Professional Documents
Culture Documents
ON
COMMODITIES
PREPARED BY
COMMODITIES
Prem Kumar
Mr. Suman Kumar Adepu 06BS 2402
Branch head, UTI securities, Ameerpet
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TABLE OF CONTENTS
Executive Summary 6
Commodities Demystified 8
Characteristics 8
FMC 17
Bullion story 28
Base metals 29
Industries we visited 48
Sugar story 51
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Hyderabad Stock Exchange episode
Ban on futures
Speculation
Prescriptions/Suggestions
The concept
Objectives
Participants
Advantages
Operations
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About the organization
Standard Chartered
Appendices
Communication details
o MCX
o FMC
o NCDEX
Business cards
Zink Calculator
References
Bibliography
Webliography
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Table no. 1: Arrivals of Chilli in Guntur market
Chart no. 9: National Spot Exchange for agro products (NSEAP)… The concept
Executive summary
Our endeavor is to find out the status of commodity Derivatives as they stand
in the overall economical, social and demographic picture of our system. The
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impact in economical system is very much obvious and beyond any dispute as
commodities are themselves economical propositions.
But commodities are also subject matter of our social fabrication. Any society
comprises of two set of people: Traders and farmers. Commodities are
affecting the lives of both set of people. Their business practices and
strategies are rapidly changing and commodity market is very much
influencing it. We have studied that impact. It is noteworthy that the new
world economic order is of convergence. All sectors, economies and trades are
being interlinked. Whether we like it or not, our businesses are no more ours.
Entire world economy is involved into it. The same applies to commodities.
Whether one participates into it or keeps himself aloof, he, in no ways can
escape its effects.
However, it has to be kept in mind that as an asset class and even as a tool of
risk minimization (for Traders, Farmers and businesses); it is a very new and
nascent proposition in India. Even though Commodity futures have
their long history in this country, periodical bans and derogatory
government policies have hindered their prospects to develop as a
tool for hedgers (risk minimization), leave alone the matter of their
development as an investment avenue. Their primary goal of true price
discovery is also much waited.
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• To develop a business development model for UTI SECURITIES as a
brokerage firm by targeting key markets and business houses in and
around Hyderabad, giving main emphasis on sugar and metal
companies.
Commodities Demystified
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A futures trading is a standardized agreement between a buyer and a seller
to exchange a pre agreed and standardized grade of an asset at a specific
price and future date. The item or underlying asset can be an agricultural
commodity, a metal, mineral, energy or commercial commodity, a financial
instrument or a foreign currency.
Characteristics
c. The units of price quotation and trading are fixed in these contracts,
parties to the contracts not being capable of altering these units.
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f. In futures market actual delivery of goods takes place only in a very
few cases. Transactions are mostly squared up before the due date of
the contract and contracts are settled by payment of differences
without any physical delivery of goods taking place.
• Trading
• Clearing
• Settlement
A buyer and seller come together, negotiate and arrive at a price. This is
trading. Clearing involves finding out the net outstanding, that is exactly
how much of goods and money the two should exchange. Settlement is the
actual process of exchanging money and goods.
In a spot transaction, the trading, clearing and settlement happens
instantaneously where as a contract by which two parties irrevocably agree
to settle a trade at a future date, for a stated price and quantity. No money
changes hands when the contract is signed. The exchange of money and the
underlying goods only happens at the future date as specified in the contract.
In a forward contract the process of trading, clearing and settlement does
not happen instantaneously. The trading happens today, but the clearing and
settlement happens at the end of the specified period. A forward is the most
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basic derivative contract. We call it a derivative because it derives value from
the price of the asset underlying the contract.
A derivative is a product whose value is derived from the value of one or
more underlying variables or assets in a contractual manner. The underlying
asset can be equity, forex, commodity or any other asset. Derivative contracts
are of different types. The most common ones are forwards, futures, options
and swaps. Participants who trade in the derivatives market can be classified
under the following three broad categories.
• Hedgers
• Speculators
• Arbitragers.
1. Hedgers: Hedgers face risk associated with the price of an asset they use
for their business. They use the futures or options markets to reduce or
eliminate this business risk. These are the people who have the direct
interest in the underlying asset.
2. Speculators: Speculators are participants who wish to bet on future
movements in the price of an asset. Futures and options contracts can give
them leverage; that is, by putting in small amounts of money upfront, they
can take large positions on the market. As a result of this leveraged
speculative position, they increase the potential for large gains as well as
large losses.
3. Arbitragers: Arbitragers work at making profits by taking advantage of
discrepancy between prices of the same product across different markets. If,
for example, they see the futures price of an asset getting out of line with the
cash price, they would take offsetting positions in the two markets to lock in
the profit.
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cotton etc., are some of the common commodities. For e.g. apple juice can be a
commodity whereas the ‘Real’ apple juice cannot be called a commodity. One
may be surprised to know that in the US commodities markets there are
futures available even on cattle.
Commodity includes all kinds of goods. FCRA defines "goods" as "every kind
of movable property other than actionable claims, money and securities".
Futures' trading is organized in such goods or commodities as are permitted
by the Central Government. At present, all goods and products of agricultural
(including plantation), mineral and fossil origin are allowed for futures
trading under the auspices of the commodity exchanges recognized under the
FCRA. The national commodity exchanges have been recognized by the
Central Government for organizing trading in all permissible commodities
which include precious (gold & silver) and nonferrous metals; cereals and
pulses; ginned and unginned cotton; oilseeds, oils and oilcakes; raw jute and
jute goods; sugar and Gur; potatoes and onions; coffee and tea; rubber and
spices, etc.
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Not bulky Bulky
Warehousing not required Warehouse required
No variation in quality Varying quality of assets
Investor’s Perspective
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Commodities futures represent a good form of investment because of the
following reasons:
Importer or Exporter
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months before the actual transaction, thereby ironing out any change
in prices that happen subsequently.
Producer’s Benefits
• Lock-in the price for the produce – For farmers, there is every
chance that the price of their produce may come down drastically at
the time of harvest. By taking positions in commodity futures they can
effectively lock-in the price at which they wish to sell your produce.
This is termed as hedging against the market price in future.
• Assured demand – Any glut in the market can make them wait
unendingly for a buyer. Selling commodity futures contract can give
them assured demand at the time of harvest.
Consumer’s Perspective
• Cost Control – For an industrialist, the raw material cost dictates the
final price of their output. Any sudden rise in the price of raw
materials can compel them to pass on the hike to their customers and
make their products unattractive in the market. By buying commodity
futures, a producer can fix the price of its raw material thus saving the
customer from a sudden price hike.
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The Indian Picture
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Coming to the Indian scenario, despite a long history of commodity markets,
commodity markets in India are still in their initial stages of development.
The essential contributors of this scenario include stringent regulatory
restrictions, intermediate ban on commodity trading and policy interventions
by the government. Commodity markets have a huge potential in the Indian
context particularly because of the agro-based economy. With the
government's initiative for agricultural liberalization, commodities' trading in
India has gained increased momentum in activities. Commodity markets are
of great help not only for their participants but also the economy as a whole.
The twenty year bear market for commodities has drastically reduced the
prices of many commodities to their lowest levels. The present shift in trend
in commodity trading complimented by the global increase in demand will
certainly hold a promising future for the investments in this segment. Indian
markets have recently thrown open a new avenue for retail investors and
traders to participate: commodity derivatives.
For those who want to diversify their portfolios beyond shares, bonds and real
estate, commodities are the best option. Till some months ago, this wouldn't
have made sense. For retail investors could have done very little to actually
invest in commodities such as gold and silver, or oilseeds in the futures
market. This was nearly impossible in commodities except for gold and silver
as there was practically no retail avenue for punting in commodities.
However, with the setting up of three multi-commodity exchanges in the
country, retail investors can now trade in commodity futures without having
physical stocks! Commodities actually offer immense potential to become a
separate asset class for market-savvy investors, arbitrageurs and
speculators. Retail investors, who claim to understand the equity markets,
may find commodities an unfathomable market. But commodities are easy to
understand as far as fundamentals of demand and supply are concerned.
Retail investors should understand the risks and advantages of trading in
commodities futures before taking a leap. Historically, pricing in commodities
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futures has been less volatile compared with equity and bonds, thus
providing an efficient portfolio diversification option.
The Regulator
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To make recommendations generally with a view to improving the
organization and working of forward markets.
To undertake the inspection of the accounts and other documents of
any recognized association or registered association or any member of
such association whenever it considerers it necessary.
Our Methodology
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Commodity Market: A new investment avenue
The Beginning…………
Our first objective was to explore the project and plan it
periodically. As the topic given to us was quite new and very
less study had so far been done, it was really a difficult task to
go ahead with our project…
Merely understanding and knowing the basics and even the intermediary
things were not going to help us. So our next endeavor was to understand the
subtle complexities of commodity markets. We would rather like to use here
the more appropriate word of commodity future because the commodity
market is entirely future market up to now.
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Mr. Suman Kumar Adepu, (Branch Head, Ameerpet, UTI securities)
Learning commodity market almost took 15 days of ours. We were now very
much comfortable with the mechanism, trends, nature and analysis of
commodities.
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The second phase of our project was to explore the real world of commodities
which was not within the four walls of our office. It was neither in the
commodity terminals nor with the books, journals and literatures. We had to
understand the practical realities of this very nascent market. We had to go
to different stakeholders, participants, traders, farmers, brokers and all the
concerned people for whom the commodity market (read future) was
envisaged.
The next few days were to face the hard realities of commodity trading in
India. We had to gauge the progress, this market has so far made and the
ground realities associated with it. It was now important for us to know
whether the market is same on ground as it appears from outside. We had to
enter the tough, exciting and promising terrain of commodity futures.
Tough, because after 6 years of introduction, it was not mature, the real
stakeholders were not fully participating. Also because. to our knowledge, the
commodity markets had still not penetrated even the crust of the Indian
Economy.
Exciting, because, commodities market has became as big as 76 % of India’s
GDP within san of 3 years. Because people out there were highest paid, it is
the fastest growing sector of Indian economy and because this sector has
yield the highest returns with least calculated risk to its investors.
Promising because, this market promises two most difficult propositions of
business: True price discovery and Risk management.
I am putting all these things across because it is very much obvious that
these traders have their stake in the commodity future market. They are the
one, who should have actively participated in the futures market for hedging
(risk management). They have their obvious interest in the future market
because futures are very much related to their business activities. Price
movements in the future market reflect in their own business and they are
prone to the activities and practices of the commodity exchanges.
