trading. The commodity futures markets are regulated by the Forward Markets Commission. Through the Finance Act, 2015, Forward Markets Commission has been merged with the securities market regulator - SEBI.

Market Imperfections and Prices

India is a huge agri-nation with shortages and surpluses. But a national common market is a far cry. Further, there is also wide discrepancy in the prices at various levels. Price heterogeneity could be largely because of information asymmetry existing in the markets; quite similar to the market for lemons. However, the latent demand for the commodities ensures that Gresham’s law does not prevail, and commodities, which are graded by quality, are sold at all prices. Owing to this, food inflation in India did not quite follow the peaks and troughs experienced in the global markets. The year 2008-09 was a watershed year in terms of the volatility in prices that was witnessed in global prices; when global commodity markets went through a roller-coaster ride, with prices sharply rising during the first half and having a free fall in the second half and culminating in a recessionary phase. Although the Indian market was spared the volatility, it became evident in 2010-11 that price levels of essential commodities had moved on to a higher trajectory.

Creation of a common market

Government has been working on the issues for internal trade reforms and making a common market for agriculture products across the country since 2012. Setting up of Spot Exchanges, was an attempt towards creation of a single market in the agricultural commodities in pursuance of the national agenda given by the Prime Minister in his address at Agricultural summit in 2005. The Department of Consumer Affairs had conceived spot exchanges as an alternative marketing channel which would facilitate a transparent system of direct marketing. It was felt that direct marketing will ensure that there is no credit and quality risk resulting in low transaction costs. It was also to integrate the physical market spatially and temporally by integrating it with the futures market. However, spot exchanges soon landed up in trouble and the permissions were withdrawn in September 2014.

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All agricultural commodities in India are trade in wholesale markets or mandies where the prices of commodity is set.If it is a principle commodity and the market determinant price is below msp the trader has to take the delivery at the msp.In return the trader is compensated by the mandi which interm compensated by government.

Mandies are set-up only with the permission of state government.Each state have a agricultural marketing board and they set-up mandi boards at the level of district.

COMPONENTS OF MANDI HOUSE

PRODUCTS: Every mandi trades in at least one primary commodity specific to that region. Typically trading is done in a set of primary and non primary commodities. As the seller brings the produce to the market, it is first weighted and both the type and quantity recorded at the entrance. The seller is given a certificate of type and quantity. Once the produce recorded at one mandi ,it has free assess to other mandies of the district. The probability that the farmer will assess more than one mandi to find the best price in the region , cost transportation , good storage and packaging facilities.

PARTICIPANTS: Other than the buyers and sellers the market has traders who intermediate between the farmer and the wholesale dealer or the mill owners. This traders are licensed by the mandi to trade in the market. Traders may use brokers to expand their business. Traders have to pay mandi fees which are of two types as :

A basic transaction fee which is a fraction of the value of trade. Other fees in the form of taxes. This is charged by the state government and

can vary widely across states. Recently the fees and taxes that the mandi charges to the traders being fixed

are a flat rate of 4%.

TRADINGS: Trading in mandies has two stages , one is dealer market where sellers typically approaches the trader for a price.Once they find a favorable price , it consider sold to the trader.The second is an open outcry auction , where the commodity is sold. The auction process has a fixed time at every mandi, The auction is run sequentially ,typically growing from 1 lot of commodity with a fixed grade to the next.

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CLEARING: Trader have to clear to deals with buyers and sellers immediately. At the time trade is clear with the seller the produce gets inspector for quality. Typically this is done by traders themselves. If there is a dispute about the quality of the produce the conflict is resolved by the mandi inspector. At the close of the trading day traders have to report both prices and volume to the mandi. Since traders pays fee to the mandi reported traded volume , they may under report traded values. This means a possibility that volumes are under reporting prices. Since under pricing could have undesirable effect of keeping the farmer away.

SETTLEMENT Farmers bring goods to the mandi which they deliver to the trader to whom they sell. Traders in term have this produce picked-up by buyers. There are typically no facilities at mandi for long –term storage. If there is excess produce than could be sold on the same day ,the mandi permits the trader to keep goods at the mandi yards overnight, There are either private or state owned warehouses provide storage facilities close to mandi at a cost.

GOVERNANCE The mandies are set-up and monitor by the mandi board, which is a committee that has representations both by the farmers and traders communities. There is also a representative from the state government on the mandi board. The chairman of the mandi board is typically from farmer community. It is the farmer community that usually originates discussion with the State Agricultural Management Board (SAMB) to organize a mandi in a new locality. And this community typically has a large voice in the governance of the mandi. The operation of the mandi is handed by staff consisting of a secretary, clerk (recording) and at least one Inspector who is qualify to certify the quality of the produce. The staff are paid out of the fee collected from farmers and market intermediaries.

REGULATION At the spot market where settlement takes place are T+0 or T+1 basis, there is a very little scope for problem of regulation. The disputes that arise about prices and quality of produce are typically handed by mandi Inspector . The most important regulatory requirement is the reporting of prices and volumes to State Agricultural Management Board (SAMB). Every district mandi board takes the responsibility of collecting and dispatching this information to State Agricultural Management Board (SAMB). The SAMB in turn dispatch it to Ministry of agriculture where prices are available on internet. The site is www.atmarket.nic.in .

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CONCEPT OF WAREHOUSE

MEANINGS OF A WAREHOUSE

Warehouses are scientific storage structures especially constructed for the protection of the quantity and quality of stored products. Warehousing may be defined as the assumption of responsibility for the storage of goods. It may be called the protector of national wealth, for the produce stored in warehouses is preserved and protected against rodents, insects and pests, and against the ill-effect of moisture and dampness. The warehousing scheme in India is an integrated scheme of scientific storage, rural credit, price stabilization and market intelligence and is intended to supplement the efforts of co-operative institutions.

CHARACTERSTICS OF AN IDEAL WAREHOUSE

Any warehouse is said to be an ideal warehouse if it possesses certain characteristics as

Warehouse should be located at a convenient place near highways, railway station and seaport where goods can be loaded and un-loaded easily.

Mechanical appliances should be there to load and un-load commodities to reduce the wastages in handling.

Adequate space should be available inside the warehouse. Warehouse should have cold storage facilities for preserving perishable goods. Proper arrangement should be there to protect goods from rain, dust, moisture,

sunlight. Warehouse having latest fire fighting equipments.

The important functions of warehouses are :

1. Scientific Storage:

Here, a large bulk of agricultural commodities may be stored. The product is protected against quantitative and qualitative losses by the use of such methods of preservation as are necessary.

2. Financing: Warehouses meet the financial needs of the person who stores the product. Nationalized banks advance credit on the security of the warehouse receipt issued for the stored products to the extent of 75 to 80 per cent of their value.

3. Price Stabilization: Warehouses help in price stabilization of agricultural commodities by checking the tendency to making post-harvest sales among the farmers.

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Farmers or traders can store their products during the post-harvest season, when prices are low because of the glut in the market. Warehouse helps in staggering the supplies throughout the year. They thus help in the stabilization of agricultural prices.

4. Market Intelligence: Warehouses also offer the facility of market information to persons who hold their produce in them. They inform them about the prices prevailing in the period, and advise them on when to market their products.

This facility helps in preventing distress sales for immediate money needs or because of lack of proper storage facilities. It gives the producer holding power; he can wait for the emergence of favourable market conditions and get the best value for his product.

OTHER FUNCTIONS

PROCESSING :- Certain commodities are not consume in the firm they are produce. Processing is required to make them consumable. For example paddy is polished, timber is sizzled and fruits are ripened.

GRADING AND BRANDING :- On requirement warehouse also performs the function of grading and branding of goods on behalf of manufacturer, wholesaler or importer. Also provides facilities for mixing and packaging of goods for convenience handling and sales.

TRANSPORTATION :- In some cases warehouses provide transport arrangement to bulk depositor. It collects goods from the place of production and also send goods to the place of delivery.

