Project Report

INVESTORS PERCEPTION REGARDING
INDIAN COMMODITY MARKET

A. INTRODUCTION

Page 1

1. INTRODUCTION
“Organized futures markets in India are now 134 years old, with the first such organization –
the Bombay Cotton Trade Association Ltd. – been set up in 1875. While India was gradually
becoming the largest consumer of gold in the world, a position it still enjoys, futures
markets in bullion were inevitable and began to emerge in Mumbai in 1920.”

The vast geographical extent of India and her huge population is aptly complemented by the
size of her market. 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. The cost of goods is estimated in terms of domestic currency. India Commodity
Market can be subdivided into the following two categories:

 WHOLESALE MARKET

 RETAIL MARKET

Considering the present growth rate, the total valuation of the Indian Retail Market is
estimated to cross Rs. 10,000 billion by the year 2010. Demand for commodities is likely to
become four times by 2010 than what it was in 2009.

1.1: Market:

A market is conventionally defined as a place where buyers and sellers meet to exchange
goods or services for a consideration. This consideration is usually money. In an Information
Technology-enabled environment, buyers and sellers from different locations can transact
business in an electronic marketplace. Hence the physical marketplace is not necessary for
the exchange of goods or services for a consideration. Electronic trading and settlement of
transactions has created a revolution in global financial and commodity markets.

Page 2

1.2: Commodity:

A commodity is a product that has commercial value, which can be produced, bought, sold,
and consumed. Commodities are basically the products of the primary sector of an
economy. The primary sector of an economy is concerned
with agriculture and extraction of raw materials such as metals, energy (crude oil, natural
gas), etc., which serve as basic inputs for the secondary sector of the economy.

1.3: Commodity Exchange:

A commodity exchange is an association or a company or any other body corporate
organizing futures trading in commodities for which license has been granted by regulating
authority.

Page 3

1.4: International Commodity Markets:

Some of the exchanges of the world are:

S. No. Global Commodity Exchanges

1 New York Mercantile Exchange (NYMEX)

2 London Metal Exchange (LME)

3 Chicago Board of Trade (CBOT)

4 New York Board of Trade (NYBOT)

5 Kansas Board of Trade

6 Winnipeg Commodity Exchange, Manitoba

7 Dalian Commodity Exchange, China

8 Bursa Malaysia Derivatives exchange

9 Singapore Commodity Exchange (SICOM)

10 Chicago Mercantile Exchange (CME), US

11 London Metal Exchange

12 Tokyo Commodity Exchange (TOCOM)

13 Shanghai Futures Exchange

14 Sydney Futures Exchange

15 London International Financial Futures and Options Exchange (LIFFE)

16 Dubai Gold & Commodity Exchange (DGCX)

Dubai Mercantile Exchange (DME), (joint venture between Dubai holding and
17
the New York Mercantile Exchange (NYMEX))

Page 4

2: INDIA AND COMMODITY MARKET

2.1: History of Commodity Market in India

The history of organized commodity derivatives in India goes back to the nineteenth century
when Cotton Trade Association started futures trading in 1875, about a decade after they
started in Chicago. Over the time derivatives market developed in several commodities in
India. Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute
and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920).
However many feared that derivatives fuelled unnecessary speculation and were
detrimental to the healthy functioning of the market for the underlying commodities,
resulting in to banning of commodity options trading and cash settlement of commodities
futures after independence in 1952. The parliament passed the Forward Contracts
(Regulation) Act, 1952, which regulated contracts in Commodities all over the India. The act
prohibited options trading in Goods along with cash settlement of forward trades, rendering
a crushing blow to the commodity derivatives market. Under the act only those
associations/exchanges, which are granted reorganization from the Government, are
allowed to organize forward trading in regulated commodities.

The act envisages three tire regulations:
Exchange which organizes forward trading in commodities can regulate trading on
day-to-day basis;

Forward Markets Commission provides regulatory oversight under the powers
delegated to it by the central Government.

The Central Government- Department of Consumer Affairs, Ministry of Consumer
Affairs, Food and Public Distribution- is the ultimate regulatory authority.

Page 5

After Liberalization and Globalization in 1990, the Government set up a committee (1993) to
examine the role of futures trading. The Committee (headed by Prof. K.N. Kabra)
recommended allowing futures trading in 17 commodity groups. It also recommended
strengthening Forward Markets Commission, and certain amendments to Forward Contracts
(Regulation) Act 1952, particularly allowing option trading in goods and registration of
brokers with Forward Markets Commission. The Government accepted most of these
recommendations and futures‟ trading was permitted in all recommended commodities. It
is timely decision since internationally the commodity cycle is on upswing and the next
decade being touched as the decade of Commodities.

Commodity Exchange Market in India plays an important role where the prices of
any commodity are not fixed, in an organized way.

2.2: Present Commodity Market in India
Today, commodity exchanges are purely speculative in nature. Before discovering the price,
they reach to the producers, end-users, and even the retail investors, at a grassroots level. It
brings a price transparency and risk management in the vital market. By Exchange rules and
by law, no one can bid under a higher bid, and no one can offer to sell higher than someone
else’s lower offer. That keeps the market as efficient as possible, and keeps the traders on
their toes to make sure no one gets the purchase or sale before they do. Since 2002, the
commodities future market in India has experienced an unexpected boom in terms of
modern exchanges, number of commodities allowed for derivatives trading as well as the
value of futures trading in commodities, which crossed $ 1 trillion mark in 2006.

In India there are 25 recognized future exchanges, of which there are four national level
multi-commodity exchanges. After a gap of almost three decades, Government of India has
allowed forward transactions in commodities through Online Commodity Exchanges, a
modification of traditional business known as Adhat and Vayda Vyapar to facilitate better
risk coverage and delivery of commodities.

Page 6

THE FOUR EXCHANGES ARE:
(i) National Commodity & Derivatives Exchange Limited (NCDEX) Mumbai,
(ii) Multi Commodity Exchange of India Limited (MCX) Mumbai and
(iii) National Multi- Commodity Exchange of India Limited (NMCEIL) Ahmedabad.
(iv) Indian Commodity Exchange Limited (ICEX), Gurgaon

There are other regional commodity exchanges situated in different parts of India.

2.3: Structure of Indian Commodity Market:

National Exchanges
• Compulsory online trading
• Transparent trading
• Exchanges to be de-mutualised
• Exchange recognised on permanent basis
• Multi commodity exchange
• Large expanding volumes

Page 7

Regional Exchanges
• Online trading not compulsory
• De-mutualisation not mandatory
• Recognition given for fixed period after which it could be given for re-regulation
• Generally, these are single commodity exchanges. Exchanges have to apply for
tradingeach commodity.
• Low volumes in niche markets

Forward Markets Commission (FMC):-
It is statutory institution set up in 1953 under Forward Contracts (Regulation) Act, 1952.
Commission consists of minimum two and maximum four members appointed by Central
Govt. Out of these members there is one nominated chairman. All the exchanges have been
set up under overall control of Forward Market Commission (FMC) of Government of India.

