3. 3
OVERVIEW:-AGRICULTURE
BUDGET 2014-15:THE FINANCE BILL
“Farming as an activity contributes nearly 1/6th
to our national GDP
and a major portion of our population is dependent on for livelihood. It has risen
the challenge of making India largely self sufficient in providing food for a
growing population. To make farming competitive and profitable there is an
urgent need to step up investment, both public and private, in agro technology
development and creation and modernisation of existing agri-business infra.
Establishing agricultural research institute in Assam and Jharkhand, in addition
to this an amount of Rs.100crores is being set aside for setting of an
“Agri-tech Infrastructure Fund”. And also Agricultural Universities along
with Horticulture Universities. And a sum of Rs.200crores has been allocated
for this.
Deteriorating soil health has been a cause of concern and leads to sub
optimal utilisation of farming resources. Government will initiate a scheme to
provide to every farmer a soil health card in a mission mode. And a sum of
Rs.100crores for this purpose and an additional Rs.56crores to set up 100
“Mobile Soil Testing Laboratories” across the country. There have also been
growing concerns about imbalance in the utilisation of different types of
fertilizers resulting deteriorating of the soil.”
Other Developmental Steps Include:-
4. 4
Agricultural Credit: - A target of Rs.8lakh crore has been set for
agricultural credit during 2014-15.
Interest Subvention Scheme for Short Term Crop Loans: - Under this
scheme, the banks are extending loans to farmers at concessional rate of
7%.
Rural Infrastructure Development Fund (RIDF):- NABARD operates
RIDF, out of the priority sector lending shortfall of the banks, which
helps in the creation of Infrastructure in agriculture and rural sectors
across the country.
Warehouse Infrastructure Fund: - Increasing the warehousing capacity
for increasing the shelf life of agricultural produces and there by the
earning capacity of the firms is utmost importance. Keeping in view of
Scientific Warehousing Infrastructure in the country.
Creation of Long Term Rural Credit Fund (LTRCF):- In order to give
a boost to long term credit in agriculture, scheme named LTRCF set up in
NABARD for the purpose of refinance support to cooperative banks and
Regional Rural Banks.
Source: - Finance Bill 2014-15, By Mr. ARUN JAITLEY
(Union Finance Minister)
5. 5
INTRODUCTION
Modern commodity exchanges date back to the trading of rice futures in the
17th century in Osaka, Japan, although the principles that underpin commodity
futures trading and the function of commodity markets are still older. The first
recorded account of derivative contracts can be traced to the ancient Greek
philosopher Thales of Miletus in Greece, who, during the winter, negotiated
what were essentially called options on oil presses for the spring olive harvest.
The Spanish dramatist Lope de Vega reported that in the 17th century options
and futures were traded on the Amsterdam Bourse soon after it was opened.
Futures’ trading is a natural application to the problems of maintaining
a year-round supply of seasonal products like agricultural crops. Exchanging
traded futures and options provide several economic benefits, including the
ability to shift or otherwise manage the price risk of market or tangible
positions. With the liberalization of agricultural trade in many countries, and the
withdrawal of Government support to agricultural producers there is a new need
for price discovery and even physical trading mechanisms, a need that can often
be met by commodity exchanges. Hence, the rapid creation of new commodity
exchanges, and the expansion of existing ones have increased over the past
decade. At present, there are major commodity exchanges in over twenty
countries, including the United States, the United Kingdom, Germany, France,
Japan, the Republic of Korea, Brazil, Australia and Singapore. A large number
of brand new exchanges have been created during the past decade in developing
countries, but many of them have disappeared.
Commodity futures markets have a long history in India. The first
organised futures market, for various types of cotton, appeared in 1921. In the
1940s, trading in forward and futures contracts as well as options was either
outlawed or rendered impossible through price controls. This situation
remained until 1952, when the Government passed the Forward Contracts
Regulation Act, which to this date controls all transferable forward contracts
and futures. During the 1960s, the Indian Government either banned or
suspended futures trading in several commodities. The Government policy
slackened in the late 1970s and recommendations to revive futures trading in a
wide range of commodities were made. With the full convertibility of the
rupee, the ongoing process of economic liberalisation and the Indian economy’s
6. 6
opening to the world market, the role of futures markets in India is being
reconsidered. Most contracts being traded are unique in the world. Although
some are clearly domestic-oriented, others (such as raw jute, pepper, and
oilseeds) have the potential to become of regional or even international
importance. Two of the better-known commodity exchanges are the Bombay
Oilseeds and Oils Exchange, founded in 1950, and the International Peppers
Futures Exchange, in 1997.
China’s first commodity exchange was established in 1990 and at least
forty had appeared by 1993, as China accelerated the transformation from
a centrally planned to a market-oriented economy.
Futures exchanges in Japan have also gone through a process of
consolidation since 1993, and only 10 remained in 1999 (down from 17
just five years earlier).. The biggest is The Tokyo Commodity Exchange
(TOCOM), created in November 1984.
Malaysia hosts two futures and options exchanges, which hold the 50th
and 51st place in the 2000 ranking of world futures exchanges by trading
volume. Singapore is home to the Singapore Exchange (SGX), which was
formed in 1999 by the merger of two well-established exchanges, the
Stock Exchange of Singapore (SES) and Singapore International
The modern commodity market originated during the 19th century when
American farmers began using "forward" contracts. These were agreements to
deliver agricultural products at a future date in return for a guaranteed price. In
the form of standardized futures contracts traded on exchanges like the Chicago
Board of Trade, those forward contracts are the primary securities traded on the
commodity market.
OBJECTIVESOF THE STUDY
The main aim of this paper is to seek whether commodity exchanges and their
twin tools of Futures and Options can bring about price stabilization in
agriculture commodities. It is generally argued that futures trading, among other
things, reduces the seasonal price variations in agriculture commodities and also
helps in discovery of spot(ready) prices. The cropping pattern and sowing
decisions are also said to be influenced by futures trading in commodities.
