Trends in Commodity Market Introduction

The vast geographical extent of India and her huge population is aptly complemented by the size of her market. India, a commodity based economy where two third of the one billion population depends on agricultural commodities, surprisingly has an under developed commodity market. Unlike the physical market, futures markets trades in commodity are largely used as risk management mechanism on either physical commodity itself or open positions in commodity stock. The broadest classification of the Indian Market can be made in terms of the commodity market and the bond market. The commodity market in India comprises of all palpable markets that we come across in our daily lives. Such markets are social institutions that facilitate exchange of goods for money.

Meaning
A commodity exchange is a place where various commodities and derivatives are bought and sold. Commodities exchanges usually trade on commodity futures. Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on xzregulated commodities exchanges, in which they are bought and sold in standardized contracts. It is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.

Early history of Commodity Markets

Historically, dating from ancient Sumerian use of sheep or goats, other peoples using pigs, rare seashells, or other items as commodity money, people have sought ways to standardize and trade contracts in the delivery of such items, to render trade itself more smooth and predictable. Commodity money and commodity markets in a crude early form are believed to have originated in Sumer where small baked clay tokens in the shape of sheep or goats were used in trade. Sealed in clay vessels with a certain number of such tokens, with that number written on the outside, they represented a promise to deliver that number. This made them a form of
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commodity money more than an I.O.U. but less than a guarantee by a nation-state or bank. However, they were also known to contain promises of time and date of delivery - this made them like a modern futures contract. Regardless of the details, it was only possible to verify the number of tokens inside by shaking the vessel or by breaking it, at which point the number or terms written on the outside became subject to doubt. Eventually the tokens disappeared, but the contracts remained on flat tablets. This represented the first system of commodity accounting. Classical civilizations built complex global markets trading gold or silver for spices, cloth, wood and weapons, most of which had standards of quality and timeliness. Considering the many hazards of climate, piracy, theft and abuse of military fiat by rulers of kingdoms along the trade routes, it was a major focus of these civilizations to keep markets open and trading in these scarce commodities. Reputation and clearing became central concerns, and the states which could handle them most effectively became very powerful empires, trusted by many peoples to manage and mediate trade and commerce. Reasons for trading in Commodity Exchanges: Hedging: Commodities are subject to constant and extreme price fluctuations. Traders are the worst sufferers of the price risk. Forward contracts have come to their rescue. A forward contract requires a buyer and a seller to take and make a delivery of a definite quantity of a particular commodity at a future specified date. Such contracts are traded on an exchange, which provides guarantee for all futures dealings, and parties can "hedge" at suitable levels. Hedging lessens risk since it involves the purchase or sale of a commodity with the intention of counterbalancing the profit or loss of another investment. Therefore, any loss on the previous investment will be hedged, or compensated, by a matching profit from the hedging instrument. Speculating: Speculators are people who are prepared to bear risks in anticipation of earning profits. Markets are granted liquidity by speculators and it is hard to conceive of a futures market devoid of speculators.
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Arbitrage: Arbitrage involves buying a commodity at a low price and instantly selling it for a higher price in another market. Thus, traders can profit from arbitrage opportunities occurring due to price differences between two exchanges. Shifting of Risk: The minute a trader finalizes a deal and secures a price, he is no longer concerned by unfavorable price shifts. For example, if a seller trades a specific contract for $ 450 and soon after the price comes down to $440, there has been an unfavourable price shift but the seller has made a profit of $10. At this point, the risk has been transferred to the buyer of the contract. Speculators trade on commodities and derivatives by undertaking risks in order to maximize profits. Information: Exchanges produce huge volumes of data that are intensely scrutinized and monitored by a wide cross-section of people as the data provides gainful insights about the prevailing economic conditions. Advantages of commodity trading: 1) Leverage: Commodity futures operate on margin, meaning that to take a position only a fraction of the total value needs to be available in cash in the trading account. 2) Commission Costs: It is a lot cheaper to buy/sell one futures contract than to buy/sell the underlying instrument. For example, one full size S&P500 contract is currently worth in excess off $250,000 and could be bought/sold for as little as $20. The expense of buying/selling $250,000 could be $2,500+. 3) Liquidity: The involvement of speculators means that futures contracts are reasonably liquid. However, how liquid depends on the actual contract being traded. Electronically traded contracts, such as the e-minis tend to be the most liquid whereas the pit traded

