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CHAPTER I

1. INTRODUCTION TO THE STUDY

India, a commodity based economy where two-third of the one billion

population depends on agricultural commodities, surprisingly has an under
developed commodity market. Unlike the physical market, futures markets
trades in commodity are largely used as risk management (hedging)
mechanism on either physical commodity itself or open positions in
commodity stock. For instance, a jeweler can hedge his inventory against
perceived short-term downturn in gold prices by going short in the future
markets.

The article aims at know how of the commodities market and how the
commodities traded on the exchange. The idea is to understand the
importance of commodity derivatives and learn about the market from
Indian point of view. In fact it was one of the most vibrant markets till
early 70s. Its development and growth was shunted due to numerous
restrictions earlier. Now, with most of these restrictions being removed,
there is tremendous potential for growth of this market in the country.

A commodity may be defined as an article, a product or material that is

bought and sold. It can be classified as every kind of movable property,
except Actionable Claims, Money and Securities.

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.
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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 futures has been less volatile compared
with equity and bonds, thus providing an efficient portfolio diversification
option.

In fact, the size of the commodities markets in India is also quite

significant. Of the country's GDP of Rs 13,20,730 crore (Rs 13,207.3 billion),
commodities related (and dependent) industries constitute about 58 per cent.

Currently, the various commodities across the country clock an annual

turnover of Rs 1,40,000 crore (Rs 1,400 billion). With the introduction of
futures trading, the size of the commodities market grows many folds here on.

Commodity market is an important constituent of the financial markets

of any country. It is the market where a wide range of products, viz., precious
metals, base metals, crude oil, energy and soft commodities like palm oil,
cotton etc. are traded. It is important to develop a vibrant, active and liquid
commodity market. This would help investors hedge their commodity risk,
take speculative positions in commodities and exploit arbitrage opportunities
in the market.
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2. COTTON PROFILE

Cotton had been used to make fine, lightweight clothing since a long time. As
cotton clothes are not meant for wearing in the cold areas, clothing for the tropical
areas of the world had been provided by cotton for over years now. The cotton plant
originated as a wild plant but the human beings had understood its importance
much late. Some researchers assume that the Egyptians started using cotton in
clothes as early as 12000 BC. But the actual evidence of cotton cloth was found in
the Mexican cave that is considered to be 7000 years back. One more evidence of
cotton cloth was discovered from the archeological site of Mohenjo –Daro that is
considered to be as old as the previous evidence. This makes it clear that the wild
cotton was actually domesticated in Southern America and India only. In fact the
earliest descriptions of this plant came from the Indian subcontinent in the Rig Veda
in 1500BC that says that India has been producing the crop for more than 6000
years. Herodotus, a Greek historian, also wrote about the Indian cotton, when he
came to India in around the year 500AD.

In the 16th century, when the Spaniards came Peru just after the discovery of
America, they found that the native people had already been growing cotton and
wearing cotton clothes. They took this fiber to their homeland and it was then, when
cotton was introduced to the rest of the world. With time, it grew popular and
cultivation of cotton spread to the warmer places on the earth.

Until the start of the 18th century, cotton became the main constituent of the
clothing of the world. When Britain emerged as a super power at that time, it banned
the import of cotton and cotton clothes into its colonies so as protect its sheep and
wool industry. But the ban was lifted soon. With time the cotton textile industry
encountered various technologies with the help of which it grew and developed to
reach its current position.
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2.1 DESCRIPTION

Cotton is a creamy white soft fiber that is primarily used to manufacture

textile and garments throughout the world. Cotton is derived from around the seeds
of the cotton plant that comes from the genus of Gossypium and family Malvaceae.
This plant is somewhat bushy in appearance and grows well in tropical and semi-
tropical climates. The plant has leaves divided in three parts and capsule shaped
seeds around which the soft white fiber grows.

Cotton fiber obtained from the plant is first processed to remove proteins
from it. The remainder left is a natural polymer having characteristics like strong,
durable and absorbent and it is spun into threads for further use.

2.2 OVERVIEW

Cotton is considered a very important crop, as it is the major source of clothing

to the world. Besides this use of cotton, it is also used in various industrial
applications. Hence, it is ranked among the most cultivated and traded commodities
on the planet. Cotton and its various by-products are traded in the market and are
looked upon as an important means of investment. The by-products of cotton
include cottonseed, staple cotton, and cotton yarn and cottonseed oilcake. The
details about these by products is given below
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1. Cottonseed - Cottonseed is an oilseed that places 2nd in the list of largest
produced oilseeds in the world. It has a vast number of uses as it provides
food for humans, feed for animals, fertilizer for plants, padding fiber and also
used in explosives and computer chip boards.
2. Cottonseed oil - Cottonseed oil is produced by crushing the cottonseeds.
During the processing of cottonseed with the use solvent or mechanical
methods, hull and cottonseed meal are also produced. This oil makes healthy
and cholesterol free edible oil that is consumed in the Western countries.
3. Staple cotton - The cotton fiber is ginned in different lengths before it is
brought for selling into the market and this ginned cotton is known as staple
cotton. Long staple cotton is ginned cotton with length of 27-29 mm. Medium
staple cotton is ginned cotton with a length 24-26 mm. The ginned cotton
below this length is called short staple cotton.
4. Cotton yarn - Cotton yarn is made by processing the cotton fibers and is used
for producing a wide range of textiles, apparel and other products. Cotton
yarns are spun with the help of spinners, which are getting more and more
developed capacity wise with the improvement in technology. The other
major processors through which cotton is spun are filament yarns and
nonwovens.

Cotton is basically produced in the areas having tropical climatic conditions.

China is the largest producer of cotton in the world followed by United States of
America and India. The world’s total produce of cottonseed hovers around 35 million
tons. It is grown over 31 million hectares of land all around the globe. But the
production of this crop has shown a fluctuating trend of production over the recent
years due to various factors like crop failures etc. The world trade in cottonseed is
relatively low as compared to its oil’s trade. From among these 35 million tons of
cotton produced in the world, only 8 million tons of it is traded in its original form.
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The rest of cottonseeds are crushed to make oil. Cottonseed oil production
figures up to around 4.5 million tons and of cottonseed meal is around 16 million
tons annually. Spun cotton yarns’ world production figures reach around 28 million
tons an year. Talking about the consumption pattern, cotton contributes to around
37% of the total fiber usage of the world. Cottonseed, generally, is consumed within
which the country it is produced to make its oil. The major consumers of cottonseed
are

• China
• India
• Uzbekistan
• United States
• Turkey
• Pakistan

The first three countries consume almost all the cottonseed produced in the
countries. United States of America’s consumption figures are around 2.5 million
tons i.e. approximately 45% of the total cottonseed production. Even most of the
cottonseed oil cake is consumed at the place of its origin only. This also affects the
trade of oil cakes in the world. The trend of consumption of cotton and its by-
products is also fluctuating since the past years.

United States dominates the world trade situation in cottonseed and its by-
products context. It is the largest exporter of cottonseed in the world with Australia
exporting around 2 to 3 lakh tons per year. The total cottonseed oil meal traded in
the world sums up to a mere 5 to 6 lakh tons annually. China is the largest exporter
of this by-product of cotton with the exports of around 1.2 lakh tons. The major
importers of cottonseed in the world are Japan, Mexico, European union, Canada,
Turkey, Indonesia and India.
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2.3 CULTIVATION PATTERN

Cotton is a tropical crop as it thrives on hot and humid climatic conditions.