NMCE (National Multi Commodity Exchange of India Ltd.)
NMCE is the first demutualized 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), National Institute of Agricultural Marketing (NIAM)
and Neptune Overseas Ltd. (NOL). Main equity holders are PNB. The Head Office of NMCE is
located in Ahmedabad. There are various commodity trades on NMCE Platform including
Agro and non-agro commodities.

NCDEX (National Commodity & Derivatives Exchange Ltd.)
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.

Page 8


MCX (Multi Commodity Exchange of India Ltd.)
Headquartered in Mumbai, MCX is a demutualised nationwide electronic commodity future
exchange. Set up by Financial Technologies (India) Ltd. permanent recognition from
government of India for facilitating online trading, clearing and settlement operations for
future market across the country. The exchange started operation in Nov, 2003.
MCX equity partners include, NYSE Euronext,, State Bank of India and it’s associated,
NABARD NSE, SBI Life Insurance Co. Ltd., Bank of India, Bank of Baroda, Union Bank of India,
Corporation Bank, Canara Bank, HDFC Bank, etc. MCX is well known for bullion and metal
trading platform.

ICEX (Indian Commodity Exchange Ltd.)
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). BSE is also planning to set up a Commodity exchange.

2.4: Unique Features Of National Level Commodity Exchanges

 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.

Page 9

3. MAJOR COMMODITES

3.1: What is “Commodity”?
Any product that can be used for commerce or an article of commerce which is traded on an
authorized commodity exchange is known as commodity. The article should be movable of
value, something which is bought or sold and which is produced or used as the subject or
barter r sale. In short commodity includes all kinds of goods. Indian Forward Contracts
(Regulation) Act (FCRA), 1952 defines “goods” as “every kind of movable property other
than actionable claims, money and securities”.

3.2: Basic Characteristics Qualifying As A Commodity For Futures Trading:

 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 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).

Page 10

3.3: Major Commodities

BULLIONS PLANTATION

GOLD SILVER RUBBER

ENERGY

ATF BRUET OIL CRUDE OIL THERMAL COAL

OIL & OIL SEEDS PULSES

SOYA SEEDS SOYA OIL CHANA URAD

CEREALS

WHEAT BARLEY RICE

Page 11


METALS

Copper STEEL ALUMANIUM

SPICES

TURMERIC PEPPER JEERA

OTHERS

POTATO SUGAR GUAR SEED

Page 12

3.4: Gold
Gold is the oldest precious metal known to man and for thousands of years it has been
valued as a global currency, a commodity, an investment and simply an object of beauty.

Major Characteristics
 Gold (Chemical Symbol-Au) is primarily a monetary asset and partly a commodity.
 Gold is the world's oldest international currency.
 Gold is an important element of global monetary reserves.
 With regards to investment value, more than two-thirds of gold's total accumulated
holdings is with central banks' reserves, private players, and held in the form of high-
karat jewellery.
 Less than one-third of gold's total accumulated holdings are used as “commodity”
for jewellery in the western markets and industry.

Value Chain

DemandandSupply Scenario
 China was the world's largest gold producer with 340.88 tonnes in 2010, followed
by the United States and South Africa.
 In 2010, India was the world's largest gold consumer with an annual demand of
963 tonnes.
 The total supply of gold coming onto the market in 2010 reached 4,108 tonnes, a
rise of 2% from 2009 levels.

Page 13

 Gold demand in 2010 reached a 10-year high of 3,812.2 tonnes, worth
US$150billon, as a result of;
strong growth in jewellery demand;
the revival of the Indian market;
strong momentum in Chinese gold demand and
 a paradigm shift in the official sector, where central banks became net purchasers
of gold for the first time in 21 years.

Global Scenario
 London is the world’s biggest clearing house.
 Mumbai is under India's liberalised gold regime.
 New York is the home of gold futures trading.
 Zurich is a physical turntable.
 Istanbul, Dubai, Singapore, and Hong Kong are doorways to important consuming
regions.
 Tokyo, where TOCOM sets the mood of Japan.

Indian Scenario
 India is the largest market for gold jewellery in the world. 2010 was a record year for
Indian jewellery demand; at 745.7 tonnes, annual demand was 13% above the
previous peak in 1998. In local currency terms, Indian jewellery demand more than
doubled in 2010.
 A 20% rise in the rupee price of gold combined with a 69% rise in the volume of
demand, pushed up the value of gold demand by 101% to 1,342 billion. This
compares with 2009 demand of 669 billon.
 The rising price of gold, particularly in the latter half of 2010, created a 'virtuous
circle' of higher price expectations among Indian consumers, which fuelled
purchases, thereby further driving up local prices.

Page 14

Factors Influencing the Market
 Above ground supply of gold from central bank's sale, reclaimed scrap, and official
gold loans.
 Hedging interest of producers/miners.
 World macroeconomic factors such as the US Dollar and interest rate, and economic
events.
 Commodity-specific events such as the construction of new production facilities or
processes, unexpected mine or plant closures, or industry restructuring, all affect
metal prices.
 In India, gold demand is also determined to a large extent by its price level and
volatility.

Measurement Weight Conversion Table
To convert from To Multiply by
Troy ounces Grams 31.1035
Million ounces Tonnes 31.1035
Grams Troy ounces 0.0321507
Kilograms Troy ounces 32.1507
Tonnes Troy ounces 32,150.70
Kilograms Tolas 85.755
Kilograms Taels 26.7172
Kilograms Bahts 68.41
Troy ounces Grains 480.00
Troy ounces Avoirdupois ounces 1.09714
Troy ounces Penny weights 20.00
Avoirdupois ounces Troy ounces 0.911458
Short tonne Metric tonne 0.9072

Purity
Gold purity is measured in terms of karat and fineness:
Karat: pure gold is defined as 24 karat
Fineness: parts per thousandThus, 18 karat = 18/24 of 1,000 parts = 750 fineness
3.5: Silver

Page 15

 Silver (Chemical Symbol-Ag) is a brilliant grey-white metal that is soft and malleable.
 Silver has unique properties such as its strength, malleability, ductility, electrical and
thermal conductivity, sensitivity, high reflectance of light, and reactivity.
 The main source of silver is in lead ore, although it can also be found associated with
copper, zinc and gold and produced as a by-product of base metal mining activities.
 Secondary silver sources include coin melt, scrap recovery, and dis-hoarding from
countries where export is restricted. Secondary sources are price sensitive.
 Silver is unique amongst metals due to the fact that it can be classified as both a
precious metal and an industrial metal.
 Today, silver is sought as a valuable and practical industrial commodity and as an
investment.
 Silver is an important element of global monetary reserves.
 It is an effective portfolio diversifier.

Demand and Supply Scenario
 Silverware achieved an increase of 4.6%, owing to stock-related gains in India.
 Demand for coins and medals surged yet higher from 2008, rising by 20.7% to reach
a new record high of 78.7 Moz (2,447 t) in 2009 on the back of strong investment
demand.
 In 2009, implied net investment soared to 136.9 Moz (4,258 t), buoyed by safe haven
concerns, which led to strong inflows into both ETFs and physical investment.
 Scrap supply continued to decrease in 2009 by almost 6% to 165.7 Moz, despite a
strong recovery in prices over the year.
 Most notable increases were seen in Bolivia and Argentina (both +6.8 Moz) with by
largest single decline coming from Australia (-9.4 Moz).
 Net government sales fell by just over one half to 13.7 Moz (426t) in 2009, primarily
driven by lowest stock sales from Russia, coupled with the continued absence of any
disposal from China and India.