Growth & Development of Commodity Exchanges

General overview

Underpinned by initially strengthening industrial activity,1 strong demand from developing countries and optimistic market sentiment following the European Central Bank’s longer-term refinancing operations, the UNCTAD price index2 for three groups of commodities – all food,3 agricultural raw materials, and minerals, ores and metals – rose in the first quarter of 2012 from their lows in December 2011. However, prices fell in the second quarter as a result of the economic slowdown in China, the intensification of the debt crisis in Europe and the appreciation of the dollar against other currencies. The drop was particularly pronounced for agricultural raw materials, and minerals, ores and metals.

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The third quarter of 2012 witnessed a different price scenario between food and base metals and ores. The food market was tight, mainly due to supply disruptions caused by adverse weather in the United States, Australia and the Black Sea region. Surging maize, wheat and soybean prices put a strain on the food market.

On the other hand, the prices of many important base metals and ores continued their downward trend in July and August 2012. Copper prices, despite their brief recovery in July, were significantly lower than a year ago. Metals and ores, key raw materials for construction and manufacturing, are sensitive to the economic performance of major consuming countries. The gloomy economic situation dampened the demand for these commodities. At the same time, the development and expansion of new projects over the last decade increased the global supply of many minerals and metals. In some markets such as aluminium, nickel and zinc, supply exceeded demand, driving down prices further.

To boost the economy, the central banks of the eurozone, the United States and Japan eased their monetary policies in September. While the full impact of these policies on economic growth is still unclear, commodity markets responded quickly, with the prices of gold and key base metals rallying.4

The price of crude oil remained high and volatile during the first 10 months of 2012, due to divergent factors. The uncertainty of the world economic outlook and geopolitical risks in the Middle East, in particular, weighed heavily on oil markets. The economic woes in the eurozone, struggling recovery in the United States and the economic slowdown in emerging countries weakened the demand for crude oil. The economic sanctions on oil exports from the Islamic Republic of Iran removed off the oil market an estimated 0.82 million barrels of crude per day in the third quarter of 2012. This vacuum, however, was filled by the increased outputs from Saudi Arabia, Libya and Iraq.

Functions of commodity exchanges

A commodity exchange acts as a portal or a common place where traders can buy and sell commodities. Such exchanges enable seamless trading, eliminate the need for middle men and allow the market to fix a price that is driven purely by demand and supply of the product.

How does a commodity exchange work?

Just like the stock market, a commodity exchange serves as a marketplace for buyers and sellers to engage in trading commodities directly. Trading can be done in two ways: cash/spot and futures. In the former method, the buyer and seller agree upon a common price of the commodity, and actual physical delivery of that commodity takes place. The latter is

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different. Futures contract do not involve spot delivery of commodities; delivery is fixed for a future date at a price agreed by both the parties.

Just like a stock exchange, a commodity exchange serves as a marketplace for buyers and sellers to engage in trading commodities directly.

People engage in this kind of trading mainly because each party gets something out of the deal. Commodity manufacturers/producers want to hedge their produces against fall in price in the future. On the other hand, commercial consumers want to lock in goods at a favourable price in order to avoid paying a higher price later. And individual traders wish to benefit from future movements of commodity prices.

The entire process is done electronically. The producer submits an offer price and the future delivery date of the commodity on this exchange. The seller, who agrees to pay that price, enters into a contract with the buyer. Almost all transactions take place in the similar manner, allowing the actual demand and supply to determine the price.

In India, there are three major national commodities exchanges: National Commodity and Derivatives Exchange Ltd, Multi Commodity Exchange of India Ltd and National Multi Commodity Exchange of India Ltd. In addition to these, 18 more domestic commodity exchanges in India are known to function.

Any commodity exchange serves three main functions:

Defines rules and regulations of trading to carry out uniform trading practice Provides dispute settlement mechanism Circulates price movements and market news to the participating members

Regulation

Trade-facilitating institutions boost trade by reducing the cost and the uncertainty of entering into transactions. One of the ways in which they do this is by applying a framework of rules and procedures to regulate trade, thereby providing individuals or organizations with increased confidence to engage in mutually beneficial transactions.

As has been detailed by UNCTAD (1997), beyond basic oversight to ensure auctions are open and not manipulated, there are two important thresholds at which the regulatory framework becomes an important foundation for commodity exchange activities. The first is when an exchange moves from trading products that are physically

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present at its premises to trading paper which represents the right to commodities. These rights need to be enforceable, and this is achieved through the clear definition of contractual rights and obligations arising from transactions conducted in the exchange, and of the mechanisms that enforce them. A second threshold occurs when intermediaries start to play a role in the market on behalf of end users; the activities of these intermediaries need to be overseen to ensure that they fulfil obligations. When either of these thresholds is crossed, there is a requirement upon the exchange to act as a self-regulator of activities taking place in its markets, and for Government to provide an overall framework for oversight.

Protection of investors : measures taken to protect investors – taken here to mean all market users – from unscrupulous or irresponsible practices by the exchanges, counterparties or intermediaries that they may interact with. Common mechanisms used to protect investors include: fitness or good character qualifications for intermediaries; requirements for intermediaries to segregate client funds from their own funds; and binding arbitration mechanisms for dispute settlement.

Ensuring that markets are fair, efficient and transparent : measures taken to ensure that the market price truly reflects the information known about the market, to constrain “speculative excess”, and to avoid manipulation of prices or physical stocks. Common mechanisms used to uphold market integrity include: ensuring a time-stamped audit trail of all trading activity; position limits for speculative participants, including tighter limits in delivery months; constant monitoring of trading for suspicious patterns; free, transparent dissemination of data; an approval process by the external regulator for new contracts to ensure an adequate deliverable supply (among other factors); and “know-your-customer” requirements for intermediaries.

Reduction of systemic risk: measures taken to effectively manage the systemic risk arising from market operations, reducing the risk of default to acceptable levels, and ensuring the system as a whole is sufficiently resilient to withstand shocks, such as spikes in volatility or the collapse of a large trader. Common mechanisms used to reduce systemic risk include: minimum capital requirements in order to participate in the markets; the rigorous use of the margining system, with margin levels related to market risk (including higher margin requirements in periods of increased volatility and during the delivery period); daily price movement limits (or “circuit filters”) that

confine daily trading within defined price parameters; and a “risk hierarchy”, which ensures that exchange members cover their clients’ positions in the case of a client default and a clearing-house guarantee fund covers members’ positions in the case of a member default.

External regulator: a governmental agency, or an independent agency accountable to Government, that provides regulatory oversight across national markets as a whole. An external regulator may also act as an interface with the external regulators of other national markets to ensure adequate regulation of transactions that are cross-jurisdictional in nature.

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The exchange as a self-regulatory organization: the exchange’s own personnel and systems that provide regulatory oversight over exchange operations, including both the trading and – where it is performed in-house – the clearing and settlement functions.

The industry self-regulatory organization: a body that either represents market intermediaries (i.e. brokers and other entities active in the markets), or is appointed by Government to oversee the activities of market intermediaries. In particular, an industry self- regulatory organization can ensure investor protection by overseeing relations between the intermediary and the end user.

STRUCTURE OF DERIVATIVE MARKET

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Derivatives In India

Ministry of Finance Ministry of ConsumerAffairs

SEBI FMC

Stock Exchanges Commodity Exchanges

Financial Derivatives Commodity Derivatives

ELECTRONIC COMMODITIES TRADING

In traditional stock market exchanges such as the New

York Stock Exchange(NYSE), most trading activity took place in the trading pits in face-to-

face interactions between brokers and dealers in open outcry trading. In 1992 the Financial

Information exchange (FIX) protocol was introduced, allowing international real-time

exchange of information regarding market transactions. The U.S. Securities and Exchange

Commission ordered U.S. stock markets to convert from the fractional system to a decimal

system by April 2001. Metrification, conversion from the imperial system of measurement to

the metrical, increased throughout the 20th century. Eventually FIX-compliant interfaces

were adopted globally by commodity exchanges using the FIX Protocol In 2001 the Chicago

Board of Trade and the Chicago Mercantile Exchange (later merged into the CME group, the

world's largest futures exchange company) launched their FIX-compliant interface.