These conditions are present in the areas close to the equator like southern part of
North America, Northern Africa and Asia. It generally needs a long duration period
to grow and get mature i.e. 5 to 6 months. Also it needs a dry weather at the time of
harvesting to get an exceedingly good yield. There are a whole lot of methods
present to protect the cotton crops from weeds and diseases. The various methods
include spraying of herbicide, use of cultivator, rotary hoe, flame cultivator etc.
Harvesting is done with the help of spindle type pickers or strippers.

The planting time of cotton crops in the world varies vastly from February to
June. In India, the crop is cultivated as a khariff crop as it is sown in the months of
March to September. The mature crop is harvested in the months of November to
March. The crop starts reaching to the Indian markets from the months of November
to March.

2.4 COTTON PRODUCING COUNTRIES

Cotton as a crop is produced all around the world but mostly in the warmer
regions of the world. It does not grow wild as earlier but it is commercially and
strategically produced now. The total production of cottonseed in the world marks at
around 35 million tons per annum. Other by-products of cotton like cottonseed oil
and cottonseed oilcake have their production figures hovering around 4.5 million
tons and 16 million tons respectively. Spun cotton yarns also make one of an
important by-product of cotton having an output of around 28 million tons.
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The major producer countries of cotton and it’s by products along with their
production figures of cottonseed are

• China (8.67 million tons)

• United States of America (6.07 million tons)
• India (5.68 million tons)
• Pakistan (3.4 million tons)
• Brazil (2.13 million tons)
• Uzbekistan (1.59 million tons)
• Turkey (1.3 million tons)
• European Union (0.71 million tons)
• Australia (0.4 million tons)

China leads the list of the cottonseed producing nations as well as cottonseed oil
meal in the world. But, though it is the largest producer of cotton in the world it is
also the largest consumer of the fiber and the large production figure is insufficient
for satisfying the domestic consumption demand in there. That is why the second
largest producer of cotton i.e. USA acts as the major player in the world market.

The trend of production has ever been fluctuating over the past years. Cotton is
grown over around 31 million hectares land around the world with India leading the
list in this context

2.5 WORLD DEMAND AND SUPPLY SITUATION

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Quantity in million Metric tons

Year
Beginning 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
August 1
World
Beginning 11.97 9.29 8.83 11.86 12.52 12.70
stock
World Cotton
19.31 21.13 27.07 25.53 26.74 25.99
Production
World Cotton
21.53 21.66 23.69 24.97 26.64 27.14
Consumption
World Cotton
6.67 7.24 7.76 9.73 8.12 8.76
Exports
World
Ending 10.06 8.83 11.86 12.52 12.70 11.55
stocks

2.6 PRODUCTION OF COTTON IN INDIA

India is the third largest producer of cotton and its derivatives in the world. The
country is responsible for the origination and domestication of the cotton crop. India
has the maximum area under cotton cultivation estimating up to around 9.50 million
tons i.e. 21% share in the world. A number of varieties of cotton are cultivated in the
country like Bengal Deshi, V-797, Jayadhar, etc and also the cotton fibers are
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graded into three major grades i.e. ‘Short’, ’Medium’ and ‘Elongated’. The northern
areas in the country provide with mostly short and medium staple cotton, central
areas provide with long and medium staple cotton and the southern areas largely
with long staple cotton. The quantity of production of cottonseeds in India is around
5.68 million tons. The states in India producing cotton crop are

• Maharashtra
• Gujarat
• Andhra Pradesh
• Haryana
• Punjab
• Rajasthan
• Karnataka
• Tamil Nadu
• Madhya Pradesh

The above-mentioned states cover around 95% area under cotton cultivation as
well as output in India. Maharashtra followed by Andhra Pradesh and Haryana are
the largest cotton producing states of the country. Regarding the cottonseed oil,
around 80% of the cottonseed produced in the country is crushed to obtain oil.

The meal produced after the extraction of oil from the seeds sums up to around
2 million tons. Like the fluctuations in the world production of cottonseed, Indian
production also fluctuates every year. Also, the productivity of cotton in India is quite
low as compared to the productivity of the crop in the rest of the world. World
average productivity of the crop is around 500 kg per hectare but Indian productivity
just reaches 300 kg per hectare.
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2.7 INDIAN COTTON MARKET

Cotton has been a traditional crop in India as it has been grown here since it
has been domesticated. It constitutes to around 60% of the fiber consumed in the
textile sector of the country. This sector is also very important for the country as it
provides a large number of employment opportunities and also contributes
significantly to the Gross Domestic product of the country. The country stands first
among the countries having the maximum area under cultivation of cotton and place
third in the list of cotton producing countries.

India produces around 35 million tons of cottonseed in a year. Maharashtra is

the leading cotton producing state in the country with a production of around 6 lakh
tons. The cottonseed meal is produced in the country to the context of 2 million
tons. The area on which cotton is produced is around 9.50 million hectares in India.
The yield per hectare in India is very low as compared to the other producing
countries of the world. The country consumes all of the cotton produced in the
country and ranks among the largest cotton consuming countries.

The main demand comes from the textile sector. Regarding the Indian
scenario in the world trade, India hasn’t been a significant player in the world
market. India sometimes exports cotton and its by-products and some times acts as
an importer to satisfy its huge domestic consumption demand. Cotton earns the
Indian economy the maximum foreign exchange among the exported commodities.
India is the largest exporter of cotton yarn in the world accounting up to 450 million
kg i.e. 17% market share. The countries to which India exports cotton yarn are

• China
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• Korea
• Bangladesh
• Egypt
• Taiwan
• Hong Kong
• Turkey
• Japan

But it also adds on to the list of expenses in the budget of the economy as large
amounts of cotton are imported due to the superior quality of foreign cotton. India
imports around 22 lakhs bales of cotton, which is same as the 12% of the domestic
productions. Also the rate of imports is overtaking the rate of exports in the country
making it a net importer of cotton. Also cotton sector in India is largely unorganized
but several associations are trying to change the scenario.

2.8 INDIA IN THE WORLD COTTON

India is the third largest producer of cotton in the world after China and USA
accounting for about 14% of the world cotton production. It has the distinction of
having the largest area under cotton cultivation in the world ranging between 8.00
million to 9.00 million hectares and constituting about 26% of the world area under
cotton cultivation. The yield per hectare is however, the lowest against the world
average, but over the last two years have shown a promising potential to reach near
the world average production level in near future.