commodities like corn, orange juice etc are not so readily available to the retail trader and are more expensive to trade in terms of commission and spread. 4) Ability to go short: Futures contracts can be sold as easily as they are bought enabling a speculator to profit from falling markets as well as rising ones. There is no uptick rule for example like there is with stocks. 5) No Time Decay: Options suffer from time decay because the closer they come to expiry the less time there is for the option to come into the money. Commodity futures do not suffer from this as they are not anticipating a particular strike price at expiry. Disadvantages of commodity trading 1) Leverage: Can be a double edged sword. Low margin requirements can encourage poor money management, leading to excessive risk taking. Not only are profits enhanced but so are losses. 2) Speed of trading: Traditionally commodities are pit traded and in order to trade a speculator would need to contact a broker by telephone to place the order who then transmits that order to the pit to be executed. Once the trade is filled the pit trader informs the broker who then informs his client. This can take some take and the risk of slippage occurring can be high. Online futures trading can help to reduce this time by providing the client with a direct link to an electronic exchange. Working of Commodity Market: There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash and carries away the goods. The second is futures trade. For commodity futures to work, the seller should be able to deposit the commodity at warehouse nearest to him and collect the warehouse receipt. The buyer should be able to take physical delivery at a location of his choice on presenting the warehouse receipt. But at present in India very few warehouses provide delivery for specific commodities.

Working procedure The futures market is a centralized market place for buyers and sellers from around the world who meet and enter into commodity futures contracts. Pricing mostly is based on an open cry system, or bids and offers that can be matched electronically. The commodity contract will state the price that will be paid and the date of delivery. Almost all futures contracts end without the actual physical delivery of the commodity. There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash and carries away the goods. The second is futures trade. The underpinning for futures is the warehouse receipt. A person deposits certain amount of say, good X in a ware house and gets a warehouse receipt which allows him to ask for physical delivery of the good from the warehouse but someone trading in commodity futures need not necessarily posses such a receipt to strike a deal. A person can buy or sale a commodity future on an exchange based on his expectation of where the price will go. Futures have something called an expiry date, by when the buyer or seller either closes (square off) his account or give/take delivery of the commodity. The broker maintains an account of all dealing parties in which the daily profit or loss due to changes in the futures price is recorded. Squiring off is done by taking an opposite contract so that the net outstanding is nil. For commodity futures to work, the seller should be able to deposit the commodity at warehouse nearest to him and collect the warehouse receipt. The buyer should be able to take physical delivery at a location of his choice on presenting the warehouse receipt. But at present in India very few warehouses provide delivery for specific commodities.

Objectives of commodity futures

Hedging with the objective of transferring risk related to the possession of physical assets through any adverse moments in price. Liquidity and price discovery to ensure base minimum volume in trading of a commodity through market information and demand supply factors that facilitates a regular and authentic price discovery mechanism. Maintaining buffer stock and better allocation of resources as it augments reduction in inventory requirement and thus the exposure to risks related with price fluctuation declines. Resources can thus be diversified for investments. Price stabilization along with balancing demand and supply position. Futures trading leads to predictability in assessing the domestic prices, which maintains stability, thus safeguarding against any short term adverse price movements. Liquidity in contracts of the commodities traded also ensures in maintaining the equilibrium between demand and supply. Flexibility, certainty and transparency in purchasing commodities facilitate bank financing. Predictability in prices of commodity would lead to stability, which in turn would eliminate the risks associated with running the business of trading commodities. This would make funding easier and less stringent for banks to commodity market players.

