A Project On Commodity Trading

COMMODITY MARKET
Commodity markets are markets where raw or primary products are exchanged. It
covers physical product (food, metals, and electricity) markets but not the ways
that services, including those of governments, nor investment nor debt, can be seen
as a commodity.
HISTORY OF COMMODITY MARKET
 Modern Commodity Market have their roots in the trading of agricultural

products.
 Wheat and corn, cattle and pigs, were widely traded using standard
instruments in the 19th century in the United States.
 Historically, in ancient times Sumerian use of sheep or goats, or other
peoples using pigs, rare seashells, or other items as commodity money, have
traded contracts in the delivery of such items, to render trade itself more
smooth and predictable.
SIZE OF THE MARKET

 The trading of commodities includes physical trading of food items, Energy
and Metals, etc. and trading of derivatives.
 In the five years up to 2007, the values of global physical exports of
commodities increased by 17% while the notional value outstanding of
commodity. OTC derivatives increased more than 500% and commodity
derivative trading on exchanges more than 200%.
1 Analysis of commodity indices in the global shipping trade

 Agricultural contracts trading grew by 32% in 2007, energy 29% and
industrial metals by 30%.
 Precious metals trading grew by 3%, with higher volume in New York being
partially offset by declining volume in Tokyo.
 OTC trading accounts for the majority of trading in gold and silver.
LIST OF TRADED COMMODITY
 Agricultural (Grains, and Food and Fiber)

 Livestock & Meat
 Energy
 Precious metals
 Industrial metals
Agricultural Products
Corn, Oats, Rough Rice, Soybeans, Rapeseed, Soybean Meal, Soybean Oil,
Wheat, Cocoa, Coffee C, Cotton No.2, Sugar No.11, Sugar No.14.
Livestock and meat

Lean Hogs, Frozen Pork Bellies, Live Cattle, Feeder Cattle.
Energy
WTI Crude Oil, Brent Crude, Ethanol, Natural Gas, Heating Oil, Gulf Coast
Gasoline, RBOB Gasoline, Propane, Uranium.

Precious Metal
Gold, Platinum, Palladium, Silver.
Industrial Metals
Copper, Lead, Zinc, Tin, Aluminum, aluminum alloy, Nickel, aluminum
alloy, Recycled steel.
COMMODITY EXCHANGES
 Abuja Securities and Commodities Exchange
 Bhatinda Om & Oil Exchange Bathinda
 Brazilian Mercantile and Futures Exchange
 Chicago Board of Trade
 Chicago Mercantile Exchange
 Commodity Exchange Bratislava, JSC
 Dalian Commodity Exchange
 Dubai Mercantile Exchange
 Intercontinental Exchange
 Minneapolis Grain Exchange
 Multi Commodity Exchange
 National Commodity and Derivatives Exchange
 National Multi-Commodity Exchange of India Ltd
 New York Mercantile Exchange
 New York Board of Trade
 London Metal Exchange

 Winnipeg Commodity Exchange
RECENT TRENDS IN COMMODITY MARKET
 The 2008 global boom in commodity prices – for everything from coal to
corn – was fueled by heated demand from the likes of China and India.
 Speculation in forward markets.
 Farmers are expected to face a sharp drop in crop prices as a result of bad
rainfall.
 Other commodities, such as steel, are also expected to fall due to lower
demand .
Basics of Futures Trading
Perhaps the biggest advantage to trading futures contracts is the leverage provided
by the exchange. However, controlling large contracts with relatively low amounts
of capital can create high levels of volatility. As a result, many traders will argue
that leverage is actually a disadvantage. Regardless of your opinion on leverage
and margin requirements, it is important that you fully understand the concepts.
Before a customer can establish a position he is required to make a minimum

“good faith deposit,” or margin, to assure the performance of his obligations. A
margin deposit is, in essence, a performance bond, which is usually between 5%
and 10% of the underlying contract value. A good faith deposit indicates the buyer
or seller’s willingness and capability to compensate the opposite party to a
transaction

Because margin requirements are low, hedgers are given the ability to lock in
pricing of cash market goods without tying up a lot of capital. It would be
counterproductive for a hedger who handles large quantities to put up 100% of the
value of the hedged commodity. The exchange grants margin discounts to those
that are deemed to be “bonefied” hedgers, due to the fact that the underlying cash
position is seen as collateral to secure the capital risked in the futures market.
Low margins make speculation in the futures markets very attractive, without the
advantage of leverage the rate of return on most commodities would be marginal.
The exchanges are responsible for setting margin requirements, but brokerage
firms have discretion to require higher deposits. Generally, the initial margin is
sufficient to cover the maximum daily price fluctuations. It is not uncommon for
margin requirements to fluctuate with the volatility of the market. A maintenance
level is established below the initial margin, usually 75% of the initial
margin. Once a trader's good faith deposit falls below this threshold additional
funds must be deposited or positions must be liquidated. This is known as a margin
call.
Orders
There are several types of orders that can be placed. In order to maximize
efficiency and profitability, traders must be comfortable in executing each of the
following options.
Market Order: The purpose of a market order is to execute a trade immediately at

the best possible price. Such orders give traders the ability to enter or exit a trade

quickly, but do not guarantee a favorable price. This order should be used when
time is more valuable than price.
Limit Order: Limit orders are used to buy or sell at a specified price or better, and
will only be filled at the state price or one that is more favorable. For a sell limit
order “better” means higher, for buy limit orders “better” means lower.
Stop Order: This type of order is usually placed to close a position; its name is
derived from the fact that, if placed properly, it will “stop loss” should the market
go against a trader’s position. Most traders chose to place a stop order at the time
that they enter a position. By definition, a sell stop will be placed below the market
while a buy stop will be placed above. All orders are day orders unless specified
otherwise and are canceled at the end of the trading day. By entering the order
GTC (good ‘til canceled), the order will be working in each trading session until
canceled by the trader.
Execution
Many beginning traders are unaware of the mechanics of executing a futures trade.
When you call your broker, an order ticket is completed and time stamped in order
to keep accurate track of the time and specifics of each order. The broker then
transmits the order to his firm’s trading desk located on the floor of the exchange
either by a computerized trading platform or by phone. The order clerk then fills
out an order card; time stamps it, and hands it to a runner who will take it directly
to a broker in the pit. The pit broker will execute the order by open outcry and
record the execution on the card before it is given back to the runner. The runner
takes the executed order back to the desk where the order clerk time stamps the
card one more time before the fill is reported to your broker

THE FIELD
I.BACKGROUND OF THE INDUSTRY
THE NCDEX PLATFORM

National Commodity and Derivatives Exchange Ltd (NCDEX) is a technology
driven commodity exchange. It is a public limited company registered under the
Companies Act, 1956 with the Registrar of Companies, Maharashtra in Mumbai on
April 23, 2003. It has an independent Board of Directors and professionals not
having any vested interest in commodity markets. It has been launched to provide a
world-class commodity exchange platform for market participants to trade in a
wide spectrum of commodity derivatives driven by best global practices,
professionalism and transparency.
NCDEX is regulated by Forward Markets Commission in respect of futures trading

in commodities. Besides, NCDEX is subjected to various laws of the land like the
Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act
and various other legislations, which impinge on its working. It is located in
Mumbai and offers facilities to its members in about 91 cities throughout India at
the moment.NCDEX currently facilitates trading of ten commodities - gold, silver,
soy bean, soy bean oil, rapeseed-mustard seed, expeller rapeseed-mustard seed oil,
and RBD palmolein, crude Palm oil and cotton, Medium and long staple varieties,
At subsequent phases trading in more commodities would be facilitated.

STRUCTURE OF NCDEX
NCDEX has been formed with the following objectives:
 To create a world class commodity exchange platform for the market

participants.
 To bring professionalism and transparency into commodity trading.
 To inculcate best international practices like de. Modularization, technology

platforms, low cost
 Solutions and information dissemination without noise etc. into the trade.
 To provide nationwide reach and consistent offering.
 To bring together the entities that the market can trust
PROMOTERS
NCDEX is promoted by a consortium of institutions. These include the ICICI Bank
Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank
for Agriculture and Rural Development (NABARD) and National Stock Exchange
of India Limited (NSE). NCDEX is the only commodity exchange in the country
promoted by national level institutions. This unique parentage enables it to offer a
variety of benefits which are currently in short supply in the commodity markets.
The four institutional promoters of NCDEX are prominent players in their
respective fields and bring with them institution building experience, trust,
nationwide reach, technology and risk management skills.

GOVERNANCE
NCDEX is run by an independent Board of Directors. Promoters do not participate
in the day to day activities of the exchange. The directors are appointed in
accordance with the provisions of the Articles of Association of the company. The
board is responsible for managing and regulating all the operations of the exchange
and commodities transactions. It formulates the rules and regulations related to the
operations of the exchange. Board appoints an executive committee and other
committees for the purpose of managing activities of the exchange.
The executive committee consists of Managing Director of the exchange who
would be acting as the Chief Executive of the exchange, and also other members
appointed by the board.
Apart from the executive committee the board has constitute committee like
Membership committee, Audit Committee, Risk Committee, Nomination
Committee, Compensation Committee and Business Strategy Committee, which,
help the Board in policy formulation.
EXCHANGE MEMBERSHIP
Membership of NCDEX is open to any person, association of persons,
partnerships, cooperative societies, companies etc. that fulfills the eligibility
criteria set by the exchange. All the members of the exchange have to register
themselves with the competent authority before commencing their operations. The
members of NCDEX fall into two categories, trading cum Clearing Members
(TCM) and Professional Clearing Members (PCM)

TRADING CUM CLEARING MEMBERS (TCMS)
NCDEX invites applications for Trading cum Clearing Members (TCMs) from
persons who fulfill the specified eligibility criteria for trading in commodities. The
TCM membership entitles the members to trade and clear, both for themselves and/
or on behalf of their clients. Applicants accepted for admission as TCM are
required to pay the required fees/ deposits and also maintain net worth as given in
Table
Table Fee/ deposit structure and net worth requirement: TCM
particulars Rupees( in lakh)
Interest free cash security deposit 15.00
Collateral security deposit 15.00

Annual subscription charges 0.50
Advance minimum transaction charges 0.50
Net worth requirement 50.00

PROFESSIONAL CLEARING MEMBERS (PCM)
NCDEX also invites applications for Professional Clearing Membership (PCMs)

from persons who fulfill the specified eligibility criteria for trading in
commodities. The PCM membership entitles the members to clear trades executed
through Trading cum Clearing Members (TCMs), both for themselves and/ or on
behalf of their clients. Applicants accepted for admission as PCMs are required to
pay the following fee/ deposits and also maintain net worth as given in Table
Table 3.2 Fee/ deposit structure and net worth requirement: PCM
particulars Rupees( in lakh)

Interest free cash security deposit 25.00
Collateral security deposit 25.00
Annual subscription charges 1.00
Advance minimum transaction charges 1.00
Net worth requirement 5000.00

CAPITAL REQUIREMENTS
NCDEX has specified capital requirements for its members. On approval as a

member of NCDEX, the member has to deposit Base Minimum Capital (BMC)
with the exchange. Base Minimum Capital comprises of the following:
1. Interest free cash security deposit

2. Collateral security deposit
All Members have to comply with the security deposit requirement before the
activation of their trading terminal
􀀀 Cash: This can be deposited by issuing a cheque/ demand draft payable at

Mumbai in favour of National Commodity & Derivatives Exchange Limited.
􀀀 Bank guarantee: Bank guarantee in favour of NCDEX as per the specified

format from approved banks. The minimum term of the bank guarantee should be
12 months.
􀀀 Fixed deposit receipt: Fixed deposit receipts (FDRs) issued by approved banks
are accepted. The FDR should be issued for a minimum period of 36 months from
any of the approved banks.
􀀀 Government of India securities: National Securities Clearing Corporation

Limited (NSCCL) is the approved custodian for acceptance of Government of
India securities. The securities are valued on a daily basis and a haircut of 25% is
levied.

