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Modern commodity exchanges date back to the trading of rice futures in the 17th century in
Osaka, Japan, although the principles that underpin commodity futures trading and the
function of commodity markets are still older. The first recorded account of derivative
contracts can be traced to the ancient Greek philosopher Thales of Miletus in Greece, who,
during the winter, negotiated what were essentially called options on oil presses for the spring
olive harvest. The Spanish dramatist Lope de Vega reported that in the 17th century options
and futures were traded on the Amsterdam Bourse soon after it was opened.
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Counterparty Clearing, which provide clearing and settlement services on a futures exchange,
as well as off-exchange in the OTC market.
Chinas first commodity exchange was established in 1990 and at least forty had
appeared by 1993, as China accelerated the transformation from a centrally planned to
a market-oriented economy.
Futures exchanges in Japan have also gone through a process of consolidation since
1993, and only 10 remained in 1999 (down from 17 just five years earlier).. The
biggest is The Tokyo Commodity Exchange (TOCOM), created in November 1984.
Malaysia hosts two futures and options exchanges, which hold the 50th and 51st place
in the 2000 ranking of world futures exchanges by trading volume. Singapore is home
to the Singapore Exchange (SGX), which was formed in 1999 by the merger of two
well-established exchanges, the Stock Exchange of Singapore (SES) and Singapore
International
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Awareness-raising:
To build awareness of the solutions that commodity exchanges provide, and their track
record in doing so, among key national, regional and international stakeholders including
Governments, regulators, the private sector, civil society and the media.
Accumulation of knowledge:
To produce a high-quality report that adds to the existing knowledge base
establishing within a coherent framework the enduring impacts that commodity exchanges
have made in key markets over time.
Promotion of best practice: To identify innovative and effective practices that can be held up
as models for or drivers of embedding a pro-growth, pro-development symbiosis within
exchange and market development
How Seasonal variation in prices of agricultural commodities are reduced by trading
at the Commodity exchange
Short-term (weekly or daily) price variations can be reduced by futures and options
To know The definite relationship between futures prices and actual commodity prices
(Spot or ready prices)
How Futures trading influence the long-term price trend (price stabilization) in any
commodity.
How Futures trading influence the sowing decisions and cropping pattern.
Apart from these, the study also traces the problems of Indian Commodity exchanges with
respect to non-transparency of prices, product standardization etc. It further attempts to find
out the nature and volume of the commodity trading pattern in India is also assessed.
RESEARCH METHODOLOGY
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This chapter deals with the description of the study area, sampling procedure adopted,
method of survey, nature and sources of data.
DESCRIPTION OF THE STUDY AREA
The present study pertains to all six nationalised commodity exchanges namely, National
Multi-commodity Exchange Ltd.(NMCE), Multi Commodity Exchange Of India Ltd.(MCX),
National Commodity and Derivative Exchange Ltd.(NCDEX), Indian Commodity
Exchange(ICEX), Universal Commodity Exchange(UCE) and ACE Commodity and
Derivative Exchange Ltd(ACE), and different role played by them
SAMPLING DESIGN
For the present study five major agricultural commodities currently traded in the
commodity exchanges were selected, namely potato, almond, chana, wheat, soybean. Which
were selected on the basis of their volume of trade.
NATURE AND SOURCES OF DATA
Secondary data thus collected from the official websites of different nationalised
commodity exchanges and other websites as well as from various text books and magazines,
newspapers.
The present study did not consider regional commodity exchanges due to difficulties
in obtaining data.
Can be a bifold belted sword. Low allowance requirements can animate poor money
management, arch to boundless accident taking. Not alone are profits added but so are
losses!
Lack of knowledge among investors.
Lack of governance.
Insufficient information to interested parties.
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LITERATURE REVIEW
Commodity trading is prevailing in India since mid-19th century. The shape and
structure of trading has undergone a sea change in terms of nature of commodities
traded, volume of trade, clearing, settlement & guarantee system, transparency in
trade, governance and regulation. The commodities trading through exchanges have
traditionally been limited to single commodity exchanges until the Union Government
decided in favour of national-level multi-commodity exchanges. It has been observed
at global level that the commodities have witnessed much more volatile price
situations than the prices in the market for financial instruments.
The relationship between spot and futures markets in price discovery has been an
important area of research. Garbade & Silber in their article Price movements
and price discovery in futures and cash markets (1982) tested whether futures
prices lead spot prices. Correlation of basis (spot prices futures prices) of the previous
time period with spot or futures prices of the current time period was empirically
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tested. If basis innovations forecast futures returns, then the spot market leads the
futures market. If basis innovations forecast spot returns, then the futures market leads
the spot market. Susan Thomas and Kiran Karande used it for castor seed market in
India.
M. Thiripalraju & T.P. Madhusoodanan in their paper Commodity Futures
prices in India: Evidence on Forecast Power, Price Formation and Inter-Market
Feedback found the efficiency of price formation in the Indian commodity futures
markets of Pepper and Castor seeds. Susan Thomas of IGIDR, Mumbai has in her
paper Agricultural Commodity Markets in India shown some evidence of role
played by futures market in price stabilisation. Her study is based on Mujaffarnagar
jaggery futures market. In her paper with D Balasundaram on cotton futures it has
been concluded that the futures market benefit the cotton economy by increasing the
efficiency of price discovery, in addition to enabling the reduction of price risk.
Futures and options market lead to destabilising speculation and malpractice if not
properly regulated. The Gupta Commit- tee (1997) on Hedging through
international commodity exchanges noted:
The need for regulation of the markets arises when such regulations
increase the allocative efficiency of these markets from what would prevail under no
regulation at all. Allocative efficiency of the futures and options market is reflected by the
ability of these markets to perform their price discovery and risk shifting functions
efficiently.
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royalty. In time, they were used for trading and were exchanged for other goods and
commodities, or for payments of labour. Gold, measured out, then became money. Gold's
scarcity, unique density and the way it could be easily melted, shaped, and measured made it
a natural trading asset.
Beginning in the late 10th century, commodity markets grew as a
mechanism for allocating goods, labour, land and capital across Europe. Between the late
11th and the late 13th century, English urbanization, regional specialization, expanded and
improved infrastructure, the increased use of coinage and the proliferation of markets and
fairs were evidence of commercialization. The spread of markets is illustrated by the 1466
installation of reliable scales in the villages of Sloten and Osdorp so villagers no longer had
to travel to Haarlem or Amsterdam to weigh their locally produced cheese and butter.
Indeed, the Amsterdam Stock Exchange, often cited as the first stock
exchange, originated as a market for the exchange of commodities. Early trading on
the Amsterdam Stock Exchange often involved the use of very sophisticated contracts,
including short sales, forward contracts, and options. "Trading took place at the Amsterdam
Bourse, an open aired venue, which was created as a commodity exchange in 1530 and
rebuilt in 1608. Commodity exchanges themselves were a relatively recent invention, existing
in only a handful of cities.
In 1864, in the United States, wheat, corn, cattle, and pigs were
widely traded using standard instruments on the Chicago Board of Trade (CBOT), the world's
oldest futures and options exchange. Other food commodities were added to the Commodity
Exchange Act and traded through CBOT in the 1930s and 1940s, expanding the list from
grains to include rice, mill feeds, butter, eggs, Irish potatoes and soybeans. Successful
commodity markets require broad consensus on product variations to make each commodity
acceptable for trading, such as the purity of gold in bullion. 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.
Through the 19th century "the exchanges became effective
spokesmen for, and innovators of, improvements in transportation, warehousing, and
financing, which paved the way to expanded interstate and international trade.
COMMON MISTAKES IN COMMODITY MARKET
1.
Trading with lagging indicators.-As a Broker, I get to see the whole range, from
traders making their first trade, to traders making their last trade, and everything in between.