To qualify as a commodity for futures trading, an article or a product has to meet some basic characteristics:
The product must not have gone through any complicated manufacturing activity, except for certain basic processing such as mining, cropping, etc. In other words, the product must be in a basic, raw, unprocessed state. There are of course some exceptions to this rule. For example, metals, which are refined from metal ores, and sugar, which is processed from sugarcane. The product has to be fairly standardized, which means that there cannot be much differentiation in a product based on its quality. For example, there are different varieties of crude oil. Though these different varieties of crude oil can be treated as different commodities and traded as separate contracts, there can be a standardization of the commodities for futures contract based on the largest traded variety of crude oil. This would ensure a fair representation of the commodity for futures trading. This would also ensure adequate liquidity for the commodity futures being traded, thus ensuring price discovery mechanism. A major consideration while buying the product is its price. Fundamental forces of market demand and supply for the commodity determine the commodity prices. Usually, many competing sellers of the product will be there in the market. Their presence is required to ensure widespread trading activity in the physical commodity market. The product should have adequate shelf life since the delivery of a commodity through a futures contract is usually deferred to a later date (also known as expiry of the futures contract).

Benefits of commodity futures markets

Price Discovery: Based on inputs regarding specific market information, the demand and supply equilibrium, weather forecasts, expert views and comments, inflation rates, Government policies, market dynamics, hopes and fears, buyers and sellers conduct trading at futures exchanges. This transforms in to continuous price discovery mechanism. The execution of trade between buyers and sellers leads to assessment of fair value of a particular commodity that is immediately disseminated on the trading terminal.
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 Price Risk Management: Hedging is the most common method of price risk management. It is strategy of offering price risk that is inherent in spot market by taking an equal but opposite position in the futures market. Futures markets are used as a mode by hedgers to protect their business from adverse price change. This could dent the profitability of their business. Hedging benefits who are involved in trading of commodities like farmers, processors, merchandisers, manufacturers, exporters, importers etc. Import-Export competitiveness: The exporters can hedge their price risk and improve their competitiveness by making use of futures market. A majority of traders which are involved in physical trade internationally intend to buy forwards. The purchases made from the physical market might expose them to the risk of price risk resulting to losses. The existence of futures market would allow the exporters to hedge their proposed purchase by temporarily substituting for actual purchase till the time is ripe to buy in physical market. In the absence of futures market it will be meticulous, time consuming and costly physical transactions. Predictable Pricing: The demand for certain commodities is highly price elastic. The manufacturers have to ensure that the prices should be stable in order to protect their market share with the free entry of imports. Futures contracts will enable predictability in domestic prices. The manufacturers can, as a result, smooth out the influence of changes in their input prices very easily. With no futures market, the manufacturer can be caught between severe short-term price movements of oils and necessity to maintain price stability, which could only be possible through sufficient financial reserves that could otherwise be utilized for making other profitable investments. Benefits for farmers/Agriculturalists: Price instability has a direct bearing on farmers in the absence of futures market. There would be no need to have large reserves to cover against unfavorable price fluctuations. This would reduce the risk premiums associated with the marketing or processing margins enabling more returns on produce. Storing more and being more active in the markets. The price information accessible to the farmers determines the extent to which traders/processors increase price to them. Since one of the objectives of futures exchange is to make available these prices as far as possible, it is very likely to benefit the farmers. Also, due to the time lag between planning and production,