Members are required to maintain minimum level of security deposit i.e.
Rs.15 Lakh in case of TCM and Rs.25 Lakh in case of PCM at any point of time. If
the security deposit falls below the minimum required level, NCDEX may initiate
suitable action including withdrawal of trading facilities as given below:
􀀀If the security deposit shortage is equal to or greater than Rs. 5 Lakh, the trading
facility would be withdrawn with immediate effect.
􀀀If the security deposit shortage is less than Rs.5 Lakh the member would be
given one calendar weeks' time to replenish the shortages and if the same is not
done within the specified time the trading facility would be withdrawn.
􀀀Members who wish to increase their limit can do so by bringing in additional

capital in the form of cash, bank guarantee, fixed deposit receipts or Government
of India securities.
THE NCDEX SYSTEM

As we saw in the first chapter, every market transaction consists of three
components:
 Trading
 clearing
 Settlement
This section provides a brief overview of how transactions happen on the

NCDEX's market.

TRADING
The trading system on the NCDEX provides a fully automated screen. Based
trading for futures on commodities on a nationwide basis as well as an online
monitoring and surveillance mechanism. It supports an order driven market and
provides complete transparency of trading operations. The trade timings of the
NCDEX are 10.00 a.m. to 4.00 p.m. After hours trading has also been proposed for
implementation at a later stage.
The NCDEX system supports an order driven market, where orders

match automatically. Order matching is essentially on the basis of commodity, its
price, time and quantity. All quantity fields are in units and price in rupees. The
exchange specifies the unit of trading and the delivery unit for futures contracts on
various commodities. The exchange notifies the regular lot size and tick size for
each of the contracts traded from time to time. When any order enters the trading
system, it is an active order. It tries to find a match on the other side of the book. If
it finds a match, a trade is generated. If it does not find a match, the order becomes
passive and gets queued in the respective outstanding order book in the system.
Time stamping is done for each trade and provides the possibility for a complete
audit trail if required.
NCDEX trades commodity futures contracts having one Month,

two Month and three month expiry cycles. All contracts expire on the 20th of the
expiry month. Thus a January expiration contract would expire on the 20th of
January and a February expiry contract would cease trading on the 20th of
February. If the 20th of the expiry month is a trading holiday, the contracts shall
expire on the previous trading day. New contracts will be introduced on the trading
day following the expiry of the near month contract.

CLEARING
National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of
trades executed on the NCDEX. The settlement guarantee fund is maintained and
managed by NCDEX. Only clearing members including professional clearing
members (PCMs) only are entitled to clear and settle contracts through the clearing
house.
At NCDEX, after the trading hours on the expiry date, based on the available
information, the matching for deliveries takes place firstly, on the basis of
locations and then randomly, keeping in view the factors such as available capacity
of the vault/ warehouse, commodities already deposited and dematerialized and
offered for delivery etc., Matching done by this process is binding on the clearing
members. After completion of the matching process, clearing members are
informed of the deliverable/ receivable positions and the unmatched positions.
Unmatched positions have to be settled in cash. The cash settlement is only for the
incremental gain/ loss as determined on the basis of final settlement price.
SETTLEMENT
Futures contracts have two types of settlements, the MTM settlement which
happens on a continuous basis at the end of each day, and the final settlement
which happens on the last trading day of the futures contract. On the NCDEX,
daily MTM settlement and final MTM settlement in respect of admitted deals in
futures contracts are cash settled by debiting/ crediting the clearing accounts of
CMs with the respective clearing bank. All positions of a CM, either brought
forward, created during the day or closed out during the day, are market to market

at the daily settlement price or the final settlement price at the close of trading
hours on a day. On the date of expiry, the final settlement price is the spot price on
the expiry day. The Responsibility of settlement is on a trading cum clearing
member for all trades done on his own account and his client's trades. A
professional clearing member is responsible for settling all the participants’ trades
which he has confirmed to the exchange.
On the expiry date of a futures contract, members submit delivery information

through delivery request window on the trader workstations provided by NCDEX
for all open positions for a commodity for all constituents individually. NCDEX on
receipt of such information matches the information and arrives at a delivery
position for a member for a commodity.
The seller intending to make delivery takes the commodities to

the designated warehouse. These commodities have to be assayed by the exchange
specified assayer. The commodities have to meet the contract specifications with
allowed variances. If the commodities meet the specifications, the warehouse
accepts them. Warehouse then ensures that the receipts get updated in the
depository system giving a credit in the depositor's electronic account. The seller
then gives the invoice to his clearing member, who would courier the same to the
buyer's clearing member. On an appointed date, the buyer goes to the warehouse
and takes physical possession of the commodities.

COMMODITIES TRADED ON THE NCDEX PLATFORM
 In December 2003, the National Commodity and Derivatives Exchange Ltd

(NCDEX) launched futures trading in nine major commodities.
 To begin with contracts in gold, silver, cotton, soybean, soya oil, rape/
mustard seed, rapeseed oil, crude palm oil and RBD palmolein are being
offered.
We have a brief look at the various commodities that trade on the NCDEX and
look at some commodity specific issues. The commodity markets can be classified
as markets trading the following types of commodities.
1. Agricultural products
2. Precious metal
3. Other metals
4. Energy
AGRICULTURAL COMMODITIES
The NCDEX offers futures trading in the following agricultural commodities.

Refined soy oil, mustard seed, expeller mustard oil, RBD palmolein, crude palm
oil, medium staple cotton and long staple cotton. Of these we study cotton in detail
and have a quick look at the others

COTTON
Cotton accounts for 75% of the fibre consumption in spinning mills in India and
58% of the total fibre consumption of its textile industry (by volume). At the
average price of Rs.45/ kg, over 17 million bales (average annual consumption, 1
bale = 170 kg) of raw cotton trade in the country. The market size of raw cotton in
India is over Rs.130 billion. The average monthly fluctuation in prices of cotton
traded across India has been at around 4.5% during the last three years. The
maximum fluctuation has been as high as 11%. Historically, cotton prices in India
have been fluctuating in the range of 3-6% on a monthly basis.
Cotton is among the most important nonfood crops. It occupies a significant

position, both from agricultural and manufacturing sectors' points of view. It is the
major source of a basic human need, Clothing, apart from other fibred sources like
jute, silk and synthetic. Today, cotton occupies a significant position in the Indian
economy on all fronts as a commodity that forms a means of livelihood to over
millions of cotton cultivating farmers at the primary agricultural sector. It is also a
source of direct employment to over 35 million people in the secondary
manufacturing textile industry that contributes to 14% of the country's industrial
production, 27.30% of the country's export earnings and 4% of its GDP.
CRUDE PALM OIL
Annual edible oil trade in India is worth over Rs.440 billion, with the share of CPO
being nearly 20% (Rs.80-90 billion). The country is over. Dependent on CPO
imports to the extent of over 50% of its annual vegetable oil imports. There is a
close inter linkage between the various vegetable oils produced, traded and

consumed across the world. The average monthly fluctuation in prices of imported
CPO traded at Kandla (one of the major importing ports in Gujarat) has been at
9.7% during the past two and a half years, the maximum monthly fluctuation being
as high as 25% during the period.
Palm oil is extracted from the mature fresh fruit bunches (FFBs) of oil palm
plantations. One hectare of oil palm yields approximately 20 FFBs, which when
crushed yields 6 tons of oil (including the kernel oil, which is used both for edible
and industrial purposes). Crude palm oil (CPO), crude palmolein, RBD (refined,
bleached, deodorized) palm oil, RBD palmolein and crude palm kernel oil (CPKO)
are the various forms of palm oil traded in the market
RBD PALMOLEIN
The RBD (refined, bleached and deodorized) palmolein is the derivative of crude
palm oil (CPO), which is obtained from the crushing of Fresh Fruit-bunches
(FFBs) harvested from oil palm plantations. When CPO is subjected to refinement,
RBD palm oil and fatty acids are obtained. Fractionation of RBD palm oil yields
RBD palmolein along with stearin, which is a white solid at room temperature.
While Oil is a stable derivative saturated fat, solid at room temperature), Olein is
relatively unstable (unsaturated fat, liquid at room temperature, but low
cholesterol). The whole quantity of CPO that is produced and used for human
consumption is in the form of RBD palmolein. Cropping of growth patterns of
CPO has been already covered.

SOY OIL
Soy oil is among the major sources of edible oils in India. Of the annual edible oil
trade worth over Rs.440 billion in the country, soy oils share is over 20.21% at
Rs.90.92 billion in terms of value. Being an agricultural commodity, which is often
subjected to various production and market related uncertainties, soy oil prices
traded across the world are highly volatile in nature.
The average fluctuation in spot prices of refined soy oil traded at Mumbai has been
at 6.6% during the past two and a half years, the maximum monthly fluctuation
being as high as 17% during the period. Historically, soy oil prices in the major
spot markets across the country have been fluctuating in the range of 4.5.8.5%.
This offers immense opportunity for the investors to profitably deploy their funds
in this sector apart from those actually associated with the value chain of the
commodity, which could use soy oil futures contract as the most effective hedging
tool to minimize price risk in the market.
Soy oil is the derivative of soybean. On crushing mature beans, 18% oil and
78.80% meal is obtained. While the oil is mainly used for human consumption,
meal serves as the main source of protein in animal feeds. Soy oil is the leading
vegetable oil traded in the international markets, next only to palm. Palm and soy
oils together constitute around 68% of global edible oil export trade volume, with
soy oil constituting 22.85%. It accounts for nearly 25% of the world's total oils and
fats production. Increasing price competitiveness, and aggressive cultivation and
promotion from the major producing nations have given way to widespread soy oil
growth both in terms of production as well as consumption.

RAPESEED OIL
Rapeseed (also called mustard or canola) oil is the third largest edible oil produced
in the world, after soy and palm oils. On crushing rapeseed, oil and meal are
obtained. The average oil recovery from the seed is about 33%. The remaining is
obtained as oil cake/ meal, which is rich in proteins and is used as an ingredient in
animal feed. Mustard oil, which is known for its pungency, is traditionally the most
favoured oils in the major production tracts world over.
SOYBEAN
The market size of the popularly known miracle bean in India is over Rs.5000
crore. With an annual production of 5.0.5.4 million tons, soybean constitutes
nearly 25% of the country's total oilseed production. The average monthly
fluctuation in prices of soybean traded at one of the active soybean spot market at
Indore (Madhya Pradesh) has been at 10.07% during the past two years, the
maximum monthly fluctuation being as high as 24.30% during the period.
Historically, soybean prices in the major spot markets across the country have been
fluctuating in the range of 5.9%. Soybean is the single largest oilseed produced in
the world. The commodity has been commercially exploited for its utility as edible
oil and animal feed. On crushing mature beans, around 18% oil could be obtained;
the rest being the oil cake/ meal, which forms the prime source of protein in animal
feeds.

