International Commodity Management, IIPMB

1. 1
Introduction to
Organized Commodity
Markets

2. Outline of presentation
• The Commodity Economy and the
need for Organized Commodity
Markets
• Commodity exchanges: What are
they?
• UNCTAD’s role in the area

3. 3
The commodities economy and
poverty: There is a strong link
between them
"75 per cent of the 1.2 billion people
living on less than $1 a day live and
work in rural areas. Moreover, about
half of the world's hungry people are
from smallholder farming communities,
another 20 per cent are rural landless
and about 10 per cent live in
communities whose livelihoods depend
on herding, fishing or forest resources."

4. • Fragmented markets
• Inadequate infrastructure
• Information asymmetries
• Limited access to affordable credit
• Weak or absent sectoral support institutions
• Globalising commodity supply chains with
rising barriers to small producer
participation
Poor Rural Development

5. Declining Commodity Prices
• Real prices have been diminishing over
the long term
• Price fluctuations are large and
increasing
• Commodity price instability

6. Most Recently:
Domestic Liberalization
• Unrealistic expectations
• Impact on farm gate prices is ambiguous
and uncertain
• Absence of functioning markets poses
unacceptable risks for producers
• Private sector has not filled the gap left
by marketing boards and other support
systems

7. Need for organized markets
The liberalisation of agricultural trade
and the withdrawal of government
support to agricultural producers outside
the OECD, recent years have seen the
rapid creation and growth of commodity
exchanges in developing countries and
countries with economies in transition

8. Need For Organized Markets
The former Chicago Board of Trade (CBOT)
was founded in 1848 by a group of Chicago
merchants keen to establish a central
marketplace for trade. Before that time,
farmers all too often had found no buyers for
the grain they had transported to Chicago.
Given the high transport costs, they had been
left with little choice but to dump the unsold
produce in the lake.

9. Organized markets:
Commodity Exchange, What is it?
• “A market in which multiple buyers and sellers trade
commodity -linked contracts on the basis of rules and
procedures laid down by the exchange.”
• This includes: Spot trade for immediate delivery of the
commodity, forward contracts, warehouse receipts trading,
commodity-based futures and options contracts, and trade
facilitation services.

10. Commodity Exchanges
Over time, virtually all developed
country exchanges moved towards
futures trade (a mechanism for risk
transfer), as their services in physical
trade (spot and forward) became
superfluous (most of the exchanges that
were not able to make this change
disappeared; the rare exceptions include
the Dutch flower auction and a cheese
exchange in the USA

11. THE WORLD’S MAJOR COMMODITY FUTURES
EXCHANGES
2008 2007
Rank
1 1 New York Mercantile Exchange
(NYMEX, US)
2 3 Dalian Commodity Exchange
(DCE, China)
3 2 Chicago Board of Trade
(CBOT, US)
4 4 ICE Futures
(formerly IPE, UK)
5 9 Zhengzhou Commodity Exchange
(ZCE, China)
6 5 London Metals Exchange
(LME, UK)
7 7 Shanghai Futures Exchange
(SHFE, China)
8 10 Multi Commodity Exchange
(MCX, India)
9 11 New York Board of Trade
(NYBOT, US)
10 6 Tokyo Commodity Exchange
(TOCOM, Japan)
11 8 National Commodity & Derivatives Exchange
(NCDEX, India)
12 13 Chicago Mercantile Exchange
(CME, US)
13 12 Tokyo Grain Exchange
(TGE, Japan)
14 15 Euronext.LIFFE (EU)
15 16 Central Japan Commodity
Exchange (C-COM, Japan)
16 17 Kansas City Board of Trade
(KCBT, US)
17 18 Winnipeg Commodity Exchange
(WCE, Canada)
18 19 Bursa Malaysia Derivatives
(BMD, Malaysia)
19 14 National Multi-Commodity
Exchange (NMCE, India)
20 20 JSE/SAFEX
(South Africa)
21 22 Brazilian Mercantile & Futures
Exchange (BM&F, Brazil)
22 21 Minneapolis Grain Exchange
(MGEX, US)
Exchange
Rank