We met a number of traders, brokers, mill owners and whole sale merchants
to find out what they thought about the different commodity exchanges. We
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introduced ourselves as research trainees from ICFAI business school that
were there to undertake research on perceptions of people towards
commodity futures trading and its comparison with other investments.
We came to know from them that they call commodity futures markets
as “Dabba Trading”
The found the initial perception of commodity market to be very
negative and inflexible.
They said that it was meant to create unnecessary volatility in the
market price, and there wasn’t any correlation between spot prices
and the future prices.
They believed that the futures market moves only due to speculation
by the few top players like ITC, Reliance etc who dominate the whole
market.
The idea of delivery did not suit them mainly due to the freight
charges involved in delivering the goods from their respective
warehouses to their place of business and moreover they were not
clear regarding the procedures to be followed for delivery of
commodities from the exchange.
The traders shared with us their experiences where last year they lost
crores of rupees due to the game in “kabuli channa”.
Farmer’s Story:
1
Source: Conversation with Pulse Traders at Begum Bazzar
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Farmer is one of the biggest stake holders of commodity (AGRI) market. So
we decided to interact with farmers also. We searched on internet about
Farmers association in Hyderabad and found the address and contact
number. We called next morning the General Secretary of Federation of
Farmers Association Mr. P Chengal Reddy and told him about our project.
We got appointment with him and met him at his office at Shanthi Nager.
Mr. Chengal Reddy Introduced us with many farmers representing
different province of the state and producer of different crops.
We were shocked by knowing that none of the farmers knew about the
commodity exchanges and future derivatives. Even Mr. Reddy was also not
having much idea. We understood that awareness level is key
responsible factor for less participation of farmers in commodity futures.
Mr. Reddy told us the various factors which are reason for farmer’s distress
condition:
Apart from all this, many reasons were being counted but the main theme of
the story was that farmers do not get remunerative price of their produce
because of cartel of traders.
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2Example 1:
The sweet oranges are sold in a lot of 10 tons and there is 1 ton "chhut" on
this. This “chhut” means Relaxation. It means farmers sell 10 tons of sweet
orange at a price of 9 tons. Even these 9 tons also are at a distress price.
This practice is running at
Kothapet Market
Dilshukh Nagar
Hyderabad
(In fact, this is the mode in entire country.)
Sweet orange farmers do not have any escape.
Example 32:
Most chilly farmers sell the red chilly at a price of 20 Rs. per Kg, while end
consumers pay a price of 120-150 per kg for chilly powder. There is a large
sum of 100-130 Rs. per Kg goes to multi layered middle man.
Though at Guntur where MCX and NCDEX have their warehouse gets price
of 50 Rs. per Kg.
We understood how Exchanges can create an environment where farmers will get
good prices.Once the farmers of India will get price, most of the issue related to farmers
will be addressed.
4Interaction with MCX and FMC:
2
Source: Conversation with Farmers
3
Source: Conversation with Mr. P Chengal Reddy
4
Email communication in Appendix:
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We sent email questionnaire to Research and
development department, MCX as well as Mr.
Anupam Mishra, Director (IR) Forward Markets
Commission about the concern raised by the trader. We got quick and positive
reply from them. This has shown us the dedication of regulators and facilitators
for the reform.
Issues raised by traders were very generic in nature and only FMC
or exchange was in capacity to answer it. So we raised the same
concern to them.
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Mr. Reddy has shown the willingness to meet the traders to solve their
problems. This was a very positive and constructive step towards organizing
seminar at chilly mandi.
Apart from this we also had a talk on farmers issue with Mr. Madhav Reddy
which was raised at farmer’s association. Mr. Reddy said that how Exchange
can help farmers to get the true price. On our query, how farmers with
delivery intentions at other part of country where exchange do not have their
warehouses can trade through it, Mr. Reddy said we can not provide
warehouse in each city as it is not financially viable. But spot market on an
electronic platform which is already started in 4 states can be a solution.
MCX as well as NCDEX is opening electronically integrated spot market in
each city of India where farmers and traders from all over country can trade
on single platform. In this case existence of trader’s cartel will not be
possible.
Due to lack of Political repercussion these exchanges could not get govt. nod
in Andhra Pradesh under APMC Act. (Government of Andhra Pradesh)
Which comes under state legislation to open Spot markets in the state?
Bullion Story
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Silver and Bullion merchants. This street is known as the biggest market for
precious metals in and around Hyderabad.
Here, we tried to interact with traders to educate them about the benefits of
using exchange as a platform for their advantage.
Base Metals
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secunderabad to meet the metal traders and later on to Balanagar
industrial area where we fixed appointments with a number of
industrialists and big traders.
Our Discoveries:
Traders here are of varying nature, some are dealers in scrap and
prime metals while some others deal in ingots and finished materials.
The turnover in this market runs from 1 crore to 100 crores.
The big players in this market from whom these traders procure most
of their materials like ingots and prime raw material are Hindustan
Zinc, Adani and Sterlite copper and some traders in Whivandi in
Maharashtra.
The industrialists here buy a considerable quantity of goods from the
local market as well in the form of scrap.
Although all the traders were aware about the overview of metals in
world market but still they were not exposed to exchange traded
contracts.
The traders here did agree with us that exchange rate and futures
contracts have a great influence on the normal business but hardly
anybody had the accurate understanding of how the exchange
functions.
Few traders who have earlier invested in the exchanges had also
stopped trading after incurring huge losses.
At Balanagar Industrial area, we met industrialists who manufacture
metal components. They are the people who have interests in zinc,
copper; aluminum and nickel. They are mainly SMEs which
manufacture metal components of machines and other equipments.
We found that few of these traders did actually did some study to
participate in the futures market to prevent their business from
market risks.
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Most of the contracts here are made for a future period, which means
we enter into contract with our customers to supply finished goods at
an agreed fixed price within the next 5 – 6 months. Told Mr. Santosh
Rungta5, an Industrialist in Balanagar.
These are the class of people who are exposed to exchange trading and
also participate in it. But the noticeable thing is that very less traders’
trade on MCX or NCDEX platform. Most of them trade through LME
or COMEX platform
When asked the reason they said that the exchanges in India were not
that mature in terms of rules and regulations, proper framework and
governing body.
Trading through LME gives them more hedges against their business
risk, since the Indian metal market is influenced by the movements in
the foreign market mostly US and china.
Moreover they told us that they import a large quantity of their goods
so trading in MCX do not give them any major advantages since there
is no delivery of goods like Zinc, copper, aluminum etc. in India now.
They also pointed out to us the difference between the futures market
and the spot market rates the reasons for which were not well
explained.
5
MD, Tapasya Casting Pvt. Limited
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of the total chilli trade in AP. The other commodities traded in this market
are Onion and tamarind.
Chilli is mainly traded in the months of march – may which is the harvesting
season for chilli and in this season the fresh crops start coming into the
market. The following table would clear the sowing and harvesting pattern of
chilli in India.
Harvesting
Sowing season
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market rate which is taken into consideration for further transactions in
other markets like the malakpet market.
In malakpet, farmers from different places and regions bring their produce
and place them for open auction. Every day about 8,000 to 10,000 bags arrive
in this market in the season time which is from January to April. During this
time the arrivals at Guntur is somewhere in the range of 1,00,000 to 1,20,000
bags. In the auction whichever trader, broker or the exporter makes the
highest bid takes away the produce and the farmers get their price.
We Discovered That:
This was a very unscientific method of price discovery and that the
farmers do not receive their right price all the time.
Another draw back of the system was that the farmers are bound to
sell their products at the market price because they cannot afford to
take back their goods due to their huge transportation costs.
We thus discussed with them the concept of futures trading and how it can be
beneficial to the traders as well as the farmers but a number of problems and
issues were brought to light by those traders
As a part of our endeavor to solve few of their issues, we wrote a mail to MCX
India, which is a well known commodity exchange. We received a positive
response from them and very soon arranged a meeting with Mr. Madhav
Reddy, Vice President, Business development in MCX. We discussed with
him all the issues brought forward by the traders in the chilli market and we
did arrive at certain conclusions and solutions on some problems. We
remained in constant touch with the MCX people from there on.
There after we again approached the Chilli association and after a series of
meetings with the President and the Gen secretary of this association, we
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planned to organize a seminar here with the help of the Association to
educate the traders and farmers about the Commodity exchanges and futures
contracts and how they can be benefited by it.
We had identified that the biggest problem in this market is the lack of
proper awareness and information about these exchanges and thus through
this seminar we tried to address these issues and enabled the traders to get
the right information straight from the horse’s mouth. The arrangements of
the seminar were being done with the help of MCX (Multi Commodity
Exchange) and the dates were to be finalized very soon.
Our seminar was scheduled for 25th April 2007. Our guests in the seminar
included:
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Mr. D. Raghevender President AP Grain & Seeds Merchants Association
Mr. Rajesgwar Secretary AP Grain & Seeds Merchants Association
Mr. Someshwar Treasurer AP Grain & Seeds Merchants Association
And other important board members and office bearers of the association.
Our speakers were:
Mr. Chirag Seth Research head STCI Commodities
Mr. Ali Spices in charge STCI Commodities
Mr. Madhav Reddy VP, Business Development MCX
Mr. Pradeep Reddy All India Product head, Chilli MCX
Traders in this market buy and sell goods on every day basis and there are
few instances where the traders take forward contracts of sale i.e. they enter
into a contract of sale of some specified quantity of goods at an agreed price
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on some specified future date. In such cases hedging should be used by taking
an inverse position in the futures market to lock in the price of goods that the
trader agrees to sell on a specified time.
Our next speaker was Mr. Ali, the spices specialist at STCI commodities. He
gave complete outlook on chilli, its fundamentals, and production, acreage
and export figures. He also discussed the future expectations of chilli, its
price targets in the medium and long term. Traders showed special interest
when they were told that chilli in Guntur accounts for about 50 % of the chilli
traded in the country and that the malakpet market contributes to about 10
% of the volume traded in Guntur.
Indian Scenario:
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world. Chillies are the most common spice cultivated in India. It is
estimated that India produced 1060345 tons of dry chilli from an area
of 8,84,183 hectares in 2003-04. 6
Almost all the states of India produce the crop. The important chilli
growing states of India are Andhra Pradesh (46%), Karnataka (15%),
Maharashtra, Madhya Pradesh, Orissa, West Bengal, Rajasthan and
Tamil Nadu.