RAPESEED
Rapeseed/ Mustard is one of the major sources of oil and meal to India. It supplies
over 1.5 million tons of oil (15.18% of India's annual edible oil requirement) and
3.3.2 million tons of oil meal, the major protein source in animal feeds. The
average monthly fluctuation in prices of rapeseed traded at one of the active
rapeseed spot market at Jaipur (Rajasthan) has been at 9.8% during the past two
years (July 2001 to July 2003), the maximum monthly fluctuation being as high as
23.4% during the period. Rapeseed/ Mustard/ Canola is a traditionally important
oilseed. China, Canada and India are the major producers of this commodity. The
other major producers are Germany, France, Australia, Pakistan and Poland. The
commodity has been commercially exploited in the form of seeds, oil (seed to oil
recovery is 39.40%) and meal.
PRECIOUS METALS
GOLD
For centuries, gold has meant wealth, prestige, and power, and its rarity and natural
beauty have made it precious to men and women alike. Owning gold has long been
a safeguard against disaster. Many times when paper money has failed, men have
turned to gold as the one true source of monetary wealth. Today is no different.
While there have been fluctuations in every market and decided downturns in
some, the expectation are that gold will hold its own. There is a limited amount of
gold in the world, so investing in gold is still a good way to plan for the future.
Gold is homogeneous, indestructible and fungible. These attributes set gold apart
from other commodities and financial assets and tend to make its returns
insensitive to business cycle fluctuations. Gold is still bought (and sold) by
different people for a wide variety of reasons. as a use in jewelry, for industrial
applications, as an investment and so on.

DEMAND
The Consumer demand for gold is more than 3400 tons per year making it
whopping $40 billion worth. More than 80% of the gold consumed is in the form
of jewellery, which is generally predominated by women. The Indian demand to
the tune of 800 tons per year is making it the largest market for gold followed by
USA, Middle East and China. About 80% of the Physical gold is consumed in the
form of jewellery while bars and coins occupy not higher than 10% of the gold
consumed. If we include jewellery ownership, then India is the largest repository
of gold in terms of total gold within the national boundaries.
Regarding pattern of demand, there are no authentic

estimates, the available evidence shows that about 80% is for jewellery fabrication
for domestic demand, and 15% is for investor demand (which is relatively elastic
to gold-prices, real estate prices, financial markets, tax policies, etc.). Barely 5% is
for industrial uses. The demand for gold jewellery is rooted in societal preference
for a variety of reasons. religious, ritualistic, a preferred form of wealth for women,
and as a hedge against inflation. It will be difficult to prioritize them but it may be
reasonable to conclude that it is a combined effect, and to treat any major part as
exclusively a store of value or hedging instrument would be unrealistic. It would
not be realistic to assume that it is only the affluent that creates demand for gold.
There is reason to believe that a part of investment demand for gold assets is out of
black money.
Rural India continues to absorb more than 70% of the gold

consumed in India and it has its own role to fuel the barter economy of the
agriculture community. The yellow metal used to play an important role in

marriage and religious festivals in India. In the Hindu, Jain and Sikh community,
where women did not inherit landed property whereas gold and silver jewellery
was, and still is, a major component of the gifts given to a woman at the time of
marriage. The changeover hands of gold at the time of marriage are from few
grams to kgs. The gold also occupies a significant position in the temple system
where gold is used to prepare idol and devotees offer gold in the temple. These
temples are run in trust and gold with the trust rarely comes into re-circulation. The
existing social and cultural system continues to cause net gold buyer market and
the government policies have to take note of the root cause of gold demand, which
lies in the social and cultural system of India. The annual consumption of gold,
which was estimated at 65 tons in 1982, has increased to more than 700 tons in late
90s. Although it is likely that, with prosperity and enlightenment, there may be
deceleration in demand, particularly
in urban areas, it would be made good by growing demand on account of
prosperity in rural areas. In the near future, therefore, the annual demand will
continue to be over 600 tons per year.
SUPPLY
Indian gold holding, which are predominantly private, is estimated to be in the
range of 10000- 13000 tons. One fourth of world gold production is consumed in
India and more than 60% of Indian consumption is met through imports. The
domestic production of the gold is very limited which is around 9 tons in 2002
resulting more dependence on imported gold. The availability of recycled gold is
price sensitive and as such the dominance of the gold supply through import is in
existence. The fabricated old gold scraps is price elastic and was estimated to be
near 450 tons in 2002. It rose almost more than 40% compared to the previous year
because of rise in gold price by more than 15%.
The demand- Supply for gold in India can be summed up thus:

􀀀 Demand for gold has an autonomous character. Supply follows demand.
􀀀 Demand exhibits income elasticity, particularly in the rural and semi-urban
areas.
􀀀 Price differential creates import demand, particularly illegal import prior to the
commencement of liberalization in 1990.
SILVER
The dictionary describes it as a white metallic element, sonorous, ductile, very

malleable and capable of high degree of polish. It also has the highest thermal and
electrical conductivity of any substance. Silver is somewhat harder than gold and is
second only to gold in malleability and ductility. Silver remains one of the most
prominent candidates in the metals complex as far as futures' trading is concerned.
Thanks to its unique volatility, silver has remained a hot favorite speculative
vehicle for the small time traders. Though futures trading were banned in India
since late sixties, parallel futures markets are still very active in Delhi and Indore.
Speculative interest in the white metal is so intense that it is believed that

combined volume of Indian punters represent almost 40 percent of volume traded
at New York Commodity Exchange. Delhi, Rajasthan, MP and UP are the active
pockets for the silver futures. Until recently, Rajkot and Mathura were conducting
futures but now players have diverted toward comex trade.
Most of the world's silver is mined in the US, Australia, Mexico, Peru, and Canada.
Cash markets remain highly unorganized in the silver and impurity and excessive
speculation remain key issue for the trade. Taking cue from gold, government of

India is planning to introduce hallmarking in silver which is likely to address
quality and credibility of Indian silverware and jeweler industry. The unique
properties of silver restrict its substitution in most applications.
DEMAND
Demand for silver is built on three main pillars; industrial and decorative uses,
photography and jewelry & silverware. Together, these three categories represent
more than 95 percent of annual silver consumption. In recent years, the main world
demand for silver is no longer monetary, but industrial. With the growing use of
silver in photography and electronics, industrial demand for silver accounts for
roughly 85% of the total demand for silver. Jewelry and silverware is the second
largest component, with more demand from the flatware industry than from the
jewelry industry in recent years. India, the largest consumer of silver, is gearing up
to start hallmarking of the white precious metal by April. India annually consumes
around 4,000 tons of silver with the rural areas accounting for the bulk of the sales.
India's demand for silver increased by 177 per cent over the past 10 years as
compared to 517 tons in 1991. According to GFMS, India has emerged as the third
largest industrial user of silver in the world after the US and Japan.
SUPPLY
The supply of silver is based on two facts, mine production and recycled silver
scraps. Mine production is surprisingly the largest component of silver supply. It
normally accounts for a little less than 2/3 rd of the total (last year was slightly
higher at 68%). Fifteen countries produce roughly 94 percent of the world’s silver
from mines. The most notable producers are Mexico, Peru, the United States,

Canada and Australia. Mexico, the largest producer of silver from mines. Peru is
the world’s second largest producer of silver. Silver is often mined as a byproduct
of other base metal operations, which accounts for roughly four-fifths of the mined
silver supply produced annually. Known reserves, or actual mine capacity, is
evenly split along the lines of production. The mine production is not the sole
source. Others being scrap, disinvestments, government sales and producers
hedging. Scrap is the silver that returns to the market when recovered from existing
manufactured goods or waste. Old scrap normally makes up around a fifth of
supply. Scrap supply increased marginally last year up by 1.2%. The other major
source of silver is from refining, or scraps recycling. Because silver is used in the
photography industry, as well as by the chemical industry, the silver used in
solvents and the like can be removed from the waste and recycled. The United
States recycles the most silver in the world, accounting for roughly 43.6 million
ounces. Japan is the second largest producer of silver from scrap and recycling,
accounting for roughly 27.8 million troy ounces in 1997. In the United States and
Japan, three-quarters of all the recycled silver comes from the photographic scrap,
mainly in the form of spent fixer solutions and old X-ray films.
THE STUDY
I. OBJECTIVES OF THE STUDY
PRIMARY OBJECTIVE
1) To understand realistically the pattern of fluctuations of price indices

of two agricultural commodities and the factors behind that

SECONDARY OBJECTIVE
2) To study the operation of commodity trading in india and assess

its importance
3) To provide a trend analysis of the current MCX & NCDEX indices
II. SCOPE OF THE STUDY

Organized commodity derivatives in India started as early as 1875, barely about a decade after
they started in Chicago. However, many feared that derivatives fuelled unnecessary speculation
and were detrimental to the healthy functioning of the markets for the underlying commodities.
As a result, after independence, commodity options trading and cash settlement of commodity
futures were banned in 1952. A further blow came in 1960s when, following several years of
severe draughts that forced many farmers to default on forward contracts (and even caused some
suicides), forward trading was banned in many commodities considered primary or essential.
Consequently, the commodities derivative markets dismantled and remained dormant for about
four decades until the new millennium when the Government, in a complete change in policy,
started actively encouraging the commodity derivatives market. Since 2002, the commodities
futures market in India has experienced an unprecedented boom in terms of the number of
modern exchanges, number of commodities allowed for derivatives trading as well as the value
of futures trading in commodities, which might cross the $ 1 Trillion mark in 2006.
However, there are several impediments to be overcome and issues to be decided for sustainable
development of the market. This paper attempts to answer questions such as:
 How do price indices fluctuate so easily and how to understand them?

 Is this progress sustainable and what are the obstacles that need urgent attention if the
market is to realize its full potential?
 Why are commodity derivatives important and what could other emerging economies
learn from the Indian mistakes and experience?

III. RESEARCH METHODOLOGY
DEFINITION
Research is an organized, systematic, data-based, critical, scientific inquiry into a specific

problem that needs a solution. Scientific research has the goal of solving problems and
establishing a step-by-step logical, organized, and rigorous method to identify problems, gathers
data, analyses the data, and draw valid conclusions there from.
1. TYPE OF RESEARCH USED
The research undertaken in this problem is descriptive in nature. Descriptive study attempts to
obtain a complete and accurate descriptive of situation, formal design is required to ensure that
the description covers all phases desired. Precise statement at problem indicates what than be
designed provides for collection of this information under the study.
2. NEED OF THE STUDY
The empirical analysis shows that cycles in economic activity are major
determinants of the short-run behavior of shipping freight rates in the year 1850
and World War I. Consistent with the economic theory, there is a striking
asymmetry between the peaks and troughs of shipping cycles. However, there is
a close timing relationship between the upper turning points of the business
cycle, commodity prices and freight rates which is particularly shown in the
peak years 1875,1889,1900,1912. So this study on commodity indices and
prices, to an extent would not only help us in understanding the economy of the
country, the growth driving commodities favoring EXIM trade but also for better
understanding the freight market changes and behavior for the future.

3. SOURCES OF DATA
The data was collected through
1. Secondary data.
SECONDARY DATA
Company records, magazines, journals and websites were made use to collect secondary data
regarding indices, operations of commodity market and growth patterns
A) STATISTICAL TOOLS:
The statistical tools that were used for the study is as follows:
1. Weighted Average and

2. Technical analysis
WEIGHTED AVERAGE:
The weighted average stands for the relative importance of the different items. The formula for
comparing weighted mean is
XW =? Xw/w
X is the variables values i.e., X1, X2…..Xn.
W represents the weights attached to values.