By 2011, the alternative trading system (ATS)

of electronic trading featured computers buying and selling without human dealer

intermediation. High-frequency trading(HFT) algorithmic trading, had almost phased out

"dinosaur floor-traders".

Increased complexity of financial instruments and interconnectedness of global market[

The robust growth of emerging market economies (EMEs), (such as Brazil, Russia, India, and

China) in the 1990s, "propelled commodity markets into a supercycle". The size and diversity

of commodity markets expanded internationally.

In 2012, as emerging-market economies slowed down, commodity prices

declined. From 2005-13 energy and metals' real prices remained well above their long-term

averages. In 2012 real food prices were at their highest level since 1982.

The price of gold bullion fell dramatically on 12 April 2013 and

analysts frantically sought explanations. Rumors spread that the European Central

Bank (ECB) would force Cyprusto sell its gold reserves in response to its financial crisis.

Major banks such as Goldman Sachs began immediately to short gold bullion. Investors

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Futures Options futures

Precious Metal Other Metals

Agriculture Energy

scrambled to liquidate theirexchange-traded funds (ETFs) and margin call selling accelerated.

George Gero, precious metals commodities expert at the Royal Bank of Canada (RBC)

Wealth Management section reported that he had not seen selling of gold bullion as panicked

as this in his forty years in commodity markets.

The earliest commodity exchange-traded fund (ETFs), such as  SPDR

Gold Shares NYSE Arca: GLD and iShares Silver Trust NYSE Arca: SLV, actually owned

the physical commodities. Similar to these are NYSE Arca: PALL (palladium)

and NYSE Arca: PPLT(platinum). However, most Exchange Traded Commodities (ETCs)

implement afutures trading strategy. At the time Russian Prime Minister Dmitry

Medvedev warned that Russia could sink into recession. He argued that "We live in a

dynamic, fast-developing world. It is so global and so complex that we sometimes cannot

keep up with the changes". Analysts have claimed that Russia's economy is overly dependent

on commodities. 

Contracts in the commodity market

A Spot contract is an agreement where delivery and payment either takes place immediately,

or with a short lag. Physical trading normally involves a visual inspection and is carried out

in physical markets such as a farmers market. Derivatives markets, on the other hand, require

the existence of agreed standards so that trades can be made without visual inspection.

Standardization

US soybean futures, for example, are of standard grade if they are "GMO or a mixture of

GMO and Non-GMO No. 2 yellow soybeans of Indiana, Ohio and Michigan origin produced

in the U.S.A. (Non-screened, stored in silo)". They are of "deliverable grade" if they are

"GMO or a mixture of GMO and Non-GMO No. 2 yellow soybeans of Iowa, Illinois and

Wisconsin origin produced in the U.S.A. (Non-screened, stored in silo)". Note the distinction

between states, and the need to clearly mention their status as GMO (Genetically Modified

Organism) which makes them unacceptable to most organic food buyers.

Similar specifications apply for cotton, orange juice, cocoa, sugar, wheat, corn, barley, pork

bellies, milk, feedstuffs, fruits, vegetables, other grains, other beans, hay, other livestock,

meats, poultry, eggs, or any other commodity which is so traded.

Standardization has also occurred technologically, as the use of the FIX Protocol by

commodities exchanges has allowed trade messages to be sent, received and processed in the

same format as stocks or equities. This process began in 2001 when the Chicago Mercantile

Exchange launched a FIX-compliant interface that was adopted by commodity exchanges

around the world.

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POTATO

POTATO , popularly known as the king of vegetables and a native of South America, has now become an indispensable part of Indian cuisine. It ranks 4th among important staple food after wheat, rice and maize. 

Potato is rich in carbohydrates, constituting 22-24% of its weight. It contains 2.1% to 2.7% protein, less than 0.5% of fat and the rest is water. Being a short duration crop, it produces more quantity of dry matter, edible energy, and edible protein in lesser duration, compared to cereals like rice and wheat. Hence,

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potatoes are useful tool to achieve the nutritional security of the nation. 

Potato is a temperate or cool season crop which needs a low temperature, low humidity, less windy, and bright sunny days. It does well under well-distributed rains or moist weather situations to high temperatures. Humidity and rains are not conducive to potatoes as these lead to insect pests and disease attacks

SCENARIO: - India produces around 8% of the world’s total produce. India ranks fourth in terms of area and third in terms of production of potato across the globe. China and Russia are ahead of India in terms of potato production. Uttar Pradesh produces the highest quantity of potatoes for India followed by West Bengal. There has been an increase of 12.5% in the production of Potato than last year (2010). Uttar Pradesh, the state which houses our basis i.e. Agra, saw an increase of 22% in their production levels.

FUTURE PROSPECTS-

There has been a constant growth in production of Potato in India in the last 5 years. The productivity level in India is below the world average level. The production of potato has gone up during the previous years due to better varieties and larger acreage under potato. There is usually very little quantity left for exports, making India’s share in world exports insignificant and inconsistent. India exports just around 1-0.5% of the world’s total potato exports.

ANALYSYS

The overall objective of this short study is to determine the effectiveness of newly developed commodity exchanges in India as a means of improving smallholder farmer linkages to markets, particularly formal markets, and the advantages in terms of new opportunities, more reliable trading relationships and improved incomes, compared with

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traditional commodity trading routes. Where possible we compare typical means of market linkage, whether through individual or farmer organizations, to wholesale markets and other trading relationships such as fair trade and contracting.

The purpose of the study is to determine whether commodity exchanges have provided a positive impact on farmer marketing channels, and assisted in upgrading marketing institutions that support the smallholder community. The target commodities for the study are coffee, maize and beans. All sophisticated market systems in developed countries, such as commodity exchanges, were established by the users of the market. They were not established and funded by outside organizations.

CHANA

Chana belongs to leguminasae family and there are two main types - Desi and Kabuli. Desi chickpeas is the main type grown in India

India's chana production fluctuates between 4-7 million tons and is normally 40% of India's total pulse production of 12-15 million tons India's chana production in 2003-04, chana production is 5.33 million tons out of a total pulse production of 15.23 million tons. 

The major producing states are Madhya Pradesh (1.5-2.5 million tons, Uttar Pradesh (0.7-0.85 million tons), Rajasthan (0.5-2.5 million tons) and Maharashtra (0.5-0.7 million tons). 

Chana is a rabi crop and is sown from November to December and harvested from Feb to March. The peak arrival period begins from March-April at the major trading centres of the country. 

India accounts for 2/3rd of the world's chickpea production. India imports around 3-4 lakh tons of chickpeas annually. The major countries from where India imports chickpeas are Canada, Australia, Iran and Myanmar.

Indian chana markets are highly fragmented, with very long value chain. The major players in the value chain are commission agents, brokers, stockists, wholesale traders, dal mills, wholesalers (dal) and retail outlets. The information flow between these participants is restricted and very slow.

 Major Trading Centers

Indore, Bhopal, Vidisha in Madhya Pradesh.  Jalgaon, Latur, Mumbai, Akola in Maharashtra.  Jaipur, Bikaner, Kota, Jodhpur, Sriganaganagar, Hanumangarh in Rajasthan. Other major centers are Delhi, Chennai, Kanpur, Hapur, Hyderabad, Vijayawada,

Gulbarga, Sirsa, Jalandhar, Ludhiana, Sangrur.

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Market Influencing Factors

Chana can withstand moisture stress to a certain extent. However, the production highly fluctuates between years, depending on the rains received and the moisture availability in the soil. 

The sentiments of traders play a significant role currently, as a consequence of the lack of free-flow of information. 

Stocks present with stockists and the stocks-to-consumption ratio. Imports and the crop situation in the countries from where imports originate, viz.,

Canada, Australia, Myanmar. There is high substitutability between pulses in India among the consumers. So the

price of other major pulses like tur, yellow peas, green peas etc also influences the prices of chana.

Wheat

General Characteristics

Wheat is one of the world's three most important cereal crops along with maize and rice. It is reported to be grown domestically from atleast as early as 9000 BC and is now grown in almost all parts of the world.

