An EU Action Plan in support of agricultural commodities in .ppt

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An EU Action Plan in support of agricultural commodities in .ppt Powered By Docstoc

Leonela Santana-Boado
Senior Economist

   The growing role of developing country exchanges
   Exchanges in Asia-Pacific
   Exchanges in Eastern Europe
   Exchanges in Africa
   Ways to improved efficiency
   Conclusions
      The growing role of developing
           country exchanges

 Nowadays (and contrary
  to the situation five years
  ago), many of the
  world's largest
  commodity exchanges in
  terms of trading volumes      SOFIA COMMODITY EXCHANGE

  are located in developing
      The growing role of developing
           country exchanges
Most developing country exchanges, though, still operate
with their hands tied behind their back: government policies
now keep these exchanges essentially domestic; many of the
exchanges are not allowed to introduce financial futures or
even index futures (and this may well be where the largest
growth potential is: worldwide, commodity futures account
for less than a tenth of futures volume); and options are still
not allowed in several countries.

Once their shackles have been removed, these exchanges
will grow even faster.
        The growing role of developing
             country exchanges
So far, only some of the smaller developing country commodity
exchanges are open to international users – in particular,
- The Malaysia Derivatives Exchange (MDEX) which trades a palm
oil futures contract (the price reference for world palm oil trade);
- The Bolsa de Mercadorias & Futuros in Brazil (small for its
commodity contracts), which trades US$-denominated coffee,
soybean, live cattle, feeder cattle, cotton, crystal sugar, corn and
gold contacts; and
- SAFEX, now a division of the Johannesburg Securities Exchange,
which trades a range of agricultural contracts for the national and
regional market.
      The growing role of developing
           country exchanges
 Developing country exchanges trade many of the same
  commodities available on western exchanges (e.g., copper,
  rice, soybeans), but also many commodities unique to the
 The National Commodity and Derivatives Exchange-
  NCDEX-Mumbai), for example, has futures contracts in
  guar (a non-edible oilseed, and its largest success), yellow
  and lal tur (types of lentils) and cashew nuts.
 The South African Futures Exchange (SAFEX) trades
  futures in sunflower seeds, and green beans are traded
  (albeit no longer very actively) in Zhengzhou.
         The growing role of developing country exchanges

       But developing country exchanges are closer to their country’s farmers
       and have both an economic and a political incentive to stimulate
       producers’ hedging.

        Price                                  Training

 NCDEX has installed price tickers,
providing real-time price information                        Strengthining
 in villages throughout the country,                        of warehousing
     including in tribal regions.                               system
                                                              NCDEX and
                           Discipline in the      the Multi-Commodity Exchange (MCX)
                           physical market                     are working
                                                    around the problem by accrediting
                                                         warehouses themselves.
               The growing role of developing
                     country exchanges
               Strengthening of warehousing system

       Farmer              1. Deposits products            warehouse

     3. The highest bidder     exchange         2. The warehouse receipt is
     gets the products, and
                                                (electronically) transferred to
     the farmer is paid
                                                the exchange and auctioned

-   the exchange either owns warehouses, or approves them
-   standardization of quality descriptions into specific grades, and
-   standardization of the documentation used.
    Exchanges in Asia-Pacific
Asian derivatives exchanges accounted for
over 37% of the world’s derivatives trading
volume in the first six months of 2004. Such
rapid growth will probably continue and in a
few years Asia is likely to account for the
bulk of global derivatives trade.
         Exchanges in Asia-Pacific
The DCE is the world’s largest
soybean futures market. The
soybean futures price in the DCE
has become an important
reference price for China’s
soybean production and
distribution and many
international traders take the
DCE soybean price as a

Some 110,000 users trade
on the exchange.
 Exchanges in Asia-Pacific: China -
   Zhengzhou Commodity Exchange (ZCE)

ZCE was until recently trading in
mungbean (green bean), small red
bean and peanut kernel. In 2000, the
Chinese regulatory body sought to
stamp out attempted manipulations.
As a result, mungbean and other
commodity trading have virtually
Cotton trading began in June 2004
and trading volumes have increased
steadily each month.
With the successful launch also of a
second wheat contracts, ZCE is in
effect a two-commodity exchange.
    Exchanges in Asia-Pacific,
China - Shanghai Futures Exchange (SHFE)
SHFE was formed in 1999 after the merger of three
exchanges: Shanghai Metal, Commodity, Cereals & Oils
Futures contracts in copper,
aluminium, natural rubber
and fuel oil: plywood and
long-grained rice contracts
are under preparation.