TECHNICAL ANALYSIS:
It is important to note that the Technical Analysis Overview provided does not attempt to be a
comprehensive treatment of Charting or Technical Analysis methods. There are numerous, well-
written books on Chart Interpretation and Technical Analysis. Brief and simplistic reviews of
some basic charting concepts are provided for reference or to stimulate further study. Please
contact your broker for a recommended reading list on Charting and Technical Analysis.
Technical Analysis makes the assumption that history repeats itself. Any
trading method or system that works well on a broad sample of historical data may have validity
when applied to future trading environments. One should keep in mind that the markets are
dynamic. The forces that motivate price movement are dynamic, and the participants are
dynamic. Therefore any system which has performed well on past historic data may decline in
value as the evolving dynamics of the markets change over time.
The assumption is made that trading results can be improved when trading skills are improved.
This requires practice! Surely any time spent learning to trade on past historical data will not be
wasted when it comes to preparing to trade for the future.
B) LIMITATIONS OF THE STUDY
1) The research holds validity for the particular period only.
2) The research is extended to particular commodities only.

ANALYSIS AND INTERPRETATION OF DATA
3) To understand realistically the pattern of fluctuations of price indices

of two agricultural commodities and the factors behind that
SUGAR
A sweet white (or brownish yellow) crystalline substance, of a sandy or granular consistency,
obtained by crystallizing the evaporated juice of certain plants, as the sugar cane, sorghum, beet
root, sugar maple, etc. It is used for seasoning and preserving many kinds of food and drink.
Ordinary sugar is essentially sucrose.
Varieties of Sugar
 White, refined sugar

 Caster sugar
 Icing sugar
 Icing mixture
 Brown sugar
 Dark brown sugar
 Raw sugar
 Golden demerara
 Golden syrup
 Treacle
 Molasses
 Caramel
Decoration and specialty sugars

Majority of the sugarcane produced in India is of the following hybrid varieties: S Sinense, S.
Barberi, CO-213, CO 223, CO 312, CO 313, CO 419, CO 1148, CO 740 and COS 767

Sugar producing areas in India
In India the major sugar cane producing areas are Andhra Pradesh, Assam, Bihar, Gujarat,
Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa, Punjab, Rajasthan,
Tamilnadu, Uttar Pradesh and West Bengal.
INDIA’S SUGAR AND SUGARCANE PRODUCTION
400
350
300
250
200
cane in million tons
150 Sugar in million tons
100
50
0
6 8 1 5 0 2 5 6 8 9 0
5 -8 7 -8 0 -9 4 -9 9 -0 1 -0 4 -0 5 -0 7 -0 8 -0 9 -1
1 98 1 98 1 99 1 99 1 99 2 00 2 00 2 00 2 00 2 00 2 00

SUGAR PRICES IN DELHI MARKET
sugar price in rupees / metric tons

25000
20000
15000 sugar price in rupees / metric

tons
10000
5000
0
jan'06 july'06 Jan'07 july'07 jan'08 july'08 jan'09
FACTORS INFLUENCING SUGAR MARKETS

 Price
 Refinery activity
 Consumer income
 Candy and confectionery sales
 Changing eating habits
 Sugars use in new technologies, such as ethanol production for automobile fuel.

IMPORTANT WORLD SUGAR MARKETS
 Brazil
 Australia
 U.S
 Cuba
 Philippines
 China
 Bangladesh
 Iran
INTERNATIONAL TRADE
Over the past fifty years, especially, the international trade in sugar has changed dramatically.
Since it is either imported or exported by every country on earth, sugar has become an integral
component of the economic relationships among nations. Because of that unique position, the
trade in sugar has both reflected-and been affected by-a wide range of divergent forces, including
global politics, health consciousness, the emergence of developing nations as suppliers and
consumers, and many others.
Perhaps the greatest change in the international sugar trade has been the trend toward price
stabilization. Historically at the mercy of everything from war to weather, the price of sugar has
always been extremely volatile. The International Sugar Trade contains the most essential and
up-to-date information currently available. It includes numerous tables and graphs describing
production, consumption, and trade for nearly every country.

U.S cents /
Kg
SUGAR PRICES 2005

Technical analysis
Jan- Mar:
Support
A horizontal floor where interest in buying a commodity is strong enough to overcome

the pressure to sell. Therefore a decrease in price is reversed and prices rise once
again. Typically, support can be identified on a chart by a previous set of lows
Apr – Jun:
Resistance
A horizontal ceiling where the pressure to sell is greater than the pressure to buy.
Therefore, an increase in price is reversed and prices revert downward. Typically
resistance can be located on a chart by a previous set of high
July - Sep
Support
A horizontal floor where interest in buying a commodity is strong enough to overcome

the pressure to sell. Therefore a decrease in price is reversed and prices rise once
again. Typically, support can be identified on a chart by a previous set of lows
Oct – Dec
Inclining
The inclining channel is a formation with parallel price barriers along both the price
ceiling and floor. Unlike the sideways channel the inclining channel has an increase in
both the price ceiling and price floor.

SUGAR PRICES 2006
Technical analysis
Jan- Mar:
Breakaway Gaps
Occur when prices gap higher or lower out of a congestion pattern in the direction of the
prevailing trend
Apr – Jun:
Measuring or Running Gaps

Difficult to identify, but usually occur at the midpoint in a price rally or decline.
July – Sep
Falling or Declining
This formation occurs when the slope of price bar highs and lows join at a point forming
an declining wedge. The slope of both lines is down with the upper line being steeper
than the lower one. To trade this formation, place an order on a break up and out of the
wedge or a sell order on a break down and out the wedge. Falling wedges, with a prior
uptrend, are anticipated to break up and out, rather than down and out

Oct – Dec
Triple Bottom
Anticipates a change in trend from down to up.
SUGAR PRICES 2007
Jan- Mar:
Declining
The declining channel is a formation with parallel price barriers along both the price
ceiling and floor. Unlike the sideways channel the declining channel has a decrease in
Apr – Jun:
Ascending Triangle
A formation in which the slope of price highs and lows come together at a point outlining
the pattern of a Right Triangle. The hypotenuse in an Ascending Triangle should be
sloping from lower to higher and from left to right. To trade this formation, place a buy
order on a break up and out of the triangle or a sell order on a break down and out of
the triangle. Ascending triangles, with a prior downtrend, are anticipated to break
down and out, rather than up and out.

July – Sep
Pennants
Similar to a Symmetrical Triangle but generally stubbier or not as elongated. A
formation in which the slope of price bar highs and lows are converging to a point so as
to outline the pattern in a symmetrical triangle. To trade this formation, you can place
orders at both the break up and out of the pennant and break
down and out of the pennant.
Oct – Dec
Triple Bottom
Anticipates a change in trend from down to up
SUGAR PRICES 2008
Jan- Mar:


Apr – Jun:
Pennants
orders at both the break up and out of the pennant and break
down and out of the pennant.
July – Sep
Descending Triangle
the pattern of a Right Triangle. The hypotenuse in an Descending Triangle should be
sloping from higher to lower and left to right. To trade this formation, place a buy order
on a break up and out of the triangle or a sell order on a breakdown and out of the
triangle. Descending triangles, with a prior uptrend, are anticipated to break up and out,
rather than down and out.
Oct – Dec
Declining
The declining channel is a formation with parallel price barriers along both the price
ceiling and floor. Unlike the sideways channel the declining channel has a decrease in

SUGAR PRICES 2009
Jan- Mar: Horizontal or Sideways
A horizontal or sideways is a formation that features both resistance and support.

Support forms the low price bar, while resistance provides the price ceiling
Apr – Jun: Resistance

July – Sep
Ascending Triangle
the triangle. Ascending triangles, with a prior downtrend, are anticipated to break down
and out, rather than up and out.

Oct – Dec
Head and Shoulders Bottom

Anticipates a rise in prices on a break above the Neckline
CONCLUSION
Despite the economic recession world over, sugar consumption growth was less impacted and
remained positive. The supply-demand disequilibrium has been caused essentially by the strident
slippage in Indian production, exacerbated by the decline in EU and other Asian countries.
The correction after surging surplus for two years in a row has come as good relief to sugar
producer’s world over. Such tightness in supply is sure to be witnessed during 2009-10 as well.

Brazil’s share in world export is expected to overshoot the half way mark to 53% this year as
against 29% a decade ago.
New York raw sugar futures as on 20th November 2009
Delivery month Close price US c/lb

Jan 2010 22.20
Mar 2010 22.74
May 2010 21.86
July 2010 20.43
Mar 2011 19.33
Mar 2012 16.63
World production is now expected to be 4.274 mln tons lower than world consumption as against
3.626 mln tons projected in November. Consequently, the statistical outlook for the market till
the end of the season in September 2009 remains constructive and supportive to the market
values. The ISO puts world export availability for 2008/09 at 49.608 mln tons raw value, as
against 46.25 mln tons in the previous crop cycle Smaller output in importing countries and in
India, in particular, is expected to trigger additional import demand which is expected to reach
49.621 mln tons, up 3.673 mln tons

WHEAT
Wheat is a cereal grain that belongs to the grass family of the genus ‘Triticum’. A dry, one
seeded fruit named kernel is obtained from this spiky grass like grain, which is ground to make
flour and is consumed throughout the world as one of the most important staple food. It is the
second largest cereal grain consumed on earth and that is why it is widely cultivated in more than
30000 varieties.
Wheat is important especially for making breads and other bakery products as it has got the
maximum number of glutens as compared to any other grain. This crop is also grown as a forage
crop for the livestock
Overview
Wheat is a very important edible cereal grain crop. As already mentioned, it is the second largest
grain crop consumed after rice. The cultivation of wheat has its own advantages like it has a very
good yield per unit area, has a relatively short growing duration period and the production of
wheat is comparatively easier than the other grain crops as it grows well in the temperate
regions. That is why it serves as a very good cash crop and proves its dominance in the world
commerce. Gluten, which is a primary constituent in raised bread, is found in wheat and that is
why most of the bakery products are made from wheat only.
The world production of wheat figures over 585 million tons annually. The largest producer of
wheat in the world is the European Union followed by China, India and United States of
America. The total wheat production of the world is slightly concentrated is clear from the fact
that these four producers contribute to around 60% of the total production. The consumption of
wheat in the world is a huge 580 million tons but is successfully kept satisfied with an equally
high production figures. Consumption has been constantly increasing during the last 10 years
with the increase in population, and alarmingly, the consumption is prepared to shoot up further
and is expected to reach up to 775 million tons in 2020. Wheat is consumed all through the globe
and the leading countries in this list are European Union, China

 India
 Russia
 United States of America
 Pakistan
The above list makes it clear that the largest producers of wheat in the world are also the largest
consumers of the world, which means, most of the wheat production is consumed at the place of
production. The export market of wheat is getting competitive with the new entrants like India
into it and the export figures hover around 200 million tons. The major exporting countries of
this crop are: -
 Australia
 Canada
 European Union
 Argentina
The imports of wheat are done by the countries, which have a high domestic demand and a
fluctuating production level. That is why the countries shuffle in the list of highest wheat
importing countries. The world import figures sum up to 100 million tons and are currently done
by more than 100 countries. The major countries are
 European Union
 China
 Egypt
 Japan
 Brazil
 Mexico
 Indonesia
 Algeria
 Philippines
 Iraq