Chillies can be grown during the entire year at one or the other part of
the country. However, the major arrival season extends from February
to April. The crop planting starts from August and extends till
October. While, the harvesting begins from December with 5% of the
arrivals usually reported in this month. The peak arrivals are
reported in February to March.
There are several varieties of chilli cultivated in India. The most
popular among these are, Sannam, LC 334, Byadgi, Teja, Wonder Hot,
Jwala etc.
The major chilly growing districts of Andhra Pradesh are Guntur,
Warangal, Khammam, Krishna and Prakasham.
The Indian scenario of chilli includes the fundamentals like demand and
supply. Arrivals in the market form an important aspect of supply and it is
shown with the help of the following table which depicts in details the
arrivals in the Guntur market that forms the benchmark for all chilli traded
on any exchange.
6
Source: MCX
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7
He presented a full picture of the chilli production over a 1 year period, the
reason for decline in 2005 mainly being the production area being used for
other crops than chilli and there has been an increase in production due to
the export demand from countries like Srilanka, Pakistan and other
countries.
7
Table no: 1
Source: STCI commodities
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Area & Production for Chili(1996-97 to 2006-07)
Kg/Hect
(000)
900000 1200
1000
700000
800
500000 600
300000 400
100000 200
7 8 9 0 1 2 3 4 5 6 )
-9 -9 -9 -0 -0 -0 -0 -0 -0 -0 (e
96 997 998 999 000 001 002 003 004 005 -07
19 1 1 1 2 2 2 2 2 2 06
20
Year
A rea (Hect) Production (Tons) Y ield (Kg/Hect)
Production
Year Area (Hect) (Tons) Yield (Kg/Hect)
Export of chilli has always been a very important aspect of discussion and it
is one important factor which governs the price movement as well.
8
Chart no. 1
9
Table no: 2
Source: STCI commodities
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Chilli Export
169000
149000
129000
109000
Year
89000
69000
49000
29000
9000
2000-01 2003-04 2004-05 2005-06 2006-07e 2007-08p
Tons
10
This increase in exports is mainly due to fresh demand coming US and from
the Asian countries.
Nepal, 3%
Malaysia,
6%
Others,
Sri Lanka,
28%
24%
11
He also talked about the technical aspects relating to chilli some of them
being the correlation between futures and the spot market at Guntur.
11
Chart no.:2
Source: STCI commodities
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Average Spot Prices Average Future Prices
7200 7200
6200 6200
5200 5200
Prices
Prices
4200 4200
3200 3200
2200 2200
1200 1200
Ja n F eb Ma r A pr Ma y J un Jul Au g S ep Oc t N ov De c
n
b
r
r
y
n
l
g
p
t
v
c
Ja
Fe
Ma
Ap
Ma
Ju
Ju
Au
Se
Oc
No
De
Month
2005 2006 2005 Month
2006
Finally before he wound up, he showed everybody the technical chart of chilli
trading in NCDEX. This was the daily candle stick chart of chilli from
January 2007 onwards which shows the trends in the price of chilli over the
last few months, the fibonacci series distribution can also be seen clearly in
the chart where the percentage distribution can be seen as 61.8 %, 50 %, 38.2
% and so on.
12
Chart no.: 3
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13
There after we laid emphasis on the delivery issue and we called the MCX
people to answer all their queries.
We had gathered from research that people in that market had the following
issues and they sought clarifications on the following matters:
Firstly they were not satisfied with the quality specifications of the
CHILLI traded in the exchange. They said that the percentage of
impurities in the exchange traded Chilli sums up to about 35% were
as in the spot market that percentage comes to only about 15%. They
blamed the exchange for adding extra impurities to make that
percentage as 35
Secondly they said that the delivery mechanism at the exchange
accredited warehouses were not up to the mark.
There is lack of transparency, no proper control, hidden costs and
other problems in the delivery.
13
Chart no: 4
Source: STCI commodities
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One trader told us that the exchange provides packaging of chilli in
bags of 25 kg where as in the spot market it is traded in bags of 40 kg.
They did not like this disparity.
Last year, there was a huge mess created by NCDEX in Guntur where
traders were denied delivery of goods when the prices were on a roll
towards the higher side and there was a lot of unrest and confidence
was breached by the traders.
Now, this seminar turned out to be hot debate between MCX officials and the
traders. Mr. Madhav Reddy explained the delivery rules and the quality
issues and specifications were taken up by Mr. Pradeep Reddy the product
head of chilli.
Mr. Madhav Reddy explained the contract specifications and rules to be kept
in mind before trading through MCX.
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Source: http://www.mcxindia.com/RedChilli_apr07.pdf14
Most of the traders who raised issues relating to delivery suggested MCX to
open warehouses and delivery centers in Hyderabad so that the traders are
saved of the transportation cost in delivering goods from Guntur to
Hyderabad. They even promised MCX to
14
Chart no.: 5
Source: www.mcxindia.com
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The Seminar Effect
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The FAPCCI Episode:
An Introduction:
Our Objective:
15
Source: FAPCCI
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3. To create the awareness about Commodity futures among the
Industries and to explore the possibility to use the Commodity futures
as a hedging tool in a real industrial scenario.
Our Approach:
This part of our project was indeed a very ambitious one. Getting access and
targeting the entire Industry community was a giant task. But this endeavor
had a great business opportunity for our organization. Hence, we contacted
FAPCCI board. We met with two Deputy Secretaries of FAPCCI, Mr, Ananth
Reddy & Mr. C.V.Rao.
We held a long discussion of about one hour and we discussed several issues
regarding FAPCCI, its members and business community, in general. We
also discussed about ways in which commodity futures contracts can be
introduced to them for mitigating their price risk by hedging and locking in
their profit.
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For attending the seminar, the CEO of our company Mr. Deepak Dave gave
his personal nod to attend. He came with his team (Mr.Chirag Seth, Head,
Commodity Research, STCI commodities ltd.).
Prem Kumar (one of us) was given the opportunity to address the gathering
of more than 100 industry heads. He talked about the Commodity Futures
contracts as a risk mitigating tool for price risk in the business of SMEs &
SSIs. Our effort was much appreciated by all the participants of the seminar.
We got many participants who were inquisitive about commodity futures and
its scope in their business model. We also got confirmation from the President
of FAPCCI for arranging a one day workshop on commodity futures. This was
a great business opportunity for our company and our efforts also got
acknowledged by CEO, STCI Commodities Limited himself.
Industries:
We also planned to meet as many industries as possible to get the real feed
back from them. We decided to convince them individually about the viability
of commodity futures in their business. In this effort, we mailed around 50
industries about commodity futures on a trial basis. We also talked to them
on phone and got appointment with many of them. Our approach was to
directly talk to heads of these businesses.
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Some of the key Industries, we interacted were:
Our meetings with all these people were very fruitful. Apart from the huge
business opportunity, we generated for the company, it also gave us an
exposure to the industrial scenario of A.P.
16
Source: Mr.U.M.Bhandari.C.M.D , Cubex Tubings pvt.Lvt.
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situation. They had to now procure raw metal at a higher price. This led
to their cost of production being more than the selling price. It made them
incurring heavy losses in spite of having good orders.
If they would had taken commodity futures contracts earlier, they would
not been suffering losses even in the worst scenario. They could have
locked up their profit margin and commodity futures contracts would have
covered their price risks.
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Sugar Story: A bitter situation
2. Cane-pricing act was enforced to provide good price to farmers. The price
at which sugarcane are procured by the
mills is controlled by central and state
government through Statutory
Minimum Price (SMP) and State
Advised Prices (SAP) respectively.
3. Due to unpaid dues to cane farmers, many of them switched over to other
crop that has its effect on the supply of sugar cane thereby price tends to
increase.
17
Source: http://www.indiansugar.com/president/index.htm
18
Source: Based on conversation with sugar mill owners
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4. Sugar as a commodity is currently faced with a peculiar situation of huge
inventories, plunging prices, unpaid dues to cane farmers and mills suffering
losses. We can see below the graph of production, consumption as well as
surplus.
19
5. Currently, the Indian sugar industry pays the highest cane price in the
world. Cost of producing one quintal of sugar is about Rs 155020 but not
realizing more than 1300 Rs per quintal. For paying unpaid due to the cane
grower, mill owners finding 250 Rs loss a better bet than taking a loan from
any bank. The down-sliding price of sugar is not Indian specific but it is
world market phenomenon.
International trend
21
19
Chart no. :6
20
Economictimes 9/05/07
21
Chart no.: 7
Source: Special Commodity Report: http://www.mcxindia.com/
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In India, government policies, both at the Centre and State levels have
played a crucial role in the development of the sugar industry. The sugar
economy in India, like many other countries, is highly regulated, starting
from sugarcane to the use of end-product sugar. Government control, covers
all aspects of sugar business i.e. licensing/capacity/cane area, procurement/
pricing/sugar pricing/distribution and Imports and exports. Even the by-
products are subject to government control.
Government control
• Fixed ocean freight reimbursement @ Rs. 350/- per tonne of the sugar
exported.
Sugar import is allowed under Open General License (OGL). Customs duty at
60% besides countervailing duty of Rs. 850/- per tonne equivalent to 7.5% is
levied on imported sugar. Imported sugar is also subject to the monthly
release mechanism & stock holding limits as applicable to domestic sugar.
Importers are also required to surrender 10% of imported sugar as levy at
prices notified by the Government.
22
Special Commodity Report: http://www.mcxindia.com/
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The internal sugar prices are largely governed by the
releases of sugar made by the Government. Higher the
release lower the price, lower the release higher the price.
free market prices also through the issue of monthly dispatch orders to all the
sugar mills in the country based on demand supply situation in the country.
Following acts and orders through which government regulates the sugar
Industry.
23
Source: http://www.indiansugar.com/
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• Sugar Development Fund Act, 1982
• LSPEF Act 1976
• Sugar Development Fund
Rules, 1983 (Government
enacted the Sugar
Development Fund Act &
Rules, which provide for levy
of Rs.l4/-per qtl. of sugar known as Sugar Development Fund
(SDF). The SDF is utilized for granting several term loans to sugar
mills for modernization and grants for research projects in the
sugar industry besides creation of buffer stocks as and when
required to ensure price stability.)