The beginner traders almost always start along the same path. Using MACD, Williams %R,
Stochastic, RSI and most other indicators you can find to predict price is a very common
mistake. These indicators often follow price movement, not predict future price movement.
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Sure when looking at a chart in hindsight, they match up great, but in real time they are
lagging. This style of trading will more than likely lead to losses.
2.
3.
4.
Losing Days-About every Trader has losing days, it is part of the business. The key is
to limit losses, similarly to trading. You should monitor your account balance like you
monitor your trades. When you see it going the wrong way, you should become impatient and
look to cut it short. There are infinite factors why you are having a losing day, the fact is you
are and you need to know in advance where the bleeding stops. Many skilled and professional
traders regularly take profits from the market day in and day out only to blow the account up
the one day the market doesnt react the way they expect. Often ego or anger can block
rational thoughts and averaging in and reversing is all too easy. Having hard rules like
maximum lot size and maximum daily loss can preserve your capital and prevent losing days
from burying your account.
5.
Chasing the market-There are so many mistakes, it is hard to only choose five, but
chasing the market will conclude this list. Markets do not move in straight lines. Aside from
major news there are very few large moves without retracements. Depending on the market a
big move can be calculated by taking the average daily range and multiplying by 2 or 3.
Market conditions are constantly changing, but in all circumstances, when a market makes a
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big move, it is more likely to retrace or reverse before continuing. Traders that buy the ES
after 15 points up or sell gold after a $50 move down are behind the ball and more times than
not will be stopped out with a loss. Wait for the retracement or play the other side, this will
help limit loses by chasing.
OVERVIEW:-AGRICULTURE
Farming as an activity contributes nearly 1/6th to our national GDP and a major
portion of our population is dependent on for livelihood. It has risen the challenge of making
India largely self sufficient in providing food for a growing population. To make farming
competitive and profitable there is an urgent need to step up investment, both public and
private, in agro technology development and creation and modernisation of existing agribusiness infra. Establishing agricultural research institute in Assam and Jharkhand, in
addition to this an amount of Rs.100crores is being set aside for setting of an
Agritech Infrastructure Fund. And also Agricultural Universities along with Horticulture
Universities. And a sum of Rs.200crores has been allocated for this.
Deteriorating soil health has been a cause of concern and leads to sub optimal utilisation
of farming resources. Government will initiate a scheme to provide to every farmer a soil
health card in a mission mode. And a sum of Rs.100crores for this purpose and an additional
Rs.56crores to set up 100 Mobile Soil Testing Laboratories across the country. There
have also been growing concerns about imbalance in the utilisation of different types of
fertilizers resulting deteriorating of the soil.
Other Developmental Steps Include: Agricultural Credit: - A target of Rs.8lakh crore has been set for agricultural credit
during 2014-15.
Interest Subvention Scheme for Short Term Crop Loans: - Under this scheme, the
banks are extending loans to farmers at concessional rate of 7%.
Rural Infrastructure Development Fund (RIDF):- NABARD operates RIDF, out
of the priority sector lending shortfall of the banks, which helps in the creation of
Infrastructure in agriculture and rural sectors across the country.
Warehouse Infrastructure Fund: - Increasing the warehousing capacity for
increasing the shelf life of agricultural produces and there by the earning capacity of
the firms is utmost importance. Keeping in view of Scientific Warehousing
Infrastructure in the country.
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Creation of Long Term Rural Credit Fund (LTRCF):- In order to give a boost to
long term credit in agriculture, scheme named LTRCF set up in NABARD for the
purpose of refinance support to cooperative banks and Regional Rural Banks.
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Apart from the role of public intervention through MSPs (mini- mum support prices)
and Procurement Price in price stabilisation of agriculture commodities, commodity
exchanges have been an effective tool in price determination and stabilisation of such
commodities. While public intervention brings about distortions in efficient price discovery,
cropping pattern and market mechanism, the role of commodity exchanges is to evolve an
efficient price discovery system along with ensuring hedging of price risks.
The High-level Committee on long-term grain policy noted:
Price instability is not merely a matter of concern from the point of view of the welfare of
producers and consumers and their incomes. There is very strong evidence from across the
world and from Indias own experience in the past that agricultural investment and growth is
adversely affected if price instability is high and, in particular, if farmers cannot be
reasonably sure that prices will remain above their costs of production
BASICS ABOUT COMMODITY MARKET & EXCHANGES
WHY COMMODITIES MARKET?
India has very large agriculture production in number of agri-commodities, which needs use
of futures and derivatives as price-risk management system. Fundamentally price you pay for
goods and services depend greatly on how well business handle risk. By using effectively
futures and derivatives, businesses can minimize risks, thus lowering cost of doing business.
Commodity players use it as a hedge mechanism as well as a means of making money. For
e.g. in the bullion markets, players hedge their risks by using futures Euro-Dollar fluctuations
and the international prices affecting it. For an agricultural country like India, with plethora
of mandis, trading in over 100 crops, the issues in price dissemination, standards, certification
and warehousing are bound to occur. Commodity Market will serve as a suitable alternative
to tackle all these problems efficiently.
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in commodities like rubber, soyabean, black pepper etc. was started in the
U.S.A after 1920. Apart from US and UK, India is the only country that had
active futures market over a long period of time. A good deal of futures trading
in cotton was done at Bombay. Other markets soon developed for oilseeds
(Gujarat & Punjab), wheat (Hapur, 1913), raw jute (Calcutta, 1912). During
WW II, futures trading in many commodities were banned under Defence of
India Rules.
Turnaround came in 1952 with the passing of Forward Contracts (Regulation)
Act (FCRA, 1952), which led to the establishment of Forward Markets
Commission (FMC) in September 1953. FMC, headquartered at Mumbai, is a
regulatory authority which is overseen by the Ministry of Consumer Affairs and
Public Distribution, Govt. of India. There are 24 commodity exchanges in the
country including recently established 4 national-level multi-commodities
exchanges.
WHAT IS A COMMODITY FUTURE EXCHANGE?
Exchange is an association of members, which provides all organizational support for
carrying out futures trading in a formal environment. These exchanges are managed by the
Board of Directors, which is composed primarily of the members of the association. There
are also representatives of the government and public nominated by the Forward Markets
Commission. The majority of members of the Board have been chosen from among the
members of the Association who have trading and business interest in the exchange. The
chief executive officer and his team in day-to-day administration assist the Board. There are
different classes of members who capitalize the exchange by way of participation in the form
of equity, admission fee, security deposits, registration fee etc.
a. Ordinary Members: They are the promoters who have the right to have own account
transactions without having the right to execute transactions in the trading ring. They have to
place orders with trading members or others who have the right to trade in the exchange.
OBJECTIVES OF FUTURES TRADING
USEFUL?
WHAT
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TYPES OF COMMODITIES
METAL
BULLION
FIBER
ENERGY
SPICES
PLANTATIONS
PULSES
PETROCHEMICALS
CEREALS
OTHERS
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NMCE is the first demutualised electronic commodity exchange of India granted the National
exchange on Govt. of India and operational since 26th Nov, 2002.
Promoters of NMCE are, Central warehousing corporation (CWC), National Agricultural
Cooperative Marketing Federation of India (NAFED), Gujarat Agro- Industries Corporation
Limited (GAICL), Gujarat state agricultural Marketing Board (GSAMB), National Institute
of Agricultural Marketing (NIAM) and Neptune Overseas Ltd. (NOL). Main equity holders
are PNB. The
Head Office of NMCE is located in Ahmadabad. There are various commodity trades on
NMCE Platform including Agro and non-agro commodities.
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NCDEX is a public limited co. incorporated on April 2003 under the Companies Act, 1956; it
obtained its certificate for commencement of Business on May 9, 2003. It commenced its
operational on Dec 15, 2003. Promoters shareholders are:
Life Insurance Corporation of India (LIC),
National Bank for Agriculture and Rural Development (NABARD) and
National Stock Exchange of India (NSE)
other shareholder of NCDEX are: Canara Bank, CRISIL limited, Goldman Sachs,
Intercontinental Exchange (ICE), Indian farmers fertilizer corporation Ltd (IFFCO) and
Punjab National Bank (PNB).