Cultivation pattern
Wheat was one of the first crops that were cultivated in the world thanks to its adaptability to
wider range of climatic conditions and soils making it a very easy to produce crop in that time
when man didn’t even know the basics of living. Wheat requires a cooler weather and a good
level of moisture in the early plantation period and once the grain is formed, it needs a warmer
weather to dry up. That is why the best-suited climate needed for the wheat crop to prosper is the
temperate climate.
In USA, the wheat seeds are sown in the months of September and October. After February,
when the snow in those areas starts to melt, the wheat crop starts to shoot up and during summers
it is left to develop and finally it is harvested in the months of June, July and September. In India,
wheat is cultivated as a Rabi crop and it is planted in the month of October. It is harvested in the
months April and May.
Wheat producing countries
The world production of wheat sums up to over 585 million tons annually. As mentioned above,
the production of wheat is slightly concentrated in the hands of a few countries as the top four
producers of the world contribute around 60% of the world’s total production. The production-
wise list of the major producers of wheat is given below
 European Union
 China
 India
 Russia
 Canada
 Australia
 Pakistan
 Turkey
 Argentina
 Iran

The largest producer of wheat in the world is European Union that contributes to around 1/4th
share to the world’s total production. As it is said that the demand of wheat increases with the
increase in population, the nations having the largest population in the world i.e. China and India
stand at the 2nd and 3rd position in the largest wheat producing nations’ list in order to satisfy
the domestic consumption demand. These two countries contribute 14 % and 12% respectively in
the world’s total production. India has shown a high rise in production of wheat after the green
revolution and taken a lead from USA in recent times.
Wheat is produced on approximately 2.5 million square kilometers of the world. The maximum
area in the total cultivated area of wheat is constituted by India at around 13%. The other major
countries that have a significant impact on the total area contributed for wheat production are
 European Union
 Russia
 China
 USA
 Australia
 Canada
 Kazakhstan
Production of wheat in India
The following areas in India are the major wheat producing areas in the country and contribute to
around 92% of the total production in the country
 Uttar Pradesh
 Haryana
 Punjab
 Rajasthan
 Madhya Pradesh
 Gujarat
 Bihar

India produces around 75 million tons of wheat every year and stands at the third position in the
list of the major wheat producers in the world. India also stands at the top in the world in terms
of area covered in production of wheat. Uttar Pradesh is the leading producer state in India
followed by Punjab and Haryana. Wheat occupies a major share of 35% production in the total
production of crops cultivated and 65% of total cropped area in the country. This share in
production and area covered of the crop has increased since independence and is also constantly
rising. The yield of wheat in kilograms per hectare has also risen significantly from 522 kg/ha in
1950/51 to 1620kg/ha in 1998/99
Indian wheat market
India is the third largest producer of the wheat crop. It has been successfully fulfilling its large
domestic consumption demand in the past few years and has been exporting the surpluses to give
the major exporters of the world a good competition. India produces an average of 75 million
tons wheat each year but the production of this crop is generally fluctuating due to the
uncertainty of the rainfall. The state of Uttar Pradesh leads the production in the country. For
self-consumption purposes, the farmers retain around 48% of their production and hence it is not
entered into the total production figures of the country.
Indian wheat is generally medium hard bread wheat. It is a staple food of this country. That is
why almost all of the wheat produced is consumed. India holds the third position in the major
wheat consumer’s list after European Union and China consuming around 72 million tons of
wheat. The demand-supply flows with in the country are largely interfered by the government of
the country so as to make sure that the grain supplies be stable and prices do not get affected.
With the introduction of the new technologies in the agricultural sector, there has been a constant
increase in the productivity of wheat produced and hence there has been a growth in the surplus
level of the country and consequently a rising trend in the wheat export. World market sees a
dependable supplier of wheat in the form of India. The major exporters of the world namely US
and Australia have lost their share in the world’s export with the coming of India in the exporting
scenario. The export figures of India in 2003-04 were 5 million tons.

The major importers of Indian wheat are the southeastern Asian countries and the gulf countries.
India was an importer of wheat in the 90s as it the domestic demand was too high but now this
situation has been overcame and overturned.
Market influencing factors
 Weather conditions
 Government policies and regulations
 Prices fluctuations of the competitive and substitute products
 Season of harvesting and peak season
 Technological improvements
 Crop size
 World demand for wheat
Varieties of Wheat
The three principal types of wheat used in modern food production are:
 Triticum vulgare - it provides the bulk of the wheat used to produce flour for bread
making and for cakes and biscuits (cookies).
 Triticum durum - Durum is the hardest of all wheat. Its density, combined with its high
protein content and gluten strength, make durum the wheat of choice for producing
premium pasta products
 Triticum compactum
The basics of wheat economics

When supplies of a commodity are excessive, prices decline. When demand for the commodity
increases, so does the price. Typically, companies invest from 5% to 7% of their gross revenues
to product promotion.
Individually, wheat farmers have little impact on demand, but putting all the heads together can
make a significant difference in product demand and market price. And that leads to the ultimate
goal of the improved income for wheat producers.

WHEAT PRICES 2007
Technical analysis
Jan- Mar:
Horizontal or Sideways
A horizontal or sideways is a formation that features both resistance and support.

Support forms the low price bar, while resistance provides the price ceiling
Apr – Jun:
Resistance

July – Sep
Non-Symmetrical
A formation in which the slope of price highs and lows are converging to a point so as to
outline the pattern in a non- symmetrical triangle. To trade this formation, place a buy order on a
break up and out of the triangle or a sell order on a break down and out of the triangle
Oct – Dec
Ascending Triangle
the triangle. Ascending triangles, with a prior downtrend, are anticipated to break
down and out, rather than up and out.
WHEAT PRICES 2008

Technical analysis
Jan- Mar:
Rising or Inclining
This formation occurs when the slope of price bar highs and lows join at a point forming
an inclining wedge. The slope of both lines is up with the lower line being steeper than
the higher one. To trade this formation, place an order on a break up and out of the
wedge or a sell order on a break down and out the wedge. Rising wedges, with a prior
downtrend are anticipated to break down and out, rather than up and out
Apr – Jun:
Symmetrical
A formation in which the slope of price highs and lows are converging to a point so as to
outline the pattern in a symmetrical triangle. To trade this formation place a buy order
on a break up and out of the triangle or a sell order on a break down and out of the
triangle.
July – Sep
Pennants

orders at both the break up and out of the pennant and break down and out of the
pennant.

Oct – Dec
Bull Flag
A formation consisting of a small number of price bars where the slope of price bar
highs and lows are parallel and declining. Bull Flags are identified by their characteristic
pattern and by the context of the prior trend. In the case of a Bull Flag the trend leading
to the formation of the Bull Flag is up. To trade this formation, place orders on the break
up and break down points, leaving your unfilled order as your stop loss
WHEAT PRICES 2009
Technical analysis
Jan- Mar:
1-2-3 (A-B-C) Bottom
Anticipates a change in trend from down to up on a break above the

number 2 point

Apr – Jun:

July – Sep
Descending Triangle
the pattern of a Right Triangle. The hypotenuse in an Descending Triangle should be
sloping from higher to lower and left to right. To trade this formation, place a buy order
on a break up and out of the triangle or a sell order on a break down and out of the
triangle. Descending triangles, with a prior uptrend, are anticipated to break up and out,
rather than down and out
Oct – Dec
Triple Top
Anticipates a change in trend from up to down

WHEAT PRICES 2010
Jan- Apr:
1-2-3 (A-B-C) Top
Anticipates a change in trend from up to down on a break below the number 2 point.
Global Scenario
 The world wheat production in the recent years has been observed to be hovering
between 560-580 million tons a year.
 The biggest cultivators of wheat are EU-25, China, India, America, Russia, Australia,
Canada, Pakistan, Turkey and Argentina. India, EU-25, China, India and US, the four
largest producers account for around 58% of the total global production.
 World wheat consumption is consistently growing with growth in population, as it is one

of the major staple foods across the world. The major consuming countries of wheat are
EU, China, India, Russia, USA and Pakistan.
 Around 16-19% of the world wheat production is traded annually between countries. The
annual world trade in wheat is to the extent of 102-106 million tons. America, Australia,
Canada, EU-25 and Argentina are the five largest exporters of wheat in the world.

 Major importing countries that tops in the figures are European Union, China, Egypt,
Japan, Brazil and European Union. Other importing nations are Mexico, Indonesia,
Algeria, Philippines, and Iraq. However the import amount varies year to year depending
upon the domestic production.
CONCLUSION
India has the largest area in the world under wheat. However, in terms of production, we
are only the third largest behind EU-25 and China. India produces about 65-75 million
tons of wheat a year, which is about 35% of India's total food grain production of 210-
212 million tons. Since wheat and rice are grown in separate seasons, they do not
compete for area. The major wheat producing states of India are Uttar Pradesh, Punjab,
Haryana, Madhya Pradesh, Rajasthan and Bihar. Which together account for around 93%
of total production. Wheat is sown during November to January and harvested during
March to April. The wheat-marketing season in India is assumed to begin from April
every year.
Indian wheat is largely soft/medium hard, medium protein, bread wheat. India also
produces around 1.5 million tons of durum wheat, mostly in central and western India,
which is not segregated and marketed separately .Government, announces Minimum
Support Prices (MSP), which is the minimum price at which procurement has to be
carried. The total procurement of wheat by Government agencies ranges from 8 to 20
million tons, accounting for only 15-20% of the total production. The support price
operation and the Public Distribution Systems (PDS) play a significant role in
maintaining reasonable and stable food grain prices in the country for both the producers
and consumers. India consumes around 70-72 million tons of wheat a year. Most
domestic wheat consumption is in the form of homemade chapatti or roti’s using custom
milled Atta, although usage of branded packaged atta marketed by large companies is

increasing in cities. There are around 200 large flourmills in India, with a milling
capacity of around 15 million tons.
India exported around 7 million tons subsidized by Govt in 2007-08, as a result of surplus
stock. However, current Govt. policies are not in favour of exports. Southeast Asia and
Gulf countries are major importers of Indian wheat.
2) To study the operation of commodity trading in india and assess its

importance
Introduction
The Indian economy is witnessing a mini revolution in commodity derivatives and risk
management. Commodity options trading and cash settlement of commodity futures had been
banned since 1952 and until 2002 commodity derivatives market was virtually non-existent,
except some negligible activity on an OTC basis. Now in September 2005, the country has 3
national level electronic exchanges and 21 regional exchanges for trading commodity
derivatives. As many as eighty (80) commodities have been allowed for derivatives trading. The
value of trading has been booming and is likely to cross the $ 1 Trillion mark in 2006 and, if all
goes well, seems to be set to touch $5 Trillion in a few years.
Chequred History
The history of organized commodity derivatives in India goes back to the nineteenth century
when the Cotton Trade Association started futures trading in 1875, barely about a decade after
the commodity derivatives started in Chicago. Over time the derivatives market developed in
several other commodities in India. Following cotton, derivatives trading started in oilseeds in
Bombay (1900), raw jute and jute goods in Calcutta (1912), wheat in Hapur (1913) and in
Bullion in Bombay (1920).