24
Source:www.mcxindia.com
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Why Futures in Sugar
Since Sugar industry is being slowly decontrolled by the government, market force would
be putting its impact on the price behavior of the commodity. India is the only country in
the world where sugar price goes against the sugarcane price. It indicates too much
interference of the government in the industry. For the industry to become competitive,
allowing future trading would lead to revivals of real market forces which will be for
good health of the industry in the long term. All the factors for success of future trading
such as organized and developed spot market, large number of participants, and active
traders are very much present in the Indian sugar industry. By products of sugar cane
industry is getting a lot of attention and it would add depth in the market. Sugar based
new industry such as ethanol and its use as fuel that has been mooted by government
would constantly strengthen the scope of sugar future trading.
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Practical Hedging Example Sugar:
Example25 In Dec 2006 if a sugar mill owner expects an output of 5000 tonnes
of sugars in May 2007. If Sugar mill Owner has done a future contract for
May 2007, He might have got a sale contract at price of 1703.Today since spot
price of Sugar in May2007 is nearly 1200-1300.
He could have cover his short position and booked a profit of nearly 400-500
Rs. Since right now the selling price in spot market is even less than Cost
price, this business loss could have turned into profit even in this worse
market scenario.
In case in opposite scenario if price of sugar have rose more than 1700. Let’s
say 1900.Future contract may give loss. This can be effectively avoided by
putting a strict stop loss at resistance say 1720.
Numerically
25
Assumed situation with real data
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Future Price 1270 Rs/ql
1703-1270=433 Rs/ql
Business profit
1900-1550=350 Rs/ql
1720-1703=17 Rs/ql
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The South India Sugar Mills Association (SISMA)
From our search in sugar from internet, we learnt about The India sugar mill
association (http//www.indiansugar.com/). The Andhra chapter comes under
(SISMA) The South India Sugar Mills Association. We called the General
Secretary of SISMA Mr.R.S. Bhale Rao and had telephonic talk with him and
fixed an appointment. At the same time we got database of sugar mills. We
used the database and followed these companies.
Prudential sugar
Rayalseema Sugars
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GMR Industries
Background Note
GMR Group is one of the biggest corporate house in India with core expertise
in Infrastructure, diversified in various sector like energy, manufacturing as
well as agri business.
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This fact is very much of concern that Indian sugar is much out of
competition in term of quality and manufacturing cost. Some times price of
cane is much more than the price of refined sugar in world market.
The first reason being Kind of harvesting is done in India. “Indian socio
cultural formation has ruined the agricultural system. You will find 28000
families with 28000 plots of small land in just 32 acres of land and each of
them having various interest of cultivation. This is main hurdle in standard
corporate cultivation with use of machinery. ”says Mr R. Ramakrishnan26.
Although, GMR is in talk with these small landlords to integrate lands for
initiating corporate cultivation. Meeting 28000 landlords, convincing them
and bring them on common platform itself is hectic task and require a big
deal of time. He was not much aware about operation of future market.
26
Joint Managing Director, GMR industries Limited
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Hyderabad Stock Exchange (HSE) episode
Before emergence of BSE and NSE, Hyderabad Stock exchange had a good
volume of trading. But the pan India reach of BSE and NSE has posed a
threat on these regional stock exchanges. There business has come down
drastically. Hardly a few trades take place on these exchanges. This has
given a crisis to the exchange.
To sustain in the market and grow, HSE has taken several restructure
measures. It is in the process of demutualization. It has floated a 100 %
owned subsidiary named HSE Securities Ltd. This new company acts as a
broker of NSE and BSE. It gives the facility to its brokers to trade in NSE &
BSE through its own platform. By this way, it has managed to keep it
relevant in this market scenario and also is a very good source of revenue
generation for it.
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• Interconnected Stock Exchange
We were assigned the task to explore the possibility of similar kind of tie up
with Hyderabad Stock Exchange also. Our CEO Himself briefed us about the
possible intricacies of such possible collaborations and mandated us to
approach HSE on behalf of the company.
The outcome of the meeting was that they were convinced with this idea but
at the same time all complication of legal aspect needed to be addressed. So,
we were told to submit a detailed proposal for this joint partnership and for
due diligence.
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Commodity Sutra… An Initiative
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Commodity exchange in India27
The list of exchanges that has been allowed to trade in commodities are
1. Bhatinda Om & Oil Exchange Ltd., Batinda.
2. The Bombay Commodity Exchange Ltd.Mumbai
3. The Rajkot Seeds oil & Bullion Merchants` Association Ltd
4. The Kanpur Commodity Exchange Ltd., Kanpur
5. The Meerut Agro Commodities Exchange Co. Ltd., Meerut
6. The Spices and Oilseeds Exchange Ltd.
7. Ahmedabad Commodity Exchange Ltd.
8. Vijay Beopar Chamber Ltd.,Muzaffarnagar
9. India Pepper & Spice Trade Association. Kochi
10. Rajdhani Oils and Oilseeds Exchange Ltd. , Delhi
11. National Board of Trade. Indore.
12. The Chamber Of Commerce, Hapur
13. The East India Cotton Association Mumbai.
14. The Central India Commercial Exchange Ltd, Gwaliar
15. The East India Jute & Hessian Exchange Ltd,
16. First Commodity Exchange of India Ltd, Kochi
17. Bikaner Commodity Exchange Ltd., Bikaner
18. The Coffee Futures Exchange India Ltd, Bangalore.
19. Esugarindia Limited.
20. National Multi Commodity Exchange of India Limited.
21. Surendranagar Cotton oil & Oilseeds Association Ltd,
22. Multi Commodity Exchange of India Ltd.
23. National Commodity & Derivatives Exchange Ltd.
24. Haryana Commodities Ltd., Hissar
25. e-Commodities Ltd.
Out of these 25 commodities the MCX, NCDEX and NMCE are large
exchanges and MCX is the biggest among them.
27
Source: PTI / New Delhi April 11, 2007
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Future Trading: the Growth story
• The turnover would have hit the Rs 37 lakh crore level, but for this
decline in business in the second half of March, a commodity analyst
said.
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• Leading agri-commodity exchange NCDEX continued to march ahead
with its turnover rising to Rs 42,982 crore during March 16-31 from Rs
41,665 crore during Mar 1-15 and Rs 33,632 crore in February 16-28.
28
http://www.pib.nic.in/release/release.asp?relid=17932&kwd
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• The three major commodity exchanges had a combined turnover of Rs
36.37 trillion (Rs 36, 37,009 crore) during the financial year.
• On the stock markets, the BSE and the NSE clocked a total turnover of
Rs 74, 15,257 crore due to introduction of 49 new stocks futures during
the year.
• The commodity futures market has been growing at a higher pace with
its share in the total pie increasing from around two per cent in 2004-
05 to 30.7 per cent in 2005-06 and 32.9 per cent in 2006-07.
• The pace of growth of commodity futures would have been much more,
if the government had not banned futures trading in the price-sensitive
agro commodities like urad, moong, tur and wheat in the second half of
2006-07. The ban halted its pace of growth from 126.4 per cent in the
first half of 2006-07 to 32.7 per cent in second half of 2006-07.
• Among the five major exchanges that allow futures trading, the
National Stock Exchange accounts for 66.6 per cent, the Multi
Commodity Exchange (MCX) 20 per cent and the National
Commodities and Derivatives Exchange (NCDEX) 10.5 per cent. The
BSE has a minuscule 0.50 per cent share, while the NMCE accounts
for the remaining 2 per cent.
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The Roadblocks: Commodity trading despised
Ban on Futures:
• The government banned futures trading in wheat and rice on February
28 when the Budget was presented in Parliament while announcing a
freeze on launching new contracts till an expert committee submits it
report. Earlier, urad and chana futures were banned.
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his satisfaction at the performance of MCX and hoped that India will become
global hub of commodity trading in near future.
Speculation
For a long time since the Forwards Contract (Regulation) Act 1952,
commodity trading was in disrepute because of unregulated speculative
activity. The attitude towards commodity trading was one of suspicion and
frown. Now things are changing for the better as both the government and
other stakeholders such as traders, investors, farmers, regulators and
financial institutions have realized that it is not enough to set up commodity
exchanges but a strong regulatory mechanism should be in place for orderly
functioning of these exchanges so that both individuals and institutions
participate on a large scale to bring about price discovery and stability to the
market. The ultimate beneficiaries in this scenario will be farmers who
deserve a fair deal in a predominantly agricultural economy of India.
There is no doubt that the situation is a far cry from the one that prevailed
towards the end of the 1960s. Then, commodities trading were looked upon
with suspicion. Traders were seen more as speculators in commodities rather
than market makers. This was because of high speculation that was order of
the day then. Largely, wrong perception owed to the absence of regulatory
mechanism. Today the situation is different as there is a regulatory
mechanism in the form of Forward Markets Commission. But there is still a
need to strengthen regulatory mechanism. There is also another aspect of
speculation. No market can thrive without speculation; much less futures.
Care should be taken to see that unrestrained speculation does not create
unwarranted volatility in prices to the detriment of stakeholders.
Commodities are no longer seen as speculators’ heaven as more and
more investors - both individuals and institutional - coming into commodities
markets on a large scale. That is the volume of trade on commodities
exchanges such as NCDEX, NMCE and National Board of Trade (NBOT) has
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reached Rs 7.5 lakh crore during the first five and a half month till
September 15 of the current fiscal. The trading volumes on commodity
exchanges surpassed that of futures on the capital market in August 2005 for
the first time in the history of the domestic derivatives in the market. If the
current trend in growth continues it is said that the trade volume will cross
Rs.10 lakh crore by 2010.
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somewhat like SEBI’s to facilitate online information. But it is not fair to
compare our software with SEBI’s as that body has spent Rs.20 crore on it. It
has also a long experience in stock regulation.
Prospects for commodities in this country are really bright. We have already
overtaken the Mumbai Stock Exchange (BSE) in terms of value. I am sure
that in the next 2-3 years will see an exponential growth of commodities
trading.”
Referring to fears about speculators distorting the market, the survey said,
"At times, price behavior of a commodity in the futures market might show
some aberrations... but it quickly reverts to long-run equilibrium price, as
information flows in, reflecting fundamentals of the respective market."
Giving speculators a clean chit, the survey said they play a role in providing
liquidity to markets and may sometimes benefit from price movements, but
do not have a "systematic causal influence on prices" .