This study is based upon these following objectives
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Awareness-raising:
To build awareness of the solutions that commodity exchanges provide, and
their track record in doing so, among key national, regional and international
stakeholders – including Governments, regulators, the private sector, civil
society and the media.
Accumulation of knowledge:
To produce a high-quality report that adds to the existing knowledge
base – establishing within a coherent framework the enduring impacts that
commodity exchanges have made in key markets over time.
Promotion of best practice: To identify innovative and effective practices that
can be held up as models for – or drivers of – embedding a pro-growth, pro-
development symbiosis within exchange and market development
How Seasonal variation in prices of agricultural commodities are reduced
by trading at the Commodity exchange
Short-term (weekly or daily) price variations can be reduced by futures
and options
To know The definite relationship between futures prices and actual
commodity prices (Spot or ready prices)
How Futures trading influence the long-term price trend (price
stabilization) in any commodity.
How Futures trading influence the sowing decisions and cropping pattern.
Apart from these, the study also traces the problems of
Indian Commodity exchanges with respect to non-transparency of prices,
product standardization etc. It further attempts to find out the nature and volume
of the commodity trading pattern in India is also assessed.
NEEDS OF THE STUDY
First of all this report fulfils the completion of our 2 year full time MFC
course
Then this report needed to find out how the commodity exchanges play a
major role for facilitating agricultural growth in India.
The most important and foremost requirement of this report is to know
the different mechanisms formulated by the commodity exchanges for the
benefits of the agricultural sector. And basically the interrelation as well
as the interaction between both.
RESEARCH METHODOLOGY
8. 8
This chapter deals with the description of the study area, sampling
procedure adopted, method of survey, nature and sources of data.
DESCRIPTION OF THE STUDY AREA
The present study pertains to all six nationalised commodity exchanges namely,
National Multi-commodity Exchange Ltd.(NMCE), Multi Commodity
Exchange Of India Ltd.(MCX), National Commodity and Derivative Exchange
Ltd.(NCDEX), Indian Commodity Exchange(ICEX), Universal Commodity
Exchange(UCE) and ACE Commodity and Derivative Exchange Ltd(ACE),
and different role played by them
SAMPLING DESIGN
For the present study five major agricultural commodities currently
traded in the commodity exchanges were selected, namely potato, almond,
chana, wheat, soybean. Which were selected on the basis of their volume of
trade.
NATURE AND SOURCES OF DATA
Primary data were collected from the selected members of the
national Commodity Exchanges and their clients. The information collected
from them by personal interview with well structured questionnaire.
Secondary data thus collected from the official websites of different
nationalised commodity exchanges and other websites as well as from various
text books and magazines, newspapers.
LIMITATION OF THE STUDY
The present study did not considerregional commodity exchanges due to
difficulties in obtaining data.
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Literature Review
Commodity trading is prevailing in India since mid-19th century.
The shape and structure of trading has undergone a sea change in terms of
nature of commodities traded, volume of trade, clearing, settlement &
guarantee system, transparency in trade, governance and regulation. The
commodities trading through exchanges have traditionally been limited to
single commodity exchanges until the Union Government decided in
favour of national-level multi-commodity exchanges. It has been
observed at global level that the commodities have witnessed much more
volatile price situations than the prices in the market for financial
instruments.
The relationship between spot and futures markets in price discovery has
been an important area of research. Garbade & Silber in their article
‘Price movements and price discovery in futures and cash markets’
(1982) tested whether futures prices lead spot prices. Correlation of basis
(spot prices futures prices) of the previous time period with spot or
futures prices of the current time period was empirically tested. If basis
innovations forecast futures returns, then the spot market leads the futures
market. If basis innovations forecast spot returns, then the futures market
leads the spotmarket. Susan Thomas and Kiran Karande used it for castor
seed market in India.
M. Thiripalraju & T.P. Madhusoodanan in their paper “Commodity
Futures prices in India: Evidence on Forecast Power, Price Formation
and Inter-Market Feedback” found the efficiency of price formation in the
Indian commodity futures markets of Pepper and Castor seeds. Susan
Thomas of IGIDR, Mumbai has in her paper “Agricultural Commodity
Markets in India” shown some evidence of role played by futures market
in price stabilisation. Her study is based on Mujaffarnagar jaggery
futures market. In her paper with D Balasundaram on “cotton futures” it
has been concluded that the futures market benefit the cotton economy by
increasing the efficiency of price discovery, in addition to enabling the
reduction of price risk.
Futures and options market lead to destabilising speculation and
malpractice if not properly regulated. The Gupta Commit- tee (1997)on
‘Hedging through international commodity exchanges’ noted:
11. 11
“The need for regulation of the markets arises when such regulations increase
the allocative efficiency of these markets from what would prevail under no
regulation at all. Allocative efficiency of the futures and options market is
reflected by the ability of these markets to perform their price discovery and
risk shifting functions efficiently.”
13. 13
Background of the study
India is predominantly an agrarian economy with very high population
dependence on agriculture and allied activities. More than 90% of rural
population and about 65% of total population derive their livelihood from
agriculture, directly or indirectly. Hence, the price determination and
stabilisation in prices of agriculture commodities become very significant for
sustainable growth in agriculture. It was in this perspective that the Long-term
grain policy of the Govt. of India1 emphasized that the role of public
intervention should primarily be to stabilise prices and that any system of price
stabilisation must be national in scope. The opening up of agricultural trade has
forced farmers to cope with the vagaries and volatility of international market
prices.
Apart from the role of public intervention through MSPs (mini- mum
support prices) and Procurement Price in price stabili- sation of agriculture
commodities, commodity exchanges have been an effective tool in price
determination and stabilisation of such commodities. While public intervention
brings about distortions in efficient price discovery, cropping pattern and
market mechanism, the role of commodity exchanges is to evolve an efficient
price discovery system along with ensuring hedging of price risks.
The High-level Committee on long-term grain policy noted:
“Price instability is not merely a matter of concern from the point of view of the
welfare of producers and consumers and their incomes. There is very strong
evidence from across the world and from India’s own experience in the past that
agricultural investment and growth is adversely affected if price instability is
high and, in particular, if farmers cannot be reasonably sure that prices will
remain above their costs of production
Basics about commodity market & exchanges
WHY COMMODITIES MARKET?