However, many feared that derivatives fuelled unnecessary speculation in
essential commodities, and were detrimental to the healthy functioning of the markets for the
underlying commodities, and hence to the farmers. With a view to restricting speculative activity
in cotton market, the Government of Bombay prohibited options business in cotton in 1939.
Later in 1943, forward trading was prohibited in oilseeds and some other commodities including
food-grains, spices, vegetable oils, sugar and cloth.
After Independence, the Parliament passed Forward Contracts (Regulation) Act, 1952 which
regulated forward contracts in commodities all over India. The Act applies to goods, which are
defined as any movable property other than security, currency and actionable claims. The Act
prohibited options trading in goods along with cash settlements of forward trades, rendering a
crushing blow to the commodity derivatives market.
Under the Act, only those associations/exchanges, which are granted recognition by the
Government, are allowed to organize forward trading in regulated commodities. The Act
envisages three-tier regulation: (i) The Exchange which organizes forward trading in
commodities can regulate trading on a day-to-day basis; (ii) the Forward Markets Commission
provides regulatory oversight under the powers delegated to it by the central Government, and
(iii) the Central Government - Department of Consumer Affairs, Ministry of Consumer Affairs,
Food and Public Distribution - is the ultimate regulatory authority.
The already shaken commodity derivatives market got a crushing blow

when in 1960s, following several years of severe draughts that forced many farmers to default on
forward contracts (and even caused some suicides), forward trading was banned in many
commodities considered primary or essential. As a result, commodities derivative markets
dismantled and went underground where to some extent they continued as OTC contracts at
negligible volumes. Much later, in 1970s and 1980s the Government relaxed forward trading
rules for some commodities, but the market could never regain the lost volumes.
Change in Government Policy

After the Indian economy embarked upon the process of liberalization and globalization in 1990,
the Government set up a Committee in 1993 to examine the role of futures trading. The
Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17
commodity groups. It also recommended strengthening of the Forward Markets Commission,
and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing
options trading in goods and registration of brokers with Forward Markets Commission. The
Government accepted most of these recommendations and futures trading were permitted in all
recommended commodities.
Commodity futures trading in India remained in a state of hibernation for nearly four decades,
mainly due to doubts about the benefits of derivatives. Finally a realization that derivatives do
perform a role in risk management led the government to change its stance. The policy changes
favoring commodity derivatives were also facilitated by the enhanced role assigned to free
market forces under the new liberalization policy of the Government. Indeed, it was a timely
decision too, since internationally the commodity cycle is on the upswing and the next decade is
being touted as the decade of commodities.
Why are Commodity Derivatives Required?
India is among the top-5 producers of most of the commodities, in addition to being a major
consumer of bullion and energy products. Agriculture contributes about 22% to the GDP of the
Indian economy. It employees around 57% of the labor force on a total of 163 million hectares of
land. Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this
indicates that India can be promoted as a major center for trading of commodity derivatives.
It is unfortunate that the policies of FMC during the most of 1950s to 1980s suppressed the very
markets it was supposed to encourage and nurture to grow with times. It was a mistake other
emerging economies of the world would want to avoid. However, it is not in India alone that
derivatives were suspected of creating too much speculation that would be to the detriment of the

healthy growth of the markets and the farmers. Such suspicions might normally arise due to a
misunderstanding of the characteristics and role of derivative product.
It is important to understand why commodity derivatives are required and the role they can play
in risk management. It is common knowledge that prices of commodities, metals, shares and
currencies fluctuate over time. The possibility of adverse price changes in future creates risk for
businesses. Derivatives are used to reduce or eliminate price risk arising from unforeseen price
changes. A derivative is a financial contract whose price depends on, or is derived from, the
price of another asset.
Two important derivatives are futures and options.
(i) Commodity Futures Contracts: A futures contract is an agreement for buying or selling a
commodity for a predetermined delivery price at a specific future time. Futures are standardized
contracts that are traded on organized futures exchanges that ensure performance of the contracts
and thus remove the default risk. The commodity futures have existed since the Chicago Board
of Trade (CBOT, www.cbot.com) was established in 1848 to bring farmers and merchants
together. The major function of futures markets is to transfer price risk from hedgers to
speculators. For example, suppose a farmer is expecting his crop of wheat to be ready in two
months’ time, but is worried that the price of wheat may decline in this period. In order to
minimize his risk, he can enter into a futures contract to sell his crop in two months’ time at a
price determined now. This way he is able to hedge his risk arising from a possible adverse
change in the price of his commodity.
(ii) Commodity Options contracts: Like futures, options are also financial instruments used
for hedging and speculation. The commodity option holder has the right, but not the obligation,
to buy (or sell) a specific quantity of a commodity at a specified price on or before a specified
date. Option contracts involve two parties – the seller of the option writes the option in favour of
the buyer (holder) who pays a certain premium to the seller as a price for the option. There are

two types of commodity options: a ‘call’ option gives the holder a right to buy a commodity at an
agreed price, while a ‘put’ option gives the holder a right to sell a commodity at an agreed price
on or before a specified date (called expiry date).
The option holder will exercise the option only if it is beneficial to him; otherwise
he will let the option lapse. For example, suppose a farmer buys a put option to sell 100 Quintals
of wheat at a price of $25 per quintal and pays a ‘premium’ of $0.5 per quintal (or a total of $50).
If the price of wheat declines to say $20 before expiry, the farmer will exercise his option and
sell his wheat at the agreed price of $25 per quintal. However, if the market price of wheat
increases to say $30 per quintal, it would be advantageous for the farmer to sell it directly in the
open market at the spot price, rather than exercise his option to sell at $25 per quintal.
Futures and options trading therefore helps in hedging the price risk and also provide investment
opportunity to speculators who are willing to assume risk for a possible return. Further, futures
trading and the ensuing discovery of price can help farmers in deciding which crops to grow.
They can also help in building a competitive edge and enable businesses to smoothen their
earnings because non-hedging of the risk would increase the volatility of their quarterly earnings.
Thus futures and options markets perform important functions that can not be ignored in modern
business environment. At the same time, it is true that too much speculative activity in essential
commodities would destabilize the markets and therefore, these markets are normally regulated
as per the laws of the country.
Modern Commodity Exchanges
To make up for the loss of growth and development during the four decades of restrictive
government policies, FMC and the Government encouraged setting up of the commodity
exchanges using the most modern systems and practices in the world. Some of the main
regulatory measures imposed by the FMC include daily mark to market system of margins,
creation of trade guarantee fund, back-office computerization for the existing single commodity
Exchanges, online trading for the new Exchanges, demutualization for the new Exchanges, and

one-third representation of independent Directors on the Boards of existing Exchanges etc.
Responding positively to the favourable policy changes, several Nation-wide Multi-Commodity
Exchanges (NMCE) have been set up since 2002, using modern practices such as electronic
trading and clearing. Selected Information about the two most important commodity exchanges
in India [Multi-Commodity Exchange of India Limited (MCX), and National Multi-Commodity
& Derivatives Exchange of India Limited (NCDEX)] is given in Exhibit-1 and Exhibit-2.
MULTI-COMMODITY EXCHANGE OF INDIA LIMITED

(MCX)
MCX an independent and de-mutualized multi commodity exchange has permanent recognition
from Government of India for facilitating online trading, clearing and settlement operations for
commodity futures markets across the country. Key shareholders of MCX are Financial
Technologies (India) Ltd., State Bank of India, NABARD, NSE, HDFC Bank, State Bank of
Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union
Bank of India, Bank Of India, Bank Of Baroda, Canara Bank, Corporation Bank.
Headquartered in Mumbai, MCX is led by an expert management team with deep domain
knowledge of the commodity futures markets. Through the integration of dedicated resources,
robust technology and scalable infrastructure, since inception MCX has recorded many first to its
credit.
Inaugurated in November 2003 by Shri Mukesh Ambani, Chairman & Managing Director,
Reliance Industries Ltd, MCX offers futures trading in the following commodity categories:
Agro Commodities, Bullion, Metals- Ferrous & Non-ferrous, Pulses, Oils & Oilseeds, Energy,
Plantations, Spices and other soft commodities. MCX has built strategic alliances with some of

the largest players in commodities eco-system, namely, Bombay Bullion Association, Bombay
Metal Exchange, Solvent Extractors' Association of India, Pulses Importers Association, Shetkari
Sanghatana, United Planters Association of India and India Pepper and Spice Trade Association.
Today MCX is offering spectacular growth opportunities and advantages to a large cross section
of the participants including Producers / Processors, Traders, Corporate, Regional Trading
Centers, Importers, Exporters, Cooperatives, Industry Associations, amongst others MCX being
nation-wide commodity exchange, offering multiple commodities for trading with wide reach
and penetration and robust infrastructure, is well placed to tap this vast potential.
National Commodity & Derivatives Exchange Limited

(NCDEX)
National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed
online multi commodity exchange promoted by ICICI Bank Limited (ICICI Bank), Life
Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE). Punjab National Bank
(PNB), CRISIL Limited (formerly the Credit Rating Information Services of India Limited),
Indian Farmers Fertilizer Cooperative Limited (IFFCO) and Canara Bank by subscribing to the
equity shares have joined the initial promoters as shareholders of the Exchange. NCDEX is the
only commodity exchange in the country promoted by national level institutions. This unique
parentage enables it to offer a bouquet of benefits, which are currently in short supply in the
commodity markets. The institutional promoters of NCDEX are prominent players in their
respective fields and bring with them institutional building experience, trust, nationwide reach,
technology and risk management skills
.
NCDEX is a public 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 nation-level, technology driven

de-mutualized on-line commodity exchange with an independent Board of Directors and
professionals not having any vested interest in commodity markets. It is committed to provide a
world-class commodity exchange platform for market participants to trade in a wide spectrum of
commodity derivatives driven by best global practices, professionalism and transparency.
NCDEX is regulated by Forward Market Commission in respect of futures trading in
commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act,
Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations,
which impinge on its working
.
NCDEX is located in Mumbai and offers facilities to its members in more than 390 centers
throughout India. The reach will gradually be expanded to more centers. NCDEX currently
facilitates trading of thirty six commodities - Cashew, Castor Seed, Chana, Chilli, Coffee,
Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Gold, Guar gum, Guar
Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry Green Cocoons, Pepper,
Rapeseed - Mustard Seed ,Raw Jute, RBD Palmolein, Refined Soy Oil, Rice, Rubber, Sesame
Seeds, Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (Black Matpe), Wheat, Yellow Peas,
Yellow Red Maize & Yellow Soybean Meal. At subsequent phases trading in more commodities
would be facilitated.
Booming Business: US$ 1 Trillion and Beyond

Since 2002 when the first national level commodity derivatives exchange started, the exchanges
have conducted brisk business in commodities futures trading. In the last three years, there has
been a great revival of the commodities futures trading in India, both in terms of the number of
commodities allowed for futures trading as well as the value of trading. While in year 2000,
futures trading were allowed in only 8 commodities, the number jumped to 80 commodities in
June 2004. The value of trading in local currency saw a quantum jump from about INR 350
billion in 2001-02 to INR 1.3 Trillion in 2003-04. The data in Exhibit-3 indicates that the value
of commodity derivatives in India could cross the US$ 1 Trillion mark in 2006. The market
regulator Forward Markets Commission (FMC) disseminates fortnightly trading data for each of

the 3 national & 21 regional exchanges that have been set up in recent years to carry on the
futures trading in commodities in the country. Exhibit-3 presents comparative trading data for
three fortnightly periods in March, June and September 2008 and brings up some interesting
facts.
Sr. no Name of the exchange 16 Mar 08 16 Jun 08 16 Sep 08

to 31 Mar 08 to 30 Jun 08 to 30 Sep 08
1 Multi-Commodity Exchange of $m4,603.69 $m5123.76 $m11,042.25