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Ironically, in the last one year, the government has clamped down heavily on
farm futures contracts by increasing the margins, reducing volatility or
simply banning them, as in the case of tur and urad to prevent 'unhealthy'
speculation.
All eyes are now on the proposed amendments to the Forward Contracts
(Regulation Act), 1952. The survey believes the amended Act, expected to be
passed in this session of Parliament, will ensure "orderly conditions" in
commodity futures. The Act intends to substantially enhance the surveillance
and monitoring powers of the regulator Forward Markets Commission. It also
allows the government to introduce options in commodity futures. The
market has been looking forward to the introduction of options as a more
sophisticated way of trading in commodity derivatives. Meanwhile, though
farmers are meant to be the chief beneficiaries of commodity exchanges, gold
has been the real star of the show this year. Punters playing on geo-political
tensions ensured that gold and silver had 50% share in terms of volume.
Guar (11%) and chana (10%) were the only farm commodities with double-
digit figures. Due to the frequent clampdowns and uncertainty in farm
futures, there has been a sharply divergent pattern of growth between MCX,
which derives its market share from metals, energy and bullion, and NCDEX,
which is the biggest in farm commodities. For the first time in three years,
NCDEX saw reduced volumes. Up to December 31, the turnover on NCDEX
shrank from Rs 10 lakh crore in 2005-06 to Rs 9.44 lakh crore in 2006-07.
On the other hand, MCX turnover rose from Rs 9.6 lakh crore in 2005-06 to
Rs 16 lakh crore in 2006-07. Riding on the back of a global boom in metals,
energy and bullion, the growth of MCX in 2006-07 is comparable with some of
the international commodity indexes such as Goldman Sachs Commodity
Index, Dow Jones AIG Commodity Cash Index and Reuters/Jefferies
Commodity Research Bureau, the survey has pointed out. Though punters on
metals and gold have been the biggest players in the market till now, the
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survey is hopeful of farm commodities getting their share of the spotlight.
"Agricultural commodities are expected to gain importance, helping their
price discovery process and thereby providing an opportunity to farmers," the
survey said. That may well come true. Last year, technology allowed India's
online commodity markets to reach the smallest investor's doorsteps. This is
something even bourses in Chicago and New York are just catching on.
Traditional regional exchanges, using the open outcry method, now have just
3% share of the total commodity derivative business.
Farmer could not make money despite having a better harvest of Arhar dal
this year because there was a glut in the market. A trader in wholesale
grains market in Who sold his stocks at much lower prices than last year,
hoping he would buy fresh stock at further lower prices. To his dismay, the
market went up instead of down, and so much so that he couldn't afford to
buy fresh stocks at such high prices. Housewives are testing out alternative
food concoctions on her family because she can't afford to prepare sambhar,
as pulses are being sold at exorbitant prices between Rs.45 to Rs.60 per kg.
In spite of high price of produce the fact is devastated by poor returns and a
mountain of debt, the Indian farmer is preferring suicide to a life of misery
and penury.
Fortunately, most Indian housewives don't exercise that option and instead
curse their fate while buying more than Rs.60 a kg for daal (pulses), more
than Rs.40 per kg for tomatoes; and a further amount of around Rs.60 a kg
for capsicum. Even rising wheat prices are triggering alarm bells with the
government announcing wheat imports.
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The obvious question is, if the farmer is not getting better returns and the
housewife is paying through her nose, where is the money going? If neither
production has gone down, nor has the consumption skyrocketed, then why
are prices hitting the roof? Most Traders acerbically blames it on futures
trading in the commodity market.
Sundaresan's point could well put rhetoric to shame, considering the fact that
there are clear indications that speculation is rampant. And least of all being
the memorandum to the President of India submitted on July 5, 2006, by
Confederation of All India Traders, who allege, "The regulator has totally
failed to monitor abnormal increase in prices of commodities in the market."
And most of all, the following:
• The closing price for mentha oil in October 2005 was about Rs.450 per
tonne; and the trading volume was 'zero'. By March 2006, the volume
traded in mentha oil had skyrocketed to about 400,000 tonnes and the
price had gone up to more than Rs.800 per tonne. Most surprisingly,
the price fell to Rs.420 (a sign?) in the next two months.
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• Often, the volumes traded in commodity exchanges are 40 to 50 times
the actual supply of the commodity.
• In turmeric, trading went on for more than one year without any
physical delivery of the commodity.
• There are persistent allegations that about 250 small commodity
traders across India have committed suicide after going bankrupt in
2005-06.
• The trading volume in the commodities exchanges went up by a
staggering 274% in 2005-06. The rate of growth continues to be very
high even now.
It's again the same for wholesalers - medium and big - who have been trading
their agri-produce after buying it from farmers and small wholesalers. And it
is this group that has been suffering the most due to the entry of FIIs and
other big stock market players in commodity trading. As mentioned before,
not only is this group now demanding a ban on futures commodity markets,
but are also pleading for warning to be given to various similarly stuck
traders. A spice merchant from Delhi provides an incriminating insight,
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"Total produce of small cardamom in India is 12,000 tonne, valued at Rs.480
million. A big trader can corner 80-90% of the produce through commodity
exchanges making the prices skyrocket in open market..." The spice man may
not be too much off the mark.
The basic issue now is how to strengthen the commodity regulator and speed
up the physical delivery system. True, there have been excessive
speculations, but only in commodities like guar gum, urad and mentha oil,
two of which do not directly affect ordinary people. It is also a fact that
besides wheat, dals and pulses, prices of other commodities like milk,
detergents, vegetables and oil too have gone up. And not all of these are being
traded in the futures market. Of course, part of the hike is additionally due to
seasonal factors.
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On the basis of parameters like rainfall, spread of disease, product managers
at commodity exchange inform traders of likely volumes of the crop. That is
the precise moment that big players step in - buying left, right and centre -
making prices go up. The speculators pitch in, creating volatility in the
market. Small and medium traders, who had already sold off their produce at
throwaway prices, hoping to buy it at later stage, rue the lost opportunity.
Even those who dare to buy in futures, hoping the market would still be high,
come in for a shock to find that speculators and big traders have sold off their
stocks causing the prices to crash. They have to pay the huge difference after
which traders either quit the market for good or join the speculation
bandwagon. A telling example is turmeric, where speculative futures trading
were being done for more than one year without any physical delivery of the
product.
There were clear indications from experts about a bumper crop and most
traders, including one Hyderabad-based trader who lost Rs.5 million, sold
turmeric short (in layman's terms, they gambled on turmeric prices falling in
the future). However, a selective and shadowy group of big traders cornered
the market and the small traders realized that they did not have the
resources to go on gambling. Most went bankrupt, or withdrew with heavy
losses. And without surprises, something exactly similar seems to have
happened with the commodity mentha oil. Overall, there have been four
confirmed cases of suicide amongst Delhi-based commodity traders in recent
weeks. Though one would not wish to connect, but in fact, there are many
traders who claim more than 200 small traders across India have committed
suicides.
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Futures trading perform two important functions:
• price discovery
• Risk management
The commodities market regulator FMC simply doesn't have the manpower,
the resources and the expertise to effectively regulate the rapidly growing
speculation in scores of commodities across India.
There are many analysts who compare the present status in the Indian
commodities markets to the Wild West scenario that prevailed in the Indian
stock markets after the first flush of liberalization in 1991. While the
Harshad Mehta scam triggered the formation of SEBI in 1992 to more
effectively regulate the markets, It took many more scams and alleged
scamsters like C. R. Bhansali and Ketan Parekh and more than a decade for
SEBI to reach a stage where it could even claim that it is actually an effective
regulator. Even now, FMC faces the dilemma faced by SEBI in the early
1990s - it simply doesn't have the wherewithal to prevent rigging, speculation
and market fixing. These factors have led many traders to raise
uncomfortable questions:
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• A whopping 98% of traders in commodities lost money... Why? Why
doesn't the government close down defaulting exchanges or manage
them better?
• Why don't all exchanges increase margins or stop trading? Why are
settlements of contracts still not transparent?
• Why are market regulators unaware of trade intricacies?
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Prescriptions / suggestions
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Commodity Futures: An Alternative Investment Avenue
The prime question here then how commodities are now considered as
a serious alternative investment avenue, not only for its real
participants but also for people who do not hold any direct business
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interest in commodities in which they are investing. They are not only
speculators but also for bourgeoning middle class with its surplus money and
expertise, who wants to take part in all pervading INDIA GROWTH STORY
and contribute in the mainstream of national economy.
The speculators are the most prominent investment class; those can be
termed as people who take commodity as their investment tool. They are very
integral part of any economical or business cycle and are also the one who are
most despised. They are blamed for their capacity of over price volatility and
inflated scenarios and are said to be hampering the business prospect of real
stakeholders.
We are analyzing the behavior and role of speculators in the
commodity market. They do good to bring liquidity in the market and are
generally the one who help in Market making.
The findings of the role of speculators in Indian commodity market are well
talked about. They are alleged for excessive price volatility and immature
behavior of market as a whole. They are also said to be keeping the real
players away from the market.
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manipulated to move consistently in one direction for significant periods of
time, inflicting losses on some and gains for the others.
%
2004-05 2005-06 increase
For this we need to compare the risks and returns of commodity futures with
other asset classes. Also we would like to emphasis that commodity markets
in India are now in the phase of a mega bull run which is going to stay for
long time. So as an asset class, they prove to be a fantastic tool in the hands
of prudent investor. If we take MCX COMDEX as a representative of
Commodity market in India and compare it with other markets n the world,
we find that other benchmarks showed negative returns, ranging from 1 per
cent to 7 per cent while MCX COMDEX gave an annualized return of 18.86%.
This implies that the Indian index has been steadily bullish compared with
its global counterparts most of which are in the negative return zone.
MCX Comdex: It was created in June 2005 to mirror the commodity prices
discovered at the Multi Commodity Exchange of India (MCX). Like the GSCI,
there is no limit on the number of underlying commodities. The MCX Comdex
now tracks 10 commodities selected on their liquidity and their importance to
the physical market. Equal weights are assigned at group level (energy,
agriculture and metals). It relies on a unique combination of liquidity on
MCX and physical market size to determine its component weighting. Only
near or near-deferred contract months are taken for the index computation.