India has very large agriculture production in number of agri-commodities,
which needs use of futures and derivatives as price-risk management system.
Fundamentally price you pay for goods and services depend greatly on how
well business handle risk. By using effectively futures and derivatives,
businesses can minimize risks, thus lowering cost of doing business.
14. 14
Commodity players use it as a hedge mechanism as well as a means of making
money. For e.g. in the bullion markets, players hedge their risks by using
futures Euro-Dollar fluctuations and the international prices affecting it. For an
agricultural country like India, with plethora of mandis, trading in over 100
crops, the issues in price dissemination, standards, certification and
warehousing are bound to occur. Commodity Market will serve as a suitable
alternative to tackle all these problems efficiently.
TRADITIONAL COMMODITY MARKETS IN INDIA
Spot trading takes place mostly in regional mandis & unorganised markets.
Markets are fragmented and isolated. Reduced Government procurement
activity, mostly in cereals through MSP distorts markets in favour of food
grains. Mandi trading in India is done in 140 crops through over 7500 Mandis
amongst trading Farmers, licensed Traders, Brokers and Wholesale Dealers.
Mandi Inspectors issue type & quantity certificate by levying Transaction fee
and Taxes that varies between 4% and 12%. State Agricultural Marketing
Boards (SAMBs) and Mandi Board (Farmers, Traders, State) govern Mandis.
EVOLUTION OF COMMODITY TRADING IN INDIA
The first derivative in the world started with the commodities.
Organised futures trading started in 1865 at the Board of Trade of
Chicago, followed by other trading centres such as Kansas,
Minneapolis, New York. Futures trading in commodities like
rubber, soyabean, black pepper etc. was started in the U.S.A after
1920. Apart from US and UK, India is the only country that had
active futures market over a long period of time. A good deal of
futures trading in cotton was done at Bombay. Other markets soon
developed for oilseeds (Gujarat & Punjab), wheat (Hapur, 1913),
raw jute (Calcutta, 1912). During WW II, futures trading in many
commodities were banned under Defence of India Rules.
Turnaround came in 1952 with the passing of Forward Contracts
(Regulation) Act (FCRA, 1952), which led to the establishment of
Forward Markets Commission (FMC) in September 1953. FMC,
headquartered at Mumbai, is a regulatory authority which is
overseen by the Ministry of Consumer Affairs and Public
Distribution, Govt. of India. There are 24 commodity exchanges in
the country including recently established 4 national-level multi-
commodities exchanges.
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WHAT IS A COMMODITY FUTURE EXCHANGE?
Exchange is an association of members, which provides all organizational
support for carrying out futures trading in a formal environment. These
exchanges are managed by the Board of Directors, which is composed primarily
of the members of the association. There are also representatives of the
government and public nominated by the Forward Markets Commission. The
majority of members of the Board have been chosen from among the members
of the Association who have trading and business interest in the exchange. The
chief executive officer and his team in day-to-day administration assist the
Board. There are different classes of members who capitalize the exchange by
way of participation in the form of equity, admission fee, security deposits,
registration fee etc.
a. Ordinary Members: They are the promoters who have the right to have own –
account transactions without having the right to execute transactions in the
trading ring. They have to place orders with trading members or others who
have the right to trade in the exchange.
OBJECTIVES OF FUTURES TRADING
Leads to price discovery
Provides hedging option
A smart investment choice
Integrates players and markets
Improves cropping pattern (in case of commodity futures)
Why is a commodity exchange useful? What functions does
it perform?
As has been discussed, the usefulness of a commodity
exchange lies in its institutional capacity to remove or reduce the high
transaction costs often faced by entities along commodity supply chains in
developing countries. A commodity exchange reduces transaction costs by
offering services at lower cost than that which participants in the commodity
sectors would incur if they were acting outside an institutional framework.
These can include – but are not limited to – the costs associated with finding a
suitable buyer or seller, negotiating the terms and conditions of a contract,
securing finance to fund the transaction, managing credit, cash and product
16. 16
transfers, and arbitrating disputes between contractual counterparties. Therefore,
by reducing the costs incurred by the parties to a potential transaction, a
commodity exchange can stimulate trade.
Moreover, properly functioning commodity exchanges can promote more
efficient production, storage, marketing and agro-processing operations,
and improved overall agriculture sector performance. It is precisely
because of these benefits that transition and developing economies with
large agricultural sectors have embraced commodity exchanges in recent
years (Seeger, 2004).
Specifically, a commodity exchange can perform one or more of a range
of potential functions – exactly which functions will depend on the nature
of the exchange and the local context in which it operates. For exchanges
that offer spot trade or supporting activities, the institutional function is to
facilitate trade – bringing together buyers and sellers of commodities, and
then imposing a framework of rules that provides the confidence to
transact.
Robust procedures for overseeing these transactions can also trigger
improvements in the efficiency and infrastructure of commodity cash
markets – for example, through the upgrading of exchange-accredited
warehousing and logistics infrastructure, the acceptance among market
participants of exchange-defined product quality specifications, and the
reduction of default levels, through intermediation by the exchange in the
processing (or “clearing”) and settling of contracts.
Commodity exchanges offering trade in instruments such as forwards and
futures contracts also provide sector participants with a means of
managing exposure to commodity-price volatility. This is important, as
world commodity prices are often highly volatile over short time periods
– sometimes fluctuating by over 50 per cent within a year. These
“hedging” instruments can bring producers greater certainty over the
planting cycle, while enabling processors, traders and purchasers to lock
in a margin that can secure them a positive return. This allows those
active in the commodity sector to commit to investments that yield
longer-term gains, and also makes it more viable for farmers to plant
higher-risk but higher-revenue crops.