Page 16

Value Chain

Global Scenario
 Silver is predominantly traded on the London Bullion Market Association (LBMA) and
COMEX in New York.
 LBMA, as the global hub of over-the-counter (OTC) trading in silver, is its main
physical market. Comex is a futures and options exchange, where most fund activity
is focused.
 Silver is invariably quoted in the US dollars per troy ounce.

Indian Scenario
 India's silver demand averages 2500 tonnes per year, whereas the country's
production was around 206.95 tonnes in 2010.
 Nearly 60% of India's silver demand comes from farmers and rural India, who store
their savings in silver bangles and coins.

Page 17

Factors Influencing the Market
 Economic events such as national industrial growth, global financial crisis, recession,
and inflation affect metal prices.
 Commodity-specific events such as the construction of new production facilities or
processes, unexpected mine or plant closures, or industry restructuring, all affect
metal prices.
 Governments set trade policy (implementation or suspension of taxes, penalties, and
quotas) that affect supply by regulating (restricting or encouraging) material flow.
 Geopolitical events involving governments or economic paradigms and armed
conflict can cause major changes.
 A faster growth in demand against supply often leads to a drop in stocks with the
government and investors.
 Silver demand is underpinned by the demand from jewellery and silverware,
industrial applications, and overall industrial growth.
 In India, the real industrial demand occupies a small share in the total industrial
demand of silver. This is in sharp contrast to most developed economies.
 In India, silver demand is also determined to a large extent by its price level and
volatility.

MeasurementWeight Conversion Table
To convert from To Multiply by
1 Moz Metric tons 31.103
1 Ton Troy ounces 32,511
1 Ton Grams 1,000,000

Page 18

3.6: ATF (Aviation Turbine Fuel)

 Aviation Turbine Fuel (ATF) or jet fuel is a specialized type of petroleum-based fuel
used for powering jet and turbo-prop engined aircraft. ATF is clear to straw coloured
blend of hydrocarbons and also contains additives such as antioxidants, metal
deactivators, anit-static agensts, corrosion inhibitors etc.
 In crude oil refining, it is classified as a middle-distillate along with diesel and
kerosene. Jet fuel is actually a highly refined grade of kerosene.
 Jet A-1 and Jet A are two main grades of turbine fuel used in civil commercial
aviation. Both of them are kerosene type fuels and are produced to an
internationally standardized set of specifications.
 Jet A, which is mainly used in the United States, must have a freeze point of -40ºC or
below, while Jet A-1 used in almost all other countries must have a freeze point of -
47ºC or below. The only other jet fuel, commonly used in civilian turbine engine-
powered aviation is called Jet B, which is a fuel in the naphtha-kerosene region and
is used for its enhanced cold-weather performance.
 The other aviation fuels include military jet fuels (predominantly JP-4, JP-5 and JP-8),
which too are kerosene type fuels. Aviation gasoline is used in spark-ignition aviation
engines.
 Aviation fuels are derived from crude oil and its price shows high correlation with
crude oil prices (96% in 2008). Airline industry and crude oil refineries are two largest
sectors facing huge price risk owing to the high volatility in prices.
 The global airline industry's fuel bill is estimated to total US$114 billion in 2009
(accounting for 25% of operating expenses at US$61.8/barrel Brent of oil).

Global Scenario
 The total global production of aviation fuels in 2007 is estimated to be 1765 million
barrels in 2007, which is 6.3% of total global production of refinery products in 2007.
 It is estimated that in 2007, global consumption of jet fuel was around 5.1 million
barrels a day. U.S. consumers are estimated to have utilized approximately 1.63
million barrels per day.

Page 19

 However, Asia-Pacific region is showing the most growth currently. The International
Air Transport Association (IATA) estimates that in 2009 Asia-Pacific travelers totaled
647 million against 638 million who travelled within North America (including
domestic markets). By 2013 an additional 217 million travelers are expected to take
to the skies within Asia-Pacific.
 US is the largest refiner of crude oil holding 20% of the total world refining capacity
of 87,700 kilo barrels per calendar day, followed by China (8.9%), Former Soviet
Union (8.8%), Japan (5.3%) and India (4.1%).
 World Kerosene Markets: Tokyo Commodity Exchange (TOCOM) and C-COM

Indian Scenario

 The growth of the Indian economy, rising incomes of the country's middle class and
entry of private players in India's aviation industry has lead to a sharp increase in
domestic consumption of ATF in recent years. Despite the rising demand, the
country is self-sufficient and even exports a significant quantity of ATF.
 India's production of all petroleum products has shown a sharp improvement in
the previous two decades, aided by the setting up of new refineries and increased
capacity utilization. The production of ATF in 2008-09 is estimated at 59.2 million
barrels.
 India's consumption of ATF in 2008-09 is estimated to be 32.6 million barrels in
2008-09, which is sharply up by 58% from 2004-05 consumption of 20.6 million
barrels.
 ATF exports from India have also been rising, with it increasing from 20.7 million
barrels in 2005-06 to 25.6 million barrels in 2008-09.
 In India, kerosene is sold through three channels - public distribution system (PDS)
for domestic use, industrial kerosene and as ATF. The prices of industrial kerosene
and ATF are revised dynamically by domestic refiners in tandem with international
prices. Thus, volatility in crude oil prices spills over to domestic ATF prices.

Page 20

Market Influencing Factors
 Globally, ATF prices are highly correlated with crude oil prices as it is produced by
distilling crude oil. Thus, all factors influencing crude oil prices have a profound
influence on ATF prices too. These factors include, supply-demand, global economic
scenario, natural disasters, currency fluctuations, geo-political tensions, interest
rates, prices of other assets, commodities etc.
 The demand from the aviation industry is the next important influencing factor.
Growth in air traffic - passengers / cargo, global economic scenario, global industrial
production, international trade, improvement in aircraft fuel-burning efficiency and
a variety of other variables influences the demand from aviation sector.
 Disruptions in production due to extreme weather or other unforeseen events can
lead to prices picking up.

Measurement
1 US Barrel = 42 US Gallons
1 US Barrel = 158.98 litres
1 MT = 7.33 barrels
Note: Measurement of barrels per tonne vary from origin to origin

Page 21

3.7: Brent Crude Oil

General Characteristics

 Brent crude oil is a light sweet crude oil from North Sea.
 It has API (American Petroleum Institute) gravity between 38-39 and has higher
sulphur content than the other well-known benchmark, WTI crude oil.
 Brent crude oil is a global benchmark for other grades and is widely used to
determine crude oil prices in Europe and in other parts of the world.
 Brent is typically refined in Northwest Europe, but a major portion is been exported
to the US Gulf and East Coasts, and also to parts of Mediterranean.
 It is more expensive than the Organization of Petroleum Exporting Countries (OPEC)
basket, but lesser than West Texas Intermediate (WTI) because of higher sulphur
content than the WTI crude.

