Project Report on COMMODITY MARKET by takkarimpexindia



Chapter I -     Introduction

Chapter II -    Overview of Commodity Market-
 a) Concept
 b) Regulation of Commodity Markets
Chapter III -   Types of Commodity Exchanges/Markets in India

Chapter IV -    Functioning of Commodity Markets

Chapter V -     Types & Participants of Derivatives

Chapter VI -    International Link

Chapter VII - Answers to Key questions

Chapter VIII - Charts and Fact reports,
Data analysis and Interpretation
Chapter IX - Findings and Conclusions

Chapter X -      Bibliography
                                   CHAPTER I


Commodity market to reach $1.73 trillion by
2010: Assocham
  Rapid economic growth in recent years has made India one of the fastest growing
economies of the world. With higher incomes giving significant purchasing power to
over a billion strong population, demand for all kinds of goods and services are set to
grow rapidly.

With liberalization measures in place, commodity markets in India are likely to make an
overwhelming impact on the global commodity markets. Indian Corporate entities are
now in a position to hedge their price risks in the domestic and international commodity
exchanges. Online trading at the three nationwide multi-commodity futures exchanges
allows domestic hedging, while some of the established commodity-specific, exchanges
are gearing up to meet the needs of the expanding market. There is no doubt that the
commodities market in India is definitely in for a big spent offering enormous
opportunities of growth to investors, speculators, arbitragers and even big corporations in
manufacturing sector.
Majority of commodities traded on commodity exchanges world over are agro based.
Commodity Markets therefore are of great importance and hold great potential in case of
Agrarian Economies like India where the agriculture sector contributes 22% to the
country’s GDP and employs 70% of the working population.
Commodities market, contrary to the beliefs of many people, has been in existence in
India through the ages. India allowed future trading in commodities in 2003 and the
turnover at 22 Indian Exchanges rose 10.58 percent from the year ago to 40.66
trillion rupees for the financial year 2007/8. However the recent attempt by the
Government to permit Multi-commodity National levels exchanges has indeed given it, a
shot in the arm. As a result two exchanges Multi Commodity Exchange (MCX) and
National Commodity and derivatives Exchange (NCDEX) have come into being. These
exchanges, by virtue of their high profile promoters and stakeholders, bundle in
themselves, online trading facilities, robust surveillance measures and a hassle-free
settlement system. India’s commodity trade may expand over 40 % in the year to
march 2009, despite trading curbs on 8 commodities. Despite bans and fears of
commodity transaction tax, the total turnover of 22 commodity exchanges in the country
has risen by 27.10% to
Rs.1,91,663 crore from previous year.
Total value of trade in all gold contracts stood at Rs.58364 crore, while crude oil and
silver recorded Rs.58197 crore and Rs.30705 crore respectively during 1-14 June, 08
The Indian commodity market is expected to grow by 30 percent and will reach
Rs.74,156 billion ($1.73 trillion) in volume by 2010, according to a study by the
Associated Chambers of Commerce and Industry of India (Assocham).
Assocham found that the Indian commodity market expanded 50 times in a
span of five years from Rs.665.3 billion in 2002 to Rs.33,753 billion in 2007
as people’s participation in such trade continued to grow.

The futures contracts available on a wide spectrum of commodities like Gold, Silver,
Cotton, Steel, Soya oil, Soya beans, Wheat, Sugar, Channa etc., provide excellent
opportunities for hedging the risks of the farmers, importers, exporters, traders and large
scale consumers. They also make open an avenue for quality investments in precious
metals. The commodities market, as it is not affected by the movements of the stock
market or debt market provides tremendous opportunities for better diversification of
risk. Realizing this fact, even mutual funds are contemplating of entering into this market.



        Markets have existed for centuries in India and abroad for selling and buying of
goods and services. The concept of market started with agricultural products and hence it
is as old as the agro products or the business of farming itself. Traditionally, the farmers
used to bring their produce to a central place (called Mandi\Bazar) in a town\village
where grain merchants\traders would also come and buy the produce and transport,
distribute it to other markets.

In a traditional market, agriculture produce would be brought and kept in the market and
the potential buyers would come and see the quality of the produce and negotiate with the
farmers directly for a price that they would be willing to pay and the quantity that they
would like to buy. The deals were then struck once mutual agreement was reached on the
price and the quantity to be bought / sold.

In the system of traditional markets, shortages of a commodity in a given season would
lead to increase in price for the commodity or oversupply on even a single day (due to
heavy arrivals) could result into decline in prices sometimes below the cost of production
to the farmers. Neither the farmers nor the food grain merchants were happy with this
situation since they could predict what the prices would be on a given: ay or in a given
season. As a result many times me farmers were required to return from the market with
their produce since it did not fetch reasonable price and since there were no storage
facilities available near the market place. It was in this context that farmers and food
grain merchants in negotiating for future supplies of grains in exchange of cash at a
agreeable price. This type of agreement was acceptable to both parties since the farmer
would know how much he would be paid for his produce, and the dealer would know his
cost of procurement in advance. This effectively started the system of commodity market,
forward contracts, which subsequently evolved to futures market.

      “A commodity is a product having commercial value, which can be produced,
bought, sold and consumed. Commodities are basically the products of primary sector of
an economy. Primary sector of an economy is that part of the economy, which is
concerned with agriculture and extraction of raw material.”

In order to qualify as a commodity, an article or a product has to meet some basic
characteristics. These are listed below:

a) The product has not gone through any complicated manufacturing activity, though
simple processing (like mining, cropping, etc.) is not ruled out. In other words, the
product must be in a basic, raw, unprocessed state. (For instance wheat is a commodity;
but wheat flour and bread are not commodities). There are of course some exceptions to
this rule e.g. in case of metals and products like sugar.

b) Major consideration while buying a particular commodity is its price (since there is
hardly any difference in quality from seller to seller)

c) The product has to be fairly standardized in the sense that there cannot such
differentiation in a product based on its quality (e.g. Rice is rice though different varieties
of rice can be treated as different commodities and hence traded as separate contracts).
d) Prices of the product are determined by market forces, demand ‘and supply and they
undergo rapid changes / fluctuations (price must fluctuate enough to create uncertainty,
which means both risk and potential profit / loss for buyers and sellers)

e) Usually there would be many competing sellers of the product in the market.

f) The product should have adequate shelf life so that delivery of a futures contract can
be deferred.

Market is a place where buyers and sellers meet to transact a business i.e. for exchange of
goods or services for a consideration, which is usually money. Markets are usually and
traditionally at a place or location, where buyers and sellers could meet. However, in
modern world, buyers and sellers on telephone lines or on Internet can transact the
business. Hence, in today’s world markets need not Exist in physical form as long as the
exchange of goods or services take place for a consideration.
Commodity market is therefore logically a market where commodities or commodity
derivatives are bought or sold for a consideration. It is thus an important constituent of
the financial system for any country.
Existence of a vibrant, active and liquid commodity market is normally considered as a
healthy sign of development of any economy. Commodity markets quite often have their
centers in developed countries though the primary commodities in many cases are
produced in developing countries. Birth and growth of transparent commodity market is
thus a sign of development of an economy. This has particular significance in case of
countries like India, which produce agro-products as well as a number of other basic
commodities, which are traded on commodity exchanges world over.
Commodity futures in particular help price discovery and assist investors in hedging their
risks by taking positions in commodities and exploiting arbitrage opportunities in the

India has a long history of commodity futures trading, extending over 125 years. Still,
such trading was interrupted suddenly since the mid seventies and the fond hope of
ushering in an elusive socialist pattern of society. As the country embarked on
economic liberalization policies and signed the GATT agreement in the early
nineties, the government realized the need for Futures trading to strengthen the
competitiveness of Indian agriculture and the commodity trade and industry.
  Further trading began to be permitted in several commodities, and the ushering
in of 21 century saw the emergence of new National Commodity Exchanges with
countrywide reach for trading in almost all primary commodities and their
The modern commodity markets have their roots in the trading of
agricultural products. While wheat and corn, cattle and pigs, were
widely traded using standard instruments in the 19th century in
the United States, other basic foodstuffs as soybeans were only
added quite recently in most markets.
For a commodity market to be established, there must be very broad consensus on
the variations in the product that make it acceptable for one purpose or
another.The economic impact of the development of commodity markets is hard to
over-estimate. 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
Commodity includes all kinds of “goods” (every kind of movable property other
than actionable claims, money and securities) defined by FCRA (Forward
Contracts Regulation Act, 1952). It includes Agro and non agro products.
At present all goods and products of agricultural (including plantation ), minerals
fossil origin, precious (gold & silver) and nonferrous metals; cereals and pulses,
ginned and unginned cotton, oil seeds, raw jute, sugar and gur, potatoes and
onions, coffee and tea, rubber and spices etc.

The system includes following elements:

a) Buyers / Sellers / Users / Producers: Farmers, Farmer’ Cooperatives, Metal (Precious
& other) producers / suppliers / stockiest, APMC Mandies, Traders, Brokers, Members of
Commodity Exchanges, State Civil Supply Corporations, Hedgers, Speculators and
arbitragers (these could include corporate houses, FMCG Companies, etc.)

b) Logistics Companies: Storage and Transport Companies/ Operator Quality Testing
and Certifying Companies, Valuers, etc.

c) Markets and Exchanges: Spot Markets (Mandies, Bazaars, etc.) and Commodity
Exchanges (National Level and Regional level),
d) Support agencies: Depositories / De-materializing agencies, Central and State
Warehousing Corporation and Private sector warehousing companies.

e) Lending Agencies: Banks, Financial Institutions.


      History of trading in commodities in India is quite old. Even Kautilya’s
‘Arthashastra’ makes a mention of commodity markets in India, which dates back to
Maurya dynasty.