Finally, where spot, forwards and futures transactions take place on a
commodity exchange, the price information those results from this trade –
the so-called “price discovery” mechanism – also performs a vital
17. 17
economic function. As exchange prices come to reflect the information
known about the market, they provide an accurate reflection of the actual
supply/demand situation. This provides important signals that market
participants can use to make informed production, purchasing and
investment decisions. Furthermore, the availability of a neutral and
authoritative price reference can overcome information asymmetries that
have often disadvantaged smaller or less well-connected sector
participants in the past.
Types of commodities
METAL Aluminum, Copper, Lead, Nickel, Sponge
Iron, Steel Long (Bhavnagar), Steel Long
(Govindgarh), Steel Flat, Tin, Zinc
BULLION Gold, Gold HNI, Gold M, i-gold, Silver,
Silver HNI, Silver M
FIBER Cotton L Staple, Cotton M Staple, Cotton
S Staple, Cotton Yarn, Kapas
ENERGY Brent Crude Oil, Crude Oil, Furnace Oil,
Natural Gas, M. E. Sour Crude Oil
SPICES Cardamom, Jeera, Pepper, Red Chili
PLANTATIONS Areca nut, Cashew Kernel, Coffee
(Robusta), Rubber
PULSES Chana, Masur, Yellow Peas
PETROCHEMICALS HDPE, Polypropylene(PP), PVC
OIL & OIL SEEDS
Castor Oil, Castor Seeds, Coconut Cake,
Coconut Oil, Cotton Seed, Crude Palm Oil,
Groundnut Oil, Kapasia Khalli, Mustard
Oil, Mustard Seed (Jaipur), Mustard Seed
(Sirsa), RBD Palmolein, Refined Soy Oil,
Refined Sunflower Oil, Rice Bran DOC,
Rice Bran Refined Oil, Sesame Seed,
Soymeal, Soy Bean, Soy Seeds
CEREALS Maize
OTHERS Guargum, Guar Seed, Gurchaku, Mentha
Oil, Potato (Agra), Potato (Tarkeshwar),
18. 18
Commodity Exchanges in India
The government of India has allowed national commodity exchanges,
similar to the BSE & NSE, to come up and let them deal in
commodity derivatives in an electronic trading environment. These
exchanges are expected to offer a nation-wide anonymous, order
driven; screen based trading system for trading. The Forward Markets
Commission (FMC) will regulate these exchanges.
Consequently four commodity exchanges have been approved to
commence business in this regard. They are:
S.NO COMMODITY MARKET IN INDIA
1 Multi Commodity Exchange (MCX), Mumbai
2 National Commodity and Derivatives Exchange Ltd
(NCDEX), Mumbai
3 National Board of Trade (NBOT), Indore
4 National Multi Commodity Exchange (NMCE),
Ahmadabad
5 ACE ( Ace Derivatives and Commodity Exchange
Limited)
6 UCX (Universal Commodity Exchange Limited)
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NMCE :( National Multi Commodity Exchange of India
Ltd.)
NMCE is the first demutualised electronic commodity exchange of
India granted the National exchange on Govt. of India and operational
since 26th Nov, 2002.
Promoters of NMCE are, Central warehousing corporation (CWC),
National Agricultural Cooperative Marketing Federation of India
(NAFED), Gujarat Agro- Industries Corporation Limited (GAICL),
Gujarat state agricultural Marketing Board (GSAMB), National
Institute of Agricultural Marketing (NIAM) and Neptune Overseas
Ltd. (NOL). Main equity holders are PNB. The
Head Office of NMCE is located in Ahmadabad. There are various
commodity trades on NMCE Platform including Agro and non-agro
commodities.
NCDEX (National Commodity & Derivates 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)
20. 20
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.
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, Euro next, 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
21. 21
among others, as its partners having its head office located at Gurgaon
(Haryana).
ACE ( Ace Derivatives and Commodity Exchange Limited)
Organization Profile
As India has entered a new phase wherein its markets are opening up more,
allowing participants to be exposed to global commodity risk, there is a growing
need to bridge the current gap through more entrants in the Indian commodity
exchange space.
Kotak Anchored, Ace Derivatives and Commodity Exchange Limited is a
screen based online derivatives exchange for commodities in India. Ace
Commodity Exchange earlier known as Ahmedabad Commodity Exchange has
been in existence for more than 5 decades in Commodity Business, bringing in
the best and transparent Business Practices in the Indian commodity space. The
Kotak group brings in more than 25 years of financial expertise and has
pioneered many business practices existing in the financial services industry.
With Ace, Kotak Group brings to the commodity market a new, state-of-the-art
trading platform which combines the operational efficiency of global exchanges
with deep domain expertise in each commodity vertical.
Key Shareholders
Kotak Mahindra Group
A legacy built over 2 decades, Kotak Mahindra is one of India’s leading
banking and financial services organizations, offering a wide range of financial
services that encompass every sphere of life. From commercial banking, to
stock broking, to mutual funds, to life insurance, to investment banking, the
group caters to the diverse financial needs of individuals and corporate sector.
22. 22
HAFED
The Haryana State Cooperative Supply & Marketing Federation Ltd.
(HAFED) is an apex State Co-operative service and marketing institution,
under the patronage and sponsorship of the Government of Haryana (India).
Other Key Shareholders
Bank of Baroda
Corporation Bank
Union Bank
UCX (Universal Commodity Exchange Limited)
Overview
Universal Commodity Exchange Limited is the next generation national level
commodity exchange for derivatives market across all commodity segments.
UCX is headquartered in the financial capital of India, Mumbai with presence in
all major trading destinations across the country.
It aims to be one of the largest commodity derivatives exchanges ensuring price
transparency and a robust risk management & surveillance system for
facilitating online trading, clearing & settlement operations for the market
across the country.
Universal Commodity Exchange Ltd. has received a permanent and perpetual
recognition from Govt. of India (Ministry of Consumer Affairs, Food & Public
Distribution) under the provision of FC(R)A.