the market-determined price information disseminated by futures exchanges would be crucial for their production decisions. Credit accessibility: The absence of proper risk management tools would attract the marketing and processing of commodities to high-risk exposure making it risky business activity to fund. Even a small movement in prices can eat up a huge proportion of capital owned by traders, at times making it virtually impossible to pay back the loan. There is a high degree of reluctance among banks to fund commodity traders, especially those who do not manage price risks. If in case they do, the interest rate is likely to be high and terms and conditions very stringent. This possesses a huge obstacle in the smooth functioning and competition of commodities market. Hedging, which is possible through futures markets, would cut down the discount rate in commodity lending. Improved product quality: The existence of warehouses for facilitating delivery with grading facilities along with other related benefits provides a very strong reason to upgrade and enhance the quality of the commodity to grade that is acceptable by the exchange. It ensures uniform standardization of commodity trade, including the terms of quality standard: the quality certificates that are issued by the exchange-certified warehouses have the potential to become the norm for physical trade. Commodities as an asset class for diversification of portfolio risk: Commodities have historically an inverse correlation of daily returns as compared to equities. The skewness of daily returns favors commodities, thereby indicating that in a given time period commodities have a greater probability of providing positive returns as compared to equities. Another aspect to be noted is that the Sharpe ratio of a portfolio consisting of different asset classes is higher in the case of a portfolio consisting of commodities as well as equities. Thus, an Investor can effectively minimize the portfolio risk arising due to price fluctuations in other asset classes by including commodities in the portfolio. An option for high net worth investors: With the rapid spread of derivatives trading in commodities, the commodities route too has become an option for high net worth and savvy investors to consider in their overall asset allocation. Useful to the producer: Commodity trade is useful to the producer because he can get an idea of the price likely to prevail on a future date and therefore can decide between various competing commodities, the best that suits him.
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 Useful for the consumer: Commodity trade is useful for the consumer because he gets an idea of the price at which the commodity would be available at a future point of time. He can do proper costing/financial planning and also cover his purchases by making forward contracts. Predictable pricing and transparency is an added advantage.

Global Commodity Exchanges

Chicago Board of Trade Chicago Board of Trade was established in 1848 and has trading in agricultural produce, interests, Dow, metals and US treasuries. Soya complex, wheat and corn prices across the world are referenced here. More than 50 contracts on futures and options are being offered by CBOT
currently through open outcry and/or electronically. It trades both in futures as well as options. In

2005 it became a public traded NYSE listed company. New York Board of Trade (NYBOT) New York Board of Trade (NYBOT) is the world's largest commodities exchange for Coffee, Sugar, Cotton and Frozen Concentrated Orange Juice. The exchange was founded as the New York Cotton Exchange in 1870. NYBOT also facilitates trades in foreign currencies and derivative indices for equities. Chicago Mercantile Exchange (CME) Chicago Mercantile Exchange (CME) is the largest futures exchange in US. The exchange trades on interest rates, equities, foreign exchange and agricultural commodities. It has both open cry as well as electronic trading. Agricultural commodities traded on the exchange include dairy products (butter, milk cheese) and live stock futures (cattle and pork). London Metal Exchange London Metal Exchange was formed in 1877 as a direct consequence of the industrial
revolution witnessed in the 19th century. The exchange trades 24 hours a day through an inter office 10

telephone market and also through a electronic trading platform. It in Metals and non ferrous metals like aluminium, copper, lead, nickel, tin and zinc. Consumers as well as producers of metals use the official prices of LME for their long term contracts pricing. There are over 400 LME approved warehouse in some 32 locations covering USA, Europe, the middle & the Far East. New York Mercantile Exchange (NYMEX) New York Mercantile Exchange in its current form was created in 1994 by the merger of the former New York Mercantile Exchange and the Commodity Exchange of New York (COMEX). Together they represent one of world's largest exchange for precious metals and energy. Tokyo Commodity Exchange (TOCOM) Tokyo Commodity Exchange (TOCOM) is the largest exchange in Japan and second largest commodity exchange in the world for futures and options. Crude oil, gasoline, kerosene, gas oil, gold, silver, aluminium, platinum and rubber are the commodities that are actively traded. Shanghai Futures Exchange Shanghai Futures Exchange is one of biggest exchange for copper price determination. It also deals in aluminium, fuel oil, rubber, etc. Dubai Gold & Commodity Exchange (DGCX) Dubai Gold & Commodity Exchange (DGCX) was formed in Dubai. It is developed jointly by Dubai government as well as MCX and FTIL. At the moment it is trading in Gold but plans to trade in others also. Dubai has an advantage of its location of serving all time zones. Dubai Mercantile Exchange (DME) Dubai Mercantile Exchange (DME) is a joint venture between Dubai holding and the New York Mercantile Exchange (NYMEX). It is still to be launched and is likely to be an active exchange for oil futures as it is in the centre of oil producing nations.
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Singapore Commodity Exchange (SICOM) Singapore Commodity Exchange (SICOM) specializes in rubber and robusta coffee.