In India there used to be a class called “Mahajans” who performed important role in trade
and banking. They had social influence and were able to enforce integrity and honesty in
trade and used to settle matters of dispute. The system continued till middle of nineteenth


The history of futures trading in commodities in India is almost as old as that in the US. It
has, however, passed through a turbulent past. India’s first organized futures market was
the Bombay Cotton Trade Association Ltd., which was set up in 1875. Futures trading in
oilseeds started with the setting up of Gujarati Vyapari Mandali in 1900. Gold futures
trading began in Mumbai in 1920. During the first half of the 20th century, there were
several commodity futures exchange trading in jute, pepper, turmeric, potatoes, sugar, etc

India’s history of commodity futures has been however turbulent. This is evident
from the following historical developments:
   Trading in forwards and futures became difficult as a result of price controls by the
    Government in mid 1940s.
   Options were banned in cotton in 1939 by the Govt. of Bombay to curb widespread
   The Forward Contract Regulation Act was passed in 1952. This put restrictions on
    futures trading.
   During 1960s and 70s, Govt. of India suspended trading in several commodities like
    jute, edible oil seeds, cotton, etc. since the Govt. felt that futures markets were
    causing excessive increase in prices of commodities.
   Govt. offered to buy agricultural produce at Minimum Support Price (MSP), had
    virtual monopoly on storage\transportation\ distribution of agriculture produce along
    with ban on futures and options trading. All these weakened the agro commodity
    markets in the country.

    The Government appointed four main committees (Shroff Commodity in 1950,
    Datwala Committee in 1966, Khusro Committee in 1980 and Kabra Committee in
    1994) to go into the details of Forward and Futures Trading perspectives in Indian

    It was Kabra Committee, which really assessed the scope for forwards and futures
    trading in commodities and recommended steps to vitalize the futures trading in
    India, which was then at the initial stages of its liberalization of economy.

    The Kabra Committee made significant contribution to the cause of commodity
    trading in the country and is in a way responsible for today’s modern system of
    commodity trading with three national level and 22 other commodity exchanges /
    associations in operation. The recommendations of this Committee finally led to the
    development of futures trading in India with the establishment of:-

   National level Commodity Exchange (NCDEX)
    - Multinational Commodity Exchange (MCX)
    - National & Multinational Commodity Exchange (NMCE)



     Investment in commodity markets has been very popular and rewarding for
investors in U.K. and U.S.A. For investors looking for diversification beyond
stock markets, commodity markets offer another investment option. The
commodity markets activity, volume and players multiplied in the recent past. In
India, although the trading in commodity markets and commodity exchanges is
booming, it has to cross few more hurdles like permitting Fills, banks and other
financial institutions to operate in these markets. The reason why investors may
look for opportunities in commodity markets may take us to the basic tenets of risk
and return theory viz. expected return and risk. Normally it is a risk - reward
relationship. The higher the risk higher is the expected return and vice versa.

Commodity markets, like any other markets, have their own limitations too. Some
of them are:
Commodity market prices can fluctuate wildly depending on the factors, which are
sometimes beyond human control (floods, storms, natural calamities like earthquakes,
etc. can create temporary shortages of commodities and hence result in drastic changes in
their prices in a very short time).
Forward / futures trading involve a passage of time between entering into a contract and
its performance making thereby the contracts susceptible to risks, uncertainties, etc.
Hence, it is necessary that the investors/players in the commodity markets understand the
functioning of commodity markets, mechanism of commodity Exchanges properly and
study the factors that can affect the commodity prices carefully.


      The fact that the benefits of futures markets accrue only in true and fair competitive
conditions and transparency of operations, the regulation is needed to create such
competitive conditions. Many times, unscrupulous participants are in a position to use
leveraged commodity contracts for manipulating prices if there were no regulations. This
in turn can have undesirable influence on the spot prices; there is an affecting interest of
common man or society at large.
In the absence of such a system, a player in the commodity market could default which in
turn could lead to a chain reaction and financial crisis in a futures market in general and
in a commodity exchange in particular.

Regulations are also necessary to ensure transparency and fairness in the entire
system including trading, clearing, settlement operations and management of the
exchange. This is useful in protecting and promoting the interest of various
stakeholders, particularly non-member users of the market and retail investors or
“common man”.

At present, there are three tiers of regulations of forward & futures trading system in
India, namely, Government of India, Forward Markets Commission and Commodity
Exchanges. The Commodity Exchanges in India are governed and regulated under the
Forward Contracts (Regulation) Act, 1952 and the rules framed there in.
The FC® Act, 1952 prohibits options in commodities. It is reported that the Government
is actively considering removal of this restriction and allow options to be traded on
registered national commodity exchanges (to start with) and other Associations.

For the purpose of forward contracts in certain commodities, forward trading can be
allowed by notifying those commodities U/S 15 of the Act; notifying these commodities
u/s 17 of the Act can prohibit forward trading in certain other commodities.

The FC® Act, 1952 provides that the FMC shall consist of at least two but not more than
four members appointed by the Central Government. A person nominated by the Central
Government is also to be the Chairman of the FMC.

Legal and regulatory provisions for customer protection:-
a) In any country or markets, it is extremely necessary to make regulatory provisions so
that the customer is protected adequately from frauds/manipulation by large
b) The F.C® Act provides that the member of the Exchange cannot appropriate client’s
position, except when a written consent is taken within three days’ time.
c) It has asked many commodity Exchanges to switch over to electronic trading, clearing
and settlement, which is more customer-friendly. This ensures free and fair-trading with
complete transparency.

d) It has also recommended simultaneous reporting system for the Exchanges following
open out-cry system.
The Forward Markets Commission (FMC), the regulatory body set up under the
Forward Contracts (Regulation) Act, 1952, to monitor forward trading in various
commodities and permit brokers in the securities market to take up membership of
commodity exchanges and engage in the business of intermediation in the commodity
markets as well as in any other body corporate organizing futures trading in commodities.
   The Forward Markets Commission was set up in 1953 under the Ministry of
    Consumer affairs, Food and Public Distribution under the Forward Contracts
    (Regulation) Act, 1952. It is the regulating authority for all Commodity Futures
    Exchanges in India. It is responsible for regulating and promoting futures/ forward
    trade in commodities. The Forward Markets Commission-is located in Mumbai
    with a regional office in Kolkata.


                               Commodity Exchange

            National                                             Regional

NCDEX                      MCX                       NBOT              20 Regional Exchages

a) FMC advises Central Government in respect of grant of recognition or withdrawal of
recognition of any association.

b) It keeps forward markets under observation and takes such action in relation to them as
it may consider necessary, in exercise of powers assigned to it.

c) It collects and publishes information relating to trading conditions in respect of goods
including information relating to demand, supply and prices and submits to the
Government periodical reports on the operations of the Act and working of forward
markets in commodities.

d) It makes recommendations for improving the organization and working of forward

e) It undertakes inspection of books of accounts and other documents of
recognized/registered Associations.
f) FMC performs such other duties and exercise such other powers as may be assigned to
it by or under the Forward Contracts (Regulation) Act, 1952 or as may be prescribed by
the Government of India.



There are two types of exchanges of commodity market in India- MCX & NCDEX:-

   (A)   MCX
MCX (Multinational Commodity Exchange) is an independent and de-mutulised
multi commodity exchange. It was inaugurated on November 10, 2003 by Mr.
Mukesh Ambani, Chairman and Managing Director, Reliance Industries Ltd. and
has permanent recognition from the Government of India for facilitating online
trading, clearing and settlement operations for commodities futures market across
the country. Today MCX features amongst the world’s top three bullion exchanges
and top four energy exchanges.

Presently the average daily turnover of MCX is in the range of Rs.15,000
crore to Rs. 17,000 crore. On 24th March, 09- MCX recorded all time high
turnover of Rs. 32,000 crore. MCX holds more than 55% market share of the
total trading volume of all the domestic commodity exchanges. The exchange has
also affected large deliveries in domestic commodities, signifying the efficiency of
price & discovery.

Being a nation-wide commodity exchange having state-of-the-art infrastructure,
offering multiple commodities for trading with wide reach and penetration, MCX
is well placed to tap the vast potential poised by the commodities market.

                           (B) NCDEX
National Commodity & Derivatives Exchange Limited (NCDEX) is a
professionally managed on-line multi commodity exchange. The shareholders
are :

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

Other shareholders: Canara Bank, CRISIL Limited (formerly the Credit Rating
Information Services of India Limited), Goldman Sachs, Intercontinental
Exchange (ICE), Indian Farmers Fertiliser Cooperative Limited (IFFCO) and
Punjab National Bank (PNB).

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

NCDEX is a public limited company incorporated on April 23, 2003 under the
Companies Act, 1956. It obtained its Certificate for Commencement of Business
on May 9, 2003. It commenced its operations on December 15, 2003.

NCDEX is a nation-level, technology driven de-mutualised on-line commodity
exchange with an independent Board of Directors and professional management -
both not having any vested interest in commodity markets. It is committed to
provide a world-class commodity exchange platform for market participants to
trade in a wide spectrum of commodity derivatives driven by best global practices,
professionalism and transparency.
NCDEX is regulated by Forward Markets Commission. NCDEX is subjected to
various laws of the land like the Forward Contracts (Regulation) Act, Companies
Act, Stamp Act, Contract act and various other legislations.

NCDEX is located in Mumbai and offers facilities to its members about 550 centres
throughout India. The reach will gradually be expanded to more centres.

On 23rd Jan, 09 –Daily turnover volume at the NCDEX stood at Rs. 24.33 billion
(one way) with 453 members (2067 users).