KEY SHAREHOLDERS
National Bank for Agriculture and Rural Development ( NABARD)
National Bank for Agriculture and Rural Development (
NABARD) is an apex institution accredited with all
matters related to policy, planning and operations in the
23. 23
field of credit for agriculture and other economic activities in rural areas. It
promotes research in the fields of rural banking, agriculture and rural
development. Over the last 3 decades of operations NABARD has played a
pivotal role towards inclusive growth of rural areas & promoting developmental
activities.
Indian Farmers Fertiliser Cooperative Limited (IFFCO)
IFFCO is the largest producer and marketer of fertilizers
having thousands of co-operative societies; represent
millions of farmers across the country.
IDBI Bank
IDBI Bank is India's leading public sector bank which
has played a pioneering role in laying the foundations
of some of the world class institutions such as National
Stock Exchange (NSE), National Securities Depository Services Ltd (NSDL),
Stock Holding Corporation India Ltd (SHCIL) and others.
Rural Electrification Corporation Limited (REC)
REC is a Navratna Central Public Sector Enterprise
under Ministry of Power, was incorporated on July
25,1969 under the Companies Act,1956. It is one of
India's leading Public Financial Institutions operating in
Power Infrastructure space. It has established itself as a strategic player in
financing of entire Power Infrastructure space which includes financing for
generation, transmission, distribution and rural electrification projects, across
the country.REC was accorded the coveted "Navratna" status by Govt. of India
in 2008.
Commex Technology
Commex Technology is a technology and
consulting service provider in commodity &
capital markets. Their domain expertise and
management bandwidth is poised to cater to the
various initiatives planned by the exchange.UCX's
business strategies along with the active support from its strategic partners in
the Bullion & Agri segments, should lead to a convergence of large-scale
processors, traders, producers & co-operative societies along with banks in the
long run and in the process- assist in the development of the Indian commodity
futures market.
24. 24
AGRICULTURE IN INDIA
2nd largest agricultural land
At 179.9 million hectares, India holds the second largest agricultural
land in the world.
Favourable climatic conditions
• With 20 agri-climatic regions, all 15 major climates in the world
exist in India. The country also possesses 46 of the 60 soil types in the
world.
Record production of food grains
• Total food grains production in India reached an all-time high of
259.32 million tonnes in FY12. Rice and wheat production in the
country stood at 105.3 and 94.9 million tonnes, respectively.
Largest producer of major agricultural and horticulture crops
• India is the largest producer of pulses, milk, tea, cashew and jute;
and the second largest producer of wheat, rice, fruits and vegetables,
sugarcane, cotton and oilseeds.
Increasing farm mechanisation
• India is one of the largest manufacturers of various farm equipments
like tractors, harvesters and tillers. India manufactures one-third of
tractors in the world; the number of tractors in the country is
estimated to reach 16 million by 2030 from 4 million in 2012.
Agricultural advantages of India
In 1960–6:-1 Food grain production: 69.3 million tonne
In 2011–12 Food grain production: 259.3 million tonnes
25. 25
Robust demand
• A large population is the key driver of demand for agricultural products
• Rising urban and rural incomes have also aided demand growth
• External demand has also been growing especially from key markets like the
Middle East
Attractive opportunities
• Increasing demand for agricultural inputs such as hybrid seeds and fertilisers
• Promising opportunities in storage facilities; potential storage capacity
expansion of 35 million tonnes under the 12th Five Year Plan
Competitive advantages
• High proportion of agricultural land (54.7 per cent or 179.9 million hectares)
• Leading producer of jute, pulses; second-largest producer of wheat, paddy,
fruits and vegetables
Policy support
• Government is increasing Minimum Support Prices (MSPs) to ensure higher
crop production
• Schemes like Rashtriya Krishi Vikas Yojana (RKVY) incentivises states to
increase private investment in agriculture and allied sectors
• Launched National Food Security Mission (NFSM) to increase production of
rice, wheat and pulse
26. 26
CONCEPT OF WAREHOUSE
Meaning and Functions
Warehouses are scientific storage structures especially constructed for the
protection of the quantity and quality of stored products. Warehousing may
be defined as the assumption of responsibility for the storage of goods. It
may be called the protector of national wealth, for the produce stored in
warehouses is preserved and protected against rodents, insects and pests,
and against the ill-effect of moisture and dampness. The warehousing
scheme in India is an integrated scheme of scientific storage, rural credit,
price stabilization and market intelligence and is intended to supplement
the efforts of co-operative institutions.
The important functions of warehouses are:
1. Scientific Storage:
Here, a large bulk of agricultural commodities may be stored. The product
is protected against quantitative and qualitative losses by the use of such
methods of preservation as are necessary.
2. Financing: Warehouses meet the financial needs of the person who
stores the product. Nationalized banks advance credit on the security of the
warehouse receipt issued for the stored products to the extent of 75 to 80
per cent of their value.
3. Price Stabilization: Warehouses help in price stabilization of agricultural
commodities by checking the tendency to making post-harvest sales among
the farmers. Farmers or traders can store their products during the post-
harvest season, when prices are low because of the glut in the market.
Warehouse helps in staggering the supplies throughout the year. They thus
help in the stabilization of agricultural prices.
4. Market Intelligence: Warehouses also offer the facility of market
information to persons who hold their produce in them. They inform them
27. 27
about the prices prevailing in the period, and advise them on when to
market their products.
This facility helps in preventing distress sales for immediate
money needs or because of lack of proper storage facilities. It gives the
producer holding power; he can wait for the emergence of favourable
market conditions and get the best value for his product.
Growth & Development of Commodity Exchanges
General overview
Underpinned by initially strengthening industrial activity,1 strong
demand from developing countries and optimistic market sentiment
following the European Central Bank’s longer-term refinancing
operations, the UNCTAD price index2 for three groups of commodities
– all food,3 agricultural raw materials, and minerals, ores and metals –
rose in the first quarter of 2012 from their lows in December 2011.
However, prices fell in the second quarter as a result of the economic
slowdown in China, the intensification of the debt crisis in Europe and
the appreciation of the dollar against other currencies. The drop was
particularly pronounced for agricultural raw materials, and minerals, ores
and metals.