NCDEX is located in Mumbai and currently facilitates trading in 57 commodities mainly in
Agro product.
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ICEX is latest commodity exchange of India Started Function from 27 Nov, 09. It is jointly
promote by Indiabulls Financial Services Ltd. and MMTC Ltd. and has Indian Potash Ltd.
KRIBHCO and IFC among others, as its partners having its head office located at Gurgaon
(Haryana).
Organization Profile
As India has entered a new phase wherein its markets are opening up more, allowing
participants to be exposed to global commodity risk, there is a growing need to bridge the
current gap through more entrants in the Indian commodity exchange space.
Kotak Anchored, Ace Derivatives and Commodity Exchange Limited is a screen based online
derivatives exchange for commodities in India. Ace Commodity Exchange earlier known as
Ahmedabad Commodity Exchange has been in existence for more than 5 decades in
Commodity Business, bringing in the best and transparent Business Practices in the Indian
commodity space. The Kotak group brings in more than 25 years of financial expertise and
has pioneered many business practices existing in the financial services industry. With Ace,
Kotak Group brings to the commodity market a new, state-of-the-art trading platform which
combines the operational efficiency of global exchanges with deep domain expertise in each
commodity vertical.
KEY SHAREHOLDERS
Kotak Mahindra Group
A legacy built over 2 decades, Kotak Mahindra is one of Indias leading banking and
financial services organizations, offering a wide range of financial services that encompass
every sphere of life. From commercial banking, to stock broking, to mutual funds, to life
insurance, to investment banking, the group caters to the diverse financial needs of
individuals and corporate sector.
HAFED
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The Haryana State Cooperative Supply & Marketing Federation Ltd. (HAFED) is an apex
State Co-operative service and marketing institution, under the patronage and sponsorship
of the Government of Haryana (India).
Other Key Shareholders
Bank of Baroda
Corporation Bank
Union Bank
Overview
Universal Commodity Exchange Limited is the next generation national level commodity
exchange for derivatives market across all commodity segments. UCX is headquartered in the
financial capital of India, Mumbai with presence in all major trading destinations across the
country.
It aims to be one of the largest commodity derivatives exchanges ensuring price transparency
and a robust risk management & surveillance system for facilitating online trading, clearing
&
settlement
operations
for
the
market
across
the
country.
Universal Commodity Exchange Ltd. has received a permanent and perpetual recognition
from Govt. of India (Ministry of Consumer Affairs, Food & Public Distribution) under the
provision of FC(R)A.
KEY SHAREHOLDERS
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Total food grains production in India reached an all-time high of 259.32 million tonnes in
FY12. Rice and wheat production in the country stood at 105.3 and 94.9 million tonnes,
respectively.
Largest producer of major agricultural and horticulture crops
India is the largest producer of pulses, milk, tea, cashew and jute; and the second largest
producer of wheat, rice, fruits and vegetables, sugarcane, cotton and oilseeds.
Increasing farm mechanisation
India is one of the largest manufacturers of various farm equipments like tractors, harvesters
and tillers. India manufactures one-third of tractors in the world; the number of tractors in the
country is estimated to reach 16 million by 2030 from 4 million in 2012.
Agricultural advantages of India
In 19606:-1 Food grain production: 69.3 million tonne
In 201112 Food grain production: 259.3 million tonnes
Robust demand
A large population is the key driver of demand for agricultural products
Rising urban and rural incomes have also aided demand growth
External demand has also been growing especially from key markets like the Middle East
Attractive opportunities
Increasing demand for agricultural inputs such as hybrid seeds and fertilisers
Promising opportunities in storage facilities; potential storage capacity expansion of 35
million tonnes under the 12th Five Year Plan
Competitive advantages
High proportion of agricultural land (54.7 per cent or 179.9 million hectares)
Leading producer of jute, pulses; second-largest producer of wheat, paddy, fruits and
vegetables
Policy support
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consumers without the middlemen in the APMCs. Minimising intermediation and the creation
of a national common market are long cherished policy goals of the government.
Tezi mandi or Futures markets
India is known for commodity forward and futures markets that existed
for centuries though standardised, regulated futures trading has a history of over a century
only. Unregulated futures markets are often called Satta Bazar.
Futures markets are auction markets in which participants buy and sell
futures contracts for delivery on a specified future date. Trading used to be carried out
through open outcry- yelling and hand signals- in a trading pits .However, since the early
2000s most of the commodity futures exchanges have migrated to the new technology
platform of online or electronic trading. The commodity futures markets are regulated by the
Forward Markets Commission. Through the Finance Act, 2015, Forward Markets
Commission has been merged with the securities market regulator - SEBI.
Market Imperfections and Prices
India is a huge agri-nation with shortages and surpluses. But a
national common market is a far cry. Further, there is also wide discrepancy in the prices at
various levels. Price heterogeneity could be largely because of information asymmetry
existing in the markets; quite similar to the market for lemons. However, the latent demand
for the commodities ensures that Greshams law does not prevail, and commodities, which
are graded by quality, are sold at all prices. Owing to this, food inflation in India did not quite
follow the peaks and troughs experienced in the global markets. The year 2008-09 was a
watershed year in terms of the volatility in prices that was witnessed in global prices; when
global commodity markets went through a roller-coaster ride, with prices sharply rising
during the first half and having a free fall in the second half and culminating in a recessionary
phase. Although the Indian market was spared the volatility, it became evident in 2010-11 that
price levels of essential commodities had moved on to a higher trajectory.
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is no credit and quality risk resulting in low transaction costs. It was also to integrate the
physical market spatially and temporally by integrating it with the futures market. However,
spot exchanges soon landed up in trouble and the permissions were withdrawn in September
2014.
PARTICIPANTS:
Other than the buyers and sellers the market has traders who
intermediate between the farmer and the wholesale dealer or the mill owners. This
traders are licensed by the mandi to trade in the market. Traders may use brokers to
expand their business.
Traders have to pay mandi fees which are of two types as :
TRADINGS:
Trading in mandies has two stages , one is dealer market where sellers
typically approaches the trader for a price.Once they find a favorable price , it
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consider sold to the trader.The second is an open outcry auction , where the
commodity is sold. The auction process has a fixed time at every mandi, The auction
is run sequentially ,typically growing from 1 lot of commodity with a fixed grade to
the next.
CLEARING:
Trader have to clear to deals with buyers and sellers immediately. At
the time trade is clear with the seller the produce gets inspector for quality. Typically
this is done by traders themselves. If there is a dispute about the quality of the
produce the conflict is resolved by the mandi inspector. At the close of the trading day
traders have to report both prices and volume to the mandi. Since traders pays fee to
the mandi reported traded volume , they may under report traded values. This means a
possibility that volumes are under reporting prices. Since under pricing could have
undesirable effect of keeping the farmer away.
SETTLEMENT
Farmers bring goods to the mandi which they deliver to the trader
to whom they sell. Traders in term have this produce picked-up by buyers. There are
typically no facilities at mandi for long term storage. If there is excess produce than
could be sold on the same day ,the mandi permits the trader to keep goods at the
mandi yards overnight, There are either private or state owned warehouses provide
storage facilities close to mandi at a cost.
GOVERNANCE
The mandies are set-up and monitor by the mandi board,
which is a committee that has representations both by the farmers and traders
communities. There is also a representative from the state government on the mandi
board. The chairman of the mandi board is typically from farmer community. It is the
farmer community that usually originates discussion with the State Agricultural
Management Board (SAMB) to organize a mandi in a new locality. And this
community typically has a large voice in the governance of the mandi. The operation
of the mandi is handed by staff consisting of a secretary, clerk (recording) and at least
one Inspector who is qualify to certify the quality of the produce. The staff are paid
out of the fee collected from farmers and market intermediaries.