NCDEX currently facilitates trading of 57 commodities -

Agriculture –
Barley, Cashew, Castor Seed, Chana, Chilli, Coffee - Arabica, Coffee - Robusta, Crude
Palm Oil, Cotton Seed Oilcake, Expeller Mustard Oil, Groundnut (in shell), Groundnut
Expeller Oil, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Indian Parboiled
Rice, Indian Pusa Basmati Rice, Indian Traditional Basmati Rice, Indian Raw Rice,
Indian 28.5 mm Cotton, Indian 31 mm Cotton, Masoor Grain Bold, Medium Staple
Cotton, Mentha Oil, Mulberry Green Cocoons, Mulberry Raw Silk, Mustard Seed,
Pepper, Potato, Raw Jute, Rapeseed-Mustard Seed Oilcake, RBD Palmolein, Refined Soy
Oil, Rubber, Sesame Seeds, Soyabean, Sugar, Yellow Soybean Meal, Tur, Turmeric,
Urad, V-797 Kapas, Wheat, Yellow Peas, Yellow Red Maize.

Aluminium Ingot, Electrolytic Copper Cathode, Gold, Mild Steel Ingots, Nickel
Cathode, Silver, Sponge, Iron, Zinc Ingot.

Energy- Brent Crude Oil, Furnace Oil.



There are three types of regulated markets in India:
   Spot Markets: Direct purchases for immediate consumption.
   Futures and Forward Markets: Agreements new to pay and received deliver
    later. Forwards and Futures reduce the risks by allowing the trader to decide a
    price today for goods to be delivered in the future.
   Derivatives Market: Is purely financial transactions based on physical trading.

The system includes following elements:

•      Hedgers, Speculators, Investors & Arbitragers.

•      Producers – Farmers

•      Consumers, refiners, food processing companies, jewelers, textile
mills, exporters & importers.

The biggest benefits of commodity trading will accrue to commodity traders,
farmers and companies dealing in commodity-based products (like wheat and
metals) by allowing them to hedge their risks. Then there are speculators, who are
in the game only to make money out of the volatility in prices. But unlike in
stocks, few retail investors are expected to trade in commodity futures since it
requires a fair bit of expertise. Even those who do will probably restrict
themselves to trading in gold or silver.


Direct purchases and sales are achieved in spot markets normally for immediate
consumption. Buyers and sellers meet ‘‘face-to-face” and deals are struck. This is
akin to “over the counter (OTC)” market where there is no need for organization
like a commodity change. These are traditional markets c1assic example of a spot
market is a Mandi where food grains are sold in bulk. Farmers would bring their
produce to this market and food grain merchants/traders would purchase the
produce “on the spot” and settle the deal in Spot markets thus call for immediate
delivery of goods/services against actual payment.


A future trading performs two important functions of price discovery and price
risk management with reference to the given commodity. It is therefore useful to
all the segments of the economy and particularly to all the constituents of the
Commodity Market System.

Benefits to Consumer & Users:-

a) It is useful for the consumer because he gets an idea of the price at which the
commodity would be available at a future point of time. He can do proper costing
and also cover his purchases by making forward contracts. Predictable pricing &
transparency is an added advantage.

b) Hedging their risks if they are using some of the commodities as their raw
materials in particular can benefit corporate entities. They can hedge the risk even
if the commodity traded does not meet their requirements of exact quality /
technical specifications.

c) Futures trading is very useful to the exporters as it provides an advance
indication of the price likely to prevail and thereby help the exporter in quoting a
realistic price and thereby secure export contract in a competitive market

Benefits to Investors:-

a) High financial leverage is possible in commodity markets. In case of stocks, an
investor needs to put up the full amount of the stock value to buy the stock. With
commodities, you control commodity futures contracts with a margin, which is
usually between 5% to 10% of the value of the commodity. Investor can
effectively hedge the risk in price fluctuations of a commodity.

b) Investor can also hedge his risk on investments in stocks and debt markets since
commodities provide a choice and provide one more alternative avenue in the
investment port for. It may be mentioned here that the Commodities are less
volatile compared to equity market, though more volatile as compared to G-Sec’s.

c) Commodity markets are extremely transparent in the sense that the
manipulation of prices of a commodity is extremely difficult. Given the
knowledge of the commodity, the investor can be thus clear about what he can
expect in foreseeable future.
d) Business involves just you and the market.

e) With the rapid spread of derivatives trading in commodities, this route too has
become an option for high net worth and savvy investors to consider in their
overall asset allocation.

f) The fact that the stock indices and commodity indices are not correlated
implies that the commodity markets can be used                    as   an   effective
diversification tool, where investors can park their money.

g) A look at the performance of the commodities markets during the last year
shows that the positive movement was witnessed during most parts of the year.

Benefits to the producers:-

It is useful to the producer because he can get an idea of the price likely to prevail
at a future point of time and therefore can decide between various competing
commodities, the best that suits him.

Farmers for instance, can get assured prices, decide on the crop that they want to
take and since there is transparency in prices, he can decide when and where to

Benefits to the Economy:-

As the constituents of the commodity market system get benefited Indian economy
in turn is also expected to gain a Lot. Growth in the commodity markets implies
that there could be tremendous benefits to the Indian economy in terms of business
generation and employment opportunities.

General benefits & other advantages for all players: -

a) Improved Product Quality: Since the contracts for commodities are
standardized, it becomes essential for the producers / sellers to ensure that the
quality of the commodity is as specified in the contract.

b) Credit Accessibility: Buyers and sellers can avail of the bank finances for
trading in commodities. More and more banks are likely to fall in line looking at
the huge potential that commodity market offers in India. Commodities are less
volatile compared to equity market, but more volatile as compared to government
DERIVATIVE- A derivative can be defined as “a financial instrument/
contract, which derives its value from the underlying asset (i.e. the asset
mentioned in the contract). The underlying asset could be (quite often the price of
traded assets) equity, commodity, currency/foreign exchange or real estate or any
other asset. Depending on what the underlying asset is, the derivative could be
named differently.

Thus a Commodity derivative is “a contract to either sell or buy a commodity
at a certain time in future at a price agreed upon at the time of entering into
such a contract.”
Derivatives are used both in financial and commodity markets. The numbers of
derivative products used in financial markets are more diverse than those in
commodity markets. However, major derivative products in the commodity
markets are basically future, options and options on futures.
Derivatives have now assumed great importance in the world of finance. Different
types of derivative have been developed and actively traded on not only stock
exchange but also on commodity exchange and “over the counter” markets.
Futures contracts are now traded very actively all over the world.

Derivative contents have several              variants    .The    most    common
variants of commodity are :-


    Forward markets are markets where delivery takes place some time in the
future, unlike spot markets that call for immediate delivery. These advance sales
help both buyers and sellers who can then resort to long term planning.

A forward contract is one of the simplest forms of derivatives. It is an agreement
to buy or sell an asset (commodity) at a certain time in future for a certain price
mentioned in the contract. It is different from the ‘spot contract’, which is an
agreement to buy or sell the asset ‘on the spot, i.e. today/immediately.

A forward contract is usually traded in over the counter (OTC) mode. The forward
contract can be between a manufacturer of a product (who want to hedge his risk
lest the price rises in future) and a producer/supplier of raw material (who wants to
hedge his risk by ensuring minimum price lest the price declines in future) used by
Under forward contracts (regulation) act, 1952, all the contracts for delivery of
goods, which are settled by payment of money difference or where delivery and
payment is made after a period of 11 days, are forward contract.

Forward contracting solved the basic problem of arranging long-term transaction
between buyers and sellers but did little to manage the financial risk that occurred
with sudden or unforeseen price changes resulting from crop failures, inadequate
storage facilities, transportation bottlenecks, or other economic or unforeseen
factors like floods or earthquakes.

Forward contract can be of two types:
•      Non Transferable Specific Delivery (N.T.S.D.) Contracts

•      Transferable Specific Delivery (T.S.D.) Contracts

Non Transferable Specific Delivery (N.T.S.D.) Contracts:

It is an enforceable bilateral agreement under which the terms of contract are
customized and the performance of the contract is by giving specific delivery of
goods. Transferring delivery order, railway receipt, bill of lading, warehouse
receipts or any other documents of title to the goods cannot transfer the rights or
liabilities under this contract.

Transferable Specific Delivery (T.S.D.) Contracts:

It is an enforceable customized agreement where unlike non transferable specific
delivery contracts, the rights or liabilities under the delivery order, railway receipt,
bill of lading, warehouse receipts or any other documents of title to the goods are
transferable. The contract is performed by delivery of goods by first seller to the
last buyer. The parties, other than the first seller and the last buyer, perform the
contract merely by exchanging money differences.

Futures markets have existed for more than 250years. They basically started with
agricultural products. Major objective of these markets was to help farmers, and
grain merchants to improve their marketing and purchasing practices.


Although futures contracts are part of the commodity markets, they are not part of
the cash market. It is because, that though the underlying in the. futures contracts,
is the cash commodity, the subject 01 trades on the futures exchanges are futures
contracts and not the physical commodity. Thus, the cash market is the physical
goods or commodity market in which everybody normally trades. The term
‘Cash’, accordingly refers neither to the method of payment nor to the time of
payment. The cash market therefore refers to the actual commodity like gold,
copper, sugar, oil etc.


Futures contracts are derivative instruments. Over a period of time forward
markets laid the foundation for futures contracts. The main difference between
forward contract and a futures contract is the way in which they are negotiated.
For forward contracts, terms like amount, quality, delivery date and price are
discussed in person between the buyer and the seller and are thus unique in each
case. In futures contracts however, all terms are standardized except price, which
is discovered through the interaction of supply and demand in a centralized
marketplace or exchange.Presently, futures contract is the only product used in the
derivative segment of Indian commodity exchanges.