Structure of Commodity Market:

Ministry of consumer affairs

FMC (Forward Market Commision)

Commodity Exchange

National Exchange

Regional Exchange

NCDEX

MCX

NMCE

NBOT

20 Other regional exchanges

Forward Markets Commission (FMC)

The Forward Markets Commission (FMC) is the chief regulator of forwards and futures markets in India. As of March 2009, it regulates Rs 52 Trillion worth of commodity trade in India. It is headquartered in Mumbai and is overseen by the Ministry of Consumer Affairs, Food and Public Distribution Established in 1953 under the provisions of the Forward Contracts (Regulation) Act, 1952, it consists of two to four members, all appointed by the Indian Government. Currently, the Commission allows commodity trading in 22 exchanges in India, of which three are national. Uniquely the FMC falls under the Ministry of Consumer Affairs, Food and Public Distribution and not the finance ministry as in most countries. This is because futures,
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traded in India, are traditionally on food commodities. However, this has been changing and there have been calls for change in the industry and in regulation. One proposal is the merging the commodities derivatives and securities regulation by including the Forward Market Commission within the Securities and Exchange Board of India (SEBI), the primary securities regulator in India. However as of 2003 there is no clear consensus for this move. Responsibilities and functions The functions of the Forward Markets Commission are as follows: To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulation) Act 1952. To keep forward markets under observation and to take such action in relation to them, as it may consider necessary, in exercise of the powers assigned to it by or under the Act. To collect and whenever the Commission thinks it necessary, to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government, periodical reports on the working of forward markets relating to such goods; To make recommendations generally with a view to improving the organization and working of forward markets; To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considers it necessary. It allows futures trading in 23 Fibers and Manufacturers, 15 spices, 44 edible oils, 6 pulses, 4 energy products, single vegetable ,20 metal futures, 33 others Futures. Leading commodity markets of India
The government has now allowed national commodity exchanges, similar to the BSE & NSE, to come up and let them deal in commodity derivatives in an electronic trading environment. These

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exchanges are expected to offer a nation-wide anonymous, order driven, screen based trading system for trading. The Forward Markets Commission (FMC) will regulate these exchanges.

Major Commodity Exchanges of India: Of the 25 commodities exchanges the MCX, NCDEX and NMCEIL are the major Commodity Exchanges in India. Unique Features of National Level Commodity Exchanges The unique features of national level commodity exchanges are: They are demutualized, meaning thereby that they are run professionally and there is separation of management from ownership. The independent management does not have any trading interest in the commodities dealt with on the exchange. They provide online platforms or screen based trading as distinct from the open outcry systems (ring trading) seen on conventional exchanges. This ensures transparency in operations as everyone has access to the same information. They allow trading in a number of commodities and are hence multi-commodity exchanges. They are national level exchanges which facilitate trading from anywhere in the country. This corollary of being an online exchange. Multi commodity exchange of India Ltd (MCX) Multi commodity exchange of India Ltd is an independent and de-mutualised exchange based in Mumbai. Established on 10 November, 2003, it is the third largest bullion exchange and fourth largest energy exchange in the world. Recognized by the Government of India it deals in numerous commodities and carries out online trading, clearing and settlement processes for commodity futures market countrywide. MCX COMDEX is India's foremost and sole composite commodity futures price index. MCX is India's No. 1 commodity exchange with 83% market share in 2009.