12. THE WORLD’S MAJOR COMMODITY FUTURES
EXCHANGES
BY SECTOR (2008)
0m
150m
300m
450m
600m
750m
Numberofcontracts(futures&options)
Agriculture 200 313 93 223 64 - 4 6 18 13 8 - 4 - 3 3 0 3 1
Metals 86 - 126 - - 113 70 29 5 - - 5 - - - - 0 - -
Energy 339 - 62 - 153 - 21 6 1 - - - - - - - 3 - -
CME
Group
DCE SHFE ZCE
ICE
Futures
LME MCX TOCOM NCDEX
NYSE
Euronext
TGE TAIFEX KCBT NMCE BMD
BM&F
Bovespa
C-COM
JSE/SAF
EX
MGEX

13. LEADING AGRICULTURAL COMMODITY EXCHANGES 2008
DCE
CBOT
ZCE
NYBOT
NCDEX
CME
TGE
LIFFE
TOCOM
MCX
KCBT
WCE
BMD
SAFEX
BM&F
MGEX
C-COM
0m
100m
200m
300m
400m
500m
600m
1
Numberofcontracts(futures&options)
OECD exchanges
Non-OECD exchanges

14. PRINCIPAL CONTRACTS OF THE MAJOR COMMODITY
EXCHANGES (2008)

15. MAIN GRAINS TRADED IN THE MAJOR
COMMODITY EXCHANGES IN THE WORLD
Dalian Commodity Exchange rice, corn, soyabeans
(DCE, China)
Chicago Board of Trade corn, soyabeans
(CBOT, US) wheat, rice
Zhengzhou Commodity Exchange wheat
(ZCE, China)
Multi Commodity Exchange cereals (maize)
(MCX, India)
New York Board of Trade wheat, barley
(NYBOT, US)
National Commodity & Derivatives Exchange rice
(NCDEX, India)
Tokyo Grain Exchange corn, soyabeans
(TGE, Japan) red beans
Euronext.LIFFE (EU) wheat, corns
Kansas City Board of Trade wheat
(KCBT, US)
Winnipeg Commodity Exchange wheat, barley
(WCE, Canada)
JSE/SAFEX maize, wheat,
(South Africa) soyabeans
Brazilian Mercantile & Futures corn, soyabeans
Exchange (BM&F, Brazil)
Minneapolis Grain Exchange wheat, corn,
(MGEX, US) soyabeans
Exchange Main grains
Traded

16. Commodity Exchanges
In the developing world, a commodity exchange may act
in a broader range of ways to stimulate trade in the
commodity sector. This may be through the use of
instruments other than futures, such as the cash or 'spot'
trade for immediate delivery, forward contracts on the
basis of warehouse receipts or the trade of farmers'
repurchase agreements, or 'repos'. Alternatively, it may
be through focusing on facilitative activities rather than
on the trade itself, as in Turkey where exchanges have
served as a centre for registering transactions for tax
purposes.

17. EXCHANGES IN AFRICA:
 The SAFEX Agricultural Products Division of the JSE Exchange, South
Africa is the continent’s only commodity futures exchange, and the only
commodity exchange in Africa that has truly withstood the test of time.
OTHER EXCHANGES IN AFRICA
• MACE (Malawi); The Malawi Agricultural Commodity Exchange
• KACE (Kenya); The Kenya Agricultural Commodity Exchange
• UCE (Uganda); The Ugandan Commodities Exchange
• ECEX (Ethiopia); Ethiopia Commodity Exchange
• ZAMACE (Zambia); The Zambia Agricultural Commodity Exchange
• ASCE (Nigeria); Abuja Securities and Commodity Exchange
• Ghanaian Commodities Exchange- in project
• ACE (regional, based in Malawi);
• Bourse Africa (Regional)

18. Bourse Africa

19. 19
AACP: An introduction
• The All ACP Agricultural Commodities Programme (AACP) is a joint
project involving:
– the European Union (EU)
– the African, Caribbean and Pacific secretariat (ACP)
– five international organisations (IOs): UNCTAD, CFC, ITC, FAO and the
World Bank
• A budget of €45 million has been set aside for actions by the IOs to
address ACP stakeholders’ needs
• The Programme’s actions will be demand-driven, arising from
participatory consultative processes to ensure ownership by ACP
stakeholders (national and regional)