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Currently, gold, silver and copper represent the metals group, while energy
and agriculture groups comprise crude oil, and Soya oil, cottonseed oilcake,
wheat, and rubber, urad and guar seed. The index is not traded on any of the
exchanges in India due to regulatory constraints. Among the benchmark
indices studied only MCX Comdex and RICI had positive returns for the
period (see Table). The Indian benchmark MCX Comdex provided the highest
annualized return of about 18.33 per cent with a moderately higher
annualized risk (19.31 per cent). This was followed by the RICI, with an
annualized return of 5.56 per cent (annualized risk: 17.04 per cent).
29
www.commodityindia.com
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SUGGESTIONS TO MAKE INDIAN COMMODITY MARKETS MATURE:
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government policies, which had the effect of delaying the growth of
commodity derivative markets.
• The best practices which are being discussed to be implemented are:
Daily mark to market margining.
Time stamping of trades
Novation of contracts and creation of trade guarantee
fund.
Back-office computerization for the existing single
commodity exchange and online trading for the new
exchanges.
Demutualization for the new exchanges.
• The market in India has been very traditional so far. These new
techniques of making market more developed are facing steep
resistance from the traders. A sizable chunk of trade often migrates to
informal system because of introduction of these measures from time
to time. A latest example could be a virtual close down of Bombay and
Kanpur commodity exchanges after enforcing new regulatory
mechanisms. The traditional players find themselves at difficulty in
changing with methods of trading, clearing and settlement suddenly.
• There is a widespread lack of awareness about the role and technique
of futures trading among the potential beneficiaries. Only massive
efforts to train younger generations in modern trading techniques and
allowing the already trained stock brokers to trade in commodity
futures can obviate the need to depend on the traditional players to
revive the commodity derivative market.
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Latest developments in Commodity Markets in last 1 Year:
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• Among the five major exchanges that allow futures trading, the
National Stock Exchange accounts for 66.6 per cent, the Multi
Commodity Exchange (MCX) 20 % and the National Commodities and
Derivatives Exchange (NCDEX) 10.5 %. The BSE has a minuscule 0.50
per cent share, while the NMCE accounts for the remaining 2 %.
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National Spot Exchange
The Concept
30
30
Chart no : 9
Source: National Spot Exchange
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MCX (Multi Commodity Exchange of India Limited), the leading commodity
exchange in India, provides futures trading in more than 70 commodities. It
is also amongst the top three Exchanges in the world in bullion futures.
Objectives
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all agricultural produces by way of creating a structured and
standardized spot market.
To promote grading and standardization of agricultural produces and
create a market, where banks and money lending agencies can provide
warehouse receipt financing to farmers and traders.
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Participants in the National Spot Exchange
31
32
31
Chart no: 11
Source: www.Nationalspotexchangeexchange.com ( National Spot Exchange)
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Benefits to the Farmers
Realizing the best possible price at the time of sale for agricultural
produces.
Trade and payment guarantee.
Cost reduction in handling and other activities.
Access to a national level transparent market, where direct selling to
processors or end users would be feasible.
Increase in holding capacity due to availability of warehouse receipt
financing.
Increase in bargaining power due to availability of an alternative
market.
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Chart no: 12
Source: National Spot Exchange
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Complete avoidance of hassles relating to physical market operations.
Trading
National Spot Exchange will provide an online screen based trading system,
which can be accessed through VSAT, leased line or internet. It will launch
daily expiry contracts, which will be traded from 10 am to 5 pm. The
positions outstanding at the end of the day will result into compulsory
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delivery. But during the day, the transactions of offsetting nature will be
netted off and delivery will be executed only with respect to the net quantity
outstanding at the end of the day. All the terms relating to quality
specifications, place of delivery, date of delivery and other conditions will be
specified by the Exchange in advance and all contracts executed on the
system would be on the basis of such terms only
33
All trades executed on a day will be netted off at the end of the day as per the
weighted average price of last 30 minutes. The profit / loss arising would be
settled on the basis of MTM on the next day. The net sellers have to give
delivery by way of depositing goods in the Exchange designated warehouses /
storage tanks within T + 3. The buyer's account will be debited by the
Exchange on T + 4 and delivery order will be handed over to them after
ensuring that payment is through. On T + 4, pay out will be credited to the
33
Chart no: 12
Source: National Spot Exchange
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seller's account. In case the seller fails to give delivery, the position will be
auctioned / closed out at the risk and cost of the seller separately. In case the
buyer fails to make payment, the buying position would be auctioned by the
Exchange at the risk and cost of the buyer.
34
The Exchange will use various tools for risk management, margining and
surveillance to ensure market integrity. All positions outstanding in the
market would be subject to margin payable by both buyers and sellers.
However, if the sellers have deposited goods in the Exchange designated
warehouses, margin will not be applicable on such positions.
34
Chart no: 13
Source: National Spot Exchange
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Settlement Guarantee Fund
Technology
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About The Organization
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development of an active secondary market for Government securities and
bonds issued by Public sector undertakings.
It commenced business operations in June 1994 and started dealing in
government securities. On the introduction of the system of Primary
Dealership in Government Securities, in February 1996, STCI became one of
the first two institutions to be accredited by RBI as a primary Dealer in
Government securities. Government of India have notified STCI as an
"Approved Finance Institution" for the purpose of Sections 18 and 24 of the
Banking Regulations Act, 1949 and Section 42(1) of the Reserve Bank Of
India Act, 1934. STCI's core activities comprise participation, underwriting,
market making and trading in Government Securities. The Company has
established a name for itself in the Indian Government Securities Market
and has emerged as one of the leading Primary Dealer over the period of
time. Apart from the above, the company is an active partner in the inter-
bank call money markets and Repo market.
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India Limited (MCX) and National Commodity and Derivatives Exchange
Limited (NCDEX).
STANDARD CHARTERED
The new company will also be going for a name change soon to reflect the
ownership of Standard Chartered in the organization.
35
http://www.business-
standard.com/common/storypage.php?autono=284476&leftnm=2&subLeft=0&chkFlg=
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Configuration of a new financial product ( For the benefits of farmers)
This can solve all the problems of farmers and can give full risk cover.
Above all can be done with the collaboration of some financial institutions.
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Appendix 1
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 was permitted again by the
government in order to help the Commodity producers, traders and investors.
World-wide, commodity exchanges originated before any other financial
exchange. Infact most of the derivatives instruments had their birth in
commodity exchanges.
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• National Commodity and Derivatives Exchange of India, Mumbai
(NCDEX).
• National Multi Commodity Exchange, Ahmedabad (NMCE).
However there are regional commodities exchanges functioning all over the
country. STCI securities 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.36
36
Table no.: 3
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Who regulates the commodity 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.
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.
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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.
Please note the delivery and settlement procedure differs for each exchange
and commodity. Read the delivery/ settlement procedure carefully or contact
us before deciding to give/ take physical delivery.
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 it is the
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.
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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/ exchange.
At NCDEX the contracts expire on 20th day of each month. If 20th happens to
be a holiday the expiry day will be the previous working day.
At MCX the expiry day is 15th of every month. If 15th 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.
Metals Steel Long, Steel Flat, Copper, Nickel, Tin , Steel ingots
37
Table no. 4
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Rubber, Guar Seed , Guargum , Cashew, Cashew Kernel ,
Others
Sugar , Gur, Coffee, Silk
MCX
Feb, Apr,
Mumbai,
Gold 3.5% 10 Gms 1 Kg Jun, Aug,
Ahmedabad
Oct, Dec
Mar, May,
Silver 5% 1 KG 30 KG Ahmedabad Jul, Sep,
Dec
NCDEX
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Table no. : 5
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Feb, Apr,
Gold
5-10 % 10 Gms 1 Kg Mumbai Jun, Aug,
(Sona)
Oct, Dec
Mar, May,
Silver
5-10 % 1 KG 30 KG New Delhi Jul, Sep,
(Chandi)
Dec
Indore,
Soy Bean 5-10 % 100 KG 1 MT All months
Nagpur, Kota
* MCX Initial margins are shown above. NCDEX follows SPAN margins
which could be between 5-10% depending on volatility.
The list given above covers only the popular commodities and not exhaustive.
FAQ S ON DERIVATIVES
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A derivative contract is an enforceable agreement whose value is derived
from the value of an underlying asset; the underlying asset can be a
commodity, precious metal, currency, bond, stock, or, indices of commodities,
stocks etc. Four most common examples of derivative instruments are
forwards, futures, options and swaps/spreads.
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What are customized contracts?
Forward contracts (other than a future) are customized. In other words, the
terms of forward contracts are individually agreed between two counter-
parties.
Futures prices evolve from the interaction of bids and offers emanating from
all over the country – which converge in the trading floor or the trading
engine. The bid and offer prices are based on the expectations of prices on the
maturity date.
One doesn't need to have the physical commodity or own a contract for the
commodity to enter into a sale contract in futures market. It is simply
agreeing to sell the physical commodity at a later date or selling short. It is
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possible to repurchase the contract before the maturity, thereby dispensing
with delivery of goods.
In most of commodities and financial derivatives market, the term refers to selling the
nearby contract month, and buying the distant contract, to profit from saving in the cost
of carry.
What is ‘Contango'?
Contango means a situation, where futures contract prices are higher than
the spot price and the futures contracts maturing earlier.
What is ‘Backwardation'?
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When the prices of spot or contracts maturing earlier are higher than a
particular futures contract, it is said to be trading at Backwardation.
What is ‘basis'?
What is offset?
The settlement price is the price at which all the outstanding trades are
settled, i.e, profits or losses, if any, are paid. The method of fixing Settlement
price is prescribed in the Byelaws of the exchanges; normally it is a weighted
average of prices of transactions both in spot and futures market during
specified period.
What is convergence?
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This refers to the tendency of difference between spot and futures contract to
decline continuously, so as to become zero on the date on maturity.
Futures contract are contracts for delivery of goods. But most of the futures
contracts, the world over, are performed otherwise than by physical delivery
of goods.
The reason is, futures contracts may not be suitable for merchandising
purpose, mainly because these are standardized contracts; hence various
aspects of the contracts, viz., quality/grade of the goods, packing, place of
delivery, etc. may not meet the specific needs of the buyers/sellers.
Due Date Rate is the weighted average of both spot and futures prices of the
specified number of days, as defined in the Byelaws of Associations.
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What is Warehouse Receipt?