Categories of Brent Crude oil
 West Texas Intermediate (WTI) crude oil is of very high quality. Its API gravity is 39.6
degrees (making it a "light" crude oil), and it contains only about 0.24 percent of
sulphur (making a "sweet" crude oil). WTI is generally priced at about a $2-4 per-
barrel premium to OPEC Basket price and about $1-2 per barrel premium to Brent,
although on a daily basis the pricing relationships between these can very greatly.
 Brent Crude Oil stands as a benchmark for Europe.
 India is very much reliant on oil from the Middle East (High Sulphur). The OPEC has
identified China & India as their main buyers of oil in Asia for several years to come.

Value Chain

Page 22

GlobalScenario
 Oil accounts for 40 per cent of the world's total energy demand.
 The world consumes about 76 million bbl/day of oil.
 United States (20 million bbl/d), followed by China (5.6 million bbl/d) and Japan (5.4
million bbl/d) are the top oil consuming countries.
 Balance recoverable reserve was estimated at about 142.7 billion tones (in 2002), of
which OPEC was 112 billion tones.

OPEC fact sheet
OPEC stands for 'Organization of Petroleum Exporting Countries'. It is an organization of
eleven developing countries that are heavily dependent on oil revenues as their main source
of income. The current Members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria,
Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.
 OPEC controls almost 40 percent of the world's crude oil.
 It accounts for about 75 per cent of the world's proven oil reserves.
 Its exports represent 55 per cent of the oil traded internationally.

Indian Scenario
 India ranks among the top 10 largest oil-consuming countries.
 Oil accounts for about 30 per cent of India's total energy consumption. The country's
total oil consumption is about 2.2 million barrels per day. India imports about 70 per
cent of its total oil consumption and it makes no exports.
 India faces a large supply deficit, as domestic oil production is unlikely to keep pace
with demand. India's rough production was only 0.8 million barrels per day.
 The oil reserves of the country (about 5.4 billion barrels) are located primarily in
Mumbai High, Upper Assam, Cambay, Krishna-Godavari and Cauvery basins.
 Balance recoverable reserve was about 733 million tones (in 2003) of which offshore
was 394 million tones and on shore was 339 million tones.
 India had a total of 2.1 million barrels per day in refining capacity.

Page 23

 Government has permitted foreign participation in oil exploration, an activity
restricted earlier to state owned entities.
 Indian government in 2002 officially ended the Administered Pricing Mechanism
(APM). Now crude price is having a high correlation with the international market
price. As on date, even the prices of crude bi-products are allowed to vary +/- 10%
keeping in line with international crude price, subject to certain government laid
down norms/ formulae.
 Disinvestment/restructuring of public sector units and complete deregulation of
Indian retail petroleum products sector is under way.

 OPEC output and supply.
 Terrorism, Weather/storms, War and any other unforeseen geopolitical factors that
causes supply disruptions.
 Global demand particularly from emerging nations.
 Dollar fluctuations.
 DOE / API imports and stocks.
 Refinery fires & funds buying.

Exchanges dealing in Crude Futures
 The New York Mercantile Exchange (NYMEX) .
 The International Petroleum Exchange of London (IPE).
 The Tokyo Commodity Exchange (TOCOM).
 Crude Oil Units (average gravity)
 1 US barrel = 42 US gallons.
 1 US barrel = 158.98 litres.
 1 tonne = 7.33 barrels .
 1 short ton = 6.65 barrels .
 Note: barrels per tonne vary from origin to origin.

Page 24

3.8: Crude Oil

 Crude oil is a mixture of hydrocarbons that exists in a liquid phase in natural
underground reservoirs. Oil and gas account for about 60 per cent of the total
world's primary energy consumption.
 Almost all industries including agriculture are dependent on oil in one way or other.
Oil & lubricants, transportation, petrochemicals, pesticides and insecticides, paints,
perfumes, etc. are largely and directly affected by the oil prices.
 Aviation gasoline, motor gasoline, naphtha, kerosene, jet fuel, distillate fuel oil,
residual fuel oil, liquefied petroleum gas, lubricants, paraffin wax, petroleum coke,
asphalt and other products are obtained from the processing of crude and other
hydrocarbon compounds.
 The prices of crude are highly volatile. High oil prices lead to inflation that in turn
increases input costs; reduces non-oil demand and lower investment in net oil
importing countries.

Categories of Crude oil
 West Texas Intermediate (WTI) crude oil is of very high quality. Its API gravity is 39.6
degrees (making it a "light" crude oil), and it contains only about 0.24 percent of
sulphur (making a "sweet" crude oil). WTI is generally priced at about a $2-4 per-
barrel premium to OPEC Basket price and about $1-2 per barrel premium to Brent,
although on a daily basis the pricing relationships between these can very greatly.
 Brent Crude Oil stands as a benchmark for Europe.
 India is very much reliant on oil from the Middle East (High Sulphur). The OPEC has
identified China & India as their main buyers of oil in Asia for several years to come.

Page 25

Value Chain

Global Scenario
 Oil accounts for 40 per cent of the world's total energy demand.
 The world consumes about 76 million bbl/day of oil.
 United States (20 million bbl/d), followed by China (5.6 million bbl/d) and Japan (5.4
million bbl/d) are the top oil consuming countries.
 Balance recoverable reserve was estimated at about 142.7 billion tones (in 2002), of
which OPEC was 112 billion tones.

OPEC fact sheet
OPEC stands for 'Organization of Petroleum Exporting Countries'. It is an organization of
eleven developing countries that are heavily dependent on oil revenues as their main source
of income. The current Members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria,
Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.
 OPEC controls almost 40 percent of the world's crude oil.
 It accounts for about 75 per cent of the world's proven oil reserves.
 Its exports represent 55 per cent of the oil traded internationally.

Page 26

Indian Scenario
 India ranks among the top 10 largest oil-consuming countries.
 Oil accounts for about 30 per cent of India's total energy consumption. The country's
total oil consumption is about 2.2 million barrels per day. India imports about 70 per
cent of its total oil consumption and it makes no exports.
 India faces a large supply deficit, as domestic oil production is unlikely to keep pace
with demand. India's rough production was only 0.8 million barrels per day.
 The oil reserves of the country (about 5.4 billion barrels) are located primarily in
Mumbai High, Upper Assam, Cambay, Krishna-Godavari and Cauvery basins.
 Balance recoverable reserve was about 733 million tones (in 2003) of which offshore
was 394 million tones and on shore was 339 million tones.
 India had a total of 2.1 million barrels per day in refining capacity.
 Government has permitted foreign participation in oil exploration, an activity
restricted earlier to state owned entities.
 Indian government in 2002 officially ended the Administered Pricing Mechanism
(APM). Now crude price is having a high correlation with the international market
price. As on date, even the prices of crude bi-products are allowed to vary +/- 10%
keeping in line with international crude price, subject to certain government laid
down norms/ formulae.
 Disinvestment/restructuring of public sector units and complete deregulation of
Indian retail petroleum products sector is under way.

Crude Oil Units (average gravity)
 1 US barrel = 42 US gallons.
 1 US barrel = 158.98 litres.
 1 tonne = 7.33 barrels .
 1 short ton = 6.65 barrels .
 Note: barrels per tonne vary from origin to origin.