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There are about 100 commodities traded on MCX, in 2009 only 3 or 4 commodities contribute for more than 80 percent of total trade volume. As per recent data the largely traded commodities are Gold, Silver, Energy and base Metals. According to FMC, MCX gained highest turnover among the 24

commodity exchanges with an amount of Rs 59, 56,644crore in 2009. MCX launched Exchange of Futures for Physicals (EFP) India's first transaction facility to integrate the futures markets with the physical markets. National Commodity & Derivatives Exchange of India Ltd (NCDEX) National Commodity & Derivatives Exchange of India Ltd located in Mumbai, is a public limited company incorporated on 23rd April 2003. NCDEX is the second largest commodity
exchange in the country after MCX. NCDEX has launched kachhi ghani mustard oil future contract

for February, march and April 2010. Promoted by national level establishments it is run by professional management. Regulated by the Forward Market Commission with reference to futures trading in commodities, it trades in various commodities online. National Multi-Commodity Exchange of India Limited (NMCEIL) - is considered the first de-mutualised, online exchange dealing in numerous commodities. Incorporated on 20th December 2001,The Commodity Exchanges with their extensive reach, embrace new participants, resulting in a powerful price discovery process. Major Regional Commodity Exchanges in India 1. Batinda commodity & oil exchange ltd. 2. The Bombay commodity exchange 3. The Rajkot seeds oil and bullion merchant 4. The Kanpur commodity exchange 5. The Meerut agro commodity exchange the spices and oilseeds exchange (sangi) 6. Ahmadabad commodity exchange 7. Vijay beopar chamber ltd. (Muzaffarnagar) 8. India peppers and spice trade association (Kochi) 9. Rajdhani oils and seeds exchange (Delhi) 10. The chamber of commerce (Hapur)
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11. The east India cotton association (Mumbai) 12. The central commercial exchange (Gwalior) 13. The east India jute & hessian exchange of India (Kolkata) 14. First commodity exchange of India (Kochi) 15. Bikaner commodity exchange ltd. (Bikaner) 16. The coffee future exchange ltd. (Bangalore) 17. E sugar India ltd. (Mumbai)

Current Scenario in Indian Commodity Market

The turnover of commodities traded in Indias exchanges during 2009 went up to a record level of Rs 70,90,442 crore, up by 40.85% as against Rs 50,33,872 crore in2008, despite a some restrictions in trading. The turnover of leading agri-commodity bourse NCDEX surged by over 28% to Rs 8,05,707 crore in 2009 following the re-launch of suspended commodities like chana, soya oil, potato and rubber during 2008-end Agriculture contributes about 22% GDP of Indian economy with a growth of 8-10 % in 2009. The value of trade in agri-commodities on the futures exchanges has doubled during April-January 15 period of the current fiscal, while the cumulative value of futures trade increased 50 per cent. According to the Forward Markets Commission data, the cumulative value of trade in agricultural commodities increased to Rs 9.61 lakh crore from Rs 4.68 lakh crore during the same period a year ago. The overall value of trade on the futures exchanges increased to Rs 58.91 lakh crore from Rs 39.19 lakh crore, The value of trade in other commodities increased 98.15 per cent. An interesting aspect of the data is that bullion accounts for 40 per cent of the total value of trade on the futures exchange, though this fiscal the value has increased only 9.67 per cent.

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According to the data, the value of trade in bullion was Rs 23.66 lakh crore so far this fiscal against Rs 21.57 lakh crore. Commodity Market In India (Value In Rs Crores) 2008-09 2009-10 3919844.79 2157532.73 46833.99 1293977.08 5891189.81 2366092.42 961066.34 2564031.05

Particulars Value of Trade Value of bullion Trade Value of agri commodities Value of other commodities

% Growth 50.29 9.67 105.21 98.15

Article: Business Line .Thursday, Feb 04, 2010

Different types of Commodities traded:

METAL BULLION FIBER

Aluminium, Copper. Lead. Nickel. Sponge Iron. Steel Long (Bhavnagar) Steel Long (Govindgarh). Steel Flat. Tin. Zinc Gold. Gold HNL Gold M. i-Rold. Silver. Silver HNI. Silver M Cotton L Staple. Cotton M Staple. Cotton S Staple. Cotton Yarn, Kapas Brent Crude Oil. Crude Oil. Furnace Oil. Natural Gas. M. E. Sotii Crude Oil

ENERGY

SPICES PLANTATIONS PULSES PETROCHEMICALS CEREALS OTHERS

Cardamom. Jeera. Pepper. Red Chilli Arecanut. Cashew KerneL Coffee (Robusta). Rubber Chana. Mastit, Yellow Peas HDPE. Pol)propylene(PP). PVC Maize Guargum. Guar Seed. Gurchaku. Mentha Oil. Potato (Agra). Potato (Taikeshwar). Sugar M-30. Sugar S-30

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Quotations of some Commodities:

Commodity
Gold Gold M Gold Guinea Silver Silver M Crude Oil Soya Oil Soya Seed Peeper Lead Lead MINI Zinc Zinc MINI Aluminium Copper

Base Value Lot Size

10 gram 10 gram 8 gram 1 kilogram 1 kilogram 1 barrel 10 kilogram 1 metric ton 10 kilogram 1 kilogram 1 kilogram 1 kilogram 1 kilogram 1 kilogram 1 kilogram 100 10 1 30 5 5 10 metric ton 10 metric ton 100 5000 1000 5000 1000 5000 1000

Facts about Commodity Market:

Commodities in which future contracts are successful are commodities those are not protected through government policies; (Example: Gold/ Silver/ Cotton/ Jute) and trade constituents of these commodities are not complaining too. This should act as an eyeopener to the policy makers to leave pricing and price risk management to the market forces rather than to administered mechanisms alone. Any economy grows when the constituents willingly accept the risk for better returns; if risks are not compensated with adequate or more returns, economic activity will come into a standstill. Worldwide, Derivatives volumes of non-US exchanges in the last decade, has been increasing as compared to the US Exchanges. Commodities are less volatile compared to equity market, but more volatile as compared to G-Sec's. The basic idea of Commodity markets is to encourage farmers to choose cropping pattern based on future and not past prices. Industry in India runs the raw material price risk, going forward they can hedge this risk. Commodities Exchanges are working with banks to provide liquidity to retail investors against holdings such as bullion, cotton or any edible oil, much like loan against shares.
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Conclusion
Indian commodity exchanges have come a long way, with an impressive growth during the last six years since 2002-03. The three national online exchanges came into being, taking the erstwhile turnover of Rs.66,530 crore to Rs.52,48,956 crore in 2008-09.After almost two years that commodity trading is finding favour with Indian investors and is been seen as a separate asset class with good growth opportunities. For diversification of portfolio beyond shares, fixed deposits and mutual funds, commodity trading offers a good option for long-term investors and arbitrageurs and speculators. And, now, with daily global volumes in commodity trading touching three times that of equities, trading in commodities cannot be ignored by Indian investors. Online commodity exchanges need to revamp certain laws governing futures in commodities to make the markets more attractive. The national multi-commodity exchanges have unitedly proposed to the government that in view of the growth of the commodities market, foreign institutional investors should be given the go-ahead to invest in commodity futures in India. Their entry will deepen and broad base the commodity futures market. As a matter of fact, derivative instruments, such as futures, can help India become a global trading hub for select commodities. Commodity market has been established for the benefit of small and large investors. But the level of investment in this trading is far lesser than the other modes of investors. The need of the hour is the proper guidelines and education to all investors. An investment in commodity market is though less risky than that of the stock market. This is because, the investors are less aware about commodities market. Commodity trading in India is poised for a big take-off in India on the back of factors like global economic recovery and increasing demand from China for commodities. Considering the huge volatility witnessed in the

equity markets recently with the sensex touching 18000 level commodities could add the
required zing to investors' portfolio. Therefore, it won't be long before the market sees the emergence of a completely redefined set of retail investors.

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