Wheat is a globally important source of dietary carbohydrate (starch) and protein (gluten). Its grain is a staple food used to make flour for leavened, flat and steamed breads, biscuits, cookies, cakes, breakfast cereal, pasta, noodles etc and for fermentation to make beer, alcohol, vodka, or biofuel. It is also used for feeding animals to a limited extent.

Different varieties of wheat are grown across the world. The three principal types of wheat used in modern food production are: Triticum vulgare (soft wheat), Triticum durum (hard wheat) and Triticum compactum

Global Scenario

The annual global wheat production has been in the range of 600-630 tonnes in the recent years. However, in 2008-09 it is estimated to have risen sharply to 689 million tonnes. The combined production of all cereals in 2008-09 is estimated to be 2525 million tonnes.

EU-27, China, India, USA and Russia are the five major producers of wheat accounting for close to 70% of the total global production, with 2008-09 production in these regions being 151, 112.5, 78.6, 68 and 63.8 million tonnes respectively.

Wheat is the most important cereal traded in the world market. The global trade in wheat during 2008-09 was sharply up at around 140 million tonnes in 2008-09 from

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an average of around 110 - 115 million tonnes in the recent previous years. While US (25 - 35 million tonnes), EU-27 (15-25 million tonnes), Canada (15-20

million tonnes), Australia (8-18 million tonnes) and Argentina (6 - 12 million tonnes) are major exporters, there are a large number of countries importing wheat with maximum demand emanating from developing nations. The major importing regions are Middle-east Asia, South-east Asia and North-west Africa. Egypt, Brazil, Indonesia, Algeria are the most important importing nations.

Wheat crops around the world have their own unique production cycles of planting and harvest timeframes.

Important World Wheat Markets

Derivatives exchanges - Chicago Mercantile Exchange, which acquired Chicago Board of Trade, Kansas City Board of Trade, Zhenghzhou Commodity Exchange, South African Futures Exchange, MCX, NCDEX

US FOB and EU (France) FOB prices determine the physical prices

 

Indian Scenario

India has the largest area in the world under wheat cultivation. However, due to low productivity it is only the third largest producer after EU-27 and China.

India's annual production of wheat has been around 75-79 million tonnes from 2006-07, with production in 2008-09 estimated to be around 78.6 million tonnes. Wheat accounts for around 30-35% of India's total foodgrain production of around 220 million tonnes. India's annual wheat consumption is estimated to be around 72 million tonnes currently.

Green revolution and increased focus by Government on wheat has helped wheat production to surge sharply from around 6 million tonnes at time of independence to current levels. Close to 90% of the area under wheat is irrigated, which too has supported the rise in output over the years.

Uttar Pradesh (34%), Punjab (20%), Haryana (13%), Rajasthan (10%) and Madhya Pradesh (10%) are the main wheat producing states of India.

Wheat is cultivated as a rabi crop in India, with sowing being undertaken from October to December and harvesting from March to May. The official marketing season of wheat in India is assumed to commence from April.

Government plays a major role in the wheat value chain in India as the cereal is very important for the country's food security. The Central Govt. sets the Minimum Support Price (MSP) every year, which sets the mood for the upcoming season. As govt. agencies have been recently procuring close to 25-30% of annual production, open market prices too do not generally fall below this price. Historically, the procurement has been around 15-20%.

The procured wheat is used to maintain a minimum buffer stock for meeting unforeseen exigencies, for providing foodgrains required for Public Distribution System (PDS) and the other foodgrain based welfare programmes of the Government. In addition, the grain is also sold at pre-determined prices to the open market.

Though, India is not a major player in global markets India has resorted to imports, whenever there is a supply tightness. India has also exported around 5 million tonnes

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of wheat in 2003-04. Govt. agencies take the decision to bring in imports and the current policies are not in favour of exports.

 

Market Influencing Factors

Wheat is an annual, seasonal crop and prices usually tend to rise during the cultivation period, i.e. December to March due to scarcity in the market and dip during the peak arrival period (April and May).

Weather has a profound influence on production, especially in Haryana and Punjab as temperature plays a crucial role in determining the yield.

The Govt. policies with regard to MSP, buffer stocks, PDS sales, Open Market Sales, imports / exports are very important influencing factor with regards to Indian wheat prices.

Despite international trade being limited, the several variations in production or consumption at various major or minor producing or consuming country, which influence global prices, are reflected in the domestic long-term price trend. However, in the short-term normally there is no significant relation with international prices.

Several international agencies like US Dept. of Agriculture, International Grains Council, Food and Agricultural Organisation release regular, periodic reports on global supply-demand situation, which is widely looked upon by the global players.

SOYA BEAN

 General Characteristics

Soybean is an important global crop and processed soybean is the largest source of protein feed and second largest source of vegetable oil in the world.

The major portion of the global and domestic crop is solvent-extracted with hexane to yield soy oil and obtain soymeal, which is widely used in the animal feed industry. It is estimated that above 85% of the output is crushed worldwide.

Though, a very small proportion of the crop is consumed directly by humans, soybean products appear in a large variety of processed foods.

The cultivation of soybean is successful in climates with hot summers, with temperatures between 20°C to 30°C being optimum. Temperatures below 20°C and over 40°C are found to retard growth significantly.

It can grow in a wide range of soils, with optimum growth in moist alluvial soils

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with a good organic content. Modern soybean varieties generally reach a height of around 1 m (3 ft), and take

80-120 days from sowing to harvesting.

 Global Scenario

The annual global soybean production has been in the range of 210-230 million tonnes in the recent years, accounting for 55-58% of total global oilseed output of around 390-400 million tonnes.

US, Brazil, Argentina, China and India are the major producers in order of production with production in these countries ranging around 70-80, 55-60, 32-48, 14-16 and 8-10 million tonnes in the recent couple of years.

Weather, acreage under other competitive crops like corn, cotton and pests & diseases are the major factors influencing production.

While in US, India and China crop starts arriving from Aug-Sept, it starts from Jan-Feb in S. America.

The annual global trade in soybean is estimated to be around 70-80 million tonnes.

While, USA (30 -35 million tonnes), Brazil (23-28 million tonnes), Argentina (5-15 million tonnes) are the exporters of beans, China (35-40 million tonnes) and EU (12-16 million tonnes) are the major importers.

In addition to soybean, soy oil and soymeal are also widely traded globally with annual trade of around 9 million tonnes and 52 million tonnes respectively. While, US is the largest exporters for soybeans, Argentina is the largest exporter of soy oil and soy meal globally.

 Important World Soy Markets

Chicago Mercantile Exchange, which acquired Chicago Board of Trade - the world's oldest soy futures market

Dalian Commodity Exchange - trades the most liquid soybean contracts in the world

Argentina and Brazil FOB determine the physical prices

 India in World Soy Industry(Rounded figs.) Global India % Share

  (In million tons)

Soybean Production 230 9 4

Soybean Trade 75 0 0

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Soy Oil Production 35 1.5 4

Soy Oil Imports 9 1 11

Soy Oil Exports 9 0 0

Soy Meal Production 150 7 5

Soy Meal Exports 52 3.5 7

Soy Meal Imports 52 0 0

 Indian Scenario

India's annual production of soybean has been around 8.5-10 million tonnes in the recent years with India's production in 2009-10 estimated to be around 8.9 million tonnes by the Government of India.

The acreage under this crop has more than doubled in the past two decades to around 11 million hectares currently being sown under this crop, with better returns encouraging more farmers to adopt this new crop.

Madhya Pradesh, Maharashtra, Rajasthan and Andhra Pradesh are the major cultivators of this important oilseed, with their respective contributions usually around 60%, 25%, 6-7% and 1-2%.

Soybean is exclusively grown in the khariff season in India, with sowing taking place after the first monsoon showers in late June or early July. Sowing can extend upto end of July in different parts of the country.

The harvesting commences from September, with Maharashtra reporting the earliest arrivals. October and November are the peak arrival months, with all-India arrivals crossing 10 lakh bags of approximately 90 kg on the peak arrival days.

The production is dependent on the monsoon and fluctuates between years. India is highly dependent on imports to meet domestic edible oil requirement.