Page 27

3.9: Wheat
 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
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.

Page 28

Important World Wheat Markets
 Derivatives exchanges - Chicago Mercantile Exchange, which acquired Chicago Board
of Trade, Kansas City Board of Trade, Zhenghzhou Commodity Exchange, South
African Futures Exchange, MCX, NCDEX
 US FOB and EU (France) FOB prices determine the physical prices

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 2006-
07, 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
production to surge sharply from around 6 million tonnes at time of independence
to current levels. Close to 90% of the area under wheat is irrigated, which too has
supported the rise in output over the years.
 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%.

Page 29

 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).
 Weather has a profound influence on production, especially in Haryana and Punjab
as temperature plays a crucial role in determining the yield.
 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.
 Despite international trade being limited, the several variations in production or
consumption at various major or minor producing or consuming country, which
influence global prices, are reflected in the domestic long-term price trend.
However, in the short-term normally there is no significant relation with
international prices.
 Several international agencies like US Dept. of Agriculture, International Grains
Council, Food and Agricultural Organisation release regular, periodic reports on
global supply-demand situation, which is widely looked upon by the global players.

Page 30

3.10: Cotton
 Cotton is essentially grown for its fibre, which is used the world-over to make textile.
 Cotton fibre is one of the most important textile fibres, accounting for around 35%
of the world's total textile fibre used.
 Cotton's strength, absorbency, and capacity to be washed and dyed also make it
adaptable to a considerable variety of textile products.
 Cotton is used for thousands of things, including clothes, space suits for astronauts
and ingredients in the food we eat.
 Cotton is classified according to the staple, grade and character of each bale—staple
refers to the fibre length; grade ranges from coarse to premium and is a function of
colour, brightness and purity; and character refers to the fibre's strength and
uniformity.

Global Scenario
 Cotton production and trade is widely spread across the world, with more than 80
nations cultivating the crop. However, its production, consumption and trade are
dominated by a few nations.
 The world cotton production in 2010-11 marketing year (July – August) is forecasted
to be 24.95 million tonnes (million MT) (147.7 million bales of 170 kg each) as against
22.1 million MT (129.7 million bales of 170 kg each) in 2009-10 marketing year.
 The world's four largest cotton-producing countries are China, India, the USA and
Pakistan, which together account for nearly 79% of the world production. Other
major producers include Brazil, Uzbekistan and Turkey.
 The top three consumers of cotton are China, India, and Pakistan, which together
account for two-thirds of the world consumption (est. 24.5 million MT). Turkey,
Brazil and the USA are the next largest consumers.
 The global trade in cotton in recent years has been around 7-8 million MT.
 The USA is the largest exporter of cotton, accounting for over one-third of global
trade in raw cotton, which is estimated to be 7.7 million MT in 2010-11. While China
is the largest importer of cotton.

Page 31

Indian Scenario
 India's annual production of cotton has been showing a steady increase in the recent
years supported by a rise in acreage, better GM seeds and improved practices.
 India is estimated to have produced 31.2 million bales of cotton from an acreage of
11.16 million hectares and a yield of 475 kg/ha in 2010-11 (October – September), as
against a production of 29.5 million bales, acreage of 10.3 million ha and yield of 486
kg/ha in 2009-10.
 Interestingly, while India has the largest area in the world under cotton cultivation,
its yield is one of the lowest at around 500 kg/ha as against the world average yield
of 740 kg/ha.
 In India, cotton is a predominantly a monsoon-season crop. It is planted from the
end of April through0 September, and harvested from October to January, based on
the time of sowing.
 Cotton is produced in three zones, the Northern zone comprising the states of
Punjab, Haryana and Rajasthan, the Central zone comprising the states of
Maharashtra, Madhya Pradesh and Gujarat and the Southern zone comprising the
states of Andhra Pradesh, Karnataka and Tamil Nadu. Cotton cultivation is also
gaining momentum in the state of Odisha.
 The states of Gujarat, Maharashtra and Andhra Pradesh are the major producers of
cotton, accounting for about 75% of the total production.
 India has been a major exporter of cotton, since 2005-06. It is currently, the world's
second largest exporter. It exported 5.5 million bales of cotton in 2010-11.
 India mostly imports Long and Extra Long Staple (ELS) cotton from the US, Egypt, and
West Africa.

Page 32

 The domestic demand supply scenario, inter-crop price parity, cost of production
and international price situation are the major factors that influence prices in the
market.
 Weather, pests, diseases and other risk factors associated with agricultural crops are
also important for cotton.
 Government policies with relation to import, export and Minimum Support Price are
significant influencers.
 Cotton yarn accounts for around 70% of the total yarn production in India. Thus,
price of cotton is a very important factor influencing the health of India’s textile
industry. And Government usually considers both these sectors (cotton & the Textile
industry)while deciding on its polices.
 Cotton yarn prices at different markets across the country show a high correlation of
above 90% with India’s raw cotton prices.
 Global trade is particularly important for cotton. In addition to around 30% of global
cotton fibre production being traded, it is also traded indirectly as yarn, fabric and
clothing.
 As cotton is used primarily in manufacturing products such as clothing and home
furnishings, the overall health of associated industries and economic well-being of
the final consumer are important.
 New developments in the textile industry, with regard to development and adoption
of new technology, fibres, mechanisation, and so forth impact cotton prices in the
long run.

Page 33

3.11: 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 2003-
04, 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 nov to december and harvested from Feb to
March. The peak arrival period begins from March-April at the major trading centers
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
chickpeas is Canada, Australia, Iran and Myanmar.
 Indian chana markets are highly fragmented, with very long value chain. The major
players in the value chain are commission agents, brokers, stockists, wholesale
traders, dal mills, wholesalers (dal) and retail outlets. The information flow between
these participants is restricted and very slow.

Major Trading Centers
 Indore, Bhopal, Vidisha in Madhya Pradesh.
 Jalgaon, Latur, Mumbai, Akola in Maharashtra.
 Jaipur, Bikaner, Kota, Jodhpur, Sriganaganagar, Hanumangarh in Rajasthan.
 Other major centers are Delhi, Chennai, Kanpur, Hapur, Hyderabad, Vijayawada,
Gulbarga, Sirsa, Jalandhar, Ludhiana, Sangrur.

Page 34

 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 influence
the prices of chana.

Page 35

3.12: Potato

Potato is the world's fourth important food crop after wheat, rice and maize owing to its
great yield potential and high nutritive value and accounts for nearly half of the worlds
annual output of all root and tuber crops. Thus, with an annual global production of about
300 million tonnes, potato is an economically important staple crop in both developed and
developing countries.

Value Chain

Supply Demand Scenario

 India is ranked 5th in potato production after China, Russian Federation, Poland and
Ukraine. However, potato productivity in India is merely 16-19 tonnes/ha vis-à-vis
that of European countries and USA, i.e 30-40 tonnes/ha.
 The potatoes in India are cultivated under highly diversified agro-climatic conditions
ranging from sea level to snowline and up to three crops are raised per year.
 Summer crop- March- April…………………… August-September
 Autumn crop- August-September………… December- January
 Spring crop- January – February………………… May-June
 Potato is mainly rabi crop and is grown mainly in UP, Punjab, Haryana, West Bengal,
Madhya Pradesh, Bihar, Andhra Pradesh, Tamil Nadu and Gujarat.