2.9 MAJOR TRADING CENTRES OF COTTON

The major international trading centers in which cotton is traded are:

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• New York Board of Trade (NYBOT) – New York
• Shanghai Commodity Exchange – China

The cotton trading centers in India are:

• Akola (Maharashtra)
• Parbhani (Maharashtra)
• Nagpur (Maharashtra)
• Yeotmal (Maharashtra)
• Adilabad (Andhra Pradesh)
• Karimnagar (Andhra Pradesh)
• Dhule (Maharashtra)
• Surendranagar (Gujarat)

• Bhavnagar (Gujarat)
• Sriganganagar (Rajasthan)
• Bhatinda (Punjab)
• Hisar (Haryana)
• Sirsa (Haryana)
• Guntur (Andhra Pradesh)
• Kurnool (Andhra Pradesh)
• Coimbatore (Tamil Nadu)
• Gulbarga (Karnataka)
• Ahmednagar (Maharashtra)
• Sangli (Maharashtra)
• Kota (Rajasthan)
• Mumbai (Maharashtra)
• Ludhiana (Punjab)
• Delhi
• Kanpur (Uttar Pradesh)
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• Bhilwara (Rajasthan)
• Ahmedabad (Gujarat)
• Surat (Gujarat)
• Indore (Madhya Pradesh)
• Kolkata (West Bengal)
• Tirupur (Tamil Nadu)
• Madurai (Tamil Nadu)

2.10 TYPES OF COTTON PRODUCTS TRADED IN COMMODITY MARKET

• Cotton L staple
• Cotton M staple
• Cotton S staple
• Kapas
• Cotton yarn
• Indian 28 mm cotton
• Indian 31 mm cotton
• Cotton Seed Oilcake
• Medium Staple Cotton
• Cotton Seed
• Cotton Seed Oil
• Raw Jute
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2.11 MARKET INFLUENCING FACTORS FOR COTTON TRADE

• Relationship with other competitive fibers

• World demand for consumer textile and demand from the cattle-feed industry
in the country
• Discovery of new cotton markets
• Introduction of new and developed technology
• Fluctuations in domestic cotton production
• Delays in the arrival of cottonseed for crushing
• Price and other policies of the government regarding the cotton sector
• Import-export scenario in the country
• Fluctuation in currency value
• Weather condition during the growth period.
• Demand from overseas consuming centers like Nepal and Pakistan.
• Quantum and timing of imports from Indonesia, Thailand and Burma.
• Government intervention through MSP purchase.
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• Carryover stocks.
• Growth of the Gutkha industry
• Government regulations related to gutkha industry.
• Only one-third of the area is under irrigation, and this causes the cotton
output to vary considerably from year to year in response to the vagaries of
weather and pest attacks.
• More than 80 percent of the cotton produced is sold out by March 31 every
year and the price starts firming up from April and starts easing only in
September when the new crop starts arriving in the market.

• The Government of India fixes the Minimum Support Price for cotton and
several Government agencies like Cotton Corporation of India, Maharashtra
State Co-operative Cotton Growers' Marketing Federation procure cotton at
this price. This sets the trend for the price initially. But the industry involves
large number of players and the market forces determine the price soon.
• The imports of cotton into the country and exports from the country.
• Variations in cotton production and its effect on cottonseed, meal and oil
production in the country.
• The arrival of cottonseed for crushing from the ginning centers of the
country.
• Comparative price with other oilseeds, oil and meal in the domestic market.
• The demand from the cattle-feed industry, which is the major consumer of
cottonseed meal.
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3. COMMODITY MARKET PROFILE

Ever since the dawn of civilization trading has become an integral part in the
life of mankind. The very reason for the lies in the fact that commodities represent
the fundamental elements of utility for human beings. The term commodity refers to
any material, which can be bought and sold. Commodities in a market’s context
refer to any movable property other than actionable claims, money and securities.
Over the year commodities markets have been experiencing tremendous progress,
which is the evident from the fact that the trade in this segment stands as the boon
for the global economy today. The promising nature of the market has made them
an attractive investment avenue for investors.

In the early days people followed a mechanism for trading called Barter
System, which involves exchange of goods for goods. This was the first form of
trade between individuals. The absence of commonly accepted medium of
exchange has initiated the need for Barter System. People used to buy those
commodities, which they lake and sell those commodities which are excess with
them.
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The commodities trade is believed to have genesis in Sumerian. The early
commodity contracts were carried out using clay tokens as medium of exchange.
Animals are believed to be the first commodities, which were traded, between
individuals. The internationalization of commodities trade can be better understood
by observing the commodity market integration that occurred after the European
voyages of discovery.

The development of international commodities trade is characterized by the

increase in volumes of trade across the nations and the convergence and price
related to the identical commodities at different markets. The major trust for the
commodities trade was provided by the changes in demand patterns, scarcity and
the supply potential both within and across the nations.

The first organized future market in India was established in 1875 under the
aegis of the Bombay Cotton Trade Association to trade in cotton contracts which
was followed by oilseeds and food grains. Before the Second World War, a large
number of commodity exchanges trading futures contracts in several commodities
like cotton, groundnut, groundnut oil, raw jute, jute goods, castor seed, wheat, rice,
sugar, precious metals like gold and silver were flourishing throughout the country.

During the Second World War future trade was prohibited. After
independence, especially in the second half of 1960s, commodity futures trading
picked up. However, due to shortage during the early and mid-sixties futures trading
in most of the commodities was prohibited.

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 inventions by the government.
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Commodity markets have a huge potential in the Indian context particularly because
of the agric-based economy. With the government’s initiative for agricultural
liberalization, commodities trading in India have gained increased momentum in
activities.

To increase the efficiency of the markets the Forward Markets Commission

(FMC), the governing body of commodities trading in India has taken several
initiatives for the establishment of national level multiple commodity exchanges in
India. These exchanges serve as platforms for facilitating transparent trading,
trading in multiple commodities, electronic delivery systems and efficient regulatory
mechanisms, creating a world class environment for Indian traders.

In order to sustain the increasing volumes in commodities trade, the need for
proper clearing and settlement systems, warehousing facilities and efficient pricing
mechanisms have been identified. With the recent boom in commodities markets,
Indian participants are gearing up exploiting the potential opportunities in the future.

Commodity markets are of great help not only for the 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.
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3.1 MAJOR COMMODITY EXCHANGES IN INDIA

3.1.1 MULTI COMMODITY EXCHANGE (MCX)

It is an independent commodity exchange based in India. It was established

in 2003 and is based in Mumbai. It has an average daily turnover of around
US$1.55 billion. MCX offers futures trading in Agricultural Commodities, Bullion,
Ferrous & Non-ferrous metals, Pulses, Oils & Oilseeds, Energy, Plantations, Spices
and other soft commodities.

MCX has also setup in joint venture the National Spot Exchange a purely
agricultural commodity exchange and National Bulk Handling Corporation (NBHC)
which provides bulk storage and handling of agricultural products.

• COMMODITIES TRADED IN MCX

METAL BULLION
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Aluminum, Copper, Lead, Nickel, Gold, Gold HNI, Gold M, i-gold, Silver,
Sponge Iron, Steel Long (Bhavnagar), Silver HNI, Silver M
Steel Long (Govindgarh), Steel Flat,
Tin, Zinc

FIBER ENERGY

Brent Crude Oil, Crude Oil, Furnace Oil,

Cotton L Staple, Cotton M Staple,
Natural Gas, M. E. Sour Crude Oil
Cotton S Staple, Cotton Yarn, Kapas

SPICES PLANTATIONS

Cardamom, Jeera, Pepper, Red Chili Arecanut, Cashew Kernel, Coffee

(Robusta), Rubber

PULSES PETROCHEMICALS

Chana, Masur, Yellow Peas HDPE, Polypropylene(PP), PVC

OIL & OIL SEEDS

Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton Seed, Crude Palm
Oil, Groundnut Oil, Kapasia Khalli, Mustard Oil, Mustard Seed (Jaipur), Mustard
Seed (Sirsa), RBD Palmolein, Refined Soy Oil, Refined Sunflower Oil, Rice Bran
DOC, Rice Bran Refined Oil, Sesame Seed, Soymeal, Soy Bean, Soy Seeds
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CEREALS OTHERS

Guargum, Guar Seed, Gurchaku,

Maize Mentha Oil, Potato (Agra), Potato
(Tarkeshwar), Sugar M-30, Sugar S-30

3.1.2 NATIONAL COMMODITY AND DERIVATIVES EXCHANGE (NCDEX)

It is an online commodity exchange based in India. It was incorporated as a

private limited company incorporated on April 23, 2003 under the Companies Act,
1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It
has commenced its operations on December 15, 2003. NCDEX is a closely held
private company which is promoted by national level institutions and has an
independent Board of Directors and professionals not having vested interest in
commodity markets.