Trading in energy products
was banned in 1994 after        250 distant
concerns about speculation,     trading terminals
                                connected by
and has been slow to recover.   satellite
     Exchanges in Asia-Pacific,
While NYMEX is still the world’s largest
commodity exchange, in 2004, the three
exchanges in China traded a total of 305.67
million contracts (with a notional value of
1.77 trillion US$), more than the 280.04
million commodity contracts for NYMEX,
CBOT and NYBOT combined.
      Exchanges in Asia-Pacific,
 In the first six months of 2004, Korea accounted for just over 80% of
  the total Asian futures and options trade. This figure is explained by
  the existence of KOSPI 200 Futures and Options. In that same month,
  all the KOSPI contracts plus single stock options were transferred from
  the Korean Stock Exchange (KSE) to the Korea Futures Exchange
 This move propelled KOFEX overnight from the 37th to the world’s
  most active derivatives market.
 KSE does not trade commodity futures and while KOFEX lists gold,
  the trade is relatively minor. KOFEX has signed a MoU with the
  Tokyo Commodity Exchange and plans to diversify into energy
  products, with oil contracts aimed at small-scale hedgers such as local
  refineries and gasoline distributors.
 In order to facilitate the diversification process and consolidate
  Korea’s regional standing, a KOFEX-KSE merger is under
        Exchanges in Asia-Pacific,
 During the 1960s, the Indian Government either banned or suspended
  futures trading in most commodities.
 The Government policy slackened in the late 1970s and trade in
  commodities futures was legalised fully in April 2003.
 Options trade is still prohibited, however: no exchange or person can
  organise or enter into or make or perform options in goods. The market
  expects that the government will nonetheless permit options trading
  soon: the Rajya Sabha passed a Bill on options in the early part of
  2004 although further development is still pending.
 The Union Budget of 2004-5 is expected to further liberalise the
  position of commodity exchanges, allowing mutual funds and foreign
  institutional investors to participate in the commodity market;
  widening the definition of commodities to include also commodity
  indices and weather derivatives; changes in the Banking Regulation
  Act allowing banks to operate in the commodity exchanges; allow set-
  offs on trading losses in the derivatives market.
       Exchanges in Asia-Pacific,
 With the establishment of National Multi-Commodity
  Exchanges in 2002/3, the Indian situation has changed
  dramatically. There are three such exchanges: NCDEX
  (started trading in December 2003; based in Mumbai),
  NMCE (Nov. 2002, Ahmedabad) and MCX (Nov. 2003,
 The new exchanges are all demutualised, with permanent
  recognition to trade any permitted commodity. They have
  blazed a trail in the establishment of hi-tech, low-cost, web-
  based trading. This has contributed enormously to their rapid
 National exchanges have also been credited with unilaterally
  introducing workable warehouse receipt systems, thereby
  improving the financial viability of India’s commodity trade.
      Exchanges in Asia-Pacific,
Many of the contracts traded are unique to India;
some are clearly domestic-oriented but others (such
as precious metals, raw jute, pepper, grains and
oilseeds) have the potential to take on international
• April 2004 to March 2005 trading volume
  of the commodity exchanges: more than
  100 billion US$.
• Will more than double in this year.
• Expectation is that within 2-3 years,
  commodity futures trade volumes will
  exceed stock market volumes.

Why such a success?
One important reason was
a massive marketing
campaign. Brokers played
a key role in this.
One relevant experience: Indian exchanges have been
willing and able to “fill the gaps” in the domestic commodity
economy – e.g., weaknesses in warehousing infrastructure,
or in legal systems.