REGULATION
At the spot market where settlement takes place are T+0 or T+1
basis, there is a very little scope for problem of regulation. The disputes that arise
about prices and quality of produce are typically handed by mandi Inspector . The
most important regulatory requirement is the reporting of prices and volumes to State
Agricultural Management Board (SAMB). Every district mandi board takes the
responsibility of collecting and dispatching this information to State Agricultural
Management Board (SAMB). The SAMB in turn dispatch it to Ministry of
agriculture where prices are available on internet. The site is www.atmarket.nic.in .
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CONCEPT OF WAREHOUSE
MEANINGS OF A WAREHOUSE
Warehouses are scientific storage structures especially
constructed for the protection of the quantity and quality of stored products.
Warehousing may be defined as the assumption of responsibility for the storage of
goods. It may be called the protector of national wealth, for the produce stored in
warehouses is preserved and protected against rodents, insects and pests, and against
the ill-effect of moisture and dampness. The warehousing scheme in India is an
integrated scheme of scientific storage, rural credit, price stabilization and market
intelligence and is intended to supplement the efforts of co-operative institutions.
CHARACTERSTICS OF AN IDEAL WAREHOUSE
Any warehouse is said to be an ideal warehouse if it possesses certain characteristics
as
Warehouse should be located at a convenient place near highways, railway
station and seaport where goods can be loaded and un-loaded easily.
Mechanical appliances should be there to load and un-load commodities to
reduce the wastages in handling.
Adequate space should be available inside the warehouse.
Warehouse should have cold storage facilities for preserving perishable goods.
Proper arrangement should be there to protect goods from rain, dust, moisture,
sunlight.
Warehouse having latest fire fighting equipments.
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2. Financing: Warehouses meet the financial needs of the person who stores the
product. Nationalized banks advance credit on the security of the warehouse receipt
issued for the stored products to the extent of 75 to 80 per cent of their value.
3. Price Stabilization: Warehouses help in price stabilization of agricultural
commodities by checking the tendency to making post-harvest sales among the farmers.
Farmers or traders can store their products during the post-harvest season, when prices
are low because of the glut in the market. Warehouse helps in staggering the supplies
throughout the year. They thus help in the stabilization of agricultural prices.
4. Market Intelligence: Warehouses also offer the facility of market information to
persons who hold their produce in them. They inform them about the prices prevailing
in the period, and advise them on when to market their products.
This facility helps in preventing distress sales for immediate money needs
or because of lack of proper storage facilities. It gives the producer holding power; he
can wait for the emergence of favourable market conditions and get the best value for
his product.
OTHER FUNCTIONS
PROCESSING :- Certain commodities are not consume in the firm they are
produce. Processing is required to make them consumable. For example paddy
is polished, timber is sizzled and fruits are ripened.
GRADING AND BRANDING :- On requirement warehouse also performs
the function of grading and branding of goods on behalf of manufacturer,
wholesaler or importer. Also provides facilities for mixing and packaging of
goods for convenience handling and sales.
TRANSPORTATION :- In some cases warehouses provide transport
arrangement to bulk depositor. It collects goods from the place of production
and also send goods to the place of delivery.
General overview
Underpinned by initially strengthening industrial activity,1 strong demand from
developing countries and optimistic market sentiment following the European
Central Banks longer-term refinancing operations, the UNCTAD price index2 for
three groups of commodities all food,3 agricultural raw materials, and minerals,
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ores and metals rose in the first quarter of 2012 from their lows in December 2011.
However, prices fell in the second quarter as a result of the economic slowdown in
China, the intensification of the debt crisis in Europe and the appreciation of the
dollar against other currencies. The drop was particularly pronounced for agricultural
raw materials, and minerals, ores and metals.
The third quarter of 2012 witnessed a different price scenario between food and base
metals and ores. The food market was tight, mainly due to supply disruptions caused
by adverse weather in the United States, Australia and the Black Sea region. Surging
maize, wheat and soybean prices put a strain on the food market.
On the other hand, the prices of many important base metals and ores continued their
downward trend in July and August 2012. Copper prices, despite their brief recovery
in July, were significantly lower than a year ago. Metals and ores, key raw materials
for construction and manufacturing, are sensitive to the economic performance of
major consuming countries. The gloomy economic situation dampened the demand
for these commodities. At the same time, the development and expansion of new
projects over the last decade increased the global supply of many minerals and
metals. In some markets such as aluminium, nickel and zinc, supply exceeded
demand, driving down prices further.
To boost the economy, the central banks of the eurozone, the United States and Japan
eased their monetary policies in September. While the full impact of these policies on
economic growth is still unclear, commodity markets responded quickly, with the
prices of gold and key base metals rallying.4
The price of crude oil remained high and volatile during the first 10 months of 2012,
due to divergent factors. The uncertainty of the world economic outlook and
geopolitical risks in the Middle East, in particular, weighed heavily on oil markets.
The economic woes in the eurozone, struggling recovery in the United States and the
economic slowdown in emerging countries weakened the demand for crude oil. The
economic sanctions on oil exports from the Islamic Republic of Iran removed off the
oil market an estimated 0.82 million barrels of crude per day in the third quarter of
2012. This vacuum, however, was filled by the increased outputs from Saudi Arabia,
Libya and Iraq.
29 | P a g e
Just like the stock market, a commodity exchange serves as a marketplace for buyers and
sellers to engage in trading commodities directly. Trading can be done in two ways: cash/spot
and futures. In the former method, the buyer and seller agree upon a common price of the
commodity, and actual physical delivery of that commodity takes place. The latter is
different. Futures contract do not involve spot delivery of commodities; delivery is fixed for a
future date at a price agreed by both the parties.
Just like a stock exchange, a commodity exchange serves as a marketplace for buyers and
sellers to engage in trading commodities directly.
People engage in this kind of trading mainly because each party gets something out of the
deal. Commodity manufacturers/producers want to hedge their produces against fall in price
in the future. On the other hand, commercial consumers want to lock in goods at a favourable
price in order to avoid paying a higher price later. And individual traders wish to benefit from
future movements of commodity prices.
The entire process is done electronically. The producer submits an offer price and the future
delivery date of the commodity on this exchange. The seller, who agrees to pay that price,
enters into a contract with the buyer. Almost all transactions take place in the similar manner,
allowing the actual demand and supply to determine the price.
In India, there are three major national commodities exchanges: National Commodity and
Derivatives Exchange Ltd, Multi Commodity Exchange of India Ltd and National Multi
Commodity Exchange of India Ltd. In addition to these, 18 more domestic commodity
exchanges in India are known to function.
Regulation
Trade-facilitating institutions boost trade by reducing the cost and the uncertainty of entering
into transactions. One of the ways in which they do this is by applying a framework of rules
and procedures to regulate trade, thereby providing individuals or organizations with
increased confidence to engage in mutually beneficial transactions.
30 | P a g e
31 | P a g e
national markets to ensure adequate regulation of transactions that are crossjurisdictional in nature.
The exchange as a self-regulatory organization: the exchanges own personnel and
systems that provide regulatory oversight over exchange operations, including both
the trading and where it is performed in-house the clearing and settlement
functions.
Derivatives In India
Ministry of Finance
SEBI
Ministry of ConsumerAffairs
FMC
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Stock Exchanges
Commodity Exchanges
Financial Derivatives
Futures
Commodity Derivatives
futures
Options
Precious Metal
Agriculture
Other Metals
Energy
33 | P a g e
Standardization
US soybean futures, for example, are of standard grade if they are "GMO or a mixture of
GMO and Non-GMO No. 2 yellow soybeans of Indiana, Ohio and Michigan origin produced
in the U.S.A. (Non-screened, stored in silo)". They are of "deliverable grade" if they are
"GMO or a mixture of GMO and Non-GMO No. 2 yellow soybeans of Iowa, Illinois and
Wisconsin origin produced in the U.S.A. (Non-screened, stored in silo)". Note the distinction
34 | P a g e
between states, and the need to clearly mention their status as GMO (Genetically Modified
Organism) which makes them unacceptable to most organic food buyers.