NCDEX currently facilitates trading of 56 commodities -

• AGRI-BASED COMMODITIES

Castor Seed, Chana, Chilli, Coffee - Arabica, Coffee - Robusta

Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Groundnut (in shell)
Groundnut Expeller Oil, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags
Indian 28 mm Cotton, Indian 31 mm Cotton, Masoor Grain Bold, Medium Staple
Cotton
 23

Mentha Oil, Mulberry Green Cocoons, Mulberry Raw Silk, Rapeseed - Mustard
Seed
Pepper, Raw Jute, RBD Palmolein, Refined Soy Oil, Rubber, Sesame Seeds, Soy
Bean
Sugar – Small, Sugar – Medium, Turmeric, Urad (Black Matpe), V-797 Kapas
Yellow Peas, Yellow Red Maize, Yellow Soybean Meal

• BULLION

Gold 1 KG, Gold 100gm, Silver 30 KG, Silver 5 KG

• ENERGY

Brent Crude Oil, Furnace Oil, Light Sweet Crude Oil.

• FERROUS METALS

Mild Steel Ingot

• PLASTICS

Polypropylene, Linear Low Density Polyethylene, Polyvinyl Chloride.

• NON-FERROUS METALS

Aluminum Ingot, Copper Cathode, Nickel Ingot, Zinc Cathode

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3.1.3 NATIONAL MULTI COMMODITY EXCHANGE OF INDIA (NMCE)

In response to the Press Note issued by the Government of India during

May'1999, first state-of-the-art demutualised multi-commodity Exchange, National
Multi Commodity Exchange of India Ltd. (NMCE) was promoted by commodity-
relevant public institutions, viz., Central Warehousing Corporation (CWC), National
Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-
Industries Corporation Limited (GAICL), Gujarat State Agricultural Marketing Board
(GSAMB), National Institute of Agricultural Marketing (NIAM), and Neptune
Overseas Limited (NOL). While various integral aspects of commodity economy,
viz., warehousing, cooperatives, private and public sector marketing of agricultural
commodities, research and training were adequately addressed in structuring the
Exchange, finance was still a vital missing link. Punjab National Bank (PNB) took
equity of the Exchange to establish that linkage. Even today, NMCE is the only
Exchange in India to have such investment and technical support from the
commodity relevant institutions. These institutions are represented on the Board of
Directors of the Exchange and also on various committees set up by the Exchange
to ensure good corporate governance. Some of them have also lent their personnel
to provide technical support to the Exchange management. The day-to-day
operations of the Exchange are managed by the experienced and qualified
professionals with impeccable integrity and expertise. None of them have any
trading interest. The structure of NMCE is impossible to replicate in India.

NMCE is unique in many other respects. It is a zero-debt company; following

widely accepted prudent accounting and auditing practices. It has robust delivery
mechanism making it the most suitable for the participants in the physical
commodity markets. The exchange does not compromise on its delivery provisions
to attract speculative volume.
 25
Public interest rather than commercial interest guide the functioning of the
Exchange. It has also established fair and transparent rule-based procedures and
demonstrated total commitment towards eliminating any conflicts of interest. It is the
only Commodity Exchange in the world to have received ISO 9001:2000 certification
from British Standard Institutions (BSI).

NMCE commenced futures trading in 24 commodities on 26th November,

2002 on a national scale and the basket of commodities has grown substantially
since then to include cash crops, food grains, plantations, spices, oil seeds, metals
& bullion among others. Research Desk of NMCE is constantly in the process of
identifying the hedging needs of the commodity economy and the basket of
products is likely to grow even further. NMCE has also made immense contribution
in raising awareness about and catalyzing implementation of policy reforms in the
commodity sector. NMCE was the first Exchange to take up the issue of differential
treatment of speculative loss. It was also the first Exchange to enroll participation of
high net-worth corporate securities brokers in commodity derivatives market. It was
the Exchange, which showed a way to introduce warehouse receipt system within
existing legal and regulatory framework. It was the first Exchange to complete the
contractual groundwork for dematerialization of the warehouse receipts. Innovation
is the way of life at NMCE.

• COMMODITIES TRADED IN NMCE

Oil Seeds Oils Oil Cakes

Castor Seed Castor Oil Castor Oilcake
Copra Coconut Oil Coconut Oilcake
Cotton Seed Cotton Seed Oil Cotton Seed Oilcake
 26
Groundnut Groundnut Oil Groundnut Oilcake
Linseed Linseed Oil Linseed Oilcake
Rape/Mustard Seed Rape/Mustard Seed
Rape/Mustard Seed
Oil Oilcake
Rape Seed-42 Sesame seed Oil Sesame Oilcake
Sesame Seed Soybean Oil Soybean Oilcake
Soybean Crude Palm Oil
RBD Palmolein
Rice bran Oil
Vanaspati

Metals Spices Others

Aluminium Pepper Rubber
Copper Ungarbled Pepper Sacking
Gold (100 Gms) Cardamom Sugar
Kilo Gold Cumin Seed Sugar S-30
Lead Turmeric Gur
Nickel Guarseed
Silver Guar Gum
Tin Wheat
Zinc Pulses Rice
Tur/Arhar Raw Jute
Urad Coffee Robusta
Moong Coffee Arabica
Masoor Menthol
Chana Isabgul Seed

3.2 CONCEPTS IN COMMODITY MARKET

3.2.1 DERIVATIVES

Derivatives are financial contracts, which derive their value from an

underlying asset. The underlying asset can be equity, commodity, foreign exchange,
interest rates, real estate or any other asset. Broadly four types of derivatives are
traded, namely forwards, futures, options and swaps.
Derivative contracts can be traded either in an exchange or over-the-counter. (OTC)

• EXCHANGE
 27
Exchange is a central marketplace for buyers and sellers of different asset
classes and financial instruments (contracts) that derive their value from these
assets as the underlying. The contracts are standardized to ensure homogeneity in
the financial instruments traded. The prices in an exchange are determined in the
form of a continuous auction. This auction provides a readily available, widely
accepted reference price for the underlying. This facilitates liquidity in the derivative
instrument being traded due to easy transferability, thereby resulting in price
discovery-the fair value is determined by market participants. For example, all
participants in the futures markets are subject to the same specifications of quality,
quantity (lot size of each futures contract) and delivery terms. It is important to
understand that the exchange neither takes positions in the market nor advises the
market is fair and orderly. The exchange provides “Trade Guarantee” using the
Settlement Guarantee Fund, thereby minimizing counterparty default (credit) risk.
Regulatory bodies are appointed by the government to regulate the functioning of all
exchanges. In India, the Forward Markets Commission (FMC) is the regulatory
authority for commodity futures exchanges in India. Members violating the rules of
the exchange and the regulatory body can be penalized.