India Limited, Mumbai
2 National Multi-Commodity $m235.74 $m143.34 $m 106.85

Exchange of India Limited,
Ahmedabad
3 National Commodity & Derivatives $m7360.45 $m8740.49 $m10,694.29
Exchange Limited, Mumbai
4 Total of three exchanges $m12199.88 $m14007.59 $m21,843.39
Note: The original data in local currency Indian Rupee (INR) was obtained from the website of
Forward Markets Commission (www.fmc.gov.in). The INR figures were translated into USD
using the monthly average exchange rates prevailing in the respective months, as obtained from
www.xrates.com. These exchange rates were: March 2008: INR 43.5861 per USD, June 2008:
INR 43.5245 per USD, and Sept 2008: INR 43.8445 per USD.
A comparison of the trading data for the three two-weekly periods above shows that the market
for commodity derivatives more than doubled over a six-month period between second half of
March 2008 and the second half of September 2008. It also shows that the total commodity

futures turnover for the three national level exchanges added up to $21.84 billion for a fortnight
in September 2008 or $546 billion for a year (assuming 25 working fortnights a year). This rising
trend gives a strong indication that, if the commodity futures market continues to expand at the
present rate, it is likely to cross the $ 1 Trillion mark in 2006 and has jumped to $4-6 Trillion in
another 2-3 years.
Top 10 Commodities
Taking together the turnover in commodities futures seen at the above three multi-commodity
exchanges during the two-week period 15-09-2005 to 30-09-2005, the following emerge as the
top-10 commodities in terms of value of futures trading done.
Commodity Turnover in $ Millions*
 Guar seed - 4,432.71

 Gold - 4,082.15
 Silver - 3,869.36
 Crude oil - l3, 380.13
 Chana (chick peas) - 2,100.15
 Urad (Black Legume) - 624.71
 Soy oil - 478.28
 Gur (Jaggery: cane sugar) - 369.72
 Guar Gum - 345.08
 Tur (Lentils) - 329.35
UNRESOLVED ISSUES AND FUTURE PROSPECTS

Even though the commodity derivatives market has made good progress in the last few years, the
real issues facing the future of the market have not been resolved. Agreed, the number of
commodities allowed for derivative trading have increased, the volume and the value of business
has zoomed, but the objectives of setting up commodity derivative exchanges may not be
achieved and the growth rates witnessed may not be sustainable unless these real issues are
sorted out as soon as possible. Some of the main unresolved issues are discussed below.
a. Commodity Options: Trading in commodity options contracts has been banned since 1952.
The market for commodity derivatives cannot be called complete without the presence of this
Important derivative. Both futures and options are necessary for the healthy growth of the
market.
While futures contracts help a participant (say a farmer) to
hedge against downside price movements, it does not allow him to reap the benefits of an
increase in prices. No doubt there is an immediate need to bring about the necessary legal and
regulatory changes to introduce commodity options trading in the country. The matter is said to
be under the active consideration of the Government and the options trading may be introduced
in the near future.
b. The Warehousing and Standardization: For commodity derivatives market to work

efficiently, it is necessary to have a sophisticated, cost-effective, reliable and convenient
warehousing system in the country. The Habibullah (2003) task force admitted, “A sophisticated
warehousing industry has yet to come about”. Further, independent labs or quality testing centers
should be set up in each region to certify the quality, grade and quantity of commodities so that
they are appropriately standardized and there are no shocks waiting for the ultimate buyer who
takes the physical delivery. Warehouses also need to be conveniently located.
Central Warehousing Corporation of India (CWC: www.fieo.com) is operating 500 Warehouses
across the country with a storage capacity of 10.4 million tons. This is obviously not adequate for
a vast country. To resolve the problem, a Gramin Bhandaran Yojana (Rural Warehousing Plan)
has been introduced to construct new and expand the existing rural godowns. Large scale
privatization of state warehouses is also being examined.

c. Cash versus Physical Settlement: It is probably due to the inefficiencies in the present
warehousing system that only about 1% to 5% of the total commodity derivatives trades in the
country are settled in physical delivery. Therefore the warehousing problem obviously has to be
handled on a war footing, as a good delivery system is the backbone of any commodity trade. A
particularly difficult problem in cash settlement of commodity derivative contracts is that at
present, under the Forward Contracts (Regulation) Act 1952, cash settlement of outstanding
contracts at maturity is not allowed. In other words, all outstanding contracts at maturity should
be settled in physical delivery. To avoid this, participants square off their positions before
maturity. So, in practice, most contracts are settled in cash but before maturity. There is a need
to modify the law to bring it closer to the widespread practice and save the participants from
unnecessary hassles.
d. The Regulator: As the market activity pick-up and the volumes rise, the market will definitely
need a strong and independent regular; similar to the Securities and Exchange Board of India
(SEBI) that regulates the securities markets. Unlike SEBI which is an independent body, the
Forwards Markets Commission (FMC) is under the Department of Consumer Affairs (Ministry
of Consumer Affairs, Food and Public Distribution) and depends on it for funds. It is imperative
that the Government should grant more powers to the FMC to ensure an orderly development of
the commodity markets. The SEBI and FMC also need to work closely with each other due to the
inter-relationship between the two markets.
e. Lack of Economy of Scale: There are too many (3 national level and 21 regional) commodity
exchanges. Though over 80 commodities are allowed for derivatives trading, in practice
derivatives are popular for only a few commodities. Again, most of the trade takes place only on
a few exchanges. All this splits volumes and makes some exchanges unviable. This problem can
possibly be addressed by consolidating some exchanges. Also, the question of convergence of
securities and commodities derivatives markets has been debated for a long time now. The
Government of India has announced its intention to integrate the two markets. It is felt that
convergence of these derivative markets would bring in economies of scale and scope without
having to duplicate the efforts, thereby giving a boost to the growth of commodity derivatives
market. It would also help in resolving some of the issues concerning regulation of the derivative
markets. However, this would necessitate complete coordination among various regulating

authorities such as Reserve Bank of India, Forward Markets commission, the Securities and
Exchange Board of India, and the Department of Company affairs etc.
f. Tax and Legal bottlenecks: There are at present restrictions on the movement of certain goods
from one state to another. These need to be removed so that a truly national market could
develop for commodities and derivatives. Also, regulatory changes are required to bring about
uniformity in octroi and sales taxes etc. VAT has been introduced in the country in 2005, but has
not yet been uniformly implemented by all states.
Conclusion
India is one of the top producers of a large number of commodities, and also has a long history of
trading in commodities and related derivatives. The commodities derivatives market has seen ups
and downs, but seem to have finally arrived now. The market has made enormous progress in
terms of technology, transparency and the trading activity. Interestingly, this has happened only
after the Government protection was removed from a number of commodities, and market forces
were allowed to play their role. This should act as a major lesson for the policy makers in
developing countries, that pricing and price risk management should be left to the market forces
rather than trying to achieve these through administered price mechanisms. The management of
price risk is going to assume even greater importance in future with the promotion of free trade
and removal of trade barriers in the world. All this augurs well for the commodity derivatives
markets.
3) To provide a trend analysis of the current MCX & NCDEX indices

TREND OF METALS IN MULTI COMMODITY
EXCHANGE OF INDIA (MCX) AND NATIONAL
COMMODITY & DERIVATIVES EXCHANGE (NCDEX)
(FOR 10TH MAY 2010)
Commodity Expiry date Current Yesterday's Present Trend Rate at

name Closing Closing which the Date when
trend the trend
changed changed
Aluminium (May) 5/28/2010 94.65 94.5 Down 105.6 4/20/2010
Aluminium (June) 6/30/2010 95.6 95.55 Down 106.9 4/20/2010
Aluminium (July) 7/30/2010 96.25 96.85 Down - -
Copper (June) 6/30/2010 317.3 316.9 Down 352.35 4/10/2010
Copper (August) 8/31/2010 319.3 318.7 Down 354.05 4/10/2010
Gold (June0 6/5/2010 17940 17940 Up 16805 4/24/2010
Gold (August) 8/5/2010 18021 18031 Up 16875 4/24/2010
Gold (Oct) 10/5/2010 18085 18085 Up 17316 5/4/2010
Silver (July) 7/5/2010 28572 28646 Down 28646 5/7/2010
Silver (Sept) 9/4/2010 28747 28803 Down 28803 5/7/2010
Silver (Dec) 12/4/2010 28952 28960 Down - -
Zinc (May) 5/28/2010 95.3 95.05 Down 104.9 4/27/2010
Zinc (June) 6/30/2010 95.95 95.5 Down 107.95 4/21/2010
Zinc (July) 7/30/2010 96.7 96.2 Down - -
Nickel (May) 5/28/2010 1017.2 1019.8 Down 1145.6 4/27/2010
Nickel (June) 6/30/2010 1018.5 1021.8 Down 1147 4/27/2010
N gas (May) 5/25/2010 182.4 181.2 Down 176 4/30/2010
N gas (June) 6/25/2010 188.2 187 Down 182.4 4/30/2010
N gas (July) 7/27/2010 193.3 193.4 Down - -
METAL COMMODITIES TRADED AT NCDEX

Commodity name Expiry Current Yesterday's Present Trend Date when the Rate at which
date Closing Closing trend changed the trend

changed
Brent crude (May) 5/14/2010 3638.5 3636.5 Down 5/6/2010 3636.5
Brent crude (June) 6/15/2010 3652 3650 Down 5/6/2010 3650
Brent crude (July) 7/16/2010 3665.5 3663.5 Down 5/6/2010 3663.5
Silver (May) 5/20/2010 27765 27350 Up 4/26/2010 27835
Silver (June) 6/18/2010 27864 27645 Up 4/26/2010 27937
Silver (July) 7/20/2010 27973 27754 Up 4/26/2010 28050
Trend of Commodities in National Commodity &

Derivatives Exchange (for 10th May 2010)
Commodity Expiry Today's Yesterday' Trend Date when the Rate at
name date closing s closing trend changed which the
trend
changed
Channa (May) 5/20/2010 2096 2088 Down 4/6/2010 2352

Channa (June) 6/18/2010 2192 2190 Down 4/7/2010 2436
Channa (July) 7/20/2010 2260 2255 Down 4/7/2010 2491
Chana (august) 8/20/2010 2328 2320 Down 4/8/2010 2514
Channa (Sept) 9/20/2010 2383 2372 Down 4/20/2010 2520
Castorseed 5/20/2010 3100 3109.5 Up 5/8/2010 3100
(May)
Castorseed 6/18/2010 530.9 Down 3/19/2008 546.3
(June)
Castorseed 7/20/2010 3242.5 3214.5 Up 5/7/2010 3242.5
(July)
Castorseed 8/20/2010 3309 3261.5 Up 5/7/2010 3309
(August)
Chilli (June) 6/18/2010 4452 4448 Down 4/17/2010 4808
Chilli (July) 7/20/2010 4600 4580 Down 4/14/2010 5073
Chilli (August) 8/20/2010 4744 4693 Down - -
Guarseed (May) 5/20/2010 2386 2377 Down 5/3/2010 2368