Similar specifications apply for cotton, orange juice, cocoa, sugar, wheat, corn, barley, pork
bellies, milk, feedstuffs, fruits, vegetables, other grains, other beans, hay, other livestock,
meats, poultry, eggs, or any other commodity which is so traded.
Standardization has also occurred technologically, as the use of the FIX Protocol by
commodities exchanges has allowed trade messages to be sent, received and processed in the
same format as stocks or equities. This process began in 2001 when the Chicago Mercantile
Exchange launched a FIX-compliant interface that was adopted by commodity exchanges
around the world.
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POTATO
POTATO , popularly known as the king of
vegetables and a native of South America, has now become an indispensable part of Indian
cuisine. It ranks 4th among important staple food after wheat, rice and maize.
Potato is rich in carbohydrates,
constituting 22-24% of its weight. It contains 2.1% to 2.7% protein, less than 0.5% of fat and
the rest is water. Being a short duration crop, it produces more quantity of dry matter, edible
energy, and edible protein in lesser duration, compared to cereals like rice and wheat. Hence,
potatoes are useful tool to achieve the nutritional security of the nation.
Potato is a temperate or cool season crop which needs a low temperature, low humidity, less
windy, and bright sunny days. It does well under well-distributed rains or moist weather
situations to high temperatures. Humidity and rains are not conducive to potatoes as these
lead to insect pests and disease attacks
SCENARIO: - India produces around 8% of the worlds total produce. India ranks fourth in
terms of area and third in terms of production of potato across the globe. China and Russia
are ahead of India in terms of potato production. Uttar Pradesh produces the highest quantity
of potatoes for India followed by West Bengal. There has been an increase of 12.5% in the
production of Potato than last year (2010). Uttar Pradesh, the state which houses our basis i.e.
Agra, saw an increase of 22% in their production levels.
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FUTURE PROSPECTSThere has been a constant growth in production of Potato in India in the last 5
years. The productivity level in India is below the world average level. The production of
potato has gone up during the previous years due to better varieties and larger acreage under
potato. There is usually very little quantity left for exports, making Indias share in world
exports insignificant and inconsistent. India exports just around 1-0.5% of the worlds total
potato exports.
ANALYSYS
The overall objective of this short study is to determine the effectiveness of newly
developed commodity exchanges in India as a means of improving smallholder farmer
linkages to markets, particularly formal markets, and the advantages in terms of new
opportunities, more reliable trading relationships and improved incomes, compared with
traditional commodity trading routes. Where possible we compare typical means of
market linkage, whether through individual or farmer organizations, to wholesale markets
and other trading relationships such as fair trade and contracting.
The purpose of the study is to determine whether commodity
exchanges have provided a positive impact on farmer marketing channels, and assisted in
upgrading marketing institutions that support the smallholder community. The target
commodities for the study are coffee, maize and beans. All sophisticated market systems
in developed countries, such as commodity exchanges, were established by the users of
the market. They were not established and funded by outside organizations.
CHANA
Chana belongs to leguminasae family and there are two main types - Desi and Kabuli.
Desi chickpeas is the main type grown in India
India's chana production fluctuates between 4-7 million tons and is normally 40% of
India's total pulse production of 12-15 million tons India's chana production in 200304, chana production is 5.33 million tons out of a total pulse production of 15.23
million tons.
The major producing states are Madhya Pradesh (1.5-2.5 million tons, Uttar Pradesh
(0.7-0.85 million tons), Rajasthan (0.5-2.5 million tons) and Maharashtra (0.5-0.7
million tons).
Chana is a rabi crop and is sown from November to December and harvested from
Feb to March. The peak arrival period begins from March-April at the major trading
centres of the country.
India accounts for 2/3rd of the world's chickpea production. India imports around 3-4
lakh tons of chickpeas annually. The major countries from where India imports
37 | P a g e
Chana can withstand moisture stress to a certain extent. However, the production
highly fluctuates between years, depending on the rains received and the moisture
availability in the soil.
The sentiments of traders play a significant role currently, as a consequence of the
lack of free-flow of information.
Stocks present with stockists and the stocks-to-consumption ratio.
Imports and the crop situation in the countries from where imports originate, viz.,
Canada, Australia, Myanmar.
There is high substitutability between pulses in India among the consumers. So the
price of other major pulses like tur, yellow peas, green peas etc also influences the
prices of chana.
Wheat
General Characteristics
Wheat is one of the world's three most important cereal crops along with maize and
rice. It is reported to be grown domestically from atleast as early as 9000 BC and is
now grown in almost all parts of the world.
Wheat is a globally important source of dietary carbohydrate (starch) and protein
(gluten). Its grain is a staple food used to make flour for leavened, flat and steamed
breads, biscuits, cookies, cakes, breakfast cereal, pasta, noodles etc and for
fermentation to make beer, alcohol, vodka, or biofuel. It is also used for feeding
animals to a limited extent.
Different varieties of wheat are grown across the world. The three principal types of
38 | P a g e
wheat used in modern food production are: Triticum vulgare (soft wheat), Triticum
durum (hard wheat) and Triticum compactum
Global Scenario
The annual global wheat production has been in the range of 600-630 tonnes in the
recent years. However, in 2008-09 it is estimated to have risen sharply to 689 million
tonnes. The combined production of all cereals in 2008-09 is estimated to be 2525
million tonnes.
EU-27, China, India, USA and Russia are the five major producers of wheat
accounting for close to 70% of the total global production, with 2008-09 production in
these regions being 151, 112.5, 78.6, 68 and 63.8 million tonnes respectively.
Wheat is the most important cereal traded in the world market. The global trade in
wheat during 2008-09 was sharply up at around 140 million tonnes in 2008-09 from
an average of around 110 - 115 million tonnes in the recent previous years.
While US (25 - 35 million tonnes), EU-27 (15-25 million tonnes), Canada (15-20
million tonnes), Australia (8-18 million tonnes) and Argentina (6 - 12 million tonnes)
are major exporters, there are a large number of countries importing wheat with
maximum demand emanating from developing nations. The major importing regions
are Middle-east Asia, South-east Asia and North-west Africa. Egypt, Brazil,
Indonesia, Algeria are the most important importing nations.
Wheat crops around the world have their own unique production cycles of planting
and harvest timeframes.
Indian Scenario
India has the largest area in the world under wheat cultivation. However, due to low
productivity it is only the third largest producer after EU-27 and China.
India's annual production of wheat has been around 75-79 million tonnes from 200607, with production in 2008-09 estimated to be around 78.6 million tonnes. Wheat
accounts for around 30-35% of India's total foodgrain production of around 220
million tonnes. India's annual wheat consumption is estimated to be around 72 million
tonnes currently.
Green revolution and increased focus by Government on wheat has helped wheat
39 | P a g e
Uttar Pradesh (34%), Punjab (20%), Haryana (13%), Rajasthan (10%) and Madhya
Pradesh (10%) are the main wheat producing states of India.
Wheat is cultivated as a rabi crop in India, with sowing being undertaken from
October to December and harvesting from March to May. The official marketing
season of wheat in India is assumed to commence from April.
Government plays a major role in the wheat value chain in India as the cereal is very
important for the country's food security. The Central Govt. sets the Minimum
Support Price (MSP) every year, which sets the mood for the upcoming season. As
govt. agencies have been recently procuring close to 25-30% of annual production,
open market prices too do not generally fall below this price. Historically, the
procurement has been around 15-20%.
The procured wheat is used to maintain a minimum buffer stock for meeting
unforeseen exigencies, for providing foodgrains required for Public Distribution
System (PDS) and the other foodgrain based welfare programmes of the Government.