• OVER-THE-COUNTER (OTC)

OTC is an alternative trading platform linked to a network of dealers who do

not physically meet but instead communicate through a network of telephones and
computers. Traders are usually transacted between financial institutions that can
also act as market makers for the traded financial instruments. All the transactions
over telephone are recorded, so that they can be authenticated in case of future
disputes. The buyer and seller can customize the contracts traded to suit their
specific requirements. Hence, the terms of the contracts are not standardized, but
customized to meet specific requirements of the counterparties. The buyer and
seller negotiate and mutually agree to the terms of the contract.
 28
3.3. TYPES OF DERIVATIVES

• FORWARD CONTRACT

A forward contract is an agreement between two parties to buy or sell an

asset (which can be of any kind) at a pre-agreed future point in time. Therefore, the
trade date and delivery date are separated. It is used to control and hedge risk, for
example currency exposure risk (e.g., forward contracts on USD or EUR) or
commodity prices (e.g., forward contracts on oil).

One party agrees (obligated) to sell, the other to buy, for a forward price
agreed in advance. In a forward transaction, no actual cash changes hands. If the
transaction is collateralized, exchange of margin will take place according to a pre-
agreed rule or schedule. Otherwise no asset of any kind actually changes hands,
until the maturity of the contract.

The forward price of such a contract is commonly contrasted with the spot
price, which is the price at which the asset changes hands (on the spot date, usually
two business days). The difference between the spot and the forward price is the
forward premium or forward discount.

• FUTURES CONTRACT

A futures contract is a standardized contract, traded on a futures exchange,

to buy or sell a certain underlying instrument at a certain date in the future, at a
specified price. The future date is called the delivery date or final settlement date.
 29
The pre-set price is called the futures price. The price of the underlying asset on the
delivery date is called the settlement price.

A futures contract gives the holder the obligation to buy or sell, which differs
from an options contract, which gives the holder the right, but not the obligation. In
other words, the owner of an options contract may exercise the contract, but both
parties of a "futures contract" must fulfill the contract on the settlement date. The
seller delivers the commodity to the buyer, or, if it is a cash-settled future, then cash
is transferred from the futures trader who sustained a loss to the one who made a
profit. To exit the commitment prior to the settlement date, the holder of a futures
position has to offset their position by either selling a long position or buying back a
short position, effectively closing out the futures position and its contract obligations.

Futures contracts, or simply futures, are exchange traded derivatives. The

exchange's clearinghouse acts as counterparty on all contracts, sets margin
requirements, etc.

• OPTION

An option gives the right but not the obligation to the option owner, to buy or
sell an underlying asset at a specific price at a specific time period in the future.

There are two types of OPTIONS

• CALL OPTION

A call option is an option contract that gives the owner of the option, the right,
but not the obligation to buy the underlying asset on or before a specific date and at
a specific price

• PUT OPTION
 30

A put option is an option contract that gives the option owner the right, but
not the obligation to sell the underlying asset on or before a specific date and at a
specific price.

• SWAPS

A swap is an agreement between two parties to exchange different stream of

cash flows in future according to predetermined terms. It is a recent innovation. The
basic idea is that the counter-parties agree to swap two different types of payments.
A payment is either fixed or is designed to float according to an underlying interest
rate, exchange rate, index or the price of a security or commodity. When the
payments are to be executed in the same currency, then only the net amount of
payments are made. The World Bank and IBM entered into the first ever swap
contract in August 1981.

3.4 ADVANCED CONCEPT IN COMMODITY MARKETS

3.4.1 HEDGING

Hedging means taking a position in the futures market that is opposite to a

position in the physical market with the objective of reducing or limiting risks
associated with price changes. Hedging is two-step process. For instance, if the
hedger is going to buy a commodity in the cash market at a future date, he buys the
futures contract now and when he buys the commodity in the cash market, the
futures contract is squared off to reduce or limit the risk of the purchase price. If the
hedger is going sell a commodity in the cash market in the future, he sells the
futures contract is squared off to reduce or limit the risk of the sales price.
 31
3.4.2 SPECULATION

Speculation means anticipating future price movements to make profits from

it. The main objective of speculation in a commodity futures market is to take risks
and profit from anticipated price changes in the futures price of an asset. A
speculator will buy futures contracts (long position) if he anticipates an increase in
the price of the commodity in future and he will sell futures contracts (short position)
if he anticipates a fall in the price of the commodity in future.

3.4.3 ARBITRAGE

Arbitrage means locking in a profit by simultaneously entering into

transactions in two or more markets. If the relationship between spot prices and
futures prices in terms of basis or between prices of two futures contracts in terms
of spread changes, it gives rise to arbitrage opportunities. Difference in the
equilibrium prices determined by he demand and supply at two different markets
also gives opportunities arbitrage. The futures price must be equal to the spot price
plus cost of carrying the commodity to the futures delivery date else arbitrage
opportunity arises.
 32

CHAPTER II

4. OBJECTIVES OF THE STUDY

• To analyze online trading mechanism of the commodity market

• To find the major factors that influence cotton items trading in the commodity
market

• To identify the cotton industries performance related to commodity market

• To evaluate the risks involved in cotton trading in the commodity market

• To give suggestion to overcome the risk involved in cotton trading in the

commodity market
 33

5. LIMITATIONS OF THE STUDY

• The study is carried out with in a short period of time

• This study has certain limitations, as it is restricted to only one area i.e.
Coimbatore.

• It is not possible to expect 100% accuracy in cotton trading in the commodity

market.

• Primary data is collected only through questionnaire and there is no interview

session with the cotton industry traders because of time constraints

• The sample respondents are restricted to 50 only which may leads to some
discrepancies in conclusion.
 34

6. RESEARCH METHODOLOGY

Research in common parlance refers to a search for knowledge. It is

systematic method of enunciating the problems, formulating a hypothesis, collecting
the facts or data, analyzing the facts and reaching certain conclusions. It is a
‘search for knowledge’.

6.1 RESEARCH DESIGN

In this research design, the researcher has focused on the cotton traders in
the commodity market. The researcher already knows the research questions
should be addressed. The research is based on descriptive research

6.2 SAMPLE UNIT

The sample unit in this project consists of the cotton industries and cotton
traders in Coimbatore

6.3 SAMPLE SIZE

 35
Total sample respondents for study are restricted to 50. The samples were
collected only from Coimbatore city. Major respondents were cotton industries and
cotton traders in Coimbatore.

6.4 SAMPLING METHOD

The sampling technique adopted for the study was non-probability

convenience sampling .It was very easy to locate the cotton traders in the
Coimbatore. So the respondents were chosen on the basis of this sampling method.

6.5 DATA COLLECTION METHOD

The data collection method includes both primary and secondary data

A) PRIMARY DATA

The primary data is collected by meeting various Cotton Industries and

Cotton Traders Coimbatore. The primary data collection is done by collecting
questionnaire from the Cotton Industries and Cotton Traders.