20. 20
Potential benefits for developing countries
 Market creation
 Stimulating regional inte-
gration & South-South trade
 Price discovery
 Price risk management
 Infrastructure enhancement
 Market access
 Facilitate provision of
finance
 Price transparency
 Reduced counterparty risk
 Quality assurance/upgrade

21. 21
Caveat: Benefits do not automatically
flow from the establishment of a
commodity exchange
• A domestic commodity exchange is not necessarily an appropriate policy
instrument for all markets and all commodities.
• An exchange is only one part of the policy framework – it is not a panacea and
it does not stand alone from other commodity policy interventions
• An exchange which is badly-structured or poorly-managed is unlikely to
deliver enhancements to underlying commodity sectors.
• The extent to which prospective enhancements are delivered in large part
depend on the services offered and the strategic priorities pursued by the
exchange.
• A well-functioning commodity exchange is predicated upon a robust legal-regulatory
framework

22. 22
UNCTAD and Commodity Exchanges
• UNCTAD is the major international organization supporting
commodity exchange development: 15 years of hands-on support
• Aims to: promote understanding; facilitate sharing of experiences,
perspectives and ideas; enhance developing country capacity and
expertise; ensure viability and sustainability of exchange initiatives
• Expertise is concentrated in two areas:
– Direct technical assistance and advice, with involvement in the
Dominican Republic, Ghana, Kazakhstan, India, Indonesia, Malaysia,
Nigeria, Russia, Sri Lanka, Turkey and Ukraine, as well as a regional
exchange for Africa
– Awareness-raising through publications, presentations and the
organization of conferences

23. Commodity exchanges development: What
can UNCTAD do?
• To assess the relevance of existing commodity exchanges initiatives and
identify if it could be an appropriate solution and how to make them
more efficient and useful for farmers
• To scan and analyze the conditions depending on the type of Commodity
Exchange (physical commodity exchange, commodity futures exchanges,
etc.);
• Creating a new commodity exchange is no easy matter – how is it to be
organized, what contracts are to be traded (UNCTAD has done several
feasibility studies), what are the possibilities with respect to trading
platforms, how does one target potential users, what types of regulation
are required.
Exchange creation andExchange creation and
growthgrowth

24. What can UNCTAD do?
• UNCTAD is ideally placed to overcome the trust gap that often
still exists between the public and private sectors in developing
countries and which hinders investments in trade-related
institutions.
• Identify the components of the legal-regulatory frameworks
required for the functioning of different types of services
provided by a commodity exchange (rules, taxation)
A public-privateA public-private
orientationorientation

25. What can UNCTAD do?
• Organize Capacity building and training programmes that
addresses the needs of the various stakeholders;
• Visit to sucessfull Exchanges both inside and outside the region;
Bridging theBridging the
information gapinformation gap

26. What can UNCTAD do?
Warehouses
National
exchanges
tied into a
pan-African
network
Exchange ofExchange of
Innovative ideas:Innovative ideas:
Regional DimensionRegional Dimension
Creation of regional linkages

27. 27
UNCTAD Analysis, 2009 – A Study of
Development Impacts of Commodity Exchanges
in Developing Countries
• Aim: To identify, analyse and assess the impacts made by commodity futures exchanges
in developing countries on economic growth, development and poverty reduction, with
particular focus on agriculture
• Study undertaken in collaboration with leading exchanges in Brazil, China, India,
Malaysia and South Africa
• Verified 66 positive impacts that commodity exchanges have made in the following
areas: price discovery, price risk management, venue for investment, facilitation of
physical trade, facilitation of finance and general market development
• Also identified versatility of exchanges across different contexts and in response to
different challenges – existing and emerging – including in a context of smallholder
farming

28. 28
Aim and Objectives
• Aim:
To identify, analyse and assess the impacts made by commodity
exchanges in developing countries on development, poverty reduction
and economic growth, with particular focus on the agricultural sector
and farmers
• Objectives:
– Awareness-raising among governments and sector stakeholders
– Knowledge development about the impacts of agricultural commodity
exchanges
– Best practice identification and promotion
– Demonstrate worldwide applicability where it exists
– Exchange of information, experience and perspectives
– Network-building among South-based exchanges