Participants in physical markets use futures market for price discovery and
price risk management. In fact, in the absence of futures market, they would
be compelled to speculate on prices. Futures market helps them to avoid
speculation by entering into hedge contracts. It is however extremely unlikely
for every hedger to find a hedger counterparty with matching requirements.
The hedgers intend to shift price risk, which they can only if there are
participants willing to accept the risk. Speculators are such participants who
are willing to take risk of hedgers in the expectation of making profit.
Speculators provide liquidity to the market; therefore, it is difficult to
imagine a futures market functioning without speculators.
Speculators are not gamblers, since they do not create risk, but merely accept
the risk, which already exists in the market. The speculators are the persons
who try to assimilate all the possible price-sensitive information, on the basis
of which they can expect to make profit. The speculators therefore contribute
in improving the efficiency of price discovery function of the futures market.
What is hedging?
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the futures and cash prices is determined by cost of carry. The two prices
therefore move in tandem. This enables the participants in the physical/cash
markets to cover their price risk by taking opposite position in the futures
market.
Can the loss incurred on the futures market be set off against normal
business profit?
Who is hedger?
Hedger is a user of the market, who enters into futures contract to manage
the risk of adverse price fluctuation in respect of his existing or future asset.
What is arbitrage?
Day traders are speculators who take positions in futures or options contracts
and liquidate them prior to the close of the same trading day.
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Who is floor-trader?
Who is speculator?
A market maker is a trader, who simultaneously quotes both bid and offer
price for a same commodity throughout the trading session.
Credit risk on account of default by counter party This is very low or almost
zeros because the Exchange takes on the responsibility for the performance of
contracts
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What is market risk?
Operational risk is the risk arising out of some operational difficulties, like,
failure of electricity, due to which it becomes difficult to operate in the
market.
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Under the Forward Contracts (Regulation) Act, 1952, forward trading in
commodities notified under section 15 of the Act can be conducted only on the
Exchanges, which are granted recognition by the Central Government
(Department of Consumer Affairs, Ministry of Consumer Affairs, Food and
Public Distribution).
to obtain certificate of Registration from the Forward Markets Commission.
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Application in triplicate for grant of certificate of Registration in Form B -
placed on the web site of the FMC < www.fmc.gov.in > - should be sent to
Forward Markets Commission, Everest, 3rd Floor, 100, Marine Drive,
Mumbai – 400 002. A fee of Rs. 50/- will have to be paid by the applicant
association for grant of registration certificate. The fee could also be
deposited in the nearest Government Treasurery or the nearest branch of
State Bank of India; provided that at Mumbai, Kolkatta, Delhi, Kanpur and
Chennai, the amount has to be deposited in the Reserve Bank of India. The
fee can also be remitted by crossed Indian Postal Order drawn in favour of
Secretary, Forward Markets Commission. The application has to be
accompanied by 3 copies of Memorandum and Articles of Association and
Byelaws.
The aim of margin money is to minimize the risk of default by either counter
party. The amount of initial margin is so fixed as to ensure that the
probability of loss on account of worst possible price fluctuation, which cannot
be met by the amount of ordinary/initial margin is very low. The Exchanges
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fix rates of ordinary/initial margin keeping in view need to balance high
security of contract and low cost of entering into contract.
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required to pay less upfront margin – which is normally collected to cover the
maximum, say, 99.9%, of the potential risk during the period of mark-to-
market, for a given limit on open position. Alternatively, for the given upfront
margin the limit on open position would have to be reduced, which has the
effect of restraining the trade and liquidity.
VI. REGULATION
The need for regulation arises on account of the fact that the benefits of
futures markets accrue in competitive conditions. The regulation is needed to
create competitive conditions. In the absence of regulation, unscrupulous
participants could use these leveraged contracts for manipulating prices. This
could have undesirable influence on the spot prices, thereby affecting
interests of society at large.. Regulation is also needed to ensure that the
market has appropriate risk management system. In the absence of such a
system, a major default could create a chain reaction. The resultant financial
crisis in a futures market could create systematic risk. Regulation is also
needed to ensure fairness and transparency in trading, clearing, settlement
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and management of the exchange so as to protect and promote the interest of
various stakeholders, particularly non-member users of the market.
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• It undertakes inspection of books of accounts and other documents of
recognized/registered associations.
The Commission has powers of deemed civil court for (a) Summoning and
enforcing the attendance of any person and examining him on oath; (b)
Requiring the discovery and production of any document; (c) Receiving
evidence on affidavits, and (d) Requisitioning any public record or copy
thereof from any office.
The following powers are vested in the Central Government, most of which
are delegated to the Commission
The powers of approving memorandum and articles of association and Bye-
laws; powers to direct to make or to make articles (Rules) or Bye-laws;
powers to suspend governing body of recognised association, and, powers to
suspend business of recognised association.
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Special margin deposit to be collected on outstanding purchases or
sales when price moves up or down sharply above or below the
previous day closing price. By making further purchases/sales
relatively costly, the price rise or fall is sobered down. This measure is
imposed only on the request of the Exchange.
Circuit breakers or minimum/maximum prices These are prescribed to
prevent futures prices from falling below as rising above not
warranted by prospective supply and demand factors. This measure is
also imposed on the request of the Exchanges.
Skipping trading in certain derivatives of the contract, closing the
market for a specified period and even closing out the contract These
extreme measures are taken only in emergency situations.
The F.C(R) Act provides that client's position cannot be appropriated by the member of
the Exchange, except a written consent is taken within three days' time. Forward Markets
Commission is persuading increasing number of Exchanges to switch over to electronic
trading, clearing and settlement, which is more customer-friendly. Commission has also
prescribed simultaneous reporting system for the Exchanges following open out-cry
system. These steps facilitate audit trail and make it difficult for the members to indulge
in malpractices like, trading ahead of clients, etc. The Commission has also mandated all
the Exchanges following open outcry system to display at a prominent place in Exchange
premises, the name, address, telephone number of the officer of the Commission who can
be contacted for any grievance. The website of the Commission also has a provision for
the customers to make complaint, send comments and suggestions to the Commission.
Officers of the Commission have been instructed to meet the members and clients on a
random basis, whenever they visit Exchanges, to ascertain the situation on the ground,
instead of merely attending meetings of the Board of Directors and holding discussions
with the office-bearers.
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Appendix: 2
STCI COMMODITIES
AP GRAIN & SEEDS
IN ASSOCIATION WITH MERCHANTS
INVITES YOU FOR THE SEMINAR ON ASSOCIATION
PRESIDENT,
AP GRAIN & SEEDS MERCHANTS ASSN.
PRODUCT HEAD,
CHILLI, MCX
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Appendix 3:
Dear Sir,
This is Chandra Prakash, Doing MBA from ICFAI Business School, Hyderabad.
As a part of curriculum we are working on a research project" Commodity market:
A new investment avenue. We went to different kinds of mandis from pluses to
bullion. But each of these places I found some kind of communication gap. Every
one has their problems every one want to speak up but no one to listen.
We also went to malakpet (Hyderabad) and came to know that many seminar
had been unsuccessfully conducted here by MCX , NCDEX as well as many
brokering houses . Not only Chilly but most of the Trader from pulses to bullion
avoid trading through exchange. During our market Survey we found that apart
from awareness there are some fundamental question that need be solved
before tapping these mandis.
We felt that our project is of no use if we could not find the way to break this ice.
So, we are planning to conduct seminar here on 6th of April in collaboration with
UTI Securities. It would be of great help and of mutual benefit if MCX will work
with us.
Regards
Chandra Prakash
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From: Shunmugam V/MCX/ R&D
Sent: Monday, April 02, 2007 10:43 AM
To: 'Sumesh P/MCX/CBO'; Joe J/MCX/Marketing
Cc: Chiragra C/MCX/Training
Subject: FW: Seminar in Chilly Market (Malakpet)
FYI.
Thank you,
Regards,
Vice President
MCX
Fax No - 022-66491751
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Mobile No - 9821420236 / 9867567508
We thank you very much for showing your confidence in MCX for your solution. May I request
you to pls let me know your Mobile no. or land line no. so that we could have discussed the
matter over telephone?
I understand from your email that you are interested in organizing a seminar at ICFAI Business
School . Please let me know the following details to enables us to take a decision on this issue.
Warm Regards
Nitin Joshi
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for, is prohibited and may be unlawful.
--------------------------------------------------
Dear Sir,
But when we started making market survey we found. This in not just awareness level or risk appetite,
reason was something else which make them avoid exchange trading.
Reasons:
1. Difference in units (They trade in 40kg unit and mcx in 25)...which I heard some days back
……MCX is working on this.
2.qualityspecification: this was raised by one of the trader that In the MCX and NCDEX warehouses
Water is purposely sprayed over chilly by using the limit of 14% humidity and limits of other impurities
to increase the weight.
3. Seller's option. Trader with intention to take delivery is discouraged by delivery logic "seller's option".
5.They wanted to know date When the spot trading will start as proposed By MCX
Apart form these there was many other concern which has been raised.
But one thing we have seen common in all these market (bullion, pulses as well as spices)
Most of the trader either have traded or know about this kind of trading through exchanges. They all
did it through Local broker without any research calls. It was pure speculation and almost all of them
lost their money and business.
We(myself with two of my batch mates working on same project) met to our company guide( Mr.
suman kumar adepu ,Branch manger,UTI Securities,Ameerpet, mobile:9394744777)
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We discussed to the matter and came to conclusion that we can tell them the difference between
speculation and Hedging.
and finally decided to conduct a seminar with all the trader of chilly market. We got consent of the
President.
Mr. adepu (Br. Manager ,Uti Sec) contacted Mumbai to call a research team to be part of this seminar.
But Sir we Still doubt the success if Exchange will not come forward for this.
Let me answer you the questions which have been asked in your letter.
1. Since we are conducting seminar not in ICFAI Campus but in Chilly market (MALAKPET) and this is
part of our project so no need of special approval from Director. Even if you feel it is required, there will
not be any problem in getting such approval.
2. Our objective was to convince them that Hedging is different than speculation and how can they use
hedging for the purpose of diversifying their business risk. But we feel that more than this, it is
important to listen their problems and work on it which only Exchange can do.
4. No. of participant:
a. We 3 intern
b. Branch manager, U Sec
c. Research Team, Usec,(Number Not Yet confirmed)
Qualification: We are doing PGDBA from ICFAI Hyderabad. Qualification of research team not known
to us
Sir we expect from you to actively participate in the seminar to address the problem raised by them.