B) SECONDARY DATA

Secondary data includes data, which exist already and are directly applied to
the study. Secondary data was collected from the literature published by various
books and related websites.
 36

6.6 STATISTICAL TOOLS

Simple percentage method is used in this study to carry out the percentage
analysis.

CHAPTER III

7. ANALYSIS AND INTERPRETATION

7.1 AWARENESS OF COTTON ITEMS TRADED IN COMMODITY MARKET

To find the cotton industries might aware about the cotton items traded in the
commodity market.

TABLE NO: 1

The table showing respondents’ opinion about awareness of cotton items

traded in commodity market

S.NO TYPE NO OF PERCENTAGE

RESPONDENTS
1 Aware 36 72
2 Unaware 14 28
Total 50 100

INFERENCE
 37

From the above table 72% of cotton industries aware about the cotton item
traded in the commodity market and 28% are not aware about the commodity
market

CHART: 1

The chart showing respondents’ opinion about awareness of cotton items

traded in commodity market

40
36
35

30
No of Respondents

25
Aware
20
Unaware
14
15

10

0
 38

7.2 TRADE IN COTTON ITEMS IN COMMODITY MARKET

To find the number of traders in the cotton items in the commodity market

TABLE NO: 2

The table showing respondents’ opinion about trade in cotton items in

commodity market

S.NO TYPE NO OF PERCENTAGE

RESPONDENTS
1 Traded 13 26
2 Not Traded 37 74
Total 50 100

INFERENCE

It is inferred from the above table there are 26% of cotton items trader are
available in the commodity market and 37% are not traded in the cotton items in the
commodity market.
 39

CHART: 2

The chart showing respondents’ opinion about traded in cotton items in

commodity market

40 37

35

30
No of Respondents

25
Traded
20
Not Traded
15 13

10

0
 40

7.3 COTTON ITEMS TRADING SUITABLE FOR LONG TERM TRADE

To find the cotton items trade in the commodity market should be suitable for
long term trade

TABLE NO: 3

The table showing respondents’ opinion about cotton items trading suitable
for long term trade

S.NO TYPE NO OF PERCENTAGE

RESPONDENTS
1 Yes 19 38
2 No 31 62
Total 50 100

INFERENCE

From the above table it shows that 38% of the cotton traders are favorable
for long term trade and 62% of the cotton traders are not favorable for long term
trade.
 41
CHART: 3

The chart showing respondents’ opinion about cotton items trading suitable
for long term trade

35
31
30

25
No of Respondents

19
20
Yes
No
15

10

0
 42
7.4 COMMODITY MARKET OFFERS BETTER QUALITY COTTON MATERIALS

To find the commodity market offers the good quality of cotton materials to
cotton traders in the commodity market.

TABLE NO: 4

The table showing respondents’ opinion about commodity market offers

better quality cotton materials

S.NO TYPE NO OF PERCENTAGE

RESPONDENTS
1 Yes 23 46
2 No 27 54
Total 50 100

INFERENCE

From the above table 46% of cotton traders are agree the cotton commodity market
offer good quality cotton materials and 54% of cotton traders are not agree the
cotton commodity market offer the good quality cotton materials
 43
CHART: 4

The chart showing respondents’ opinion about commodity market offers

better quality cotton materials

28
27
27

26
No of Respondents

25
Yes
No
24
23
23

22

21

7.5 REASONS FOR TRADING COTTON ITEMS IN THE COMMODITY MARKET

 44
There are three basic reasons for trading in the cotton items in the
commodity market those are Standardization, Price, and Delivery and to find the
cotton traders reason for trading in the cotton commodity market.

TABLE NO: 5

The table showing respondents’ opinion about reasons for trading cotton
items in the commodity market

S.NO TYPE NO OF PERCENTAGE

RESPONDENTS
1 Standardization 15 30
2 Price 16 32
3 Delivery 2 4
4 No Answer 17 34
Total 50 100

INFERENCE

From the above table it shows that 30% of cotton traders are favorable for
standardization and 32% of cotton traders is favorable for price and 4% cotton
traders is favorable for delivery and 34% of cotton traders are not specify the
reason.

CHART: 5

The chart showing respondents’ opinion about reasons for trading cotton
items in the commodity market
 45

18 17
16
16 15

14
No of Respondents
12
Standardization
10 Price
8 Delivery
No Answer
6

4
2
2

7.6 SPECIFICATION OF THE COMMODITY EXCHANGE NAME THOSE WHO

TRADE

To know the cotton traders in which commodity exchange those who trade
cotton items in the commodity market.
 46
TABLE NO: 6

The table showing respondents’ opinion about specification of the commodity

exchange name those who trade

S.NO TYPE NO OF PERCENTAGE

RESPONDENS
1 MCX 13 26
2 NCDEX 0 0
3 Others 37 74
Total 50 100

INFERENCE

From the above table 26% of cotton traders are trade only in MCX and there
is no cotton traders are trade in NCDEX

CHART: 6

The chart showing respondents’ opinion about specification of the

commodity exchange name those who trade
 47

40 37

35

30

No of Respondents 25
MCX
20 NCDEX
Others
15 13

10

5
0
0

7.7 TRADING YEARS OF THE PERSON TRADE IN COTTON ITEMS IN THE

COMMODITY MARKET

To know the No of years of cotton traders make a trade in cotton items in the
commodity market.

TABLE NO: 7
 48

The table showing respondents’ opinion about trading years of the person
trade in cotton items in the commodity market

S.NO TYPE NO OF PERCENTAGE

RESPONDENS
1 Less than one 8 16
Year
2 1 to 5 years 5 10
3 More than 5 Years 0 0
4 Others 37 74
Total 50 100

INFERENCE

It is inferred from the above table there are 16% of cotton traders are trade
below one year and 10% of cotton traders are trade between 1 to 5 years and no
person trade more than 5 years.

CHART: 7

The chart showing respondents’ opinion about trading years of the person
trade in cotton items in the commodity market
 49

40 37

35

30

No of Respondents 25 Less than one Year

1 to 5 years
20
More than 5 Years
15 Others

10 8
5
5
0
0

7.8 BASIS OF TRADE COTTON ITEMS IN THE COMMODITY MARKET

There are two basis of trade of cotton items in the commodity market those
are one day trader and more than a day trader.

TABLE NO: 8
 50

The table showing respondents’ opinion about basis of trade cotton items in
the commodity market

S.NO TYPE NO OF PERCENTAGE

RESPONDENS
1 Daily Trader 1 2
2 More than a Day 12 24
3 Others 37 74
Total 50 100

INFERENCE

It is inferred from the above table only 2% of trader is done one day trade
and 24% of cotton traders are done more than a day trade.

CHART: 8

The chart showing respondents’ opinion about basis of trade cotton items in
the commodity market
 51

40 37

35

30

No of Respondents 25
Daily Trader
20 More than a Day
Others
15 12

10

5
1
0

7.9 FLUCTUATION PRICE OF COTTON ITEMS IN THE COMMODITY MARKET

To find the level of fluctuation price in cotton items in the commodity market.

TABLE NO: 9
 52
The table showing respondents’ opinion about fluctuation price of cotton
items in the commodity market

S.NO TYPE NO OF PERCENTAGE

RESPONDENS
1 High 4 8
2 Medium 7 14
3 Low 2 4
4 Others 37 74
Total 50 100

INFERENCE

From the above table 8% of cotton traders are favorable for high fluctuation
price and 14% of cotton traders are favorable for medium level and 4% cotton
traders are favorable for low level fluctuation price of cotton items in the commodity
market.