In addition, the grain is also sold at pre-determined prices to the open market.
Though, India is not a major player in global markets India has resorted to imports,
whenever there is a supply tightness. India has also exported around 5 million tonnes
of wheat in 2003-04. Govt. agencies take the decision to bring in imports and the
current policies are not in favour of exports.
Wheat is an annual, seasonal crop and prices usually tend to rise during the cultivation
period, i.e. December to March due to scarcity in the market and dip during the peak
arrival period (April and May).
The Govt. policies with regard to MSP, buffer stocks, PDS sales, Open Market Sales,
imports / exports are very important influencing factor with regards to Indian wheat
prices.
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SOYA BEAN
General Characteristics
Soybean is an important global crop and processed soybean is the largest source
of protein feed and second largest source of vegetable oil in the world.
The major portion of the global and domestic crop is solvent-extracted with
hexane to yield soy oil and obtain soymeal, which is widely used in the animal
feed industry. It is estimated that above 85% of the output is crushed worldwide.
Though, a very small proportion of the crop is consumed directly by humans,
soybean products appear in a large variety of processed foods.
The cultivation of soybean is successful in climates with hot summers, with
temperatures between 20C to 30C being optimum. Temperatures below 20C
and over 40C are found to retard growth significantly.
It can grow in a wide range of soils, with optimum growth in moist alluvial soils
with a good organic content.
Modern soybean varieties generally reach a height of around 1 m (3 ft), and take
80-120 days from sowing to harvesting.
Global Scenario
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The annual global soybean production has been in the range of 210-230 million
tonnes in the recent years, accounting for 55-58% of total global oilseed output of
around 390-400 million tonnes.
US, Brazil, Argentina, China and India are the major producers in order of
production with production in these countries ranging around 70-80, 55-60, 3248, 14-16 and 8-10 million tonnes in the recent couple of years.
Weather, acreage under other competitive crops like corn, cotton and pests &
diseases are the major factors influencing production.
While in US, India and China crop starts arriving from Aug-Sept, it starts from
Jan-Feb in S. America.
The annual global trade in soybean is estimated to be around 70-80 million
tonnes.
While, USA (30 -35 million tonnes), Brazil (23-28 million tonnes), Argentina (515 million tonnes) are the exporters of beans, China (35-40 million tonnes) and
EU (12-16 million tonnes) are the major importers.
In addition to soybean, soy oil and soymeal are also widely traded globally with
annual trade of around 9 million tonnes and 52 million tonnes respectively.
While, US is the largest exporters for soybeans, Argentina is the largest exporter
of soy oil and soy meal globally.
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India
% Share
230
Soybean Trade
75
35
1.5
11
150
52
3.5
52
Indian Scenario
India's annual production of soybean has been around 8.5-10 million tonnes in
the recent years with India's production in 2009-10 estimated to be around 8.9
million tonnes by the Government of India.
The acreage under this crop has more than doubled in the past two decades to
around 11 million hectares currently being sown under this crop, with better
returns encouraging more farmers to adopt this new crop.
Madhya Pradesh, Maharashtra, Rajasthan and Andhra Pradesh are the major
cultivators of this important oilseed, with their respective contributions usually
around 60%, 25%, 6-7% and 1-2%.
Soybean is exclusively grown in the khariff season in India, with sowing taking
place after the first monsoon showers in late June or early July. Sowing can
extend upto end of July in different parts of the country.
The harvesting commences from September, with Maharashtra reporting the
earliest arrivals. October and November are the peak arrival months, with allIndia arrivals crossing 10 lakh bags of approximately 90 kg on the peak arrival
days.
The production is dependent on the monsoon and fluctuates between years.
India is highly dependent on imports to meet domestic edible oil requirement.
Government policies are in favour of developing the domestic crushing industry
and supporting Indian farmers and do not promote import or export of soybean.
Thus, there is virtually no import or export of soybeans.
However, India out of its total soymeal production of around 6.5-7 million
tonnes, exports around 3.5 million tonnes with Vietnam, Japan, Thailand,
43 | P a g e
Domestic prices are highly influenced by the global price movements, with prices
highly correlated with the CME prices.
Fundamentally, weather at all producing centers, domestic and international is the
most crucial factor, with the pod bearing period, being the most crucial.
United States Department of Agriculture makes progressive assessment of crops,
stocks, global supply and demand and releases regular reports, which are widely
looked upon by the global market to determine prices.
The other major influencing factor is the prices of soy oil and soymeal, which are
in-turn dependent on the fundamentals of global edible oil and global animal feed
industry.
Locally, prices are influenced by currency fluctuations, weather, acreage, pest &
diseases, production estimates by industry associations, Government agencies.
India imports more than 60% of its entire edible oil requirement and the entire
edible oilseed and oil sector is a highly sensitive sector. Thus, new Government
policies and apprehensions about new policies have a strong sway over prices,
during periods when new announcements are made or are about to be made.
The supply-demand and price scenario of competitive oils, viz., palmoil.
The crush margin between meal, oil and seed
ALMOND
General Characteristics
Almonds, though considered to be nuts are technically the seed of the fruit of the
almond tree, which is a medium-sized tree that bears fragrant pink and white
44 | P a g e
flowers. The fruit, botanically referred to as a drupe has an outer hull and a hard
shell with the seed inside.
Almonds are commonly sold shelled. Shelling almonds refers to removing the
shell to reveal the seed. Almonds with their shells attached are called unshelled
almonds. Blanched almonds are shelled almonds that have been treated with hot
water to soften the seedcoat, which is then removed to reveal the white embryo.
Sweet almonds and Bitter almonds are two forms of almonds, of which sweet
almond is the variety, which is consumed directly or indirectly by humans as a
food product. Bitter almond is slightly shorter and broader than sweet almonds
and are mainly used for extracting almond oil and not consumed as food, as it is
poisonous.
Chocolate confectionary, bakery and snacking are the three major global
categories for almond usage.
Global Scenario
The annual global Sweet almond production on shelled-basis has been in the
range of 7 - 8.5 lakh tonnes in the recent years. Record crops and a steady
increase in production were seen from 2005-06 to 2008-09 (Almond crop year is
from August to July). However, the output in 2009-10 is forecasted to dip on
account of unfavourable climatic conditions.
United States of America is the single largest producer, consumer and exporter of
Sweet almonds, with the country contributing to over 80% of the global almond
production.
The state of California in US is the most important producer of Sweet almonds,
as this region is reported to be accounting for 99% of the American production.
Nonpareil is the single largest variety planted in California. Its production is
reported to be 38% of the total output, followed by Carmel (12%), Monterey
(10%), Butte/Padre (9%) and Butte (8%).
The world's largest almond handler is the Blue Diamond Growers Cooperative,
which is located in Sacramento, California. Blue Diamond is owned by over twothirds of California growers and markets one-third of California's crop.
The other producing countries are Australia, Turkey, Chile, European Union,
China and India with a production of 26,000 tonnes, 16,000, 9500, 79,800, 1,500
and 1,200 tonnes on a shelled basis in 2008-09. Spain is the single largest
producer in the European Union.
The annual trade in almonds has been around 4.6 lakh tonnes (on shelled basis)
in the recent years. The major exporters are US, Australia and Chile with exports
of 4,40,000 tonnes, 12,300 tonnes and 6,700 tonnes (on shelled basis) in 2008-09.
European Union, India, Japan, Canada and Turkey are the major importers with
imports of 2,00,000 tonnes, 45,000 tonnes, 21,000 tonnes, 19,000 tonnes and
14,000 tonnes in 2008-09.
While, the peak harvesting period of the Californian crop starts from mid-August
and extends till September that of Australian crop occurs between February and
45 | P a g e
April.
Indian Scenario
The ever-expanding middle class and increase in health awareness, has lead the
growing consumption of almond in the country in recent years. The annual rate
of increase in India's domestic consumption of almonds is reported to be around
20%.