“A commodity futures contract is an agreement between two parties, to buy or sell
a specified quantity and defined quality of a commodity, at a certain time in future,
at a price agreed upon at the time of entering into the contract on a commodity


The need for a futures contract and its trading through the exchange arose mainly
due to the hedging function that it can perform for both buyers as well as the
Commodity markets like any other financial instrument, involve risks associated
with frequent price volatility. The prices volatility in general can be attributed
to the following two reasons:

a) Consumer preference: due to change in preferences of customers, the demand
for a commodity could suddenly increase or decrease affecting its price. However,
their impact on prices would normally be slow and quite often short lived. This is
also because the manufacturers, dealers, stockiest and wholesalers get sufficient
time to adjust their inventories.

b) Changes in supply: these are abrupt and unpredictable and bring about wild
fluctuations in prices. This is more likely in case of agricultural commodities
where weather plays a major role in determining the success or failure of a
particular crop.

The futures markets tries to reduce such risk through the mechanism that is
called hedging.


•      Hedging with a view to transfer the price risk;

•      Price discovery through a large number of transactions and players;

•      Maintenance of buffer stock and better allocation of resources;

•      Reduction in inventory requirement and thereby reduction in cost of carry;
•      Price stabilization through balanced demand and supply positions;

•      Helps raise ban finance through transparency and flexibility coming with
futures contracts;


Thus commodities futures contracts will always have a fixed period, like one
month, three month etc. as the life of the contract. The life of the may be different
in different commodity exchanges. At the end of contract period, the futures
contract would expire and the concerned parties will have to give and receive
delivery of the commodity mentioned in the contract. Both the time and the places
of delivery are prescribed by the exchange and this will form part of the futures
There is usually a time difference between futures contract and the delivery
period. As a. result of this intervening period, the cash price for a commodity
would be different home its futures price mentioned in the contract.

    An option is the right to buy or sell a particular commodity or a currency or an
asset for a limited period at a predetermined price. An option contract gives the
buyer (holder) of the option the right to perform under the contract or do nothing
as it pleases him. It means that the buyer of the option contract has a right or
privilege of one-way bet. Thus, the basic fact about an option is that it is a one-
way bet. However this privilege of one-way bet comes with a cost to the buyer of
the option. That cost is termed as premium. You pay a price (premium) and buy an
option. The premium has to be paid to the seller (writer) of the option, up-front i.e.
at the time of entering into option contract. Options are derivative products.

“Options are contracts under which the buyer of option contract has a right
without obligation to perform under the contract for payment of a price,
called premium. Option contracts provide a right or privilege to buy or sell
some thing, say a commodity, at a predetermined price over the contract
period. The right or privilege is available to the option buyer only upto the
expiry dates of contract.”

Options are now traded on many exchanges throughout the world. Option
contracts are available on commodities, currencies, stocks, metals, oil etc. Until
1973, it was possible to buy an option, but it was not really possible to trade it.
Exchange traded options were first introduced in 1973 on stocks by the Chicago
Board Options Exchange (CBOE). The single most important innovation of CBOE
was to set up standard option prices and standard expiration dates.
The Chicago Board Options Exchange was followed by many of the American
Stock exchanges, such as Philadelphia Stock Exchange, Pacific Stock Exchange.
Today option contracts are traded in London International Financial Futures
Exchange (IIFFE), Singapore International Monetary Exchange (SIMEX),
Chicago Board of Trade CBOT) and many other exchanges. In India, currently
stock options are traded in Stock Exchanges. Currency options are written by
banks as the over-the-counter (OTC) product but exchange traded options on
commodities are not available in India. However it is a matter of time, huge
exchange traded options on commodities are introduced in commodity exchanges
like Multi Commodity Exchange.


Commodity options are options with a commodity as the underlying. For instance,
a gold options contract would give the holder i.e. the buyer of option, the right to
buy or sell a specified quantity of gold at the price specified in the contract
irrespective of the price ruling in the market at the time of exercising the option.

Option markets are very divers and they have their own jargons. As such
understanding of options requires a grasp of institutional details and terminology
employed in option markets.

There are two basic types of options known as call options and put options:-

• Call option: A call option gives the buyer (holder) the right but not the
obligation to buy an asset by a certain Rate for a certain price.

•       Put option: A put option gives the holder the right but not the obligation to
sell an asset by a certain date for a certain price.

Value of Call and Put Options:-

The value of a call option generally increases as the current spot price of the
commodity, the time to expiration of the contract and the volatility increases.
Conversely, the value of a call option decreases as the strike price increases and
time to expiration and volatility of market price decreases.

The value of a put option generally increases as the strike price, time to expiration
and the volatility of the commodity price increases. The value of a put option
decreases as the current market price increases and the time to expiration and
volatility of the commodity price decreases.


Option contracts are a useful technique when the buyer or holder of option desires
to limit his downside risk (loss) while keeping the upside gain open to unlimited
level. Under all cases, the maximum loss for option holders will be limited to the
extent of option premium. This happens when the holder does not deal at the strike
price with the option writer since he may find the ruling spot price in the market is
more favorable or advantageous to him.

However at the same time his upside gain may be enormous depending upon the
price movements. Of course, this price movement makes his strike price more
favorable as compared to market price. Thus a long call at the strike price of
Rs.2000 per quintal may lead to huge profit, if market price keeps on rising
beyond the strike price enabling the option buyer to buy the commodity from the
option writer at the strike price. We must remember that the option buyer’s
opportunity to make profit under the circumstances is limited to the extent of
contracts bought. Thus unlike forward contracts, option contracts provide
opportunity to limit losses or make gains.

There are mainly three participants of derivatives:-

a) Hedgers

b) Speculators

c) Arbitrages


   a) HEDGING:-

   Hedging means taking a position in the futures market that is opposite to a
   position in the physical market with a view to reducing or limiting risk
   associated with unpredictable changes in prices.

   Hedging is a strategy usually adopted by companies who would be using
   tradable commodities as the raw materials for their products / processes.
   Hedging strategies could be different for buyers and sellers.
For instance if the Hedger is going to buy a commodity in cash market
(because he needs it as a raw material) at a future date, he buys the future
contract now and when he actually buys the commodity in the physical market,
he squares off the futures contract to reduce or limit the risk of the purchase

Similarly if the hedger is planning to sell a commodity in the cash market in
future, he instead sells the futures contract for that commodity now and when
he actually sells the commodity in the physical market in future, he squares off
his futures contract to reduce or limit the risk of the selling price.

Buying Hedge Or Long Hedge:-

Buying hedge means buying futures contracts to hedge cash Position. Buying
hedge is also known as Long Hedge. Strategy of buying hedge is normally
used by the Consumers, Dealers, Manufacturers, etc. who have taken or would
be taking exposure for that commodity in the physical market.

Buying Hedge is used in following cases:

•   To protect against possible rise in the prices of raw materials.

•   To replace inventory at a lower prevailing cost and

•   To protect uncovered sale of finished products.

Buying Hedge is necessary for the purpose of protecting against increase in
prices on the spot market of a commodity~ which has been already sold but not
purchased yet. This is a very common practice among the exporters and
importers. They would sell commodities at an agreed price for delivery in
future. If the commodity is not still in possession and a commitment has been
given for sales, the forward delivery is considered as uncovered.
Long hedgers also include traders and processors / manufacturers who have
made formal commitments to deliver the specified amount of raw materials or
processed / manufactured products at a later date at a price currently agreed
upon but do not have the stocks of raw materials necessary to fulfill their
commitments for forward deliveries.

Selling Hedge or Short Hedge:-

Selling Hedge is also known as short hedge. Selling hedge means selling
futures contract to hedge a cash position. This strategy is usually adopted by
users (manufacturers/ fabricators, who need the commodity as raw material),
dealers, consumers, etc. who have taken or would be taking an exposure to the
commodity in the physical market since they need it for their own consumption
or rely on it for their business.

Following are the uses of selling hedge strategy:-

• To protect the price of products for which sales commitment has been

•   To protect the inventory not covered by forward sales.

•   To protect prices of estimated production of finished products.

Short Hedgers are merchants or processors who build inventories of a
commodity by purchasing it in the spot market and who simultaneously sell an
equivalent amount (either less or more depending on the anticipated rise or
decline in spot prices) in the futures market. Hedgers in this case are said to be
long in their spot transactions and short on their futures transactions.

Rolling over the hedge positions:-

If the time required for a hedge position is later than the expiry date of the
Futures contracts, the hedger can decide to roll over the position i.e. he can
close out the current position in futures contract and simultaneously take a new
position in a futures contract with a later date of expiry.

If a person wants to reduce or limit the risks due to fall in prices of the material
to be sold after say six moths and if the futures contracts have ‘expiry of two
months, then he can roll over his short hedge position three times i.e. till the
date of physical sale. Every time the hedge position is rolled over, there is a
possibility if basis risk but at the same time it limits or reduces the price risk

Advantages of Hedging:-

a) Hedging reduces or limits the price risk associated with the physical
possession of commodity.

b) Hedging is used to protect the price risk of a commodity for long periods by
rolling over positions on futures contracts adequately.

c) Hedging makes business planning more flexible without interfering with the
regular/ routine business operations of a company.
d) Hedging can facilitate low cost financing.

Limitations of Hedging:-

a) Due to standardized nature of futures contracts, it is not possible to
completely eliminate the price risk associated with the physical commodity.

b) Because of basis risk, hedging may not provide full protection against
adverse price movements.


Speculation means anticipating price movement of a commodity and
accordingly making profits by selling and buying a commodity at
appropriate / opportune times. Main objective of speculation in commodity
futures market is to take risks and profit from anticipated price changes in the
futures of that asset / commodity. A speculator will buy futures contracts of a
commodity (long position) only if he is anticipating the prices of that
commodity and hence its futures to rise in the future. On the other hand a
speculator will sell futures contracts (Short position) if he is anticipating that
the commodity prices are likely to decline in future.