CHART: 9

The chart showing respondents’ opinion about fluctuation price of cotton

items in the commodity market
 53

40 37

35

30

No of Respondents 25 High
Medium
20
Low
15 Others

10 7
4
5 2

7.10 COTTON ITEMS IN THE COMMODITY MARKET IS CONVENIENT FOR

BULK PURCHASE

To know the cotton items trade in the commodity market is suitable for bulk
purchase.

TABLE NO: 10
 54

The table showing respondents’ opinion about cotton items in the commodity
market is convenient for bulk purchase

S.NO TYPE NO OF PERCENTAGE

RESPONDENS
1 Yes 10 20
2 No 3 6
3 Others 37 74
Total 50 100

INFERENCE

From the above table 20% of cotton traders are favorable for bulk purchase
and 6% of cotton traders are not favorable for bulk purchase of cotton items in the
commodity market.

CHART: 10

The chart showing respondents’ opinion about cotton items in the commodity
market is convenient for bulk purchase
 55

40
37

35

30

No of Respondents 25
Yes
20 No
Others
15
10
10

5 3

7.11 DELIVERY OF COTTON ITEMS IN THE COMMODITY MARKET

To know the cotton traders those who take any delivery of cotton items in the

commodity market.
 56
TABLE NO: 11

The table showing respondents’ opinion about delivery of cotton items in the
commodity market

S.NO TYPE NO OF PERCENTAGE

RESPONDENS
1 Yes 0 0
2 No 13 36
3 Others 37 74
Total 50 100

INFERENCE

From the above table there are no person take deliveries of cotton items in
the commodity market.

CHART: 11

The chart showing respondents’ opinion about delivery of cotton items in the
commodity market
 57

40
37

35

30

No of Respondents 25
Yes
20 No
Others
15 13

10

5
0
0

7.12 COTTON VARIETIES CAN BE ADDED IN THE COMMODITY MARKET

There are some cotton items traded in the commodity market if there is any
need for include of cotton items in the commodity market.

TABLE NO: 12
 58

The table showing respondents’ opinion about cotton varieties can be added
in the commodity market

S.NO TYPE NO OF PERCENTAGE

RESPONDENS
1 Yes 2 4
2 No 11 22
3 Others 37 74
Total 50 100

INFERENCE

It is inferred from the above table there are 4% of cotton traders are wanted
to include some cotton items in the commodity market and 22% of cotton traders
are not need to include of cotton items in the commodity market.

CHART: 12

The chart showing respondents’ opinion about cotton varieties can be added
in the commodity market
 59

40
37

35

30

No of Respondents 25
Yes
20 No
Others
15
11
10

5
2

7.13 PROBLEMS OF COTTON ITEMS TRADING IN THE COMMODITY MARKET

To find the problems of cotton items trade in the commodity market.

TABLE NO: 13
 60
The table showing respondents’ opinion about problems of cotton items
trading in the commodity market

S.NO TYPE NO OF PERCENTAGE

RESPONDENS
1 Quality 2 4
2 Price 1 2
3 Delivery 10 20
4 Others 37 74
Total 50 100

INFERENCE

From the above table 4% of cotton traders are faces the problem of quality
and 2% of cotton traders are faces the problem of price variations and 20% of
cotton traders are faces the problem in taking delivery of cotton items in the
commodity market.

CHART: 13

The chart showing respondents’ opinion about problems of cotton items

trading in the commodity market
 61

40
37

35

30

No of Respondents 25 Quality
Price
20
Delivery

15 Others

10
10

5
2
1
0

7.14 CHEAPEST MODE FOR PURCHASING COTTON ITEMS

There are two types of market one is spot market and another one is
commodity market. According to those markets which market gives cheapest mode
for purchasing cotton items in the commodity market.

TABLE NO: 14
 62

The table showing respondents’ opinion about cheapest mode for purchasing
cotton items

S.NO TYPE NO OF PERCENTAGE

RESPONDENS
1 Spot Market 37 74
2 Commodity 13 26
Market
Total 50 100

INFERENCE

From the above table 74% of cotton traders found spot market is the
cheapest mode for purchasing cotton and 26% of cotton traders are favorable for
cotton items in the commodity market are cheapest mode for purchasing cotton.

CHART: 14

The chart showing respondents’ opinion about cheapest mode for purchasing
cotton items
 63

40
37

35

30

No of Respondents 25

Spot Market
20
Commodity Market

15 13

10

7.15 DISCOUNT RATE OF PURCHASING COTTON ITEMS

There are two types of market one is spot market and another one is
commodity market. In above two markets which market gives more discount rate for
purchasing of cotton items in the commodity market.

TABLE NO: 15
 64

The table showing respondents’ opinion about discount rate of purchasing

cotton items

S.NO TYPE NO OF PERCENTAGE

RESPONDENS
1 Spot Market 37 74
2 Commodity 13 26
Market
Total 50 100

INFERENCE

It is inferred from the above table there are 74% of cotton traders are
favorable for spot market and 26% of cotton traders are favorable for commodity
market.

CHART: 15

The chart showing respondents’ opinion about discount rate of purchasing

cotton items
 65

40
37

35

30

No of Respondents 25

Spot Market
20
Commodity Market

15 13

10

7.16 INTRODUCING THE OPTIONS FOR TRADING OF COTTON ITEMS IN THE

COMMODITY MARKET

The one concept of commodity market is OPTIONS this choice will be

introduce in future market is that helpful for cotton items trade in the commodity
market.
 66
TABLE NO: 16

The table showing respondents’ opinion about introducing the options for
trading of cotton items in the commodity market

S.NO TYPE NO OF PERCENTAGE

RESPONDENS
1 Yes 11 22
2 No 2 4
3 Others 37 74
Total 50 100

INFERENCE

From the above table 22% of cotton traders are willing to introduce the
OPTIONS choice in the commodity market and 4% percentage of cotton traders are
not willing to introduce the OPTIONS choice in the commodity market.

CHART: 16

The chart showing respondents’ opinion about introducing the options for
trading of cotton items in the commodity market
 67

40
37

35

30

No of Respondents 25
Yes
20 No
Others
15
11
10

5
2

7.17 TAX REDUCTION IN TRADING OF COTTON ITEMS IN THE COMMODITY

MARKET

For cotton traders in the commodity market does have any tax reduction for
their trade of cotton items in the commodity market.

TABLE NO: 17
 68

The table showing respondents’ opinion about tax reduction in trading of

cotton items in the commodity market

S.NO TYPE NO OF PERCENTAGE

RESPONDENS
1 Yes 9 18
2 No 4 8
3 Others 37 74
Total 50 100

INFERENCE

From the above table 18% of cotton traders got the tax reduction of trade of
cotton items in the commodity market and 8% of cotton traders not got any tax
reduction for their trade of cotton in the commodity market.