The third quarter of 2012 witnessed a different price scenario between
food and base metals and ores. The food market was tight, mainly due to
supply disruptions caused by adverse weather in the United States,
Australia and the Black Sea region. Surging maize, wheat and soybean
prices put a strain on the food market.
On the other hand, the prices of many important base metals and ores
continued their downward trend in July and August 2012. Copper prices,
despite their brief recovery in July, were significantly lower than a year
ago. Metals and ores, key raw materials for construction and
manufacturing, are sensitive to the economic performance of major
consuming countries. The gloomy economic situation dampened the
demand for these commodities. At the same time, the development and
expansion of new projects over the last decade increased the global
supply of many minerals and metals. In some markets such as
aluminium, nickel and zinc, supply exceeded demand, driving down
prices further.
To boost the economy, the central banks of the eurozone, the United
States and Japan eased their monetary policies in September. While the
28. 28
full impact of these policies on economic growth is still unclear,
commodity markets responded quickly, with the prices of gold and key
base metals rallying.4
The price of crude oil remained high and volatile during the first 10
months of 2012, due to divergent factors. The uncertainty of the world
economic outlook and geopolitical risks in the Middle East, in particular,
weighed heavily on oil markets. The economic woes in the eurozone,
struggling recovery in the United States and the economic slowdown in
emerging countries weakened the demand for crude oil. The economic
sanctions on oil exports from the Islamic Republic of Iran removed off
the oil market an estimated 0.82 million barrels of crude per day in the
third quarter of 2012. This vacuum, however, was filled by the increased
outputs from Saudi Arabia, Libya and Iraq.
Functions of commodity exchanges
A commodity exchange acts as a portal or a common place where traders can
buy and sell commodities. Such exchanges enable seamless trading, eliminate
the need for middle men and allow the market to fix a price that is driven purely
by demand and supply of the product.
How does a commodity exchange work?
Just like the stock market, a commodity exchange serves as a marketplace for
buyers and sellers to engage in trading commodities directly. Trading can be
done in two ways: cash/spot and futures. In the former method, the buyer and
seller agree upon a common price of the commodity, and actual physical
delivery of that commodity takes place. The latter is different. Futures contract
do not involve spot delivery of commodities; delivery is fixed for a future date
at a price agreed by both the parties.
Just like a stock exchange, a commodity exchange serves as a marketplace for
buyers and sellers to engage in trading commodities directly.
People engage in this kind of trading mainly because each party gets something
out of the deal. Commodity manufacturers/producers want to hedge their
produces against fall in price in the future. On the other hand, commercial
consumers want to lock in goods at a favourable price in order to avoid paying a
higher price later. And individual traders wish to benefit from future movements
of commodity prices.
29. 29
The entire process is done electronically. The producer submits an offer price
and the future delivery date of the commodity on this exchange. The seller, who
agrees to pay that price, enters into a contract with the buyer. Almost all
transactions take place in the similar manner, allowing the actual demand and
supply to determine the price.
In India, there are three major national commodities exchanges: National
Commodity and Derivatives Exchange Ltd, Multi Commodity Exchange of
India Ltd and National Multi Commodity Exchange of India Ltd. In addition to
these, 18 more domestic commodity exchanges in India are known to function.
Any commodity exchange serves three main functions:
Defines rules and regulations of trading to carry out uniform trading
practice
Provides dispute settlement mechanism
Circulates price movements and market news to the participating
members
Regulation
Trade-facilitating institutions boost trade by reducing the cost and the
uncertainty of entering into transactions. One of the ways in which they do this
is by applying a framework of rules and procedures to regulate trade, thereby
providing individuals or organizations with increased confidence to engage in
mutually beneficial transactions.
As has been detailed by UNCTAD (1997), beyond basic oversight
to ensure auctions are open and not manipulated, there are two important
thresholds at which the regulatory framework becomes an important foundation
for commodity exchange activities. The first is when an exchange moves from
trading products that are physically present at its premises to trading paper
which represents the right to commodities. These rights need to be enforceable,
and this is achieved through the clear definition of contractual rights and
obligations arising from transactions conducted in the exchange, and of the
30. 30
mechanisms that enforce them. A second threshold occurs when intermediaries
start to play a role in the market on behalf of end users; the activities of these
intermediaries need to be overseen to ensure that they fulfil obligations. When
either of these thresholds is crossed, there is a requirement upon the exchange to
act as a self-regulator of activities taking place in its markets, and for
Government to provide an overall framework for oversight.
Protection of investors: measures taken to protect investors – taken
here to mean all market users – from unscrupulous or irresponsible
practices by the exchanges, counterparties or intermediaries that they may
interact with. Common mechanisms used to protect investors include:
fitness or good character qualifications for intermediaries; requirements
for intermediaries to segregate client funds from their own funds; and
binding arbitration mechanisms for dispute settlement.
Ensuring that markets are fair, efficient and transparent: measures
taken to ensure that the market price truly reflects the information known
about the market, to constrain “speculative excess”, and to avoid
manipulation of prices or physical stocks. Common mechanisms used to
uphold market integrity include: ensuring a time-stamped audit trail of all
trading activity; position limits for speculative participants, including
tighter limits in delivery months; constant monitoring of trading for
suspicious patterns; free, transparent dissemination of data; an approval
process by the external regulator for new contracts to ensure an adequate
deliverable supply (among other factors); and “know-your-customer”
requirements for intermediaries.
Reduction of systemic risk: measures taken to effectively manage the
systemic risk arising from market operations, reducing the risk of default
to acceptable levels, and ensuring the system as a whole is sufficiently
resilient to withstand shocks, such as spikes in volatility or the collapse of
a large trader. Common mechanisms used to reduce systemic risk
include: minimum capital requirements in order to participate in the
markets; the rigorous use of the margining system, with margin levels
related to market risk (including higher margin requirements in periods of
increased volatility and during the delivery period); daily price movement
limits (or “circuit filters”) that confine daily trading within defined price
parameters; and a “risk hierarchy”, which ensures that exchange members
cover their clients’ positions in the case of a client default and a clearing-
31. 31
house guarantee fund covers members’ positions in the case of a member
default.