Government policies are in favour of developing the domestic crushing industry and supporting Indian farmers and do not promote import or export of soybean. Thus, there is virtually no import or export of soybeans.

However, India out of its total soymeal production of around 6.5-7 million tonnes, exports around 3.5 million tonnes with Vietnam, Japan, Thailand, Indonesia, UAE, Greece being the major importers.

Major Trading Centres

Indore, Ujjain, Dewas, Mandsore in Madhya Pradesh, Akola, Sangli, Nagpur in

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Maharashtra, Kota in Rajasthan are major trading centres.

Market Influencing Factors

Domestic prices are highly influenced by the global price movements, with prices highly correlated with the CME prices.

Fundamentally, weather at all producing centers, domestic and international is the most crucial factor, with the pod bearing period, being the most crucial.

United States Department of Agriculture makes progressive assessment of crops, stocks, global supply and demand and releases regular reports, which are widely looked upon by the global market to determine prices.

The other major influencing factor is the prices of soy oil and soymeal, which are in-turn dependent on the fundamentals of global edible oil and global animal feed industry.

Locally, prices are influenced by currency fluctuations, weather, acreage, pest & diseases, production estimates by industry associations, Government agencies.

India imports more than 60% of its entire edible oil requirement and the entire edible oilseed and oil sector is a highly sensitive sector. Thus, new Government policies and apprehensions about new policies have a strong sway over prices, during periods when new announcements are made or are about to be made.

The supply-demand and price scenario of competitive oils, viz., palmoil. The crush margin between meal, oil and seed

ALMOND  

General Characteristics

Almonds, though considered to be nuts are technically the seed of the fruit of the almond tree, which is a medium-sized tree that bears fragrant pink and white flowers. The fruit, botanically referred to as a drupe has an outer hull and a hard shell with the seed inside.

Almonds are commonly sold shelled. Shelling almonds refers to removing the shell to reveal the seed. Almonds with their shells attached are called unshelled almonds. Blanched almonds are shelled almonds that have been treated with hot water to soften the seedcoat, which is then removed to reveal the white embryo.

Sweet almonds and Bitter almonds are two forms of almonds, of which sweet almond is the variety, which is consumed directly or indirectly by humans as a food product. Bitter almond is slightly shorter and broader than sweet almonds and are mainly used for extracting almond oil and not consumed as food, as it is

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poisonous. Chocolate confectionary, bakery and snacking are the three major global

categories for almond usage.

 Global Scenario

The annual global Sweet almond production on shelled-basis has been in the range of 7 - 8.5 lakh tonnes in the recent years. Record crops and a steady increase in production were seen from 2005-06 to 2008-09 (Almond crop year is from August to July). However, the output in 2009-10 is forecasted to dip on account of unfavourable climatic conditions.

United States of America is the single largest producer, consumer and exporter of Sweet almonds, with the country contributing to over 80% of the global almond production.

The state of California in US is the most important producer of Sweet almonds, as this region is reported to be accounting for 99% of the American production.

Nonpareil is the single largest variety planted in California. Its production is reported to be 38% of the total output, followed by Carmel (12%), Monterey (10%), Butte/Padre (9%) and Butte (8%).

The world's largest almond handler is the Blue Diamond Growers Cooperative, which is located in Sacramento, California. Blue Diamond is owned by over two-thirds of California growers and markets one-third of California's crop.

The other producing countries are Australia, Turkey, Chile, European Union, China and India with a production of 26,000 tonnes, 16,000, 9500, 79,800, 1,500 and 1,200 tonnes on a shelled basis in 2008-09. Spain is the single largest producer in the European Union.

The annual trade in almonds has been around 4.6 lakh tonnes (on shelled basis) in the recent years. The major exporters are US, Australia and Chile with exports of 4,40,000 tonnes, 12,300 tonnes and 6,700 tonnes (on shelled basis) in 2008-09. European Union, India, Japan, Canada and Turkey are the major importers with imports of 2,00,000 tonnes, 45,000 tonnes, 21,000 tonnes, 19,000 tonnes and 14,000 tonnes in 2008-09.

While, the peak harvesting period of the Californian crop starts from mid-August and extends till September that of Australian crop occurs between February and April.

 Indian Scenario

The ever-expanding middle class and increase in health awareness, has lead the growing consumption of almond in the country in recent years. The annual rate of increase in India's domestic consumption of almonds is reported to be around 20%.

More than 95% of almonds consumed by Indians is imported with more than

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80% of imports being sourced from California. The other major country from which India imports almonds is Australia. While, Indian imports in 2008-09 is reported to be above 45,000 tonnes, the imports in 2009-10 are expected to rise to 50,000 tonnes.

India has to resort to imports to meet almost its entire requirements as domestic production of sweet almonds is only around 1,200 tonnes. The other almond trees present in the country are of non-descript variety and mostly produce bitter almonds.

India imports almonds with shells and processes it domestically to obtain shelled almonds, unlike almost all other importing nations, which import shelled almonds. This is due to availability of cheap labour and better appearance and lesser losses in manual shelling of almonds as against mechanized shelling.

Most of the manual shelling of almonds in India is undertaken at Bombay and New Delhi, from where the shelled almonds are transported to other consumption centres.

The Indian festival season extending from September to December is the peak consumption period for almonds, with maximum demand witnessed in November. Thus heavy imports of new Californian almonds are seen from September to meet the strong domestic demand during the festival season. Imports from Australia pick up during April and May after the harvesting season in that country.

 

Major Indian Trading Centres

Mumbai, New Delhi

 Market Influencing Factors

The domestic almond prices are a reflection of global supply-demand fundamentals, with the annual production at California being the most important price determining factor.

The Indian traders keep a close track of the Californian crop progress with special focus kept on forecasts by US agencies, weather, pest attacks etc. The United States Department of Agriculture and the California Almond Board makes progressive assessment of crops, stocks, global supply and demand and releases regular reports, which are widely looked upon by the global market to determine prices.

Domestically, stock present with traders and the cost at which it has been acquired is the most important price influencing factor.

The major importers and traders of almond in India are well aware of the fundamentals of the domestic market requirements and are usually well-stocked

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to meet the annual festival demand. Meanwhile, as almond is not considered as an essential commodity and there is

no local farming community producing this crop, policy intervention in this commodity is very minimal.

Agriculture Price Policy

1. Although India’s past record in food price stabilisation is good, principally because of government’s intervention, instability has increased very markedly in recent years. In real terms (i.e. in terms of the ratio of the wholesale price index (WPI) for cereals to the all-commodity WPI), cereals prices increased 17.4 per cent between 1997-98 and 1999-00 followed by an almost equally sharp decline of 13.3 per cent between 1999- 00 and 2001-02. High MSPs have distorted inter-crop price parities, particularly in favour of wheat, leading to shift of area from oilseeds and pulses and to high import of these commodities.

2. Agricultural price policy, as it exists in India currently, was conceived of on the premise of a closed economy where domestic production has to meet domestic demand in almost every commodity. MSP serves the requirement of price stability by ensuring that years of glut are not followed by large production declines leading to high prices in the subsequent year. The procedure assumes that long-run domestic costs are good indicators of long-run prices and that stocks accumulated when production exceeds demand in the short-run, pushing prices below MSP, can in normal course be disposed off without undue downward pressure on market prices at other times when production falls below demand.

3. In an open economy, however, long-run domestic prices will increasingly be affected by trends in international prices although domestic production costs would still be the dominant determinant in a large economy such as India’s. Assessment of how India’s costs of production are moving relative to world prices will, therefore, become progressively more important not only for the design of domestic price policy but also in areas such as technology development and trade policy. More importantly for price stability, since world prices fluctuate considerably around their long-run trends, it would also be necessary to ensure a mechanism to prevent international price fluctuations from influencing domestic prices so much as to nullify the domestic price policy.