CHART: 17

The chart showing respondents’ opinion about tax reduction in trading of

cotton items in the commodity market
 69

40
37

35

30

No of Respondents 25
Yes
20 No
Others
15

9
10

4
5

7.18 RECOMMENDATION FROM COMMODITY BROKER FOR TRADING OF

COTTON ITEMS

The cotton traders get some recommendation from their commodity broker

TABLE NO: 18
 70

The table showing respondents’ opinion about recommendation from

commodity broker for trading of cotton items

S.NO TYPE NO OF PERCENTAGE

RESPONDENS
1 Yes 13 26
2 No 0 0
3 Others 37 74
Total 50 100

INFERENCE

From the above table 36% of cotton traders got recommendation for the
trade of cotton items in the commodity market.

CHART: 18

The chart showing respondents’ opinion about recommendation from

commodity broker for trading of cotton items
 71

40
37

35

30

No of Respondents 25
Yes
20 No
Others
15 13

10

5
0
0

7.19 RECOMMENDATIONS IS HELPFUL FOR TRADE OF COTTON ITEMS IN

THE COMMODITY MARKET

The recommendations from their commodity broker are that helpful for trade
of cotton items in the commodity market.

TABLE NO: 19
 72

The table showing respondents’ opinion about recommendations is helpful

for trade of cotton items in the commodity market

S.NO TYPE NO OF PERCENTAGE

RESPONDENS
1 Yes 6 12
2 No 7 14
3 Others 37 74
Total 50 100

INFERENCE

From the above table shows that 12% of cotton traders are favorable for the
recommendation of their commodity broker and 14% of cotton traders are not
favorable for the recommendation of their commodity broker for the trade of cotton
items in the commodity market.

CHART: 19

The chart showing respondents’ opinion about recommendations is helpful

for trade of cotton items in the commodity market
 73

37

No of Respondents Yes
No
Others

7
6

NO OF RESPONDENS

8. FINDINGS

• India is the third largest producer of cotton in the world after China and USA
accounting for about 14% of the world cotton production.
 74
• India produces around 35 million tons of cotton seed in a year. India is the
largest exporter of cotton yarn in the world accounting up to 450 million kg
i.e. 17% market share.

• All agricultural commodities in India trade in wholesale market or mandis

where the price of a commodity is determined by free market forces of
demand and supply.

• The Indian commodity market has failed to focus on the cotton industries and
most of the cotton industries are not traded in the commodity market

• Hedging mechanism is available for all commodities

• The commodity market offers the good standardization and certification of

cotton materials rather than the spot market

• Comparing to the spot market, delivery procedure of cotton items in the

commodity market follows many legal rules and regulations.

• The cheapest mode for purchasing cotton items is spot market.

• If OPTIONS will be introduced in the commodity market, the investor’s risks

will be minimized.

9. SUGGESTIONS

• Forward Market Commission (FMC) should allocate funds to educate the

investors about cotton as a commodity that can be traded in the commodity
market.
 75

• If OPTIONS are introduced in the future market most of the investors will get
benefited by trading.

• Delivery procedure should be minimized for all type of commodities in the

commodity market.

• Government may fix the rate of the purchase of cotton items in the
commodity market

• To avoid artificial demand created by commodity market should be controlled

by government or regulatory authority.

• The cotton association in India should give the knowledge to cotton

industries, about the standardization, quality and price etc offer by the
commodity market and their features.

10. CONCLUSION

The various organization and association are focused to develop the cotton
trade in the commodity market as well as in the spot market. Particularly in
Coimbatore city have south India cotton association (SICA) plays a very major role
for the development of the cotton items trade in the commodity market and also spot
market in the Coimbatore.
 76

The commodity exchanges in India plays vital role in the trade of cotton items
in the commodity market and all controls of the commodity exchanges comes under
the Forward Market Commission (FMC).

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 unfavorable 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 futures has been less
volatile compared with equity and bonds, thus providing an efficient portfolio
diversification option.

Commodity market is an important constituent of the financial markets

of any country. It is the market where a wide range of products, viz., precious
metals, base metals, crude oil, energy and soft commodities like palm oil,
cotton etc. are traded. It is important to develop a vibrant, active and liquid
commodity market. This would help investors hedge their commodity risk,
take speculative positions in commodities and exploit arbitrage opportunities
in the market.

11. BIBLIOGRAPHY & WEBLIOGRAPHY

BOOKS
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• C.R. Kothari (2002) ‘Research Methodology’, Wishwa Prakashan, New Delhi
2nd Edition.
• Reference Material ‘MCX certified commodity professional (MCCP)’
• Commodity & Derivatives (Issue No: 8 August 2007)
• Philip Kotler & Gary Armstrong, Principles of Marketing, ed7, Prentice-Hall of
India,
• New Delhi, 1997.

REPORTS

• Government of India 1997 : Economic Survey 1996-97, p15.

• International Monetary Fund, International Financial Statistics (various
issues, Washington DC.
• Cotton Corporation of India – Annual Reports 2006 to 2007.

NEWSPAPERS

• The Economic Times, 12th January 2008, p7.

• Business Line, 15th January 2008, p5 and 11th February 2008, p9.

WEBSITES

• www.mcxindia.com
• www.ncdex.com
• www.nmce.com
• www.google.com
• www.wikepedia.com
• www.cotcorp.gov.in
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• www.commodityindia.com

12. APPENDIX

“A STUDY ON COTTON TRADING IN COMMODITY MARKET WITH

SPECIAL REFERENCE TO COIMBATORE“

Company Name :

1) Are you aware of the cotton items traded in the commodity market?
□ Aware □ Unaware
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If UNAWARE please specify the any of the following reasons given below:

□ Lack of awareness
□ Lack of standards
□ Price dissemination
□ Future risk
□ Deliver basis procedures
□ Any other reason please specify ………………..

2) Have you traded cotton items in the commodity market?

□ Traded □ Not Traded

3) Is cotton items trading suitable for long term trade?

□ Yes □ No

4) Does the commodity market offer better quality cotton materials?

□ Yes □ No

5) Reasons for trading cotton items in the commodity market?

□ Standardization □ Price □ Delivery
If any other reason……………….

6) Specify the name of the commodity exchange through whom you trade?
□ MCX □ NCDEX □ Others

7) How long have you been trading with cotton items in the commodity
Market?
□ Less than one year □ 1 to 5 year □ More than 5 year

8) In what basis do you trade cotton items in the commodity market?

□ Daily Trader □ More than a Day

9) How is the fluctuation in the price of cotton items in the commodity market?
□ High □ Medium □ Low
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10) The commodity market transactions are convenient for bulk purchase?
□ Yes □ No

11) Have you taken any delivery of cotton in the commodity market?
□ Yes □ No

12) Do you think any more cotton varieties can be added in the commodity
market?
□ Yes □ No

13) What are the problems faced in commodity market while you trading in cotton?
□ Quality □ Price □ Delivery

14) According to you which is the cheapest mode for purchasing cotton items?
□ Spot market □ commodity market

15) Which market gives you more discount rate while purchasing cotton items?
□ Spot market □ commodity market

16) If OPTIONS will introduce in commodity market is useful for trading the cotton
items?
□ Yes □ No

17) Are you availing any tax reduction in transaction of cotton items in the
commodity market?
□ Yes □ No

18) Did you got any recommendations from your commodity broker?
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□ Yes □ No

19) The recommendation is helpful for your trade?

□ Yes □ No

20) Suggestion for improving cotton items in the commodity market?

a) .........................
b) ……………….
c) ……………….
d) ……………….