29. 29
Scope
• Commodity futures exchanges have been selected as the focus of the
study because they tend to be the most sophisticated adaptation of a
commodity exchange
– The array of impacts generated is potentially the broadest
– A commodity exchange that offers other services but not futures
trading is likely to generate impacts that feature only a sub-set of
those generated by commodity futures exchanges
• However, this selection does not imply:_
– that a commodity futures exchange is always the appropriate form
of exchange to be established in every market or for every
commodity
– that every commodity futures market always in reality generates a
wider array of impacts than other forms of commodity exchange
– that a commodity futures exchange will always generate the same
range of impacts as those identified in this study

30. 30
Approach
• Country case studies - a comparative review of agricultural
futures exchanges in five key developing economies:
– Under what conditions they have emerged
– The factors that have driven their ongoing development
• Impact assessment research methodology:
– Designing a framework for analysing 81 potential development
impacts arising from agricultural futures contracts and supporting
services offered by commodity exchanges participating in the
Study Group
– Conducting an empirical investigation into these 81 impact
hypotheses in each of the featured countries

31. 31
Participants
•Africa •South Africa •JSE/SAFEX •White Maize
•Wheat
CountryRegion Exchange
Featured
contracts
•Latin America •Brazil • Bolsa de
Mercadorias &
Futuros (BM&F)
•Coffee
•Live Cattle
•East Asia •China •Dalian Commodity
Exchange (DCE)
•Soybean
•Maize
•South Asia •India •Multi Commodity
Exchange (MCX)
•Cardamom
•Mentha Oil
•South East Asia •Malaysia •Bursa Malaysia •Crude Palm Oil
A study group comprising the leading agricultural futures exchange by volume in each
developing region, with a focus on two commodities traded at each:

32. 32
Impact framework (1)
Price discovery
Price risk
management
Investment
venue
More efficient price
formation
Wider supply of
more accurate
information
Effective transfer of
price risk
Improved
investment
environment
Core functions
14 hypotheses 8 hypotheses 14 hypotheses
Exchange functions
Benefits arising
Impacts on beneficiaries1
(81 in total)
1 Impact hypotheses are further split into potential impacts specifically or mainly for farmers (37) and potential impacts for the wider commodity sector or the
overall economy (44); and potentially positive impacts (76) and potentially negative impacts (5). The full list of impacts can be found in the working paper
version of the study, available at: www.unctad.org/commodities

33. 33
Impact framework (2)
Exchange functions Facilitation of
physical trade
Market
development
Facilitation of
financing
Improved spot
reference price
generation
Reinforce cash market
transactions
Enhances storage &
logistics infra-
structure
Upgrades quality
standards
Education & capacity-
building
International trade
facilitation
Technology upgrade
& promotion
Industry growth
Enables bank lending
& other modes of
financing
Wider functions
18 hypotheses 9 hypotheses 18 hypotheses
Benefits arising
Impacts on beneficiaries1
(81 in total)
1 Impact hypotheses are further split into potential impacts specifically or mainly for farmers (37) and potential impacts for the wider commodity sector or the
overall economy (44); and potentially positive impacts (76) and potentially negative impacts (5). The full list of impacts can be found in the working paper
version of the study, available at: www.unctad.org/commodities

34. 34
Impact results
• Of 81 impact hypotheses, evidence was found to support the occurrence
of 69 of these in at least one of the featured markets2
– 31 related to farmers, 38 to the wider commodity sector or overall
economy
– 66 positive impacts, 3 negative impacts
• The study suggests that farmers do not need to directly use the exchange
to realise benefits from it:
– Indirect usage via aggregators (e.g. cooperatives, purchasers, financiers)
– Benefits arising from transparent dissemination of market information
•The study also suggests that many impacts – particularly those related to
facilitation of the physical market - can be realised without the exchange
needing to offer trade in futures
2 The performance in each exchange for 81 impact hypotheses, along with documentation of evidence, can be found in the working paper version of the study,
available at: www.unctad.org/commodities