4. Traditional system of price stability through MSP mechanism has increased Government’s food-subsidy burden and is, therefore, unviable. Hence, it is also necessary to consider very seriously alternative mechanisms of risk management. One of these is the idea of extending insurance to cover not only the risks of crop failure and yield loss but also losses stemming from unforeseen price fluctuations. Futures trading in grains can significantly reduce the risks of price fluctuations. Futures trading lead to more efficient price discovery by allowing more agents with relevant information to participate in price formation than would be possible if all these agents had to bear the fixed costs of physical trading. Secondly, since risks in physical trading can be reduced through hedge options, existence of futures markets can reduce costs of insuring against price risks and encourage more trade in spot physicals.

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ROLE OF COMMODITY EXCHANGES IN FACILITATING AGRICULTURE.

1. Price discovery:-

Price discovery refers to the mechanism through which prices come to reflect known information about the market. The price level established on the open market can therefore represent an accurate depiction of the prevailing supply/demand situation in the underlying commodity markets, whether in the spot market for current deliveries or in the forwards/futures markets for deliveries at specified future occasions. The benefits of price discovery can be categorized as those arising from a more efficient price formation process, and those arising from the wider supply of more – and more accurate – market information.

The former refers to those benefits arising from the proper alignment of supply and demand, ensuring that the market pricing signal triggers efficient production, purchasing and investment decisions by participants in the sector. The latter refers to those benefits arising from the publication and dissemination of market information, with the resulting price transparency providing a readily available, authoritative and neutral price reference to sector participants.

2. Price-risk management:-

A commodity exchange can provide price-risk management solutions by offering trade in commodity futures and options contracts. These instruments address the fact that as Governments have withdrawn from the sector, commodity sector participants have become increasingly exposed to the notorious price volatility that has long afflicted global commodity markets.

Price volatility breeds risk, and vulnerability to risk is recognized as one of four dimensions that constitute poverty. When farmers receive prices that are unstable and uncertain, they run price risks from the moment that they decide to plant a crop and every time that they buy and apply inputs such as fertilizers or pesticides, or use paid labor. They never know whether the price that they receive at the end will cover their costs and be worth their efforts. Such risks can deter farmers from making important investments in upgrading their productive activities, and can instead lock them into a vicious cycle of low productivity and low returns. Thus, price volatility creates and sustains rural poverty.

The usage of commodity-linked instruments to hedge commodity price risk can bring greater certainty over the planting cycle, allowing those active in the commodity sector to commit to investments that yield longer-term gains, and increasing the viability of planting

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higher-risk but higher-revenue crops. Even in the face of a long-term decline in the prices of their commodity, the ability to hedge against shorter-term price movements provides farmers with a window in which to adjust cropping patterns and diversify their risk profile.

3. Venue for investment:-

Commodity futures exchanges also offer a number of wider benefits as an institutional venue for investment. Firstly, the exchange clearing house acts as a counterparty to all trades, reducing the risk of counterparty default and providing a more secure and reliable investment environment. Secondly, the exchange’s rules, regulations and governance procedures, coupled with those of its regulators and intermediary bodies, provide an orderly rule-based framework within which investment practices can be enhanced and disputes can be arbitrated. Thirdly, the speculative interest that it generates is usually necessary to provide the liquidity required for hedging to be effective.

However, the role of speculative participation in commodity futures markets is heavily contested. In some situations, speculation may be considered by Government or society to be a wasteful or morally undesirable activity.

Impacts on farmer;-

A liquid environment in which to effectively hedge. Speculation may lift price, and therefore farmer return. Speculation can increase futures market volatility making effective hedging more

challenging. Tendency for farmers to speculate in ways in which they cannot afford.

4. Facilitation of physical commodity trade:-

The orthodox theory argues that futures markets evolve after the development of a well-ordered cash market. However, recent experience suggests that in certain circumstances, the introduction of a commodity futures market can stimulate the development of the cash markets. Central to this experience has been the notion of the exchange as an “island of excellence”, extending the high levels of performance in its core trading functions to the physical commodity markets that it serves.

Impacts on farmer

Improved price from intermediaries received by farmers because availability of neutral & authoritative reference price.

Reduces need for distress sales. Access to more distant markets through logistics.

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Facilitates new sources of commodity finance. Increases crop’s suitability to end user requirements.

5. Facilitation of financing to the agricultural sector:-

Lack of access to affordable sources of finance is a significant constraint faced by many entities in the developing world. Financiers often consider agriculture to be a particularly high-risk and low-profit proposition for standard modes of bank lending. This means that farmers and other entities in agricultural sectors typically pay high rates of interest for borrowing, through both formal and informal channels. Alternatively, they may abstain from borrowing altogether, and become locked into a cycle of low investment and low returns. However, forms of commodity finance have been developed that can reduce financiers’ risks and costs of delivery, by linking traditional financial tools with commodity exchange services. The lower risks and lower costs that ensue can enable banks to reduce accordingly the rates of interest charged to the borrower.

Impacts on farmer

Increases farmers’ access to finance. Reduces costs of borrowing by reducing risks to borrower & lender. Provides working capital to cover important expenses and avoid distress sales. Ultimately enables greater capital for investment Financing becomes more organized

and predictable. Cash and carry arbitrage provides an alternative cheap source of financing. Income stabilization for farmers

Policy options for commodity income stabilization

Diversification strategies: Reducing dependence on limited and volatile income streams, by diversifying into new crops with unrelated price development.

Supply management: Controlling the supply of a commodity relative to demand, in an attempt to influence price.

National revenue management: Budgetary management designed to smooth government expenditure over time, via stabilization funds and spending rules.

Compensatory finance: Relief loans or payments to countries triggered by falls in commodity export revenues.

Market-based risk management instruments: Instruments used to offset exposure to price risk through financial markets or other institutions.

SITUATION OF THE INDIAN COMMODITY EXCHANGES

India does not have a large nation-wide commodity market, but isolated regional commodity markets. In parallel with the underlying cash markets, Indian commodity futures markets too are dispersed and fragmented, with separate trading communities in different regions and with little contact with one another. While the exchanges

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have varying degrees of success, the industry is generally viewed as unsuccessful. The exchanges – with a few exceptions – have acknowledged that they need to embrace new technologies, and, above all, modern – and transparent – methods of doing business. But management often find it difficult to chart out a route into the future, and have had difficulties in convincing their membership.

Next to the officially approved exchanges, there are many havala markets. Most of these unofficial commodity exchanges have operated for many decades and have built up a reasonable reputation in terms of integrity and liquidity. Some unofficial markets trade 20-30 times the volume of the “official” futures exchanges. They are often localised in close proximity to the official exchanges. They offer not only futures, but also option contracts. Transaction costs are low, and they therefore attract many speculators and the smaller hedgers. Absence of regulation and proper clearing arrangements, however, mean that these markets are mostly “regulated” by the reputation of the main players. Many market participants feel that as this system has worked well for a long time, there is no reason to fear a breakdown of this system based on trust. However, this clearly cannot be the base for government policy, which has a duty to protect the public against the risks that use of these markets pose.

RISKS MANAGEMENT IN AGRICULTURAL COMMODITY BY USING FUTURE.

Risks and transaction costs in agriculture

The Government of India (GOI) Working Group on Risk Management in Agriculture defines agricultural risk in the following way: “Agricultural risk is associated with negative outcomes that stem from imperfectly predictable biological, climatic, and price variables. These variables include natural adversities (for example, pests and diseases) and climatic factors not within the control of the farmers. They also include adverse changes in both input and output prices” (GOI, 2007b: 6). These risks are exacerbated by deficiencies in infrastructure and market formation, information asymmetries, and the lack of livelihood resilience that results from a situation of poverty and its root causes (these include access to health, education, social security, land and capital).

A range of risks can be identified:

Production risk, associated with uncertainty about quantity and quality of output;

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Price risk, associated with commodity-price volatility that creates uncertainty about the level of return on investment and assets;

Market risk, associated with uncertainty about whether a purchaser can be found for farmers’ produce; Counterparty risk, associated with uncertainty about whether other parties to a transaction will fulfil the terms of a contract; Credit risk, associated with uncertainty about securing funds to cover working capital during the course of the season and investment for next year’s crop; Institutional risk, associated with uncertainty about changes to public regulation or to government support regimes that may adversely affect the producer.