“PH Ravikumar, MD, NCDEX said
India needed at least 1,000
warehouses, while only 150
warehouses were there. NCDEX
started NCMSL early this year to
facilitate physical delivery of
exchange traded commodities.
NCMSL already has close to 50
warehouse. Most of them are
either leased or franchised, while
rest are managed in association
with government's warehouses.”
(The Economic Times, India, 21
June 2005)
Another important lesson: nowadays, exchanges are to
a large extent technology firms, instead of “logistics”
firms. They need to have the management and financial
capacity to invest in such technology and to roll it out,
including to reach clients.
E.g., in both Chinese and Indian exchanges, satellite-
based connections played a
large role, and the
exchanges facilitated
members’ procurement
of VSATs (Very Small
Aperture Terminals,
satellite-receiving stations
that cost around US$
      Exchanges in Asia-Pacific,
The Agricultural Futures Exchange of Thailand
(AFET) began operating in May 2004 and is the
country’s sole commodity futures exchange, offering
contracts in rubber and rice. Trading volumes have
been slow to take off (it was only 120 million US$ in
2004). To address the situation the exchange in
March 2005 introduced tapioca starch futures, and
plans to introduce shrimp later in the year. It will
also upgrade its technology so as to allow the
participation of international investors.
Exchanges in Asia-Pacific, Malaysia
            Kuala Lumpur
  1980                        Commodity
              Commodity                                KLSE de-mutualised
           Exchange (KLCE)                             in 2004 and
                                                       renamed itself
                                 Kuala Lumpur          Bursa Malaysia. In
                                                       order to reflect its
  1995                         Financial Futures       membership of the
                              Exchange (KLOFFE)        Group, MDEX
         Subsidiary                                    today refers to itself
                                     Stock index       as Bursa Malaysia
  1996    Malaysia Monetary Interest     futures       Derivates. The stock
          Exchange (MME) rate futures                  and derivatives
                                                       exchanges occupy
                                                       the same premises.
  1998   KLCE & MME merge into COMMEX                  It offers eight
                                                       futures contracts,
  1999   KL Stock Exchange (KLSE) buys KLOFFE          including two
  2001   KLOFFE and COMMEX merge into Malaysia         commodity
         Derivatives Exchange (MDEX). Their clearing
         houses had already merged in 1997. Open
         outcry trading was stopped.
       Exchanges in Asia-Pacific
 Singapore is home to the Singapore Exchange (SGX),
  formed in 1999 by the merger of two well-established
  exchanges, the Stock Exchange of Singapore (SES) and
  Singapore International Monetary Exchange (SIMEX). It
  trades about 31 million contracts; it concentrates on
  financial instruments. Its trade in commodity futures
  (fuels) is minimal, only a few thousand contracts a year.
 A smaller exchange, the Singapore Commodity Exchange,
  offers rubber futures contracts and (without success) a
  robusta coffee futures contract.
    Exchanges in Asia-Pacific
           Dubai (1)
The Dubai Mercantile

Planned commodities:
crude oil, natural gas,
electricity futures and
metals such as
aluminium and
(perhaps) gold. Planned
start: mid-2006, with a
sour crude futures.
  Exchanges in Asia-Pacific
         Dubai (2)
And a second project: the
Dubai Gold and Commodity
Exchange (DGCX),
announced in November 2004.
After establishing gold
contracts, the exchange
intends to cater to a significant
amount of trade in silver,
steel, freight, cotton and
energy products. Planned
start: last quarter of 2005.
       Exchanges in Asia-Pacific
There are two planned
futures exchanges in
Iran. One for
commodities (which has
already started physical
trade), one Euro-
denominated for fuels
and petrochemicals. The
latter, of course, is not
very popular with the US,
and some US authors
suggest it may be a reason
for attacking Iran next.
   Exchanges in Eastern Europe
The Budapest Commodity Exchange,
 created in 1989, which trades in financial
 futures as well as grains and livestock, has
 been quite successful. Nevertheless, its
 commodity futures volume has been falling
 in recent years, not just in relation to its
 financial futures but also in absolute terms.
  ‘Exchanges in Eastern Europe’
Romania’s Sibiu Monetary Financial and
 Commodities Exchange- founded in 1997-
 trades in futures contracts in foreing
 Romanian Commodities Exchange, opened
 in 1992, which also trades in grains and oil
  ‘Exchanges in Eastern Europe’
Warsaw Commodity Exchange, founded in
 1995, deals in futures and options in
 agricultural products and currency. It is part
 of the Polish Commodity Exchange
 network, composed of 18 exchanges spread
 throughout the country.
  ‘Exchanges in Eastern Europe’
Moscow Commodity Exchange (MCE) created in
 late 1992, launched the first futures contract on
 US dollars.
Now, the fastest growing market is the new
 screen-based futures and options exchange
 FORTS – created in August 2001 after the merger
 of the derivatives division of the St. Petersburg
 stock exchange and the Moscow-based electronic
 stock market RTS (Russian Trading System).
              Exchanges in Europe
 Around 20 of the existing exchanges are engaged in active
  commodity spot and to some extent, forward trade (others
  are called exchanges, but in fact, only act as centres for the
  registration of commodity trade transactions). The oldest,
  in Izmir, traces its origin back to 1891.
 In 1997 the Istanbul Gold Exchange was launched to meet
  the demand for future gold products in Turkey. It was
  Turkey's first derivatives market, but remained largely
 Early 2002, the Turkish Derivatives Exchange (TurkDex),
  headquartered in Izmir, was finally granted regulatory
  approval to introduce futures contracts. It started trading
  financial futures, cotton and wheat in February 2005.
             South Africa
 Africa’s most active and most important commodity exchange is the JSE
  Securities Exchange, South Africa that took over SAFEX in August
  2001. SAFEX was formally established in 1988 and has been
  responsible for one of the leading emerging commodity markets. For a
  long time SAFEX only traded financial futures, but the creation of the
  Agricultural Markets Division in 1995 led to the introduction of a range
  of agricultural futures and options contracts for commodities. It now
  trades futures and options on white and yellow maize, bread milling
  wheat, sunflower seeds and more recently soya beans.

