Commodity Business: An Introduction Session I Rahul Singh, Ph. D.
A bulk good such as an agricultural product, food, natural resource or metal that is traded on an exchange in bulk quantities.
A commodity is any homogenous item which may be freely bought and sold. The term typically refers to products such as coffee, cocoa and soyabeans (soft commodities) or gold, aluminium and platinum (hard commodities). Commodities typically are bought and sold in futures markets where producers combine with manufacturers and speculators to create a smoothly functioning market.
Commodity market is a place where trading in commodities takes place. These are the markets where raw and primary products are exchanged.
These raw commodities are traded on regulated commodity exchanges, in which they are bought and sold in standardised contracts. It is similar to an equity market, but instead of buying or selling shares one buys or sells commodities.
The commodities markets are one of the oldest prevailing markets in the human history. In fact, derivatives trading started off in commodities with the earliest records being traced back to the 17th century when rice futures were traded in Japan.
Precious Metals: Gold, Silver, Platinum, etc.
Other Metals: Nickel, Aluminum, Copper, Zinc, etc.
Agro-Based Commodities: Wheat, Rice, Corn, Cotton, Oils, Oilseeds, etc.
Soft Commodities: Coffee, Cocoa, Sugar, etc.
Petrochemicals: High Density Polyethylene, Polypropylene.
Live-Stock: Live Cattle, Pork Bellies, etc.
Energy: Crude Oil, Natural Gas, Gasoline, etc.
How is Indian Market Moving?
Turnover in agriculture grew 375 per cent over the past two years.
There are 18 commodity exchanges in India.
Multi Commodity Exchange of India Ltd (MCX), located at Mumbai.
National Commodity and Derivatives Exchange Ltd (NCDEX), located at Mumbai.
National Board of Trade (NBOT), located at Indore.
National Multi Commodity Exchange (NMCE), located at Ahmedabad.
Trading in country’s commodity exchanges totalled $460 billion in the financial year ended 2005, a four-fold jump from the year before.
Currently, the commodity market in India clocks a daily average turnover of Rs 14,000-16,000 crore.
Only 4 commodities out of the 94 allowed for trading account for over 70 per cent of the total turnover. This does not speak highly about the commodity futures market in terms of its width and depth.
How is Indian Market Moving?
The Survey has admitted that gold and crude oil account for the major part of the total transactions in the futures market at present.
During 2005-06, the total value of commodity futures trade was Rs. 21.34 lakh crore as compared to Rs. 5.71 lakh crore during 2004-05 showing an increase of 274%.
The volume of trade has also gone up to 6685 lakh tonnes during 2005-06 as compared to 1942 lakh tonnes during 2004-05. The trade volume has also gone up by 244% during 2005-2006.
Mega Trends in Commodity
Reduction of government intervention
Globalisation (competition vs. market
Technology revolution: information and bio-sciences
The consumer as queen
New “corporate” business models
64% of pop. Works in agriculture=35 % GNI.
It now accounts for approx. 23 % of GDP compared to 50 % in 1947.
Economy potentially very strong, large industrial output, technological knowledge and extensive reservoir of skilled manpower.
Exports: cotton goods, iron, jute products, coffee, electrical goods, leather, handicrafts, diamonds, chemicals, auto and software.
Imports are machinery, petroleum, chemicals, cereals, copper, and zinc.
Fraction of Agriculture in National GDP
Market Structure: Spot
Minimum Support Price (MSP)
Product – primary and non-primary, Participants, Trading, Clearance, Settlement, Governance