Commodity Exchange to Stabilize Volatility of Prices of Ago – Products. Speaker: Mr. Wali-ul-Maroof Matin

1. Commodity Exchange
to stabilize volatility of agro-product
Wali-ul-Maroof Matin
Member, CARES

2. Philosophy first
Philosophy first
• Capitalism or Market Economy
• Laissez Faire vs Regulated
Competition
• Price Fixation vs Price Discovery
Committee of Action for Research, extension and Services, July 2012

3. Define Commodity and
Commodity Exchange
• A Commodity is a product which has a commercial value. It
can be produced, bought, sold and consumed.
• A commodities exchange is an exchange, just like any Stock
Exchange where various commodities and derivatives
products are traded. Most Commodity Exchanges across the
world trade in agricultural products and other raw materials
• To be traded on an Exchange must meet certain
specification regarding self life, quality standard, demand
and supply and some more.
Committee of Action for Research, Extension and Services, July 2012

4. Time dimension of markets
Committee of Action for Research, Extension and Services, July 2012

5. History:
History:
market isnatural development
market is a a natural
development
• First organized futures market Osaka Rice
Exchange – 1730
• First organized futures trading in US, Chicago
Board of Trade – 1848
• Standardized Futures Contract in US – 1865
• The Chicago Butter and Egg Exchange – 1898.
This Exchange evolved into Chicago
Mercantile Exchange in 1919. The number
one now.
Committee of Action for Research, extension and Services, July 2012

6. Some important
Commodity Futures Exchanges
Exchange Main Products
Chicago Board of Trade (CBOT) Wheat, Corn, Soybean, Soy Oil, Mini Gold,
Mini Silver, Live Cattle, Pork Belly, Ethanol
New York Board of Trade (NYBOT) Sugar, Cotton, Coffee, Cocoa, Orange
Juice, Ethanol
New York Mercantile Exchange (NYMEX) Light Sweet Crude Oil, Gasoline, Heating
Oil, Gold, Silver, Platinum, Palladium,
Copper, Electricity
Intercontinental Exchange Brent crude, light sweet crude, gasoline,
Natural Gas, Coal, Electricity
Bursa Malaysia Berhard Crude Palm Oil, RBD palmolein
Dubai Gold & Commodity Exchange Gold, Silver, Steel, Freight rates, Cotton
(DGCEX)
Multi Commodity Exchange, India Gold, Silver, Energy, Agricultural Products
Committee of Action for Research, Extension and Services, July 2012

7. Trading in Commodity Futures is
almost similar to trading in stocks
• Trading in Commodities and that in stocks
both require you to research the stock or
commodity that you plan to trade in and in
both cases you need to have the capital to
invest.
• In both cases, the Exchanges help to mitigate
risks of trading as they stand as surety for the
trades that take place via their Systems
Committee of Action for Research, Extension and Services, July 2012

8. The Ecosystem
Logistics Companies
USERS SUPPORT AGENCIES
Storage & Transport Requirements
Quality Certification Requirements
Farmers & Farmer
Cooperatives Public
(Hedgers) Testing & Certifying
Companies Warehouses
Investors Spot Markets Private Sector
(Speculators)
Warehousing
info
Companies
Traders Commodity Exchange
(Arbitrageurs)
Warehouse Receipt System
Commodity Information
Lending Agencies
Committee of Action for Research, extension and Services, July 2012

9. Benefits of Commodity Futures
trading
• Balanced investment portfolio management
• Transparent and fair price discovery
• Platform for risk management
• Helps to improve cropping patterns
• Assures hedgers fixed prices
• Inventory management
• Replace minimum support prices as a mean of
hedging
• Means of implementing food security
• Security against default
• Standardization of commodities
Committee of Action for Research, extension and Services, July 2012

10. Inverse relation between
commodity and stock prices
• Raw material form a key element. The
increase in raw material cost increases
overall input costs and weights down the
earning for most companies. This adversely
impacts the share price of the company.
Steel
Construction
Committee of Action for Research, Extension and Services, July 2012

11. Players in Commodity
Exchange
Committee of Action for Research, Extension and Services, July 2012

12. Farmers’ risks
• Production risk
– Adverse weather
– Pest
• Price Risk
– Domestic Demand Shock
– Too much of production
– Manipulation by middlemen
Committee of Action for Research, extension and Services, July 2012

13. Price & Sowing Decisions
Committee of Action for Research, extension and Services, July 2012

14. Trading and Settlement
6 6
SELLER Bank 1 Bank 2 BUYER
1 1
2 2
5 5
EXCHANGE
3
3 Matching Engine
4
Unmatched orders pending in the
system
Committee of Action for Research, extension and Services, July 2012

15. Delivery Mechanism
2 5
SELLER Warehouse BUYER
1 5
5
4
4
3 EXCHANGE 3
Intent 3 Matching for delivery 3 Willingness
Default X% on due date rate
6
7
7
Unmatched orders pending in the
system
Open short and long positions not
marked for delivery will be settled at
the due date rate
Committee of Action for Research, extension and Services, July 2012

16. SEC’s ( Regulator) roles:
 Approve, and regulate Exchanges
 Oversee the risk management
 Promote the business as whole
 Bring manipulation attempts to justice
Committee of Action for Research, Extension and Services, July 2012

17. Committee of Action for Research, Extension and Services, July 2012

18. Thanks for your patience
Committee of Action for Research, extension and Services, July 2012