Page 36

 During 2004-05, 24.15million ton potato was produced in the country while
production figure for 2003-04 is 23.27 million ton. According to the ministry of
agriculture advance estimate potato production during 2005-06 will be 24.65 million
tons.
 Average acreage under potato varies between 12 to 15 lakh hectares depending on
the weather condition during sowing period.

Major Trading Centres
There are four-potato export zone in India viz. in UP, Punjab, MP and West Bengal. The
major potato markets in UP are Agra, Hathras, Kanpur, Meerut, Farrukkhabad; Jalandhar,
Ludhiana, Phul and Patiala in Punjab; Ujjain, Indore and Dewas in MP and Hoogly, Burdwan
and Howrah in West Bengal


 Variations in potato domestic acreage based on yield and price realization
 Crop development based on weather progress in key growing regions particularly
cold wave and heavy rains during tuber formation
 Comparative price with other vegetables in the domestic market,
 Upcountry demand of potato from the major cities and food processing
industries
 The potato price tends to firm up during the planting period and eases down
during the harvesting period.
 Transportation charges have also profound impact on prices
 Potato growers and traders hoard the commodity before selling in expectation of
better prices. Potato can be kept in cold storages without spoilage for 5-6
months.

Page 37

3.13: Gaur Seed
 Guar, or clusterbean, (Cyamopsis tetragonoloba (L.) Taub), is the source of a natural
hydrocolloid, which is cold water soluble forming thick solutions at low
concentrations.
 The guar seed consists of three parts: the germ, the endosperm, and the husk. It is
from the endosperm that guar gum is derived. 100 Kilos of beans, minus their bean
pods yields roughly 29 kilos of endosperm; 29 kilos of Guar powder.
 Industrially it is used in mining, petroleum drilling and textile manufacturing.
 In food it is used as a thickener and as a mean of preventing ice crystal formation in
frozen desserts.

Supply Scenario
 India is the major producer of Guar Seed followed by Pakistan and US. India's
guarseed production fluctuates between years and has been around 2-6 lakh tons in
the recent years. India's guar production in 2003, is estimated at around 6 lakh tons.
 India accounts for 80% of the total guar produced in the world. 70% of India's
production comes from Rajasthan. The other producers are Gujarat, Haryana,
Punjab, Uttar Pradesh and Madhya Pradesh.
 Taking the US, Australian, African crop the total world supply of Guar Split is around
4-5 lakh tons in a normal year. It may even increase to 8 lakh tons as has been visible
in 2003-04.
 Guar is a crop of semi-arid - sub tropical areas spread over the north and north west
of India and east and south east of Pakistan. It is grown in arid zones of Rajasthan,
some parts of Gujarat, Haryana, Madhya Pradesh. The main guar-growing region in
India is Rajasthan.
 Guar is a rain fed monsoon crop, which requires 8-15 inch of rain in 3-4 spells and is
harvested in October - November. It is sown immediately after first showers say in
July and harvested around November each year. The crop yield is directly related to
the monsoon. It requires a relative long growing season of 20-25 weeks.

Page 38

Demand scenario
 World market for guar gum is estimated to be around 150,000 tons/year, 70% of
which is produced by India and Pakistan.
 US consumption is estimated to be around 40,000 tons/year.
 The export from India is around 115,000 tons and the domestic market is of around
25,000 tons.
 India exported 33000 tons of guar gum refined split and 84000 tons of guar gum
treated and pulverized in 2002-03, which together accounts for an export of 117000
tons of guargum exports valued above Rs. 300 crores.
 The main demand of guar seed originates from the US petroleum industry and also
the oil fields of Middle East.

Market influencing factors
 The production is directly related to monsoon. In Rajasthan, the rainfall fluctuates
between years and thus results in high volatility in production and consequently on
prices.
 While the demand is almost constant over the years, supply varies largely between
years.
 The physical market of the commodity involves speculators and stockists. The
commodity is subjected to a long storage period based on demand and market
prices..
 There are no Government rules and regulations governing the production,
distribution, marketing, exports or imports of the commodity and the market forces
determine the prices.

Page 39

4. COMMODITY FUTURE MARKET
4.1: What is a commodity Market?
Commodity markets are markets where raw or primary products are exchanged. These raw
commodities are traded on regulated commodities exchanges, in which they are bought and
sold in standardized contracts.

Commodity market is an important constituent of the financial markets of any country. It is
the market where a wide range of products, viz., precious metals, base metals, crude oil,
energy and soft commodities like palm oil, 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.

4.2: What is Commodity Futures?
A Commodity futures is an agreement between two parties to buy or sell a specified and
standardized quantity of a commodity at a certain time in future at a price agreed upon at
the time of entering into the contract on the commodity futures exchange.

The need for a futures market arises mainly due to the hedging function that it can perform.
Commodity markets, like any other financial instrument, involve risk associated with
frequent price volatility. The loss due to price volatility can be attributed to the following
reasons:

 Consumer Preferences: - In the short-term, their influence on price volatility is small
since it is a slow process permitting manufacturers, dealers and wholesalers to
adjust their inventory in advance.

 Changes in supply: - They are abrupt and unpredictable bringing about wild
fluctuations in prices. This can especially noticed in agricultural commodities where
the weather plays a major role in affecting the fortunes of people involved in this
industry. The futures market has evolved to neutralize such risks through a
mechanism; namely hedging.

Page 40

4.3: 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.

4.4: Benefits of Commodity Futures Markets
The primary objectives of any futures exchange are authentic price discovery and an
efficient price risk management. The beneficiaries include those who trade in the
commodities being offered in the exchange as well as those who have nothing to do with
futures trading. It is because of price discovery and risk management through the existence
of futures exchanges that a lot of businesses and services are able to function smoothly.

Page 41

1. 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.

2. 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.

3. 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.

4. 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.

Page 42

5. 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 unfavourable 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.

6. 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.

7. 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.

Page 43

4.5: What Makes Commodity Trading Attractive?

 A good low-risk portfolio diversifier.

 A highly liquid asset class, acting as a counterweight to stocks, bonds and real estate.

 Less volatile, compared with, equities and bonds.

 Investors can leverage their investments and multiply potential earnings.

 Better risk-adjusted returns.

 A good hedge against any downturn in equities or bonds as there is

 Little correlation with equity and bond markets.

 High co-relation with changes in inflation.

 No securities transaction tax levied.

Page 44

5. INSTRUMENTS AVAILABLE FOR TRADING
In recent years, derivatives have become increasingly popular due to their applications for
hedging, speculation and arbitrage. While futures and options are now actively traded on
many exchanges, forward contracts are popular on the OTC market. While at the moment
only commodity futures trade on the NCDEX, eventually, as the market grows, we also have
commodity options being traded.

5.1 Forward Contracts

A forward contract is an agreement to buy or sell an asset on a specified date for a
specified price.