Long Position In Futures:-

Long position in a commodity futures contract by a person who does not have
any intention to take delivery of the commodity or does not have any exposure
to the cash market means a speculative transaction. Long position in
commodity futures contract for speculative purposes implies that the buyer of
the contract is bullish on the commodity i.e. he is expecting that the price of
the said commodity would continue to rise before the expiry of the contract so
that he/she can profit by squaring off his/her position before the expiry date. If
the price of, the commodity futures contract increases before the expiry.

The holder of the contract (speculator) would make profit by squaring off the
contract before its expiry. If the prices of the futures contract decline, the
speculator stands to incur loss on squaring off the contract.

Short Position in Futures:-

Short Position in a commodity futures contract by a person who does not have
any intention to give delivery of the commodity or does not have any exposure
to the cash market means a speculative transaction. Short position in
commodity futures contract for speculative purposes implies that the buyer of
the contract is bearish on the commodity i.e. he is expecting that the price of
the said commodity would continue to decline before the expiry of -the
contract so that he / she can profit by squaring off his/her position before the
expiry date.

It the price of the commodity futures contract declines before the expiry
date, the holder of the contract (speculator) would make profit by
squaring off the contract before its expiry. If the prices of the futures
contract increase, the speculator stands to incur loss on squaring off the

The Role Of Speculation In Futures Markets:-

One of the prominent concerns about the functioning of the commodity futures
Markets and its impact on common man / masses is speculation. Speculation
provides the depth and flow that is key to the functioning of a futures market.
There will be very high liquidity in the futures market if firms after entering a
trade to buy or sell have lo wait till a suitable bid or offer arose since the
availability of commodities in physical may not always necessarily match with
the firm’s decision lo buy or sell commodities.

There is also misconceptions about speculation being similar to gambling.
Athough the intention of both the speculators and gamblers is to profit by
taking risks, the gambler creates risk where none exists, the speculator on the
other hand takes risk that is already prevalent in the market and as a result
plays an economically significant role. A proper’ and accurate assessment and
interpretation of the fundamental factors that drive the market forces
determines the extent of success in speculating in the futures markets while in
gambling it is only a matter of chance, in fact, the important function of price
discovery in the futures markets is a direct outcome of the exercise of
information gathering in the underlying commodities being done by the

Speculation is also not similar to manipulation. A manipulator tries to
push prices in the reverse direction of the market equilibrium while, the
speculator forecasts the movement in prices and this effort would
eventually bring the prices closer to the market equilibrium. If the futures
markets do not adhere lo the relevant risk management requirements of
growers, manufacturers, traders and processors, they would not survive
since their correlation with the underlying physical market would be

   Arbitrage means locking in a profit by simultaneously entering into
   transactions in two or more markets. If the relationship between spot prices and
   futures prices in terms of basis or between prices of two futures contracts in
   terms of spread changes, it gives rise to arbitrage opportunities. Difference in
   the equilibrium prices determined by the demand and supply at two different
   markets also gives opportunities to arbitrage.

   The futures price must be equal to the spot price plus cost of carrying the
   commodity to the futures delivery date else arbitrage opportunity arises.

   Mathematically it can be expressed as

   F (o, n) = So (1 +C).

   F (o, n) = Futures price of the commodity at t = o for expiry at t = n

   So = Spot price of the commodity at t = o

   C = Cost of carry from t = o (present) to t = n (expiry date of futures)expressed
   as a percentage of the spot price

OTC and exchange-traded
Broadly speaking there are two distinct groups of derivative contracts, which are
distinguished by the way that they are traded in market:

   • Over-the-counter (OTC) derivatives are contracts that are traded (and
   privately negotiated) directly between two parties, without going through an
   exchange or other intermediary. Products such as swaps, forward rate
   agreements, and exotic options are almost always traded in this way. The OTC
   derivatives market is huge.

   • Exchange-traded derivatives are those derivatives products that are traded
   via Derivatives exchanges. A derivatives exchange acts as an intermediary to
   all transactions, and takes Initial margin from both sides of the trade to act as a
   guarantee. The world’s largest[2] derivatives exchanges (by number of
   transactions) are the Korea Exchange (which lists KOSPI Index Futures &
   Options), Eurex (which lists a wide range of European products such as
   interest rate & index products), Chicago Mercantile Exchange and the Chicago
   Board of Trade.
Today commodity markets are situated throughout the world. In many cases, the
markets deal in specialized commodities. Notable among them are, Chicago Board
of Trade in U.S.A., London Commodity Exchange in U.K., Sydney Futures
Exchange in Australia, Tokyo Commodity Exchange in Japan and Singapore
International Monetary Futures Exchange in Singapore.

In India we have a number of small / regional exchanges for trading in different
commodities and at national level we have three commodity exchanges. The
commodities are traded both in cash market and in futures markets. It is the futures
markets that take lead in commodity trading as compared to cash markets.


The first recorded instance of futures trading occurred in rice in Japan and China
some 6,000 years ago. In the United States, futures trading started in the grain
markets in the middle of the nineteenth Century. Major development in forward
trading in commodities work place in middle of eighteenth century in Chicago in
United States.


In the 1840s, Chicago had become a commercial center since it had good railroad
and telegraph lines connecting it with the East. Around this same time, good
agriculture technologies were developed in the area, which led to higher wheat-
production. Midwest farmers therefore used to come to Chicago to sell their wheat
to dealers who, in turn, used to ship it all over the country. The farmers would
bring their wheat to Chicago hoping to sell it at a good price. The city had very
limited storage facilities and hence, the farmers were often left at the mercy of the
dealers. The situation changed for the better when in 1848 a central place was
opened where farmers and dealers could meet to deal in “spot” grain – that is, to
exchange cash for immediate delivery of wheat.
Farmers (sellers) and food merchants\dealers (buyers) slowly started entering into
contract for future exchanges of grain for cash so that farmers could avoid taking
the trouble of transporting\storing wheat (at very high costs), if the price was not
acceptable. This system was suitable to farmers as well as the dealers. The farmer
knew how much he would be paid for his wheat, and the dealer knew his costs of
procurement well in advance.

Such (forward) contracts became common and were even used as collateral for
bank loans subsequently. The contracts slowly got “Standardized” on quantity and
quality of wheat being traded. They also began to change hands before the
delivery date. If the dealer decided he didn’t want the wheat he would sell the
contract to someone who needed it. On other side if the fan-her who didn’t want to
deliver his wheat could also pass on his obligation on to another farmer. The price
of the contract would go up and down depending on what was happening in the
wheat market. If bad weather had come, supply of wheat would be less and the
people who had contracted to sell wheat would hold on to more valuable contracts
expecting to fetch better price; if the harvest were bigger than expected, the
seller’s contract would become less valuable since the supply of wheat would be
Slowly, even those individuals who had no intention of ever buying or selling
wheat began trading in these contracts expecting to make some profits based on
their knowledge of the situation in the market for wheat. They were called
peculators. They hoped to buy contracts at low price and sell them at high price• or
sell the contracts in advance for high price and buy later at a low price. This is
how the futures market in commodities developed in United States.

Futures industry has changed a great deal over the last 20 year including usage of
term futures itself. The industry was never referred to as futures” but rather
“commodity”. Until 1970s the agricultural markets dominated the industry, and
the trading was known as “commodity trading”. Today these markets are known
as the futures market or are referred to as the new commodity futures market.


The biggest increase in futures trading activity occurred in the 1970s when futures
on financial instruments started trading in Chicago. Currency futures began
trading in the International Money Market (IMM) of the Chicago Mercantile
Exchange in 1972. Since then many other futures markets have opened up such as
London International Financial Futures Exchange (LIFFE).

Currencies such as the Swiss Franc and the Japanese Yen were the earliest
currencies to be traded in currency futures market. The other financial assets
traded in the exchanges include, stock indices, futures and options in interest rate
instruments such as United States Treasury Bonds and T-Bills. In the 1980s
futures began trading on stock market indices such as the S&P 500.


The history of futures trading in commodities in India is almost as old as that
in the US. It has, however, passed through a turbulent past. India’s first organized
futures market was the Bombay Cotton Trade Association Ltd., which was set up
in 1875. Futures trading in oilseeds started with the setting up of Gujarati Vyapari
Mandali in 1900. Gold futures trading began in Mumbai in 1920. During the first
half of the 20th century, there were several commodity futures exchange trading in
jute, pepper, turmeric, potatoes, sugar, etc.

International Exchanges:-
Exchange               Major Commodities traded
New York Mercantile    Crude oil, Heating oil
exchange (NYMEX)
COMEX                  Gold and Silver
Chicago Board of Trade Soy oil, Soy bean, corn
London Metals Exchange Aluminium, copper, tin, lead.
Tokyo Commodity        Gold, Silver, Crude oil, Rubber
Exchange (TOCOM)
Bursa Malaysia         Crude Palm Oil
Derivatives Berhad (M-
Singapore Commodity Rubber, Robusta Coffee
Exchange (SICOM)

     “As the commodity market is Internationally linked, it has International
   impact also”.


At present, India’s share in the global commodity markets - both agricultural and
industrial, especially of energy products and base metals - is not big enough to
make a major impact on international prices (bullion being an exceptional case).
India currently accounts for only around 3 per cent of the global oil demand and 2
per cent of the global copper demand. In comparison, China accounts for 8 per
cent and for oil and as high as 22 per cent of the global demand
However, in the gold market, bout 20 per cent of the world demand and remains a
key buying support on price corrections. In case of agricultural commodities,
India’s production base is large, but international trade volumes are still low.

India is the world’s largest producer of World’s second largest producer of rice
and wheat after China and the US; though foreign trace (export and import) in
these commodities is rather limited. However, in getable oil, India is the world’s
largest importer (with 4.5-5.0 million tones annually), as is the case with pulses
(close to 2 million tones) also.

Despite a modest share in the industrial products market, the prospects for growth
for the industrial commodities in India are considerable. Despite a slowdown in
industrial production at times overall the domestic economy in India continues to
grow while imports and growth in demand for corporate borrowing also indicate a
positive outlook.