Farmers have a range of mechanisms for dealing with these risks . From the preceding remarks, it becomes clear that price risk is only one of the risks that farmers face, and futures contracts are only one of the mechanisms to deal with these risks. However, it will be argued in this study that commodity exchanges do not merely provide hedging services that enable producers to manage price risk – although this is what they are most “famous” for. Instead, it will be contended that commodity exchanges are versatile and dynamic entities that enable entities in agricultural sectors, including small-scale farmers, to address the key challenges that face their market. It will be shown that they offer a range of instruments for tackling not just price risk, but also potentially production, market,

RISKS MANAGEMENT IN COMMODITY BY USING FUTURE.

Benefits of Futures Trading

•Efficient Price discovery

•Price risk management

•Credit mobilization

•Integration of rural, urban and global markets

•Increased awareness about quality standards

•Rising investment in market related infrastructure (e.g., standardization/quality testing/warehousing) Benefit –Investment, employment generation and penetration of financial services to rural India.

COMMODITY PRICE RISK MANAGEMENT

Reduces risks and locks cost.

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Results in better cash flow management Mechanism to identify, Measure, manage and monitor risk. Removes speculative element in the business by mitigating exchange rate risk.

Protects business margins Enhances efficiency and competitiveness

CURRENT STATUS:-

oo Broken links in Agri-chain production

oo Poor extension

oo Low Lack of quality

oo Low capacity utilization Marketing

oo Lack of grading

oo Non transparency in prices

oo Quality inputs

oo Non demand linked production

oo Supply chain

oo Lack of storage

oo Poor transportation

oo High wastages

oo Productivity Multiple intermediaries Processing

oo Low processing

oo Poor returns

oo Poor infrastructure

oo No linkages

FUTURES MARKETS-DIVERSIFICATION TOOL

Futures markets are centralized and organized markets where futures contracts and options are traded. All economic agents, both professionals and speculators, can buy and sell such contracts at low transaction costs and on a competitive basis. Market liquidity guarantees the quality of the futures prices as well as the premium values of the put and call options. This means that the futures price incorporates all available information. In other words, at any time and for a set of current information, the futures price is the best predictor of the future spot price.

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Derivatives are financial evolved from simple commodity future contracts into a diverse

group of financial instruments that apply to every kind of asset, including mortgages,

insurance and many more. Futures contracts, Swaps (1970s-), Exchange-traded Commodities

(ETC) (2003-), forward contracts, etc. are examples. They can be traded through formal

exchanges or through Over-the-counter (OTC). Commodity market derivatives unlike credit

default derivatives for example, are secured by the physical assets or commodities.

FORWARD CONTRACTS

A forward contract is an agreement between two parties to exchange at some fixed future

date a given quantity of a commodity for a price defined when the contract is finalized. The

fixed price is known as the forward price. Such forward contracts began as a way of reducing

pricing risk in food and agricultural product markets, because farmers knew what price they

would receive for their output.

Forward contracts for example, were used for rice in seventeenth century Japan.

FUTURES CONTRACT

Futures contracts are standardized forward contracts that are transacted through an exchange.

In futures contracts the buyer and the seller stipulate product, grade, quantity and location and

leaving price as the only variable.

Agricultural futures contracts are the oldest, in use in the United States for more than 170

years. Modern futures agreements, began in Chicago in the 1840s, with the appearance of the

railroads. Chicago, centrally located, emerged as the hub between Midwestern farmers and

east coast consumer population centers.

SWAPS

A Swaps is a derivative in which counterparties exchange the cash flows of one party's

financial instrument for those of the other party's financial instrument. They were introduced

in the 1970s.

Exchange-traded commodities (ETCs)

Exchange-traded commodity is a term used for commodity  exchange-

traded funds (which are funds) or commodity exchange-traded notes (which are notes). These

track the performance of an underlying commodity index including total return indices based

on a single commodity. They are similar to ETFs and traded and settled exactly like stock

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funds. ETCs have market maker support with guaranteed liquidity, enabling investors to

easily invest in commodities.

They were introduced in 2003.

At first only professional institutional investors had access,

but online exchanges opened some ETC markets to almost anyone. ETCs were introduced

partly in response to the tight supply of commodities in 2000, combined with record low

inventories and increasing demand from emerging markets such as China and India.

Prior to the introduction of ETCs, by the 1990s ETFs

pioneered by Barclays Global Investors (BGI) revolutionized the mutual funds industry. By

the end of December 2009 BGI assets hit an all-time high of $1 trillion. Gold was the first

commodity to be securitised through an Exchange Traded Fund (ETF) in the early 1990s, but

it was not available for trade until 2003. The idea of a Gold ETF was first officially

conceptualised by Benchmark Asset Management Company Private Ltd in India, when they

filed a proposal with the Securities and Exchange Board of India in May 2002.The first gold

exchange-traded fund was Gold Bullion Securities launched on the ASX in 2003, and the

first silver exchange-traded fund was iShares Silver Trust launched on the NYSE in 2006. As

of November 2010 a commodity ETF, namely SPDR Gold Shares, was the second-largest

ETF by market capitalization.

Generally, commodity ETFs are index funds tracking non-

security indices. Because they do not invest in securities, commodity ETFs are not regulated

as investment companies under the Investment Company Act of 1940 in the United States,

although their public offering is subject to SEC review and they need an SEC no-action

letter under the Securities Exchange Act of 1934. They may, however, be subject to

regulation by the Commodity Futures Trading Commission.

The earliest commodity ETFs, such as  SPDR Gold

Shares. NYSE Arca: GLD and iShares Silver Trust NYSE Arca: SLV, actually owned the

physical commodity (e.g., gold and silver bars). Similar to these

are NYSE Arca: PALL (palladium) and NYSE Arca: PPLT (platinum). However, most ETCs

implement a futures trading strategy, which may produce quite different results from owning

the commodity.

Commodity ETFs trade provide exposure to an increasing range of

commodities and commodity indices, including energy, metals, softs and agriculture. Many

commodity funds, such as oil roll so-called front-month futures contracts from month to

month. This provides exposure to the commodity, but subjects the investor to risks involved

in different prices along the term structure, such as a high cost to roll.

ETCs in China and India gained in importance due to those

countries' emergence as commodities consumers and producers. China accounted for more

than 60% of exchange-traded commodities in 2009, up from 40% the previous year. The

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global volume of ETCs increased by a 20% in 2010, and 50% since 2008, to around 2.5

billion million contracts

Over-the-counter (OTC) commodities derivatives

Over-the-counter  (OTC) commodities derivatives trading originally

involved two parties, without an exchange. Exchange trading offers greater transparency and

regulatory protections. In an OTC trade, the price is not generally made public. OTC are

higher risk but may also lead to higher profits.

Between 2007 and 2010, global physical exports of

commodities fell by 2%, while the outstanding value of OTC commodities derivatives

declined by two-thirds as investors reduced risk following a five-fold increase in the previous

three years.

Money under management more than doubled between

2008 and 2010 to nearly $380 billion. Inflows into the sector totaled over $60 billion in 2010,

the second highest year on record, down from $72bn the previous year. The bulk of funds

went into precious metals and energy products. The growth in prices of many commodities in

2010 contributed to the increase in the value of commodities funds under management.

At the time of sowing the farmer has three basic potential strategies:

Strategy 1: Do nothing with the hope of a spot price increase. This position is usually called speculative.

Strategy 2: Hedge future production by selling futures contract at for a volume equivalent to the expected crop. The farmer is covering the market price risk and fixing his financial margin.

Strategy 3: Buy a put option at-the-money, meaning the right to sell for a premium.

Two possibilities may occur after the farmer’s decision during sowing: the market price can increase or decrease during the production cycle. As expected, the speculative strategy (Strategy 1) has the highest result variability, with very high and very low results with respect to market behaviour. With no basis risk, the hedging with futures contract (Strategy 2) offers as final payment the value of the target price

in both cases. Finally, the purchase of a put option (Strategy 3) is a good “second best” strategy, bringing financial results very close to the best results of any of the

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above cases. This example presents the basic interest of futures contract as well as options. Combinations of strategies are required. Risk diversification comes from the positive correlation between futures and spot prices as well as asymmetric risk outcomes of options.