One of the parties to the contract assumes a long position and agrees to buy the underlying
asset on a certain specified future date for a certain specified price. The other party
assumes a short position and agrees to sell the asset on the same date for the same price.
Other contract details like delivery date, price and quantity are negotiated bilaterally by the
parties to the contract. The forward contracts are normally traded outside the exchanges.
The salient features of forward contracts are:
 They are bilateral contracts and hence exposed to counter-party risk.
 Each contract is custom designed, and hence is unique in terms of contract size,
expiration date and the asset type and quality.
 The contract price is generally not available in public domain.
 On the expiration date, the contract has to be settled by delivery of the asset.
 If the party wishes to reverse the contract, it has to compulsorily go to the same
counterparty, which often results in high prices being charged.

However forward contracts in certain markets have become very standardised, as in the
case of foreign exchange, thereby reducing transaction costs and increasing transactions
volume. This process of standardisation reaches its limit in the organised futures market.

Page 45

5.2 Futures Market

Futures markets were designed to solve the problems that exist in forward markets. A
futures contract is an agreement between two parties to buy or sell an asset at a certain
time in the future at a certain price. But unlike forward contracts, the futures contracts are
standardized and exchange traded. To facilitate liquidity in the futures contracts, the
exchange species certain standard features of the contract. It is a standardized contract with
standard underlying instrument, a standard quantity and quality of the underlying
instrument that can be delivered, (or which can be used for reference purposes in
settlement) and a standard timing of such settlement. A futures contract may be offset prior
to maturity by entering into an equal and opposite transaction. More than 99% of futures
transactions are offset this way.

The standardized items in a futures contract are:
 Quantity of the underlying

 Quality of the underlying

 The date and the month of delivery

 The units of price quotation and minimum price change

 Location of settlement

 Spot price: The price at which an asset trades in the spot market.

 Futures price: The price at which the futures contract trades in the futures market.

Page 46

5.3: Margin Requirements

INITIAL MARGIN

The amount that must be deposited in the margin account at the time a futures contract is
first entered into is known as initial margin.
Initial margin based on “Value at Risk” Model (VaR) to estimate worst loss that can happen
for a time horizon 99% confidence level SPAN® is the system used for margin calculation.
Volatility is one of the inputs to the SPAN calculations EWMA/ J.P.Morgan Risk Metrics
methodology for calculation of volatility will be adopted. Similar procedure is followed in
most international exchanges like CBOT, CME, NYMEX, NYBOT, TOCOM, LME, LIFFE.

MARKING- TO- MARKET MARGIN

In the futures market, at the end of each trading day, the margin account is adjusted to
reflect the investor's gain or loss depending upon the futures closing price. This is called
marking-to-market.
All open positions will be marked-to-market at the daily settlement price at the end of the
day Client has to bring mark-to-market (MTM) margin to be through funds transfer the next
day.

MAINTENANCE MARGIN

This is somewhat lower than the initial margin. This is set to ensure that the balance in the
margin account never becomes negative. If the balance in the margin account falls below
the maintenance margin, the investor receives a margin call and is expected to top up the
margin account to the initial margin level before trading commences on the next day.

Page 47

5.4: Options

Options are fundamentally different from forward and futures contracts. An option gives
the holder of the option the right to do something. The holder does not have to exercise this
right. In contrast, in a forward or futures contract, the two parties have committed
themselves to doing something.
Whereas it costs nothing (except margin requirements) to enter into a futures contract, the
purchase of an option requires an up-front payment.
There are two basic types of options, call options and put options.

CALL OPTION: A call option gives the holder the right but not the obligation to buy an asset
by a certain date for a certain price.

PUT OPTION: A put option gives the holder the right but not the obligation to sell an asset
by a certain date for a certain price.

Page 48

6. PARTICIPANTS FOR COMMODITY MARKET
Participants who trade in the derivatives market can be classified under the following three
broad categories:
1. Hedgers

2. Speculators

3. Arbitragers

6.1: Hedgers

A Hedger can be Farmers, manufacturers, importers and exporter. A hedger buys or sells in
the futures market to secure the future price of a commodity intended to be sold at a later
date in the cash market. This helps protect against price risks.

The holders of the long position in futures contracts (buyers of the commodity), are trying to
secure as low a price as possible. The short holders of the contract ( sellers of the
commodity) will want to secure as high a price as possible. The commodity contract,
however, provides a definite price certainty for both parties, which reduces the risks
associated with price volatility. By means of futures contracts, Hedging can also be used as a
means to lock in an acceptable price margin between the cost of the raw material and the
retail cost of the final product sold.

Someone going long in a securities future contract now can hedge against rising equity
prices in three months. If at the time of the contract's expiration the equity price has risen,
the investor's contract can be closed out at the higher price. The opposite could happen as
well: a hedger could go short in a contract today to hedge against declining stock prices in
the future.

Page 49

6.2: Speculators

Other commodity market participants, however, do not aim to minimize risk but rather to
benefit from the inherently risky nature of the commodity market. These are the
speculators, and they aim to profit from the very price change that hedgers are protecting
themselves against. A hedger would want to minimize their risk no matter what they're
investing in, while speculators want to increase their risk and therefore maximize their
profits. In the commodity market, a speculator buying a contract low in order to sell high in
the future would most likely be buying that contract from a hedger selling a contract low in
anticipation of declining prices in the future.

Unlike the hedger, the speculator does not actually seek to own the commodity in question.
Rather, he or she will enter the market seeking profits by offsetting rising and declining
prices through the buying and selling of contracts.

LONG SHORT

Secure a price now to Secure a price now to protect
protect against future rising against future declining prices
HEDGER prices

Secure a price now in Secure a price now in
anticipation of rising prices anticipation of declining
SPECULATOR
prices

Page 50

6.3: Arbitragers
A central idea in modern economics is the law of one price. This states that in a competitive
market, if two assets are equivalent from the point of view of risk and return, they should
sell at the same price. If the price of the same asset is different in two markets, there will be
operators who will buy in the market where the asset sells cheap and sell in the market
where it is costly. This activity termed as arbitrage, involves the simultaneous purchase and
sale of the same or essentially similar security in two different markets for advantageously
different prices. The buying cheap and selling expensive continues till prices in the two
markets reach equilibrium. Hence, arbitrage helps to equalize prices and restore market
efficiency.

Since the cash and futures price tend to move in the same direction as they both react to
the same supply/demand factors, the difference between the underlying price and futures
price is called as basis. Basis is more stable and predictable than the movement of the prices
of the underlying or the Futures price. Thus, arbitrageur would predict the basis and
accordingly take positions in the cash and future markets.

PARTICIPANTS OF COMMODITY MARKET

• Producers - farmers
HEDGERS • Consumers –refineries, food processing
companies

• Brokerage houses
SPECULATORS • Retail investors
• People involved in commodity spot trading

• Brokerage houses
ARBITRAGEURS • People trading in commodity spot markets
• Warehousing companies

Page 51


B. NEED OF THE STUDY

Page 52


NEED OF THE STUDY

The need of the study arises due to lack of knowledge about the commodity market because
now-a-days, commodity trading has become an important investment avenue and most of
the investors are still unaware about its advantages and shortcomings. Huge amount of
investment is required for trading in commodity market. To know the impact of other
markets on commodity market, it became necessary to understand the trading of
commodity market.

