The Indian Commodity Markets

THE INDIAN COMMODITY MARKETS
The Indian Commodity markets have witnessed a multifold increase interms of the number of commodity wise transactions and commodity wise turnover. This achievement can be attributed to the
Efforts of MCX( Multi Commodity Exchange) , NCDEX (National Commodities & Derivatives Exchange) who have gone all way out to educate the investors about the commodity markets and demystifying the common myths and resurfacing the surprising realities which the commodity markets offer to its investors. An insight into the commodity markets can unleash the advantages and immense profit potential of commodities over stocks and other investment avenues.
MCX and NCDEX are the face of the Indian Commodity Exchanges while the FMC( Forward Markets Commission) is the watchdog which regulates the national and regional exchanges in India.
MCX and NCDEX offer commodity derivatives over a range of commodities which can be classified as follows-
 BULLION : Gold, Silver, Platinum
 BASE METALS : Nickel, Tin, Copper, Zinc, Aluminum, Lead
 FERROUS METALS : Steel Long
 CEREALS : Maize, Barley
 SPICES : Pepper, Red Chilli, Jeera, Turmeric, Cardamom
 ENERGY & GAS : Crude Oil, Brent Crude Oil, Natural Gas
 OIL & OIL SEEDS : Castor Seeds, Soy Seeds, RM Seed, Refined Soya oil, CPO
 FIBRE : Kapas, Cotton
 PULSES : Chana
 PLANTATIONS : Rubber, Jute, Coffee
 OTHERS : Guar Seed, Gur, Guargum, Mentha Oil, Potato

The Commodity Derivatives available in India are Futures and Forwards.
Futures Contracts are exchange traded where as Forward Contracts are over the counter traded. Futures Contracts are standardized in the form of a Fixed Quantity and Quality Specifications , Price movements can be monitored Any deviation from the aforesaid Quality specifications will attract a penalty where as Forwards do not have any standard Quantity and Quality specifications. Futures are safe as far as the promise of delivery and payment is concerned as Future Contracts are exchange traded, Forwards involve plenty of risk in the form of payments default or delivery default.
Future Contracts are financial instruments which help in the price discovery and Price risk management of various commodities.
Ex of Price Discovery - If a Farmer knows that he is going to produce an X crop in the next 3 months, He can enter into a Futures contract promising to sell it at the prices prevailing in the Exchange on the day of entering into the contract. Once he knows that he is going to get a specific price for his produce he can concentrate on cost trimming and thus maximize his profits. If Price of the crop falls later he stands to gain as he has already locked in a price for his produce, If the Price rises he stands to lose .
Ex of Price Risk management- If a trader knows that he needs a metric tonne of a commodity in the next 2 months, He can enter into a Futures Contract to buy that commodity at the prevailing price on the day of buying a futures position. He thus could lock a price for his requirements, If the price of that commodity increases later he stands to gain , If the price of the commodity falls he stands to lose. The advantage of the contract being an assured delivery of the commodity.


The participants of the Commodity Markets can be classified as:
1.Hedgers - Participants who take positions to offset the possible losses or minimize the possible losses.
2.Speculators- Participants who take positions in anticipation of making profits owing to price swings.
3.Arbitrageurs – Participants who try to capitalize the price variations in different markets.
4. Traders (Includes Retail Investors) – Paticipants who take positions in order to meet their business requirements and other commitments.
One needs to be aware of the following terms while dealing in commodities:
Basis – Difference between the Spot Price and the Futures Price at a given point of time. Basis is never the same , it fluctuates in tandem with Contract Expiry date.
Spread – Price Difference between 2 contracts of a particular commodity.
Intercommodity Spread- Price difference between 2 different commodities.
Contango Market – When the current month futures trade less than that of the next month futures, its known as a Contango Market.
Backwardation Market- When the current month futures trade at a premium when compared to the next months futures is known as Backwardation Market.
In the developed Nations, Commodity derivatives account for a higher trade turnover in comparison to Equity Derivatives. There is still a vast scope for commodity markets to perform better in India. Commodity futures offer better prospects than that of equity futures. This can be attributed to the following:
• Lower Margin Requirements in comparison to stocks.
• Lower price volatility in comparison to stocks.
• Probability of price manipulation is nil.
• Longer trading hours.

The Indian Government can perform its share by trying to minimize its interference and lifting its ban on essential commodities including sugar. Commodity prices are purely based on the demand supply dynamics., as commodities are traded world wide, possibility of manipulation is nil. The Govt. can educate the farmers about the commodity markets and help them in optimally utilising the commodity derivatives. Only 2% of the total transactions are converted to delivery which is not a very good indication, This is due to the high carrying costs involved, costs are high as the delivery centres are commodity specific. If the delivery centres are made available through out the nation, The Indian commodity markets will witness a spurt in volumes accompanied by a significant increase in deliverable Quantity. MCX officially confirmed 10000 crore turnover in a single day which is a phenomenal achievement for India. India has got the potential of registering a 40000 crore daily turnover ,if it can breach that levels , India can transform into “A Global Commodity Trading Hub”

Lets Hope for a Commodity Driven India.
The above articls has been penned by me and has been published in the Prometheus E-Newsletter August 2009 Edition.