External regulator: a governmental agency, or an independent agency
accountable to Government, that provides regulatory oversight across
national markets as a whole. An external regulator may also act as an
interface with the external regulators of other national markets to ensure
adequate regulation of transactions that are cross-jurisdictional in nature.
The exchange as a self-regulatory organization: the exchange’s own
personnel and systems that provide regulatory oversight over exchange
operations, including both the trading and – where it is performed in-
house – the clearing and settlement functions.
The industry self-regulatory organization: a body that either represents
market intermediaries (i.e. brokers and other entities active in the
markets), or is appointed by Government to oversee the activities of
market intermediaries. In particular, an industry self- regulatory
organization can ensure investor protection by overseeing relations
between the intermediary and the end user.
Structure of Derivative Market
Derivatives In India
32. 32
Ministry of Finance Ministry of ConsumerAffairs
SEBI FMC
StockExchanges Commodity Exchanges
Financial Derivatives Commodity Derivatives
Futures Options futures
Precious Metal Other Metals
Agriculture Energy
34. 34
Recent Issue on “POTATO’’
POTATO, popularly known as the king of vegetables and a native of South
America, has now become an indispensable part of Indian cuisine. It ranks 4th
among important staple food after wheat, rice and maize.
Potato is rich in carbohydrates, constituting 22-24% of its weight. It contains
2.1% to 2.7% protein, less than 0.5% of fat and the rest is water. Being a short
duration crop, it produces more quantity of dry matter, edible energy, and edible
protein in lesser duration, compared to cereals like rice and wheat. Hence,
potatoes are useful tool to achieve the nutritional security of the nation.
Potato is a temperate or cool season crop which needs a low temperature, low
humidity, less windy, and bright sunny days. It does well under well-distributed
rains or moist weather situations to high temperatures. Humidity and rains are
not conducive to potatoes as these lead to insect pests and disease attacks
SCENARIO: - India produces around 8% of the world’s total produce. India
ranks fourth in terms of area and third in terms of production of potato across
the globe. China and Russia are ahead of India in terms of potato production.
Uttar Pradesh produces the highest quantity of potatoes for India followed by
West Bengal. There has been an increase of 12.5% in the production of Potato
than last year (2010). Uttar Pradesh, the state which houses our basis i.e. Agra,
saw an increase of 22% in their production levels.
35. 35
FUTURE PROSPECTS-
There has been a constant growth in productionof Potato in India
in the last 5 years. The productivity level in India is below the world average
level. The production of potato has gone up during the previous years due to
better varieties and larger acreage under potato. There is usually very little
quantity left for exports, making India’s share in world exports insignificant and
inconsistent. India exports just around 1-0.5% of the world’s total potato
exports.
36. 36
ANALYSYS
The overall objective of this short study is to determine the effectiveness of
newly developed commodity exchanges in India as a means of improving
smallholder farmer linkages to markets, particularly formal markets, and the
advantages in terms of new opportunities, more reliable trading relationships
and improved incomes, compared with traditional commodity trading routes.
Where possible we compare typical means of market linkage, whether
through individual or farmer organizations, to wholesale markets and other
trading relationships such as fair trade and contracting.
The purpose of the study is to determine whether
commodity exchanges have provided a positive impact on farmer marketing
channels, and assisted in upgrading marketing institutions that support the
smallholder community. The target commodities for the study are coffee,
maize and beans. All sophisticated market systems in developed countries,
such as commodity exchanges, were established by the users of the market.
They were not established and funded by outside organizations.
Major Agricultural product wise analysis
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 November to December and
harvested from Feb to March. The peak arrival period begins from
March-April at the major trading centres of the country.
India accounts for 2/3rd of the world's chickpea production. India imports
37. 37
around 3-4 lakh tons of chickpeas annually. The major countries from
where India imports chickpeas are 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.
Market Influencing Factors
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
consequenceof the lack of free-flow of information.
Stocks present with stockists and the stocks-to-consumptionratio.
Imports and the crop situation in the countries from where imports
originate, viz., Canada, Australia, Myanmar.
There is high substitutability between pulses in India among the
consumers. So the price of other major pulses like tur, yellow peas, green
peas etc also influences the prices of chana.
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Wheat
General Characteristics
Wheat is one of the world's three most important cereal crops along with
maize and rice. It is reported to be grown domestically from atleast as
early as 9000 BC and is now grown in almost all parts of the world.
Wheat is a globally important sourceof 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
39. 39
countries importing wheat with maximum demand emanating from
developing nations. The major importing regions are Middle-east Asia,
South-east Asia and North-west Africa. Egypt, Brazil, Indonesia, Algeria
are the most important importing nations.
Wheat crops around the world have their own unique production cycles
of planting and harvest timeframes.
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
40. 40
around 15-20%.
The procured wheat is used to maintain a minimum buffer stock for
meeting unforeseen exigencies, for providing foodgrains required for
Public Distribution System (PDS) and the other foodgrain based welfare
programmes of the Government. In addition, the grain is also sold at pre-
determined prices to the open market.
Though, India is not a major player in global markets India has resorted
to imports, whenever there is a supply tightness. India has also exported
around 5 million tonnes of wheat in 2003-04. Govt. agencies take the
decision to bring in imports and the current policies are not in favour of
exports.
Market Influencing Factors
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.
Soya bean:-
General Characteristics
Soybean is an important global crop and processed soybean is the
largest source of protein feed and second largest source of vegetable
41. 41
oil in the world.
The major portion of the global and domestic crop is solvent-
extracted with hexane to yield soy oil and obtain soymeal, which is
widely used in the animal feed industry. It is estimated that above
85% of the output is crushed worldwide.
Though, a very small proportion of the crop is consumed directly by
humans, soybean products appear in a large variety of processed
foods.
The cultivation of soybean is successful in climates with hot
summers, with temperatures between 20°C to 30°C being optimum.
Temperatures below 20°C and over 40°C are found to retard growth
significantly.