Guarseed (June) 6/18/2010 2399 2392 Down 5/3/2010 2381
Guarseed (July) 7/20/2010 2419 2403 Down 5/3/2010 2396
Guarseed (aug) 8/20/2010 2441 2440 Down 5/3/2010 2436
GuarGum (May) 5/20/2010 4650 4615 Up 4/6/2010 1192
GuarGum (June) 6/18/2010 5200 5157 Up 5/7/2010 1239
GuarGum (July) 7/20/2010 5267 5224 Up 5/7/2010 5224
GuarGum 8/20/2010 5291 5332 Down 5/3/2010 5054
(August)
Gur (July) 7/20/2010 961 958.2 Up 5/8/2010 961
Gur (Sept) 9/20/2010 930 928.8 Down 5/6/2010 935.8
Jeera (May) 5/20/2010 12529 12480 Down 5/8/2010 12529
Jeera (June) 6/18/2010 12735 12685 Up 4/22/2010 11921
Jeera (July) 7/20/2010 13002 12950 Up 4/21/2010 12319
Maize (May) 5/20/2010 880.5 879.5 Down 5/3/2010 877
Maize (June) 6/18/2010 904 900.5 Down 5/3/2010 897
Maize (July) 7/20/2010 916 921 Down 5/3/2010 918.5
Maize (August) 8/20/2010 924 925.5 Down 4/20/2010 946.5
Expiry Today's Yesterday' Trend Date when the Rate at
date closing s closing trend changed which the
Commodity trend
name changed
Mentha (May) 5/31/2010 772.4 775.5 Down 5/3/2010 792.8

Mentha (June) 6/30/2010 775.2 778.4 Down 5/3/2010 795.7
Mentha (July) 7/30/2010 778.1 781.2 Down 5/3/2010 798.7
Mentha 8/31/2010 781.1 784.3 Down 5/3/2010 801.9
(August)
Pepper (May) 5/20/2010 15479 15111 Down - 15479
Pepper (June) 6/18/2010 16540 16359 Up 4/23/2010 15929
Pepper (July) 7/20/2010 16803 16614 Up 4/23/2010 16070
Pepper (August) 8/20/2010 16952 16806 Up 4/23/2010 16252
Pepper (Sept) 9/20/2010 17363 17279 Up 4/23/2010 16461
Pepper (Oct) 10/20/201 17525 17491 Up 4/24/2010 16930
0
Ref Soy (May) 5/20/2010 586 591.25 Up 12/15/2007 547.35
Ref Soy (June) 6/18/2010 450.8 449.05 Down 5/4/2010 445.55
Ref Soy (July) 7/20/2010 452.4 450.35 Down 5/4/2010 446.6
Sugar (May) 5/20/2010 3526 3517 Up - 3526
Sugar (June) 6/18/2010 2892 2866 Down 9/26/2009 2895
Sugar (July) 7/20/2010 2892 2866 Down 9/26/2009 2895
Sugar (August) 8/20/2010 2892 2866 Down 9/26/2009 2895
Turmeric (May) 5/20/2010 15121 14824 Up 4/26/2010 13343
Turmeric (June) 6/18/2010 14989 14695 Up 4/27/2010 13694
Turmeric (July) 7/20/2010 14903 14610 Up 4/27/2010 13499

Conclusion:
There is significant relation between the indices value of various commodities to the current and
future prices of those commodities
FINDINGS OF THE STUDY
 India is one of the top producers of a large number of commodities, and also has a long
history of trading in commodities and related derivatives. The market has made enormous
progress in terms of technology, transparency and the trading activity. Interestingly, this
has happened only after the Government protection was removed from a number of
commodities, and market forces were allowed to play their role.
 The management of price risk is going to assume even greater importance in future with
the promotion of free trade and removal of trade barriers in the world.
 Even though the commodity derivatives market has made good progress in the last few
years, the real issues facing the future of the market have not been resolved. The
objectives of setting up commodity derivative exchanges may not be achieved and the

growth rates witnessed may not be sustainable unless these real issues are sorted out as
soon as possible.
 Sugar prices in India are therefore influenced by various demand supply factors operating
within the country, international sugar beet and sugarcane prices, demand for refined
sugar from abroad, Candy and confectionery sales , prices of sugarcane and the other
sugar sources, are less likely to have any major impact on sugar prices in India.
 The international trade in sugar has changed dramatically. Perhaps the greatest change in
the international sugar trade has been the trend toward price stabilization. Historically at
the mercy of everything from war to weather, the price of sugar still has always been
extremely volatile.
 Despite the economic recession world over, sugar consumption growth was less impacted
and remained positive. The supply-demand disequilibrium has been caused essentially by
the strident slippage in Indian production, exacerbated by the decline in EU and other
Asian countries.
 The statistical outlook for the market till the end of the season in September 2009 for
sugar remains constructive and supportive to the market values.
 Wheat farmers have little impact on demand, but putting all the heads together can make
a significant difference in product demand and market price. And that leads to the
ultimate goal of the improved income for wheat producers.

 World wheat consumption is consistently growing with growth in population, as it is one
of the major staple foods across the world. There exists a clear trough and crest in the
seasonality of wheat production, indicating a typical seasonality in the production cycle.
 Factors that influence price are Supply demand scenario of wheat and its competing crops
like maize, barley etc., in the global market apart from other staple foods such as grains
 Wheat anticipates a change in trend from up to down on a break from the month of May
2010.
SUGGESTIONS AND RECOMMENDATIONS
 The Govt should take all possible steps to solve the unresolved issues such as
o Commodity Options
o The Warehousing and Standardization
o Cash versus Physical Settlement
o The Regulator
o Lack of Economy of Scale
o Tax and Legal bottlenecks
 More training should be carried out periodically to enhance the skills of the persons
involved in commodity trading
 Implementation aspects of margining and risk management at NCDEX must be monitored

continuously

 To impart knowledge on Commodity Market and their uses to Business Management
Students by revising courses taking into consideration the increasing importance of
Commodity Market in India as an investment avenue.
 More simpler analytical techniques must be developed for analysis and interpretation of
commodity futures charts and data.
CONCLUSION
Did the prices of a
While almost all agricultural product prices increased at least in nominal terms, the rate of
increase varied significantly from one commodity to another. In particular, international prices of
basic foods, such as cereals, oilseeds and dairy products, increased far more dramatically than
the prices of tropical products, such as coffee and cocoa, and raw materials, such as cotton or
rubber.
Therefore, developing countries dependent on exports of these latter products found that while
their export earnings might have been increasing this was at a slower rate than the cost of their
food imports. As many developing countries are net food importers, this imposed a serious
balance of payments problem. The leap in food prices was in sharp contrast to the secular
downward trend and the prolonged slump in commodity prices from 1995 to 2002, which even
prompted calls for the revival of international commodity agreements.
For some analysts, the increases or signaled the end of the long-term decline in real agricultural
commodity prices, with The Economist (2007) announcing “the end of cheap food”. It is an

interesting question whether these sharp increases are fundamentally different from earlier price
spikes and whether the long-term decline in real prices could have come to a halt, signaling a
fundamental change in agricultural commodity market behavior. High-price events, like low ice
low-price events, are not rare occurrences in agricultural markets, although high prices often tend
to be short-lived compared with low prices, which persist for longer periods.
What has distinguished this episode was the concurrence of the hike in world
prices of not just a few but of nearly all major food and feed commodities and the possibility that
the prices may remain high after the effects of short- term shocks dissipate In the first four
months of 2008, volatility in wheat and rice prices approached record highs (volatility in wheat
prices was twice the level of the previous year while rice price volatility was five times higher).
The increase in volatility was not confined to cereals – vegetable oils, livestock products and
sugar all witnessed much larger price swings than in the recent past. High volatility means
uncertainty, which complicates decision-making for buyers and sellers.
Greater uncertainty limits opportunities for producers to access credit markets and tends to result
in the adoption of low-risk production technologies at the expense of innovation and
entrepreneurship. In addition, the wider and more unpredictable the price changes in a
commodity are, the greater is the possibility of realizing large gains by speculating on future
price movements of that commodity.
BIBLIOGRAPHY
Magazines
 ISO February outlook 2009
Internet
Charts:
 www.barcharts.com
 www.chartsrus.com
 www.mongabay.com
 www.djindexes.com
 Dow Jones Industrial Average Historical Prices / Charts

Trend and other information:
 www.crnindia.com
 www.indiamart.com
 www.ncdex.com
 www.fmc.gov.in
BOOKS
 Futures, options and swaps by Robert W. Kolb.
 Derivative markets in India 2003 edited by Susan Thomas.
 Options, futures and other derivatives by John Hull.
 Thomas Susan (2003): Agricultural Commodity Markets in India; Policy Issues for
Growth, Indira Gandhi Institute for Development Research, Mumbai.


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COMMODITY MARKET

HISTORY OF COMMODITY MARKET

 Modern Commodity Market have their roots in the trading of agricultural

SIZE OF THE MARKET

1 Analysis of commodity indices in the global shipping trade

LIST OF TRADED COMMODITY

 Agricultural (Grains, and Food and Fiber)

Livestock and meat

2 Analysis of commodity indices in the global shipping trade

3 Analysis of commodity indices in the global shipping trade

RECENT TRENDS IN COMMODITY MARKET

Before a customer can establish a position he is required to make a minimum

4 Analysis of commodity indices in the global shipping trade

Market Order: The purpose of a market order is to execute a trade immediately at

5 Analysis of commodity indices in the global shipping trade

6 Analysis of commodity indices in the global shipping trade

I.BACKGROUND OF THE INDUSTRY

THE NCDEX PLATFORM

NCDEX is regulated by Forward Markets Commission in respect of futures trading

7 Analysis of commodity indices in the global shipping trade

NCDEX has been formed with the following objectives:

 To create a world class commodity exchange platform for the market

 To bring professionalism and transparency into commodity trading.

 To inculcate best international practices like de. Modularization, technology

 To provide nationwide reach and consistent offering.

 To bring together the entities that the market can trust

8 Analysis of commodity indices in the global shipping trade

9 Analysis of commodity indices in the global shipping trade

Table Fee/ deposit structure and net worth requirement: TCM

particulars Rupees( in lakh)

Interest free cash security deposit 15.00

Collateral security deposit 15.00

Advance minimum transaction charges 0.50

Net worth requirement 50.00

10 Analysis of commodity indices in the global shipping trade

NCDEX also invites applications for Professional Clearing Membership (PCMs)

particulars Rupees( in lakh)

Collateral security deposit 25.00

Annual subscription charges 1.00

Advance minimum transaction charges 1.00

Net worth requirement 5000.00

11 Analysis of commodity indices in the global shipping trade

NCDEX has specified capital requirements for its members. On approval as a

1. Interest free cash security deposit

􀀀 Cash: This can be deposited by issuing a cheque/ demand draft payable at

􀀀 Bank guarantee: Bank guarantee in favour of NCDEX as per the specified

􀀀 Government of India securities: National Securities Clearing Corporation

12 Analysis of commodity indices in the global shipping trade

􀀀Members who wish to increase their limit can do so by bringing in additional

THE NCDEX SYSTEM

This section provides a brief overview of how transactions happen on the

13 Analysis of commodity indices in the global shipping trade

The NCDEX system supports an order driven market, where orders

NCDEX trades commodity futures contracts having one Month,

14 Analysis of commodity indices in the global shipping trade

15 Analysis of commodity indices in the global shipping trade

On the expiry date of a futures contract, members submit delivery information

The seller intending to make delivery takes the commodities to

16 Analysis of commodity indices in the global shipping trade

 In December 2003, the National Commodity and Derivatives Exchange Ltd

The NCDEX offers futures trading in the following agricultural commodities.

17 Analysis of commodity indices in the global shipping trade

Cotton is among the most important nonfood crops. It occupies a significant