We suggest you to have a meeting with us before this seminar and work out the agenda of the seminar
if you are convince with our proposal.
Regards
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Our Communication with FMC Director, Mr. Anupam Mishra
from chandra prakash <chandra5911@gmail.com> hide details 09-Mar
to
anupam@fmc.gov.in < anupam@fmc.gov.in>,
anupam_mishra@hotmail.com <anupam_mishra@hotmail.com>
date 09-Mar-2007 23:22
subject Research on Commodity market
mailed-by gmail.com
Dear sir,
1. Exchange are not made for real trading,they are just for speculation.
One option may be ,if for some time if exchange will make it mandatory
to take the delivery, will eliminate the speculator and will give way
for trader to come forward. Once market will take the healthy
shape,the current condition can be resumed.
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I read about an awareness programme dated in 2006. I really don't know
the twist of the whole story. but if I am right story can be re
written and scenario can be changed.
Regards
Dear Chandra,
Thanks for the mail and sharing of your views. We appreciate the concerns raised by you. We would
definitely like to have furthur suggestions in the matter. If you ever happen to be in Mumbai you could
give me a ring and we could share our perceptions of the markets.
Anupam Mishra
Director(IR)
Forward Markets Commission
Government of India
"Everest", 3rd floor,
100, Marine Drive,
Mumbai - 400 002
INDIA
Phone: +91 22 22026541 / 22795307
Fax: +91 22 22812086
E-mail: anupam_mishra@hotmail.com
anupam.fmc@nic.in
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Our Communication with NCDEX
-----Original Message-----
From: chandra prakash (chandra5911@gmail.com)
Date: Friday, March 30, 2007 02:35 PM
To: askus@ncdex.com ( askus@ncdex.com)
Subject: Educational Seminar for farmer in Hyderabad
Dear Sir,
This is Chandra Prakash, Doing MBA from ICFAI Business School,Hyderabad. As a part of
curriculum we are working on a research project" Commodity market: A new investment avenue.
We went to different kinds of mandis from pulses to bullion. But each of these places we found
some kind of communication gap. Every one has problems.
We met to many farmers and farmer association as well and we found that proper education and
awareness is required.
I read the news about NCDEX that it is planning to educate farmers in Punjab. If NCDEX would
prefer to plan same kind of educational Seminar here in Hyderabad and nearby village, we can
help arranging that and that would be part of our project.
Please respond if Exchange is having any such plan.
Regards
Chandra Prakash
An effort is being made to empower the farmers with information technology. BKU Bharat Kissan
union activists also seems to be supporting these companies.
Addressing the farmers here in Moga, Mr Sharad Joshi, Member of Parliament, said, "I do not
mind future trading provided it benefits the farmers. After all Punjab provides wheat to entire
India. "Thing that is going in the favour of these farmers is that the companies like NCDEX are
ready to bear the hoarding cost as well.
Normally the debt ridden farmers in the state try to sell their produce as soon as possible so as to
pay back the loan they had borrowed from the Artiyas and money lenders.
"Now with companies ready to pay the hoarding cost the debt ridden farmers can always wait.
Earlier their was no option before them." Says Balwant Singh, GS, BKU, (Punjab).
Top FMI and NCDEX officials impressed upon the participants, numbering over 1,000, the fact
that futures trading in commodities on an online commodity exchange like NCDEX results in
transparent and fair price discovery due to large scale participation of farmers/producers, traders,
processors, exporters/ importers and end users of a commodity and reflects the views and
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expectations of a wider cross-section of people related to that commodity.
Mr Narendra Gupta, chief strategy, NCDEX, said farmers can use the online trading platform of
NCDEX to hedge the price risk by selling forward their expected production.
He emphasised that NCDEX provides an effective platform for price risk management for all
segments of players farmers/producers, traders, processors, exporters/importers and end users
of the commodity even as farmers can use price signals on the exchange platform to decide
which crop to grow in the next season.
However, Mr Sharad Joshi, accepted that the future trading can pave a way to the price rise. "To
make farmers come out of the debt trap I do not mind if the consumers have to pay bit more."
Said Mr Joshi. Also for these companies both agrarian states Punjab and Haryana are important
markets. "
The phone and fax number on NCDEX side have been changed from 5xxx xxxx to 6xxx xxxx.
Kindly take a note of the same.
"This e-mail message may contain confidential, proprietary or legally privileged information. It should not be used by anyone who is not the
original intended recipient. If you have erroneously received this message, please delete it immediately and notify the sender. The recipient
acknowledges that NCDEX or its subsidiaries or associated companies, are unable to exercise control or ensure or guarantee the integrity
of/over the contents of the information contained in e-mail transmissions and further acknowledges that any views expressed in this message
are those of the individual sender and no binding nature of the message shall be implied or assumed unless the sender does so expressly with
due authority of NCDEX.Before opening any attachments please check them for viruses and defects."
Dear Sir,
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Appendix: 4
As part of the work in our company, we had active talks and meetings with
the following dignitaries in our company: They also include the CEO, our
Research Head, VP of MCX and other important people
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Following is the list of important companies that we visited and gave
presentations to their top honchos.
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We had a series of meetings and talks with the AP Grain and Seeds
merchants Association which helped us arrange the seminar in the Malakpet
mandi. Following is the list of some important association members.
As a part of the task given to us by the CEO, STCI Commodities, Mr. Deepak
Dave, we arranged meetings with key personnel in the Hyderabad Stock
Exchange. Following is their list:
These are the people who made our meeting with the FAPCCI association
possible:
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Our meeting with the Farmers Association enabled us to interact with the
following people in the association:
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APPENDIX 5:
S.No Particulars
1 International spot price 3420
2 Ex Rate –Say 43.1
3 Final Settlement 144000 147402
For Delivery
4 Premium CIF - ($125) 5387.5
5 Ex Rate 43.1 152789.5
Caliculating custom
duty
6 Landing charge 1527.895
7 Assessable Value 154317.4
Basic customs
8 duty(7.5%) 11573.80463
CVD Plus 2 %
9 cess(16.32) 25184.59886
custom cess on aggrete
of
10 Duties(2%) 735.1680698
11 Total Custom duty(8+10) 12308.97269 166626.4
Wharfage
12 Charges(.20%) 246.1794539
13 Landed Cost (Re/Mt) 166872.5
Per Kg cost 166.8725
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APPENDIX 6:
Dear Sir,
“COMMODITY FUTURES -
A STRATEGIC RISK MANAGEMENT TOOL”
A brief introduction about our company:
UTI SECURITIES LTD. (UTISEL) was incorporated on June 28, 1994 by Unit Trust of
India as its 100% subsidiary and in the year 2006, it was taken over by the “Securities
Trading Corporation of India” (STCI), which was established by Reserve Bank of India
(RBI) in May 1994. It was one of the first two institutions to be accredited by RBI as a
primary Dealer in Government securities. Its core activities comprise participation,
underwriting, market making and trading in Government Securities.
UTISEL has been working as an independent professional entity for providing financial
intermediary and advisory services to corporate institutional and retail clientele. The
Company has built up a reputation for transparent and fair execution of transactions,
which have been well received and appreciated by its clientele. We are also one of the top
players in Equity and Commodity trading.
Commodity trading in India has been formally started in the year 2003 under the
regulatory authority of FORWARD MARKET COMMISSION. Since then it has been
growing at a phenomenal rate, with its turnover crossing 36 lakhs crore in the year 2006-
2007.
The commodity derivatives have been a very operational tool in the hands of industries
and businesses all over the world.Industries; both agro and metal based have been using
these tools to fight the adverse impacts of price fluctuations and risk factors. Of late, it
has also developed as an investment avenue for maximizing their corporate and
individual profits. To put the point more clearly, a large part of metal trading in Europe is
done through LME (London Metal Exchange).Internationally Commodity Marketsare
around 40 times larger than Equity Markets.
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In India, the commodity futures have been faced with several resistances. It is alleged to
be still in the influence of speculators and real players are still wary off entering the
market.Hence, commodity futures are even now far away from its championed objectives
of True price discovery and risk minimization in the wake of price volatility.
It is often asked that why Commodity futures in India has not attained its goal and could
not give much benefits to industries and businesses. Our researches show that
unawareness and faulty strategies have led to loss and finally disinterest among traders
and industries. As a repercussion, our industries are not able to derive full benefits of
these tools to minimize their risks and profit maximization.
Our Objective:
As part of our national campaign, we have been conducting several seminars and other
activities to create awareness among traders, farmers and industrialists regarding true
benefits and proper strategies of commodity futures.
In Hyderabad itself, we are conducting seminar in Chilli markets (Malakpet) with
A.P.Seeds and Grains Merchants Association on 25th April. A similar kind of seminar is
scheduled for Bullion traders in the 1st week of May.
We are also in active talk with Andhra Pradesh farmers association to conduct similar
activities among farmers of Andhra Pradesh. We have been active through different
platforms to address the issues of unawareness and strategic risk management among all
stakeholders of economy, be it farmer, trader or industries.
Sir, we have learnt that FAPCCI is a leading consortium of all Industrialists and
businesses of Andhra Pradesh and its role in bringing forward the issues and problems
concerning the industrial community as a whole has been very well appreciated.
Therefore sir, we recognize it to be an ideal forum for addressing the issues of
commodity futures amongst the industrialists of AP.
Sir, we propose to conduct a seminar on “Futures market” with your active association
where in we will be inviting research analysts, commodity experts and representatives
from different commodity exchanges.
Regards
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REFERENCES
BIBLIOGRAPHY:
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WEBLIOGRAPHY:
http://www.basemetals.com
http://www.blonnet.com/iw/2007/04/01/20hdline.htm
http://www.commoditycontro.com
http://www.contentlinks.asiancerc.com/utisecurities/product_services.asp
http://www.crnindia.com
http://www.fmc.gov.in
http://www.karvycomtrade.com/why_commodities.asp
http://www.karvycomtrade.com/mcx.asp
http://www.karvycomtrade.com/commoditiesFAQ.asp
http://www.karvycomtrade.com/indian_commodities_market.asp
http://www.karvycomtrade.com/101FAQfromFMC.asp
http://www.lme.co.uk
http://www.mcxindia.com
http://www.mcxcomnews_annual07.pdf
http://www.ncdex.com
http://www.nationalspotexchange.com
http://www.usectrade.com/
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