In addition, large infrastructure works are being undertaken across the country,
covering rail, road, energy and sports. The outgoing Golden Quadrilateral project
is an excellent example of road connective to the four corners of the country. Port
modernization and involvement of the private sector in infrastructure development
are likely to be the key growth drivers.

A sectoral study of India conducted by consultants McKinsey had suggested that
global steel consumption would increase to around 80-100 million tones by 2015,
up from 33 million tones in 2003. due to robust demand growth from
infrastructure, construction, manufacture and automotive sectors mainly in India
and China.

All these factors point out a very encouraging outlook for the growth of Indian
commodity markets.


Significantly developing countries are producers and exporters of most of the
commodities globally traded. This is applicable to various products such as
agricultural produce, metals, oils etc. lack of demand for such products from the
developed world affects the export earnings as well as terms of trade of the
producer (developing) countries. In fact, commodity prices had been in a long bear
market phase during 1980s and 1990s. Thank to improved manufacturing and
economic activities notably in Asia, particularly in countries like china and India
and in the United States there is a growing demand for raw material in the global
market. Today global growth comes from four important developing countries viz.
China, India, Brazil and Russia.

Commodities Worldwide
Globally Commodities is the second most traded contract

         Types of Contract                   Million           Percentage
  Interest Rate                                      759.9             58.4

  Commodities                                         307              23.6

   Equity                                            178.5           13.72

 Foreign                                              54.5             4.19
 Other                                                 1.2             0.09
  Total                                            1301.1              100

Equities vs. Commodities

Period                     Equities                   Commodities
1st Month                  1.5 cr per day             5 cr per day

1st 6 months               12 cr                      500 Cr

1st 12 months              418 cr                     1700 Cr

1st 24 months              1000 Cr                    6300 Cr (21 months)

To reach 1K Cr             24 months                  9 months

To reach 2K Cr             30 months                  10 months

To reach 5K Cr             38 months                  20 months
To reach 10K Cr              40 months                    23 months

Underlying                   122                          45


The stock market witnessed strong growth during 1980s till the market crashed,
first in New York, on October 19, 1987 (Black Monday). Indian stock markets
also witnessed scams and large rise and fall in prices occasionally leading to
sudden and big wealth accumulation and destruction. These price changes were
essentially acts of rampant speculation from few market players who have large
chunk of funds to move the market on either side. Such downslide in stock
markets provided alternative investment opportunities in commodity markets.

Markets in developing countries provide an excellent opportunity for all types of
investors since most of the commodities trade globally are produced and exported
from developing countries. India is no exception to this rule, since a variety of
commodities ranging in agricultural category and commodities like iron (steel),
copper, aluminum, gold, silver in the category of metals, and petroleum products
in the category of oil are traded in the Indian markets. Hence trading in
commodity exchanges offer equal opportunity and benefit for investors and traders
in commodity exchanges is the first hand knowledge about the products, their
sources of demand and supply etc. which primarily influence price movements in
the commodity markets as against unbridled speculation in stock markets.


Economic expansion led to a rapid demand for many commodities particularly for
petroleum, metal and other rnineral resources and agricultural commodities.
Further rising population in 1960s and later, increased the demand for
commodities. Although the population was rising in many developing countries,
improved technology, extensive and intensive method of collation increased
agricultural production and other commodities more than the rise in population.
New countries also emerged as new producers. The net result was that the stock of
commodities was piling up and commodity prices started falling relative to the
prices of other goods, particularly that of manufactured goods. This led to adverse
terms of trade for the producers and exporters of commodities during 1970s and
1980s. Buffer stocks were used by organizations to stabilize prices. Countries had
entered into commodity agreements to ensure fair price realizations, but most of
the agreements failed and prices were destabilized.


The high scale production going on in China due to cheap labor and
manufacturing facilities have suddenly brought the commodities alive. Today the
word “commodity” is the new buzzword in the global market as well as in India.
At the same time all Asian countries are experiencing high growth, increasing
trade volumes and rising prices income fetidities. During 1980s & 1990s,
commodities were traded at all time low prices. Today, gold prices are shooting
up. Metals like copper, nickel, and aluminum are trading @<hidden> all time
high. Crude oil price was at all time high at $67 per barrel in mid-August, 2008.

The commodity price index is continuously rising which reflects the rising
consumer demand and money spent on commodities. The rising commodity prices
are driving the commodity companies. Turning to capital markets for their funding
requirements. The current commodity prices also provided excellent trading
opportunities for large investors like hedge funds and pension fun4s besides small
investors like retail investors looking for investments linked to commodities.

Additionally demand is certainly encouraging supply. Global capital market
players estimate that institutional funds tracking commodity indices worldwide
had gone up four times between 2004 and 2008 from $ 10 billion to $ 40 billion.
Similarly U.S. mutual funds exposure to commodities has reportedly gone up from
$ 300 million in 2003 to a level of more than $ 7 billion in early 2008. Thus
investors are looking for extra and alternative return in commodities markets to
compensate for the poor bond market return and to certain extent the not so high
equity market return. Many commodity prices are running all time high in the
global market. The best example for this is the price of oil, steel and gold.
However investors prefer investment in commodities rather than investment in the
equity of relative companies.

This awareness of investment opportunities in commodity markets has entered in
to the Indian soil. Commodity Exchanges, at national level, have suddenly come
up one after another. Their volume is growing at a pace faster than the growth
witnessed in equity markets in 1980s and 1990s. Everybody is now more aware of
commodities because the oil price is regularly on the front pages of economic
newspapers. Talk of oil price and assessment of performance of oil companies are
the daily discussions in print and electronic media.
This has both a positive and negative impact-on the Indian economy. While India
may benefit from increased commodity prices, which it exports, the increase in oil
prices - its major import item, affects its growth adversely. In the global
investment market, currently commodity market is the most attractive asset market
for investment.

Money In Commodity Markets & its peculiarity:

Marc Faber, an Investment Expert and business cycle analyst predicts that the next
big profit will be in hard assets and not in financial assets. The hard asset he
referred to was that of commodity markets. Investors however have to find out
which commodities will boom and which will not. One has to be selective in
choosing the commodity. Investors will have to study individual markets and buy
sell commodities accordingly. This will be a different ball game for investors. It is
a different kind of research as compared to stock markets. The reason, there are no
balance sheets to read, no quarterly or half yearly results for comparison, no
announcement for future growth or dividend Policy to keep tract of events and
prices. Yet commodity markets provide Huge investment opportunity for investors
and speculators.

(1) What are the working hours for the commodity exchanges?

Commodity Exchanges (MCX and NCDEX) function from 10.00 Am to 11.55
PM with a break of 30 minutes between 5.00 PM and 5.30 PM. However some
specific commodities with strong international price linkages (such as Gold,
Silver, Soy oil, Crude Oil etc) are allowed to be traded after 8.00 PM.

(2) Who regulates the commodity exchanges?

Just as SEBI regulates the stock exchanges, commodity exchanges are regulated
by Forwards Market Commission (FMC); Forwards Market Commission is under
the purview of the Ministry of Food, Agriculture and Public Distribution.
(3) What are the volumes in commodity exchanges recently?

The two exchanges (NCDEX & MCX) have seen tremendous growth in less than
two years. The daily average on these two exchanges put together has now grown
to a healthy Rs.3700 Crores. It has been believed by experts that the volumes on
these exchanges would overtake the stock market volumes in the days to come.

Month/Rs Cr                MCX           NCDEX           Total      Daily Avg
April--2008                  1508             856            2364           107

May                          1577             987            2564           117

June                         2654            2041            4695           213

July                         5340            6381           11721           533
August                       8397            9744           18141           825

Sept                         12131           34000          46131          2097

Oct                          17567           27696          45263          2057

Nov                          21240           26756          47996          2182

Dec                          21152           42091          63243          2875

January--2009                17996           30736          48732          2215

February                     25076           34665          59741          2716

March                        31886           50379          82265          3739

(4) What are Commodity Futures?

Commodity Futures are contracts to buy specific quantity of a particular
commodity at a future date. It is similar to the Index futures and Stock futures but
the underlying happens to be commodities instead of Stocks and indices.

(5) Commodity Futures are recently introduced in India. Aren’t they?
Commodity futures market has been in existence in India for centuries. The
Government of India banned futures trading in certain commodities in 70s.
However trading in commodity futures has been permitted again by the
government in order to help the Commodity producers, traders and investors.
World-wide, commodity exchanges originated before the other financial
exchanges. Infact most of the derivatives instruments had their birth in commodity

(6) What are the major commodity Exchanges?

The Government of India permitted establishment of National-level Multi-
Commodity exchanges in the year 2002 and accordingly three exchanges have
come into picture. They are
      Multi-Commodity Exchange of India Ltd, Mumbai (MCX).
      National Commodity and Derivatives Exchange of India, Mumbai (NCDEX).
      National Multi Commodity Exchange, Ahmedabad (NMCE).
However there are regional commodity exchanges functioning all over the
country. Karvy Comtrade Ltd has got membership of both the premier commodity
exchanges i.e. MCX and NCDEX.
At international level there are major commodity exchanges in USA, Japan and
UK. Some of the most popular exchanges around the world are given below along
with the major commodities traded:
EXCHANGE                                MAJOR COMMODITIES TRADED
New York Mercantile Exchange            Crude Oil, Heating Oil
Chicago Board of Trade                  Soy Oil, Soy Beans, Corn
London Metals Exchange                  Aluminium, Copper, Tin, Lead
Chicago Board Option Exchange           Options on Energy, Interest rate
Tokyo Commodity Exchange                Silver, Gold, Crude oil, Rubber
Malaysian Derivatives Exchange          Rubber, Soy Oil, Palm Oil

(7) Commodity markets are small. Aren’t They?