So commodity trading covers the meaning of commodity market, its trading, clearing and
settlement, the various commodities being traded on NCDEX and MCX. It further includes
the various market participators in commodity market and instruments available for trading
like future contracts, forward contracts and options.

Page 53


C. SCOPE AND OBJECTIVES
OF THE STUDY

Page 54

SCOPE OF THE STUDY
This project on ‘Investors Perception Regarding Commodity Trading’ has a wide scope and is
indeed a great help in understanding the core concept of trading in various commodities.
The scope of my study was confirmed to current time period.

A limited sample was selected to fulfil the various objectives of the study. Scope was related
to have a general view of the investors towards the commodity trading.

OBJECTIVES OF THE STUDY
 To know about the commodity in which the investors mostly trade.
 To know about the Commodity Exchanges preferred by investors.
 To know the purpose of investment in commodity market.
 To find out the problems regarding trading in commodity market.
 To understand the modus operandi of commodity exchanges
 To understand the awareness of Commodity Market in India
 How investors reach to decision of investment in particular commodity?
 Individual perception regarding overall Commodity Market.

Page 55


D. RESEARCH
METHODOLOGY

Page 56

Research methodology
Research methodology is a way to systematically solve the research problem. The
researchmethodology includes the various methods and techniques for conducting a
research. “MarketingResearch is the systematic design, collection analysis and reporting of
data and finding relevantsolution to a specific marketing situation or problem.” D. Slesinger
and M. Stephenson in the encyclopaedia of social sciences define Research as “the
manipulation of things, concept orsymbols for the purpose of generalizing to extend, correct
or verify knowledge, whether thatknowledge aid n construction of theory and practice of an
art.

Research is thus an original contribution to the existing stock of knowledge making for
itsadvancement. The purpose of research is to discover the answers to the questions
through theapplication of scientific procedures.

Defining the Research Problem and Objectives:It is said, “A problem well defined is
halfsolved”. The first step in research methodology is to define the problem and deciding
theresearch objective. The objective of the study is to know about the Investor perception
regardingCommodity Trading

Research Design: Research Design is a blueprint or framework for conducting the
researchproject. It specifies the details of the procedures necessary for obtaining the
information needed to structure and solve research problem. The research design used in
present study is descriptiveresearch.

Sampling design:Sampling can be defined as the section of some part of an aggregate
ortotality on the basis of which judgment or an inference about aggregate or totality is
made. Thesteps involved in sampling design are as follows:

Universe:Universe refers to the total of the units in field of inquiry. Universe of the
presentstudy is all the investors who trading in Commodity market

Page 57

Sampling unit:Sampling unit of the present study is Investors of Commodity Market and
potential investors of same. (As I did online survey so exact location cannot be determined)

Sampling size:Sampling size is the total no. of units which we covered in the study. In
present study sample size is 35.

Sampling Technique:Sampling Technique used in the study is Convenient Sampling.

Convenient sampling:It is that type of sampling where the researcher selects the
sampleaccording to his or her convenience.

Data Collection and Analysis:Data can be collected in two ways
Primary data: Primary data are those, which are collected afresh and for the first
time,and thus happen to be original in character. It is the backbone of any study.

Secondary data: Secondary data are those which have already been collected
bysomeone else and which have already been passed through the statistical
process. In thiscase one is not confronted with the problems that are usually
associated with thecollection of original data. Secondary data either is published
data or unpublished data.

Source of data: Source of the present research is both primary and secondary data.
Primarydata is obtained from respondents with the help of widely used and well-known
method of
Survey, Through a well-structured questionnaire. And the secondary data is collected from
the public domain.

Research instrument: Research instrument is that with the help of which the researcher
collect the data from respondents. The questionnaire of the present research consists of
close ended and Likert Scale.

Page 58

Tools of Analysis: In present study pie charts, graphs and percentage use to analyse the
collected data.

Page 59


E. LIMITATIONS OF THE
STUDY

Page 60


Limitations of the Study

Although the sincere efforts have been done to collect authentic and relevant information,
the study may have the following limitations -:

Hard Enough to Fetch Information: It was not an easy task to get information from
investors who invest in commodity. The investors were not always open and
forthcoming with their views, even agitated and not disclosing. The Major
contribution in Commodity market is by wholesalers and big companies they were
not sharing their strategies they use in share market. Hence information is restricted
to individual investors.

Limited Scope: Scope of study is limited potential Investors and Individual Investors
only and because of limited time and money, the results of study may not be
generalized for India as a whole.

Results may be Inaccurate: This study is based on the assumption that perceptions
are true and factual although at times that may not be the case.

Existence of Biases: Though every care has been taken to eliminate such biases, but
considering the human factor the possibility of small bias having come up cannot be
ruled out altogether.

Investor Behaviour: Investor behaviour is dynamic in nature and thus over the time,
finding today may become invalid tomorrow.

Small Sample Size: The sample size taken is small and may not be sufficient to
predict the result with 100% accuracy and hence findings may not be generalized.

Page 61


F. DATA ANALYSIS AND
INTERPRETATION

Page 62

DATA ANALYSIS AND INTERPRETATION
Where do you prefer to invest your savings?
Real Estate Govt. Bonds
5% 4%
Gold / Silver
15%

Equity Market
11%

Insurance
13%
Other IPO 3%
Post Office 26%
8%
Mutual Fund
Bank 13%
28%

For Tabular format data check Annexure 1

Analysis:
28% of the Investors prefer to invest in Banks only. 10% of Investors still prefer
in invest in Post office saving schemes. 24% of investor prefers to invest in
Gold/Silver, Government Bonds and Real Estate. 27% of investors prefer to
invest in Stock markets like Equity Market, IPO and Mutual Fund.

Interpretation:
Still People prefer to invest in Banks products like Saving account, fixed
deposits and all.Some of the investors still invest their amount in
traditional savings schemes of Post-Offices
According to investors Gold/Silver and Real Estate are good investments
because they have physical evidence.
Approx. 27% investors only prefer Stock markets
Page 63

Where do you invest?

Not Investing
13%

Commodity
Equity
21%
63%

Derivatives
3%

For Tabular format data check Annexure 2

Analysis:
This was a specific question to know the where investors are investing in the
main there broad financial instruments available in the Indian Financial
Market.
It was found that 63% investor is investing in Equity while in Commodity
Market Only 21% are investing. On the other hand on negligible % of investor
are investing in Derivatives Market. 13% didn’t response to this question.

Interpretation:
Investors are avoiding Derivatives Market; Might be they are not proper
aware about the mechanism of Derivatives Market.
Slowly Investors are attracting towards Commodity Market.
Mostly people are investing in Equity Market.
13% people skipped this question hence it can be conclude that some
are the people are not investing in modern financial instruments.

Page 64

Project Report

Recommandé

Recommandé

Contenu connexe

Tendances

Tendances (20)

En vedette

En vedette (8)

Similaire à Project Report

Similaire à Project Report (20)

Plus de Kapil Israni

Plus de Kapil Israni (9)

Project Report