A PRESENTATION ON “COMMODITY MARKET &FUTURES” HISTORY Modern Commodity Market have their roots in the trading of agricultural products. Wheat and corn, cattle and pigs, were widely traded using standard instruments in the 19th century in the United States. Historically, in ancient times Sumerian use of sheep or goats, or other peoples using pigs, rare seashells, or other items as commodity money, have traded contracts in the delivery of such items, to render trade itself more smooth and predictable. CONT… Chicago Board of Trade established in 1848 by 82 merchants who were frustrated over unstable prices and neglected forward contracts. Commodity futures contracts started being traded in 1865. Chicago Mercantile Exchange was established in 1919. WHAT IS COMMODITY MARKET? Commodity market organized traders' exchange in which standardized, graded products are bought and sold. Market in which goods or services are bought and sold. Commodities are raw materials such as tea, rubber, tin or copper, which generally need processing to reach their final state. The actual commodities are seldom present, and what is traded is their ownership. The largest commodity exchange in the world is in Chicago. DEFINITION OF A "COMMODITY" Any product that can be used for commerce or an article of commerce which is traded on an authorized commodity exchange is known as commodity. commodity includes all kinds of goods. Forward Contracts (Regulation) Act (FCRA), 1952 defines “goods” as “every kind of movable property other than actionable claims, money and securities”. The national commodity exchanges, recognized by the Central Government, permits commodities which include precious (gold and silver) and non-ferrous metals; cereals and pulses; ginned and un-ginned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and gur; potatoes and onions; coffee and tea; rubber and spices. Etc. SIZE OF THE MARKET The trading of commodities includes physical trading of food items, Energy and Metals, etc. and trading of derivatives. In the five years up to 2007, the value of global physical exports of commodities increased by 17% while the notional value outstanding of commodity OTC derivatives increased more than 500% and commodity derivative trading on exchanges more than 200%. CONT… Agricultural contracts trading grew by 32% in 2007, energy 29% and industrial metals by 30%. Precious metals trading grew by 3%, with higher volume in New York being partially offset by declining volume in Tokyo. OTC trading accounts for the majority of trading in gold and silver. LIST OF TRADED COMMODITY Agricultural (Grains, and Food and Fiber) Livestock & Meat Energy Precious metals Industrial metals CONT… Agricultural Products:- Corn, Oats, Rough Rice, Soybeans, Rapeseed, Soybean Meal, Soybean Oil, Wheat, Cocoa, Coffee C, Cotton No.2, Sugar No.11, Sugar No.14. Livestock and Meat:- Lean Hogs, Frozen Pork Bellies, Live Cattle, Feeder Cattle. Energy:- WTI Crude Oil, Brent Crude, Ethanol, Natural Gas, Heating Oil, Gulf Coast Gasoline, RBOB Gasoline, Propane, Uranium. CONT… Precious Metal:- Gold, Platinum, Palladium, Silver. Industrial Metals:- Copper, Lead, Zinc, Tin, Aluminium, Aluminum alloy, Nickel, Recycled steel. COMMODITY EXCHANGES Abuja Securities and Commodities Exchange Bhatinda Om & Oil Exchange Bathinda Brazilian Mercantile and Futures Exchange Chicago Board of Trade Chicago Mercantile Exchange Commodity Exchange Bratislava, JSC Dalian Commodity Exchange Dubai Mercantile Exchange Euronext.liffe Intercontinental Exchange CONT… Minneapolis Grain Exchange Multi Commodity Exchange National Commodity and Derivatives Exchange National Multi-Commodity Exchange of India Ltd National Food Exchange New York Mercantile Exchange New York Board of Trade Rosario Board of Trade Steelbay CONT… Kansas City Board of Trade London Metal Exchange Winnipeg Commodity Exchange National Spot Exchange RECENT TRENDS IN COMMODITY MARKET The 2008 global boom in commodity prices - for everything from coal to corn – was fueled by heated demand from the likes of China and India. Speculation in forward markets. Farmers are expected to face a sharp drop in crop prices as a result of bad rainfall. Other commodities, such as steel, are also expected to fall due to lower demand. WHAT COMMODITY FUTURES MARKETS DO? A well-developed and effective commodity futures market, unlike physical market, facilitates offsetting the transactions without impacting on physical goods until the expiry of a contract. Futures market attract hedgers who minimize their risks, and encourages competition from other traders who possess market information and price judgment. While hedgers have long-term perspective of the market, the traders, or arbitragers as they are often called, hold an immediate view of the market. CONT... A large number of different market players participate in buying and selling activities in the market based on diverse domestic and global information, such as price, demand and supply, climatic conditions and other market related information. All these factors put together result in efficient price discovery as a result of large number of buyers and seller transacting in the futures market. FUTURES EXCHANGE A central market place with established rules and regulations where buyers and sellers meet to trade futures contracts. CASH VS FUTURES MARKET TRADING o In cash market, a physical commodity is exchanged in a buy and a sell agreement. o In futures market, you are paper trading and don’t take physical possession of the commodity in most cases. o The difference between the cash market price and the futures market price of a commodity. TWO TYPES OF FUTURES TRADERS HEDGER - o An individual or company who offsets a cash market position by shifting some of the risk of adverse fluctuations in price, by buying or selling a futures contract. o Example: a farmer plants his corn crop in March and immediately sells a September futures corn contract. In the fall he harvests the corn and sells it on the cash market. He then buys back his September futures contract. He locks in his price and avoids market fluctuations CONT… SPECULATOR o A market participant who tries to make a profit on buying or selling commodity futures contracts and assumes the majority of the risk from the hedger. o Example: a person expects cotton to rally because of heavy rains in the Mississippi delta will damage the crop and cause harvest delays. He buys a Dec contract of cotton and prays. FUTURE CONTRACT Commodity and Futures contracts are similar as "Forward" Contracts. Early days "future" contracts (agreements to buy now, pay and deliver later) were used as a way of getting products from producer to the consumer. These typically were only for food and agricultural Products. Now it is used for every metal. Future contract for commodity trading and for share trading is all different from one another. CONT… Futures are traded in certain contract months Contracts are at specified and pre-determined amounts Owner doesn’t take physical possession of commodity OPTION FUTURES CONTRACT o A futures contract in which you have the right but not an obligation to exercise your option at a future date. CONT… o Two types of option contracts: o Put - an option contract that gains value when the market price falls. o Call - an option contract that gains value when the market price rises. o Strike price - price you would like to receive for your commodity minus the premium.
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