This is the biggest myth about the commodities market. Commodities (spot)
Markets in India are about Rs.11 trillion worth per annum. Internationally the
futures market in commodities is 5- 20 times that of the spot market. Look at the
table given below. Even if we assume a 5 times multiple the commodity futures
markets can grow up to become Rs.55 trillion.
       Market          Annual Physical         3 time multiple       5 time multiple
                       trade (Rs. Cr.)           (Rs. in Cr.)          (Rs. in Cr.)

       Bullion               40,000                1,20,000              2,00,000

       Metals                60,000                1,80,000              3,00,000

  Agriculture               5,00,000               15,00,000             25,00,000

       Energy               5,00,000               15,00,000             25,00,000

       Total               11,00,000               33,00,000             55,00,000

    Per Day                   4400                   13200                 22000

(8) Who benefits from dealing in commodity futures and how?

Commodity futures are beneficial to a large section of the society, be it farmer,
businessmen, industrialist, importer, exporter, consumer at all.
If you are an investor, commodities futures represent a good form of investment
because of the following reasons.
     Diversification – The returns from commodities market are free from the direct
        influence of the equity and debt market, which means that they are capable of
        being used as effective hedging instruments providing better diversification.
       Less Manipulations - Commodities markets, as they are governed by
        international price movements are less prone to rigging or price manipulations by
       High Leverage – The margins in the commodity futures market are less than the
        F&O section of the equity market.
If you are an importer or an exporter, commodities futures can help you in the
following ways…
       Hedge against price fluctuations – Wide fluctuations in the prices of import
        or export products can directly affect your bottom-line as the price at which you
        import/export is fixed before-hand. Commodity futures help you to procure or sell
        the commodities at a price decided months before the actual transaction, thereby
        ironing out any fluctuation in prices that happen subsequently.
If you are a producer of a commodity, futures can help you as follows:
 Lock-in the price for your produce – If you are a farmer, there is every chance
    that the price of your produce may come down drastically at the time of harvest. By
    taking positions in commodity futures you can effectively lock-in the price at which
    you wish to sell your produce.
   Assured demand – Any glut in the market can make you wait unendingly for a
    buyer. Selling commodity futures contract can give you assured demand at the time
    of harvest.
   Increase in holding power – You can store the underlying commodity in
    exchange approved warehouse and sell in the futures to realize the future value of the

If you are a large scale consumer of a product, here is how this market can help
 Control your cost – If you are an industrialist, the raw material cost dictates the
    final price of your output. Any sudden rise in the price of raw materials can compel
    you to pass on the hike to your customers and make your products unattractive in the
    market. By buying commodity futures, you can fix the price of your raw material.
   Ensure continuous supply – Any shortfall in the supply of raw materials can stall
    your production and make you default on your sale obligations. You can avoid this
    risk by buying a commodity futures contract by which you are assured of supply of a
    fixed quantity of materials at a pre-decided price at the appointed time.

(9) How risky are these markets compared to stock & bond markets?

Commodity prices are generally less volatile than the stocks and this has been
statistically proven. Therefore it’s relatively safer to trade in commodities.
Also the regulatory authorities ensure through continuous vigil that the commodity
prices are market-driven and free from manipulations.
However all investments are subject to market risk and depends on the individual
decision. There is risk of loss while trading in commodity futures like any other
financial instruments.
(10) Are the trades/ settlement guaranteed by the exchanges?

YES, the commodity exchanges have got some of the most high profile corporate
as their promoters. Multi Commodity exchange of India, promoted by Financial
Technologies Ltd has got on board institutions such as SBI, HDFC Bank, Canara
Bank, Corporation Bank, Bank of India, Union Bank of India, Bank of Baroda.
The National Commodity and Derivatives Exchange (NCDEX) has got NSE,
ICICI, NABARD, CRISIL, LIC, PNB, Canara Bank as the major share-holders.
Such a high profile share-holding provides these exchanges valuable experience,
knowledge and also high standards of operations . Also the exchange guarantees
the settlement of trades and so eliminates the counter-party risk in the transactions.
The exchange for this purpose maintains a Settlement –Guarantee fund akin to the
stock exchanges.

(11) Are there physical deliveries in commodity futures exchanges?

YES, the exchanges, in order to maintain the futures prices in line with the spot
market, have made available provisions of settlement of contracts by physical
delivery. They also make sure that the price of futures and spot prices coincide
during the settlement so that the arbitrage opportunities do not exist.

(12) How the deliveries are made possible?

The exchange has enlisted certain cities for specific commodities as the delivery
centres. The seller of commodity futures, upon expiry of the contract may choose
to deliver physical stock instead of settling the positions by cash, in which case he
would be required to deliver the stocks to the specified warehouses. The buyer of
the commodity futures, if he is interested in physical delivery would be matched
with a seller and would be required to take delivery of the specified quantity of
stock from the designated warehouse. World-wide commodity futures are
generally used for hedging and speculation and hence physical deliveries are
negligible. However the possibility of physical delivery has made these markets
more attractive in India. Both NCDEX and MCX have successfully completed
physical delivery in bullions and various agro-commodities.
In case of NCDEX it is mandatory to open a Demat account with an approved DP
by the buyer and seller if they wish to take/ give delivery of goods.

(13) Is there a need to pay sales tax on all trades? Is registration mandatory?
NO. If the trade is squared off no sales tax is applicable. The sales tax is
applicable only in case of trade resulting into delivery. Normally its seller’s
responsibility to collect and pay the sales tax. The sales tax is applicable at the
place of delivery. Those who are willing to opt for physical delivery need to have
sales tax registration number.

(14) Are any transaction duty charges imposed on commodity futures
contracts, as in case of stocks?

Although FMC does not levy any transaction charges as of now, the respective
commodity exchanges levy transaction charges. Transaction charges are in the
range of Rs 4 to Rs 6 per lakh/per contract, which may differ for each commodity/

(15) What is the date of expiry?

At NCDEX the contracts expire on 20 th day of each month. If 20 th happens to be
a holiday the expiry day will be the previous working day.

At MCX the expiry day is 15 th of every month. If 15 th happens to be a holiday
the expiry day will be the previous working day. The expiry day also differs for
different commodities in both the exchanges.

(16) How much are the margins on these Commodity futures?

Generally commodity futures require an initial margin between 5-10% of the
contract value. The exchanges levy higher additional margin in case of excess
volatility. The margin amount varies between exchanges and commodities.
Therefore they provide great benefits of leverage in comparison to the stock and
index futures trade on the stock exchanges. The exchange also requires the daily
profits and losses to be paid in/out on open positions (Mark to Market or MTM) so
that the buyers and sellers do not carry a risk of not more than one day.

(17) What are the commodities on which futures trading take place?

At Present futures are available on the following commodities:-
    Bullion       Gold and Silver
                Castor Seeds, Soy Seeds, Castor Oil, Refined Soy
                Oil, Soymeal, RBD Palmolein, Crude Palm Oil,
 Oil & Oilseeds
                Groundnut Oil, Mustard Seed, Mustard Seed Oil,
                Cottonseed Oilcake, Cottonseed
       Spices     Pepper, Red Chilli, Jeera, Turmeric
                  Steel Long, Steel Flat, Copper, Nickel, Tin , Steel
       Fibre      Kapas, Long Staple Cotton, Medium Staple Cotton
       Pulses     Chana, Urad, Yellow Peas, Tur , Yellow Peas
                  Rice, Basmati Rice, Wheat , Maize , Sarbati Rice ,
    Energy        Crude Oil
                  Rubber, Guar Seed , Guargum , Cashew, Cashew
                  Kernel , Sugar , Gur, Coffee, Silk

Following is a table showing the details # regarding major commodities
traded on MCX & NCDEX:-
                Initial                Lot      Delivery   Available
Commodity               Quotation
                Margin                 Size     Centre      months
                                                        Feb, Apr,
Gold            3.5%    10 Gms       1 Kg               Jun, Aug,
                                                        Oct, Dec
                                                           Mar, May,
Silver          5%      1 KG         30 KG    Ahmedabad
                                                           Jul, Sep,
Crude Oil    5%       1 bbl               Mumbai        All months
Soy Oil      3%       10 KG       10 MT Indore          All months
Pepper       8%       10 KG       100 KG Kochi          All months
Soy Seed     4%       1 MT        10 MT Indore          All months


              Initial              Lot     Delivery     Available
Commodity             Quotation
             Margin*               Size    Centre        months
 Guar Seed   5-10 %    100 KG     10 MT    Jodhpur
  Soy Oil    5-10 %    100 KG     10 MT     Indore
  Sugar M    5-10 %    100 KG     10 MT Muzaffarnagar

   Gold                                                 Feb, Apr,
             5-10 %    10 Gms     1 Kg     Mumbai       Jun, Aug,
  (Sona)                                                Oct, Dec
             5-10 %     1 KG      30 KG   New Delhi      May, Jul,
                                                         Sep, Dec
  Wheat      5-10 %    100 KG     10 MT     Delhi
  Pepper     5-10 %    100 KG     1 MT      Kochi
     Chana         5-10 %        100 KG        10 MT           Delhi
      Urad         5-10 %        100 KG        10 MT         Mumbai
                                                            Indore,             All
    Soy Bean       5-10 %        100 KG         1 MT
                                                          Nagpur, Kota         months

•    MCX Initial margins are shown above. NCDEX follows SPAN
margins which could be between 5-10% depending on volatility.