35. 35
Bolsa de Mercadorias & Futuros,
Brazil (BM&F)
Context
• Continuous commodity trading in Brazil since
early 20th century
• The exchange’s room for action squeezed by
varying levels of government intervention
• Agro-liberalisation and deregulation in the
1980s, and increased export orientation
Development impacts
• Distributed across core and wider functions
• Hedging and price discovery are prominent
• The BM&F subsidiary, “Brazilian Commodity
Exchange” has integrated national cash markets
and enables financing and export promotion
possibilities for agro-participants
Key achievements
• Providing services that have supported the
commercialization of the agro-economy
e.g. enabling flow of capital into the sector;
enhancing efficiency and transparency of
government support; integrating the domestic
physical market; facilitating export markets
Relevance to smallholders
• BM&F mechanisms used by Government to
support smallholders schemes e.g. auctions to
support government procurement; channeling
finance to smallholders and providing a
secondary market

36. 36
Dalian Commodity Exchange, China
(DCE)
Context
• Established during economic reform period as
Government looked to build market institutions
• The exchange as a mechanism to support moves
towards framework for market pricing and
market opening
Development impacts
• Focused primarily on core price discovery and
price risk management functions
• Important emphasis also on capacity-building
for farmers to use market information
• Financing functionalities are nascent but have
strong growth potential
Key achievement
• Creating high levels of liquidity for key agro-
commodities
e.g. generated significant trading volumes in
strategic commodities; enhanced market
functioning; adapted to emerging dynamics in
important markets - liberalisation, GMO
Relevance to smallholders
•Major training and capacity-building execerise
by DCE to help smallholders improve cropping
and marketing decisions with market
information
•DCE encourages downstream partners to pass
on hedging benefits to smallholders

37. 37
Multi Commodity Exchange, India
(MCX)
Context
• Heavy government intervention, including
prohibition on futures trading until 1980s
• Three national multi-commodity exchanges a
key element of Government plan to upgrade
fragmented and infrastructure-deficient
commodity markets
Development impacts
• Distributed across core and wider functions
• Price discovery and dissemination a key impact
• Impacts arising from facilitation of physical
market and market development have been high
Key achievement
• Catalyzing development of the wider
commodity ecosystem
i.e. as well as price risk management, has also
improved the flow of information, facilitated
physical infrastructure development,
established reliable quality standards
Relevance to smallholders
•High expectation for direct farmer participation
•Current usage is low, but high impacts from
information & physical market development
•Indirect participation of small farmers via co-
operatives
•Regulatory obstacles

38. India can lead the way in integrating farmers into national
and international market places using modern information
and communications technologies

39. 39
Bursa Malaysia
Context
• Established in 1980 on the back of a well-
developed and strongly-regulated physical
market for crude palm oil
• The consummation of the Government’s
diversification strategy, originating in the early
1960s
Development impacts
• Mainly arising from core functions
• Price discovery and price risk management for
world palm oil industry
Key achievement
• Bringing pricing power to Malaysia for its key
export commodity
i.e. unique in establishing a benchmark
exchange in the developing world, ensuring
pricing power for its key export commodity on
the world market.
Relevance to smallholders
• No observed smallholder focus - development
impact has been elsewhere
• Many smallholders operates within government
support schemes

40. 40
JSE/SAFEX, South Africa
Context
• Heavy government intervention in the agro-
markets until political transition brought on by
the demise of the apartheid regime
• Root-to-branch liberalisation in mid-1990s
entrenched market pricing and an open,
unprotected and volatile grain sector
Development impacts
• Distributed across core and wider functions
• Price discovery and risk management key in
supporting sector performance despite high
levels of price and production volatility
• High impact in enabling financing and
facilitating physical market development
Key achievement
• Filling the void left by sudden government
deregulation of the markets
i.e. has become a core institution in the
deregulated South African grain markets, for
the conduct of hedging, financing and cash
transactions
Relevance to smallholders
•JSE/SAFEX supports smallholder capacity-
building programmes in partnership with other
agencies
•Indirect usage of the exchange's market
information has been encouraged.

41. 41
Conclusions
Exchanges are versatile instruments, capable of upgrading
commodity sector performance in a range of situations and
addressing emerging challenges as they arise
 In general, exchange services are relevant for smallholders
 however, price risk management is not always an important - or
even relevant service - for smallholders compared with price
information and physical market services
 The exchange is not a panacea, and has depended on an
appropriate regulatory environment and other complimentary
policies and mechanisms