More than 95% of almonds consumed by Indians is imported with more than
80% of imports being sourced from California. The other major country from
which India imports almonds is Australia. While, Indian imports in 2008-09 is
reported to be above 45,000 tonnes, the imports in 2009-10 are expected to rise to
50,000 tonnes.
India has to resort to imports to meet almost its entire requirements as domestic
production of sweet almonds is only around 1,200 tonnes. The other almond trees
present in the country are of non-descript variety and mostly produce bitter
almonds.
India imports almonds with shells and processes it domestically to obtain shelled
almonds, unlike almost all other importing nations, which import shelled
almonds. This is due to availability of cheap labour and better appearance and
lesser losses in manual shelling of almonds as against mechanized shelling.
Most of the manual shelling of almonds in India is undertaken at Bombay and
New Delhi, from where the shelled almonds are transported to other consumption
centres.
The Indian festival season extending from September to December is the peak
consumption period for almonds, with maximum demand witnessed in
November. Thus heavy imports of new Californian almonds are seen from
September to meet the strong domestic demand during the festival season.
Imports from Australia pick up during April and May after the harvesting season
in that country.
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special focus kept on forecasts by US agencies, weather, pest attacks etc. The
United States Department of Agriculture and the California Almond Board makes
progressive assessment of crops, stocks, global supply and demand and releases
regular reports, which are widely looked upon by the global market to determine
prices.
Domestically, stock present with traders and the cost at which it has been
acquired is the most important price influencing factor.
The major importers and traders of almond in India are well aware of the
fundamentals of the domestic market requirements and are usually well-stocked
to meet the annual festival demand.
Meanwhile, as almond is not considered as an essential commodity and there is
no local farming community producing this crop, policy intervention in this
commodity is very minimal.
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4. Traditional system of price stability through MSP mechanism has increased Governments
food-subsidy burden and is, therefore, unviable. Hence, it is also necessary to consider very
seriously alternative mechanisms of risk management. One of these is the idea of extending
insurance to cover not only the risks of crop failure and yield loss but also losses stemming
from unforeseen price fluctuations. Futures trading in grains can significantly reduce the risks
of price fluctuations. Futures trading lead to more efficient price discovery by allowing more
agents with relevant information to participate in price formation than would be possible if all
these agents had to bear the fixed costs of physical trading. Secondly, since risks in physical
trading can be reduced through hedge options, existence of futures markets can reduce costs
of insuring against price risks and encourage more trade in spot physicals.
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Price volatility breeds risk, and vulnerability to risk is recognized as one of four
dimensions that constitute poverty. When farmers receive prices that are unstable and
uncertain, they run price risks from the moment that they decide to plant a crop and
every time that they buy and apply inputs such as fertilizers or pesticides, or use paid
labor. They never know whether the price that they receive at the end will cover their
costs and be worth their efforts. Such risks can deter farmers from making important
investments in upgrading their productive activities, and can instead lock them into a
vicious cycle of low productivity and low returns. Thus, price volatility creates and
sustains rural poverty.
The usage of commodity-linked instruments to hedge commodity price risk can bring
greater certainty over the planting cycle, allowing those active in the commodity sector to
commit to investments that yield longer-term gains, and increasing the viability of planting
higher-risk but higher-revenue crops. Even in the face of a long-term decline in the prices
of their commodity, the ability to hedge against shorter-term price movements provides
farmers with a window in which to adjust cropping patterns and diversify their risk profile.
3. Venue for investment: Commodity futures exchanges also offer a number of wider benefits as an
institutional venue for investment. Firstly, the exchange clearing house acts as a
counterparty to all trades, reducing the risk of counterparty default and providing
a more secure and reliable investment environment. Secondly, the exchanges
rules, regulations and governance procedures, coupled with those of its regulators
and intermediary bodies, provide an orderly rule-based framework within which
investment practices can be enhanced and disputes can be arbitrated. Thirdly, the
speculative interest that it generates is usually necessary to provide the liquidity
required for hedging to be effective.
However, the role of speculative participation in commodity futures markets is
heavily contested. In some situations, speculation may be considered by
Government or society to be a wasteful or morally undesirable activity.
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The orthodox theory argues that futures markets evolve after the development of a
well-ordered cash market. However, recent experience suggests that in certain circumstances,
the introduction of a commodity futures market can stimulate the development of the cash
markets. Central to this experience has been the notion of the exchange as an island of
excellence, extending the high levels of performance in its core trading functions to the
physical commodity markets that it serves.
Impacts on farmer
Improved price from intermediaries received by farmers because availability of
neutral & authoritative reference price.
Reduces need for distress sales.
Access to more distant markets through logistics.
Facilitates new sources of commodity finance.
Increases crops suitability to end user requirements.
5. Facilitation of financing to the agricultural sector:Lack of access to affordable sources of finance is a significant constraint faced
by many entities in the developing world. Financiers often consider agriculture to be a
particularly high-risk and low-profit proposition for standard modes of bank lending. This
means that farmers and other entities in agricultural sectors typically pay high rates of interest
for borrowing, through both formal and informal channels. Alternatively, they may abstain
from borrowing altogether, and become locked into a cycle of low investment and low
returns. However, forms of commodity finance have been developed that can reduce
financiers risks and costs of delivery, by linking traditional financial tools with commodity
exchange services. The lower risks and lower costs that ensue can enable banks to reduce
accordingly the rates of interest charged to the borrower.
Impacts on farmer
Increases farmers access to finance.
Reduces costs of borrowing by reducing risks to borrower & lender.
Provides working capital to cover important expenses and avoid distress sales.
Ultimately enables greater capital for investment Financing becomes more organized
and predictable.
Cash and carry arbitrage provides an alternative cheap source of financing.
Income stabilization for farmers
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adverse changes in both input and output prices (GOI, 2007b: 6). These risks are
exacerbated by deficiencies in infrastructure and market formation, information
asymmetries, and the lack of livelihood resilience that results from a situation of
poverty and its root causes (these include access to health, education, social security,
land and capital).
Price risk, associated with commodity-price volatility that creates uncertainty about
the level of return on investment and assets;
Market risk, associated with uncertainty about whether a purchaser can be found for
farmers produce;
Credit risk, associated with uncertainty about securing funds to cover working capital
during the course of the season and investment for next years crop;
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CURRENT STATUS:o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
53 | P a g e
FORWARD CONTRACTS
A forward contract is an agreement between two parties to exchange at some fixed future
date a given quantity of a commodity for a price defined when the contract is finalized. The
fixed price is known as the forward price. Such forward contracts began as a way of reducing
pricing risk in food and agricultural product markets, because farmers knew what price they
would receive for their output.
Forward contracts for example, were used for rice in seventeenth century Japan.
FUTURES CONTRACT
Futures contracts are standardized forward contracts that are transacted through an exchange.
In futures contracts the buyer and the seller stipulate product, grade, quantity and location and
leaving price as the only variable.
Agricultural futures contracts are the oldest, in use in the United States for more than 170
years. Modern futures agreements, began in Chicago in the 1840s, with the appearance of the
railroads. Chicago, centrally located, emerged as the hub between Midwestern farmers and
east coast consumer population centers.
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SWAPS
A Swaps is a derivative in which counterparties exchange the cash flows of one party's
financial instrument for those of the other party's financial instrument. They were introduced
in the 1970s.
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as investment companies under the Investment Company Act of 1940 in the United States,
although their public offering is subject to SEC review and they need an SEC no-action
letter under the Securities Exchange Act of 1934. They may, however, be subject to
regulation by the Commodity Futures Trading Commission.
The earliest commodity ETFs, such as SPDR Gold
Shares. NYSE Arca: GLD and iShares Silver Trust NYSE Arca: SLV, actually owned the
physical
commodity
(e.g.,
gold
and
silver
bars).