This hedging activity should be managed as a dynamic position. The question is when to sell futures contract. Should the farmer sell the entire expected crop quantity when planting seeds? Should he choose a time between sowing and harvest? In fact, the farmer must diversify the hedging times in order to really diversify price risk and manage yield risk. A satisfactory hedging programme could be utilizing futures market at various stages of crop production and spreading the risk over the duration of the crop.

Optimal hedging has been studied extensively by academics, first in the seventies/early eighties using purely futures contracts and then in the late eighties/nineties using option contracts. The models are increasingly complex but are all based on price correlation between the futures and the local spot prices. They give important information on the quantity to be hedged with respect to both the cash position and the correlation coefficient between the futures and the spot prices. Practical analysis also gives useful information on the diversification potential of futures markets. This is called hedging effectiveness computed as the reduction in variance that results from maintaining a hedged position rather than an unhedged position. All these types of practical computations are bridging the gap between theoretical analysis of risk management and practical use of futures markets.

THE ROLE OF GOVERNMENT

Most strategies that farmers can use to reduce income risk are likely to increase their production cost or might not be sufficient in the case of natural catastrophes. Such market failures have been used to justify government intervention in risk management in agriculture.

Risk in agriculture is often considered as having specific characteristics that explain the more frequent government intervention in risk management than in other sectors. Specifically, the relationship with nature, in particular the dependence on climate and biological processes, makes risk more difficult to control than with mechanical processes. Inelasticity of both demand and supply also contribute to fluctuations in agricultural commodity prices. In consequence, variability in agricultural prices is often higher than that in other products and annual income from agricultural activities can vary to a large extent in the absence of offsetting policy interventions. However, futures markets help to reduce price volatility but do not prevent longer- term price downturns.

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When government intervention in risk management involves elements of support, as has often been the case in OECD countries, farm families have no incentive to adopt risk strategies at the production and consumption level, or to use market-based approaches. This in turn hampers the development of market, risk-shifting solutions. In addition, reducing risk faced by farmers may encourage them to take production decisions that are not sustainable. Hence, it is argued that some degree of instability can be good as it encourages technical progress and innovation in marketing. Various underlying elements contribute to increasing the costs of intervention and lower its efficiency. Appreciating these concerns, some governments have tried to encourage farmers to use futures markets. It is established widely that futures markets, where they exist, help to reduce price fluctuations within a given year. Recognizing this, government’s first contribution could be to provide information on prices and contracts, and training programmes to farmers on how to use futures markets. In some cases, governments have acted as intermediaries between farmers and futures exchanges, with or without subsidy.

FINDINGS

The important findings of the study & the conclusion drawn these from are presented below.

Really commodity exchanges play a vital role for the growth of the agricultural sector Because agriculture provides 1/6th to GDP & employs largest no of labour force

around the country Commodity exchanges provide a basic future mechanisms which helps the hedgers,

producers, processors to minimise the risk. The commodity exchanges are now trying to establish a direct interaction platform

with the farmers The most important facility which provided by the commodity exchanges are saving

the farmers from unexpected future price fluctuation, moreover only for the betterment of the agriculture sector & provides various mechanisms like,

Price discovery Price risk management Venue for investment Facilitation of physical commodity trade

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Facilitation of financing to the agricultural sector

SUGGESTION & RECOMMENDATION

Regulatory Perspectives: -

What Should the Forward Markets Commission Focus On?

The FMC needs a new focus, a stronger role, and an improved day-to-day oversight of exchanges. The Forward Contracts (Regulation) Act, 1952, does not properly allow for many of these changes. Certain parts of the FR (C) Act would become superfluous if the changes mentioned below were adopted (e.g., the references to transferable delivery contracts), others need to be changed (e.g., the ban on options), and the FR (C) Act does not provide the FMC to take on necessary new roles, e.g. properly regulating brokerage activity. FMC may therefore consider the overhaul of the FR (C) Act, as long as this does not slow down those changes that are both necessary, and possible under the Act.

The FMC should allow Option trading in commodity market in India. The FMC has to take some steps to increase the awareness of future

commodity trading India. The FMC has to encourage the mutual fund companies and institutional investors to

invest in commodity market in India.

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The government has to allow FIIs to invest in commodity market in India in future market not in option.

The FMC should have concrete plan to stop “Dabba trading” in commodity market in India.

The FMC should increase the range of commodities in future commodities in commodity market in India.

To motivate the commodity business in India the FMC should come up with some rebate in taxes.

The FMC should increase the delivery centres of commodities in India. As commodity market is very potential for business, the angel co. should think about

various ways to attract the customers.

Trading Members: These members execute buy and sell orders in the trading ring of the exchange on their account, on account of ordinary members and other clients.

Trading-cum-Clearing Members: They have the right to trade and also to participate in clearing and settlement in respect of transactions carried out on their account and on account of their clients.

Institutional Clearing Members: They have the right to participate in clearing and settlement on behalf of other members but do not have the trading rights.

Designated Clearing Bank: It provides banking facilities in respect of pay-in, payout and other monetary settlements.

The composition of the members in an exchange however varies. In some exchanges there are exclusive clearing members, broker members and registered non -members in addition to the above category of members.

RECOMMENDATIONS

For developing-country Governments:

• Where a commodity exchange (or commodity exchanges) do not exist already, appraising the feasibility of establishing a commodity exchange (or commodity exchanges); determining whether to perform registration and trade facilitation services or to provide markets for cash, forwards, financing and/or futures instruments;

• Ensuring an overarching regulatory framework that upholds the transparency and integrity of commodity markets, protects market participants from unscrupulous practices, and effectively manages the risks that arise from market operations;

• Ensuring that the wider legal–economic framework provides legal certainty for exchange operations and is free of impediments that unduly restrict exchange functions, except where superseded by other fundamental or strategic national development imperatives;

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• Developing elements of physical infrastructure that support commodity exchange and market development – including information and communications technology, electricity, storage and logistics;

• Recognizing that a rules- or principles-based approach to regulation – as opposed to a discretionary or ad hoc approach – is an essential foundation for market development and exchange success;

For established exchanges in the developing world:

• Increasing awareness of the actual and potential development impacts arising from commodity exchange services in developing countries, and recognizing that pursuit of these impacts represents a win–win solution for both the exchange and the wider economy;

• Educating key stakeholders about exchange functions, operations, services and benefits – including market users, commodity sector participants, government, the media, academia and civil society;

• Deepening and broadening the exchange’s development impact through the innovative application of products, services, technologies and capacity-building programmes;

• Partnering with other entities that are well placed both to deliver exchange services to market users and also to enhance impact on market users, especially rural communities. Such entities may include farmer cooperatives/associations, government agencies, research institutes, extension agencies, financial and microfinance institutions, and civil society organization

CONCLUSION

Last but not the least what I found personally from the above study want to conclude that, India is the second largest populated and first agriculture oriented country whose more than 70 percentage of the population are depending upon agriculture. As far as the study concerned India have developed from both technologically as well as infrastructurally.

Nationalised commodity Exchanges like MCX, NCDEX, UCE, ACE, ICEX AND NMCE, with the developed features like robust technology & scalable infrastructure, the exchanges have added International 1st records to their history, but the most important thing is the proper communication and networking with the grass root level farmers, which can only be possible if Regional Commodity Exchanges actively participate in competition.

In most of the states the farmers are least aware of the commodity exchanges and other mechanisms. Basically the farmers of the Drought and flood affected states face a huge loss, which ultimately enhance the dearth of commodities and creates inflation.

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Therefore, the most important ingredient about the commodity exchanges is establishing a two way communication with the small holder farmers of the country. Which will facilitate the following:-

Stabilizing the prices-enabling information flow-wider participation Overall strengthening of financial markets -portfolio diversification -hedging risks Efficient markets-(financial/commodities)-financial stability economic

stability-political stability Commexes-essential function-efficient allocation of primary sector resources

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