# The specifications are subject to change by the exchanges / FMC
The list given above covers only the popular commodities and not


Ground Realities
    The commodities are traded on Exchanges, which are:-
              o Screen based and Online,
              o Transparent,
              o Having counter party guarantee, and
              o Having large settlement guarantee funds
    The underlying commodity is bought or sold at a future date.
    It is a tool used by Investors, Hedgers, Arbitrageurs, Day Traders, etc..
    The futures contracts available on a wide spectrum of commodities like Gold, Silver,
     Cotton, Steel, Soya oil, Soya beans, Wheat, Sugar, Channa etc., provide excellent
     opportunities for hedging the risks of the farmers, importers, exporters, traders and
     large scale consumers.
    They also make open an avenue for quality investments in precious metals.

  “ The commodities market, as it is not affected by the movements of the stock market
or debt market provides tremendous opportunities for better diversification of risk”.
Realizing this fact, even mutual funds are contemplating of entering into this market.
Important Dates:-
    1955 gold and silver future trading banned by govt.
    1966 futures trading in most commodities banned by govt.
    1980 govt. removed ban on selected commodities like cotton, jute, potatoes, etc.
    1994 kabra committee recommended removeal of ban on futures trading on
     most commodities.
    2002 Licenses issued for setting up national level multi-commodity exchanges.
    2003 National Level Exchanges approved by GOI
    2003 Nov/Dec Establishment of MCX & NCDEX

Factors Driving commodity futures trading CFT:-
      Demand and Supply
      Seasonal patterns
      Indian economic data/ policies
      Weather Conditions
      Import/ export parity and government policies
      Forex / currency movement
      Global political/ economic events and data
      Global benchmark commodity Indices
      Global commodity prices

Benefits of commodity futures trading CFT:-
      Additional Investment/ Trading opportunity
      Diversification of Portfolio
      Low Margins – High leverage for traders
      Hedging/ Arbitrage opportunities

JUNE, 08.

   -  Gold recorded the highest value of trade in all cotracts at Rs.58,364
      crore during last year.
•     Starting in the summer of ’09, the precious metal staged a historic bull
move and reached $953 an ounce.
   - On 25 May, 09 – When market started, Gold was at INR 44,790.2 per
      ounce ,but at the end of the day it took a great leap and closed at INR
      45,238 per ounce (up by +1.2%).
   Whereas, in USD it started equally at US$
   956.83 per ounce, but ended up in rather low rate at US$ 953.80
   per ounce (down by -0.28%).
   - Rising by $78 an ounce in the past 30 days, the price of gold has given
      many Speculators a golden chance to reap huge luring profits.
•     Gold’s bull market started in 2001. A calm steady rise took the price
from $250 an ounce to record peak of $953 an ounce in 9 years.
   - Fall in Stock prices due to recession in recent past year is the reason
      for rise in prices of gold. Stock investment proving to be risky because
      of recession, investors started investing in rather safe investment such
      as gold. As a result of increase in demand of gold than it’s supply –

•  Silver recorded highest total value of trade of Rs.30,705 crore during
last year.
•      Starting in the summer of ’09, silver failed to stag a historic bull
mark of US$ 19.09 an ounce in May last last year, but managed to
achieve a mark of US$ 14.69 an ounce in May, 09.
•      280,000 tonnes of underground silver mean. 280,000 tonnes of silver
is the equivalent of over 9 billion ounces of silver.
       It has been observed that 17,900 tonnes of silver production is
        straightforward. There are approximately 32,000 ounces per tonne so this is
        approximately 573 million ounces of silver KNOWN by the

U.S. Geological Survey.
       “Reserve Base” listed as 420,000 tonnes or approximately 13 plus

Billion ounces of silver. These 420,000 tonnes of silver “resource”
       include the 280,000 tonnes of silver “reserve”.

1 barrel=117.347766ltrs.



Annual          Physical   3       time 5       time
                trade (Rs. multiple     multiple
                Cr.)       (Rs. in Cr.) (Rs. in Cr.)
Bullion          40,000         1,20,000          2,00,000
Metals           60,000         1,80,000          3,00,000
Agriculture      5,00,000       15,00,000 25,00,000
Energy           5,00,000       15,00,000 25,00,000
Total            11,00,000      33,00,000 55,00,000
Per Day          4400           13200             22000


1) MILL QUALITY WHEAT -         Rs.1075 per quintal

2) MILL DELIVERY SUGAR -        Rs.2275/2360 per quintal

3) MUSTARD SEEDS          -     Rs.2425 per quintal

4) MAIZE                  -     Rs.930/935 per quintal

5) MOONG                  -     Rs.250 per quintal

6) JEERA                  -      Rs.10700/11100 per quintal


       The India Commodity Market is expected to grow by 30 percent and will reach
        Rs.74,156 billion ($ 1.73 trillion) in volume by 2010, according to study by the
        Associated Chambers of Commerce and Industry of India(ASSOCHAM).
       24 March,09- MCX rexcords all time high turnover of Rs.32,000 crore.
       15 May,09- NCDEX total value of trade stood at Rs.1,988 crore, whereas, last
        year in Oct,08 it was 1,637 crore.
•       Domestic Market Contributes 17-20% of world’s physical gold trade.
•       Indians already doing 30% of Comdex volumes: Approx 2500 Cr + Daily.
    • This market has wide coverage as it binds the whole world.
    • Any fluctuation in equity market does not effect the commodity market.
    • The main function of this market is to provide the hedging facility to
    farmers, traders and other investors.
    • Commodity market is the worlds 2nd market with market coverage of 23%.
    • This market will prove the best market than equity market in the coming
    • NCDEX is the world’s 3rd largest exchange.

                   Commodity Exchanges in the World

       HedgeStreet Exchange (California)
       Abuja Commodity Exchange (Nigeria)
       Central Japan Commodity Exchange (Nagoya)
       Commodity Exchange Hannover (Hannover)
       Chicago Board of Trade (Chicago)
       Chicago Climate Exchange (Chicago)
       Chicago Mercantile Exchange (Chicago)
       Euronext.liffe (Europe)
       European Climate Exchange (Europe)
       Intercontinental Exchange (Atlanta)
       London Metal Exchange (London)
       Multi Commodity Exchange (India)
       New York Board of Trade (New York)
       New York Mercantile Exchange - NYME (New York)
      Shanghai Metal Exchange (Shanghai)
      The National Commodities and Derivatives Exchange (Mumbai)
      Tokyo Commodity Exchange (Tokyo)
      Winnipeg Commodity Exchange (Winnipeg)
      Yokohama Commodity Exchange (Yokohama)
      Bolsa Nacional Agropecuaria (Colombia)

Majority of commodities traded on commodity exchanges world over are
agro based. Commodity Markets therefore are of great importance and hold
great potential in case of Agrarian Economies like India where the
agriculture sector contributes 22% to the country’s GDP and employs 70% of
the working population.
There is a huge domestic market for commodities in India since India consumes a
major portion of its agro production locally. However our exports of agro-products
are very insignificant. Indian commodities market therefore has excellent growth
potential and has created good opportunities for market players. The following
salient features of the Indian economy / commodity markets and their related
aspects would adequate to stress the relevance of commodity markets and the great
potential that they offer for future development in India:

a) India is the world’s leading producer of 17 agricultural commodities and is also
the world’s largest consumer of edible oils and gold,

b) India has 30 major markets and nearly 7,000 Mandies with substantial arrivals
of a variety of commodities,

c) Over 27,000 haats (rural bazaars) exist in the country with seasonal arrivals of
various commodities,
d) Nearly 5 million traders are engaged in commodity trading in India,

e) Commodities related and dependent industries constitute approximately 58 per
cent of country’s GDP of Rs 1,320,700 crore,

f) State and Central Governments have invested substantial resources to boost
production of agricultural commodities. Many of these would be traded on the
futures markets as food processing increases from the current level of 2% to 40-
50% comparable to other countries,

g) There are three national level Commodity Exchanges that trade in
approximately 100 commodities at present and the list continues to expand,

h) Indian spot market for commodities such as bullion, metals, agriculture produce
and energy is estimated at approximately Rs 11,00,000 crore annually. According
to the experts ins the field, global trends indicate that the volume in futures trading
tend to be 5-7 times the size of commodities’ spot trading in the country
(Internationally, the multiple for physical versus derivatives is much higher at 15
to 20 times). This implies that the potential for futures trading market in India
currently stands at staggering Rs. 55,00,000 crore to Rs. 77,00,000 crore annually.

i) Three nationwide electronic exchanges and 22 recognized regional or small
commodity exchanges in India had an estimated total combined turnover of Rs
569277.92 crore in the first quarter of current financial year (April-August 2005).

j) Many nationalized and private sector banks have announced plans to disburse
substantial amounts to finance commodity-trading business. (Private sector giant
viz. HDFC Bank alone is planning to disburse over Rs 1,200 crore for financing
agriculture commodities).

k) The Government of India has initiated several measures to stimulate active
trading interest in commodities. Some of these measures are:
- Lifting the ban on futures trading in commodities;
- Approving new exchanges;
- Developing exchanges with modern infrastructure and systems such as
online trading
- Removing legal hurdles to attract more participants.

As a result of the above developments, both the spot and futures markets in India
are witnessing rapid growth. The trading volumes are increasing as the list of
commodities traded on national commodity exchanges also continues to expand.
The volumes are likely to surge further as a result of the increased interest from
the international players in the Indian commodity markets. If these international
players are allowed to participate in commodity markets (like in case of capital
markets), the growth in commodity futures can be expected to be phenomenal.

The commodity markets are normally ten times bigger than stock markets all
over the world. There is no reason why similar proportions would not exist in
India in the next five to ten years.

“Potential of commodity market in India is very high thus Commodity
trading and commodity financing are going to be a rapidly growing business
in coming years in India”.



1. NCFM Commodity Dealer Module – NSE India
2. Diploma In Commodities trading (DITC)
   - By Welingkar Institute Of Management Development & Research
3. Security Analysis & Portfolio Management- By Fisher & Jordon


  - Economic times
-   Financial Express
-   Bajaj Capital journals

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