Similar
to
these
are NYSE Arca: PALL (palladium) and NYSE Arca: PPLT (platinum). However, most ETCs
implement a futures trading strategy, which may produce quite different results from owning
the commodity.
Commodity ETFs trade provide exposure to an increasing range of
commodities and commodity indices, including energy, metals, softs and agriculture. Many
commodity funds, such as oil roll so-called front-month futures contracts from month to
month. This provides exposure to the commodity, but subjects the investor to risks involved
in different prices along the term structure, such as a high cost to roll.
ETCs in China and India gained in importance due to those
countries' emergence as commodities consumers and producers. China accounted for more
than 60% of exchange-traded commodities in 2009, up from 40% the previous year. The
global volume of ETCs increased by a 20% in 2010, and 50% since 2008, to around 2.5
billion million contracts
Over-the-counter (OTC) commodities derivatives
Over-the-counter (OTC) commodities derivatives trading originally
involved two parties, without an exchange. Exchange trading offers greater transparency and
regulatory protections. In an OTC trade, the price is not generally made public. OTC are
higher risk but may also lead to higher profits.
Between 2007 and 2010, global physical exports of
commodities fell by 2%, while the outstanding value of OTC commodities derivatives
declined by two-thirds as investors reduced risk following a five-fold increase in the previous
three years.
Money under management more than doubled between
2008 and 2010 to nearly $380 billion. Inflows into the sector totaled over $60 billion in 2010,
the second highest year on record, down from $72bn the previous year. The bulk of funds
went into precious metals and energy products. The growth in prices of many commodities in
2010 contributed to the increase in the value of commodities funds under management.
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At the time of sowing the farmer has three basic potential strategies:
Strategy 1: Do nothing with the hope of a spot price increase. This position is usually called
speculative.
Strategy 2: Hedge future production by selling futures contract at for a volume equivalent to
the expected crop. The farmer is covering the market price risk and fixing his financial
margin.
Strategy 3: Buy a put option at-the-money, meaning the right to sell for a premium.
Two possibilities may occur after the farmers decision during sowing: the market
price can increase or decrease during the production cycle. As expected, the
speculative strategy (Strategy 1) has the highest result variability, with very high and
very low results with respect to market behaviour. With no basis risk, the hedging
with futures contract (Strategy 2) offers as final payment the value of the target price
in both cases. Finally, the purchase of a put option (Strategy 3) is a good second
best strategy, bringing financial results very close to the best results of any of the
above cases. This example presents the basic interest of futures contract as well as
options. Combinations of strategies are required. Risk diversification comes from the
positive correlation between futures and spot prices as well as asymmetric risk
outcomes of options.
This hedging activity should be managed as a dynamic position. The question is when
to sell futures contract. Should the farmer sell the entire expected crop quantity when
planting seeds? Should he choose a time between sowing and harvest? In fact, the
farmer must diversify the hedging times in order to really diversify price risk and
manage yield risk. A satisfactory hedging programme could be utilizing futures
market at various stages of crop production and spreading the risk over the duration of
the crop.
Optimal hedging has been studied extensively by academics, first in the
seventies/early eighties using purely futures contracts and then in the late
eighties/nineties using option contracts. The models are increasingly complex but are
all based on price correlation between the futures and the local spot prices. They give
important information on the quantity to be hedged with respect to both the cash
position and the correlation coefficient between the futures and the spot prices.
Practical analysis also gives useful information on the diversification potential of
futures markets. This is called hedging effectiveness computed as the reduction in
variance that results from maintaining a hedged position rather than an unhedged
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position. All these types of practical computations are bridging the gap between
theoretical analysis of risk management and practical use of futures markets.
Most strategies that farmers can use to reduce income risk are likely to increase
their production cost or might not be sufficient in the case of natural catastrophes. Such
market failures have been used to justify government intervention in risk management in
agriculture.
Risk in agriculture is often considered as having specific characteristics that explain
the more frequent government intervention in risk management than in other sectors.
Specifically, the relationship with nature, in particular the dependence on climate and
biological processes, makes risk more difficult to control than with mechanical
processes. Inelasticity of both demand and supply also contribute to fluctuations in
agricultural commodity prices. In consequence, variability in agricultural prices is
often higher than that in other products and annual income from agricultural activities
can vary to a large extent in the absence of offsetting policy interventions. However,
futures markets help to reduce price volatility but do not prevent longer- term price
downturns.
When government intervention in risk management involves elements of support, as
has often been the case in OECD countries, farm families have no incentive to adopt
risk strategies at the production and consumption level, or to use market-based
approaches. This in turn hampers the development of market, risk-shifting solutions.
In addition, reducing risk faced by farmers may encourage them to take production
decisions that are not sustainable. Hence, it is argued that some degree of instability
can be good as it encourages technical progress and innovation in marketing. Various
underlying elements contribute to increasing the costs of intervention and lower its
efficiency. Appreciating these concerns, some governments have tried to encourage
farmers to use futures markets. It is established widely that futures markets, where
they exist, help to reduce price fluctuations within a given year. Recognizing this,
governments first contribution could be to provide information on prices and
contracts, and training programmes to farmers on how to use futures markets. In some
cases, governments have acted as intermediaries between farmers and futures
exchanges, with or without subsidy.
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FINDINGS
The important findings of the study & the conclusion drawn these from are
presented below.
Really commodity exchanges play a vital role for the growth of the agricultural sector
Because agriculture provides 1/6th to GDP & employs largest no of labour force
around the country
Commodity exchanges provide a basic future mechanisms which helps the hedgers,
producers, processors to minimise the risk.
The commodity exchanges are now trying to establish a direct interaction platform
with the farmers
The most important facility which provided by the commodity exchanges are saving
the farmers from unexpected future price fluctuation, moreover only for the
betterment of the agriculture sector & provides various mechanisms like,
Price discovery
Price risk management
Venue for investment
Facilitation of physical commodity trade
Facilitation of financing to the agricultural sector
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The FMC has to take some steps to increase the awareness of future
commodity trading India.
The FMC has to encourage the mutual fund companies and institutional investors to
invest in commodity market in India.
The government has to allow FIIs to invest in commodity market in India in future
market not in option.
The FMC should have concrete plan to stop Dabba trading in commodity market in
India.
The FMC should increase the range of commodities in future commodities in
commodity market in India.
To motivate the commodity business in India the FMC should come up with some
rebate in taxes.
The FMC should increase the delivery centres of commodities in India.
As commodity market is very potential for business, the angel co. should think about
various ways to attract the customers.
Trading Members: These members execute buy and sell orders in the trading ring
of the exchange on their account, on account of ordinary members and other clients.
Trading-cum-Clearing Members: They have the right to trade and also to
participate in clearing and settlement in respect of transactions carried out on their account
and on account of their clients.
Institutional Clearing Members: They have the right to participate in clearing and
settlement on behalf of other members but do not have the trading rights.
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institutes, extension agencies, financial and microfinance institutions, and civil society
organization
CONCLUSION
Last but not the least what I found personally from the above study want to conclude that,
India is the second largest populated and first agriculture oriented country whose more than
70 percentage of the population are depending upon agriculture. As far as the study
concerned India have developed from both technologically as well as infrastructurally.
Nationalised commodity Exchanges like MCX, NCDEX, UCE, ACE, ICEX AND
NMCE, with the developed features like robust technology & scalable infrastructure, the
exchanges have added International 1st records to their history, but the most important thing is
the proper communication and networking with the grass root level farmers, which can only
be possible if Regional Commodity Exchanges actively participate in competition.
In most of the states the farmers are least aware of the commodity exchanges and other
mechanisms. Basically the farmers of the Drought and flood affected states face a huge loss,
which ultimately enhance the dearth of commodities and creates inflation.
Therefore, the most important ingredient about the commodity exchanges is
establishing a two way communication with the small holder farmers of the country. Which
will facilitate the following:
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