 SAFEX trades an average of 100,000 tonnes of product daily and is
  widely recognised as the price discovery mechanism for maize in the
  Southern African region and as an efficient and effective price risk
  management facility for the grain industry. Its prices are quoted in
  several neighbouring countries.
Mostly, a story of failures, at times linked to government policies:
 Alexandria’s Cotton Exchange, then 90 years old, was closed by Egypt’s
  Government in 1956.
 Farmers established the Zimbabwe Agricultural Commodity Exchange
  (ZIMACE) in 1994, in response to the gradual liberalization of state-
  controlled agricultural marketing. The Exchange conducted spot and
  forward transactions and mostly handled agriculture produce, in
  particularly maize. A policy reversal led to a halt of the exchange’s
 The Zambia Agricultural Commodity Exchange (ACE), founded in 1994,
  conducted spot and forward transactions in wheat, maize and other
  agricultural products. The success of ACE led to the development of the
  Kapiri Commodity Exchange in Zambia’s central province and the
  Eastern Agricultural Commodity Exchange, in Zambia’s eastern
  province, both launched in 1997. However, policy reversals (government
  intervention in the maize market) led to the demise of the exchanges.
 Nigeria’s Arusha Commodity Exchange was the result of the conversion
  by the Government of the Arusha Stock Exchange: trading software, staff
  training, everything was inappropriate…
But sometimes, a poor business model was to blame. E.g.,
 The Kenya Commodity Exchange (KACE) was set up in Nairobi in
  1997, to provide the basic services of a commodity exchange. The
  products meant to be traded were agricultural commodities, like
  cereals, dairy products and cotton. In reality, trade has always been
  minimal. The exchange owners intelligently identified another
  potential flow of business, namely aid donors, and re-oriented the
  “exchange” to become a provider of paid-for price information.
  With donor funds, it is so far surviving.
 Three different initiatives in Ghana never found sufficient business
 Similarly for a private-sector driven initiative in Nigeria
 In Cote d’Ivoire, there is a “Bourse” for cocoa and coffee, but it has
  so far not managed to develop any real business.
 Two different initiatives in Uganda, one with clear (vocal)
  government support, did not go to implementation.
 Africanlion, a web-based coffee exchange, has not built up volumes.
Traditional problem: high set-up costs for a good system, but
small economies make it impossible to recuperate costs. A
new “franchising” model may well provide the solution.
   Building an exchange in Africa
   Africa may go far with the creation of the Pan Africa Commodities and Derivatives
   Exchange (PACDEX). The national exchanges (all using the same common
   services) form part of a pan-African network, this would automatically link together
   country warehouses. This, in turn, can form the basis for intra-regional trade.


tied into a
‘Ways to improve efficiency’
        Creation of common platforms.

                Sharing of trading   Sharing of
 MoUs               platforms         clearing


Strategic alliances are crucial for the success of an
exchange. For this to be possible, the exchange should
represent the common interest, not narrow interests.

In practice, those owning or
controlling the exchange may be
short-sighted, and opt for the
safe and known strategy rather
than opening up the exchange
to wider interests.
This has regularly led to the
demise of exchanges – and is
an important argument for
demutualisation as a condition
for the long-term success of an
   ‘Ways to improve efficiency’
Consolidation of commodity exchanges within countries

                      Sharing of trading    Sharing of
      Mergers             platforms          clearing
        Ways to improve efficiency
    Tendency to separate exchange management from direct ownership and
trading interests (resulting in publicly listed, shareholder-owned companies with
                 freely traded shares) appears to be motivated by

    concerns about              self-regulation         investor confidence
    good governance
Thank you

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