It can grow in a wide range of soils, with optimum growth in moist
alluvial soils with a good organic content.
Modern soybean varieties generally reach a height of around 1 m (3
ft), and take 80-120 days from sowing to harvesting.
Global Scenario
The annual global soybean production has been in the range of 210-
230 million tonnes in the recent years, accounting for 55-58% of total
global oilseed output of around 390-400 million tonnes.
US, Brazil, Argentina, China and India are the major producers in
order of production with production in these countries ranging around
70-80, 55-60, 32-48, 14-16 and 8-10 million tonnes in the recent
couple of years.
Weather, acreage under other competitive crops like corn, cotton and
pests & diseases are the major factors influencing production.
While in US, India and China crop starts arriving from Aug-Sept, it
starts from Jan-Feb in S. America.
The annual global trade in soybean is estimated to be around 70-80
million tonnes.
While, USA (30 -35 million tonnes), Brazil (23-28 million tonnes),
Argentina (5-15 million tonnes) are the exporters of beans, China
(35-40 million tonnes) and EU (12-16 million tonnes) are the major
importers.
In addition to soybean, soy oil and soymeal are also widely traded
42. 42
globally with annual trade of around 9 million tonnes and 52 million
tonnes respectively. While, US is the largest exporters for soybeans,
Argentina is the largest exporter of soy oil and soy meal globally.
Important World Soy Markets
Chicago Mercantile Exchange, which acquired Chicago Board of
Trade - the world's oldest soy futures market
Dalian Commodity Exchange - trades the most liquid soybean
contracts in the world
Argentina and Brazil FOB determine the physical prices
India in World Soy Industry
(Rounded figs.) Global India % Share
(In million tons)
Soybean Production 230 9 4
Soybean Trade 75 0 0
Soy Oil Production 35 1.5 4
Soy Oil Imports 9 1 11
Soy Oil Exports 9 0 0
Soy Meal Production 150 7 5
Soy Meal Exports 52 3.5 7
Soy Meal Imports 52 0 0
Indian Scenario
India's annual production of soybean has been around 8.5-10 million
tonnes in the recent years with India's production in 2009-10
estimated to be around 8.9 million tonnes by the Government of
43. 43
India.
The acreage under this crop has more than doubled in the past two
decades to around 11 million hectares currently being sown under this
crop, with better returns encouraging more farmers to adopt this new
crop.
Madhya Pradesh, Maharashtra, Rajasthan and Andhra Pradesh are the
major cultivators of this important oilseed, with their respective
contributions usually around 60%, 25%, 6-7% and 1-2%.
Soybean is exclusively grown in the khariff season in India, with
sowing taking place after the first monsoon showers in late June or
early July. Sowing can extend upto end of July in different parts of
the country.
The harvesting commences from September, with Maharashtra
reporting the earliest arrivals. October and November are the peak
arrival months, with all-India arrivals crossing 10 lakh bags of
approximately 90 kg on the peak arrival days.
The production is dependent on the monsoon and fluctuates between
years.
India is highly dependent on imports to meet domestic edible oil
requirement. Government policies are in favour of developing the
domestic crushing industry and supporting Indian farmers and do not
promote import or export of soybean. Thus, there is virtually no
import or export of soybeans.
However, India out of its total soymeal production of around 6.5-7
million tonnes, exports around 3.5 million tonnes with Vietnam,
Japan, Thailand, Indonesia, UAE, Greece being the major importers.
Major Trading Centres
Indore, Ujjain, Dewas, Mandsore in Madhya Pradesh, Akola, Sangli,
Nagpur in Maharashtra, Kota in Rajasthan are major trading centres.
Market Influencing Factors
Domestic prices are highly influenced by the global price movements,
with prices highly correlated with the CME prices.
Fundamentally, weather at all producing centers, domestic and
international is the most crucial factor, with the pod bearing period,
44. 44
being the most crucial.
United States Department of Agriculture makes progressive
assessment of crops, stocks, global supply and demand and releases
regular reports, which are widely looked upon by the global market to
determine prices.
The other major influencing factor is the prices of soy oil and
soymeal, which are in-turn dependent on the fundamentals of global
edible oil and global animal feed industry.
Locally, prices are influenced by currency fluctuations, weather,
acreage, pest & diseases, production estimates by industry
associations, Government agencies.
India imports more than 60% of its entire edible oil requirement and
the entire edible oilseed and oil sector is a highly sensitive sector.
Thus, new Government policies and apprehensions about new
policies have a strong sway over prices, during periods when new
announcements are made or are about to be made.
The supply-demand and price scenario of competitive oils, viz.,
palmoil.
The crush margin between meal, oil and seed
Almond
General Characteristics
Almonds, though considered to be nuts are technically the seed of the
fruit of the almond tree, which is a medium-sized tree that bears
fragrant pink and white flowers. The fruit, botanically referred to as a
drupe has an outer hull and a hard shell with the seed inside.
Almonds are commonly sold shelled. Shelling almonds refers to
removing the shell to reveal the seed. Almonds with their shells
attached are called unshelled almonds. Blanched almonds are shelled
almonds that have been treated with hot water to soften the seedcoat,
45. 45
which is then removed to reveal the white embryo.
Sweet almonds and Bitter almonds are two forms of almonds, of
which sweet almond is the variety, which is consumed directly or
indirectly by humans as a food product. Bitter almond is slightly
shorter and broader than sweet almonds and are mainly used for
extracting almond oil and not consumed as food, as it is poisonous.
Chocolate confectionary, bakery and snacking are the three major
global categories for almond usage.
Global Scenario
The annual global Sweet almond production on shelled-basis has
been in the range of 7 - 8.5 lakh tonnes in the recent years. Record
crops and a steady increase in production were seen from 2005-06 to
2008-09 (Almond crop year is from August to July). However, the
output in 2009-10 is forecasted to dip on account of unfavourable
climatic conditions.
United States of America is the single largest producer, consumer and
exporter of Sweet almonds, with the country contributing to over
80% of the global almond production.
The state of California in US is the most important producer of Sweet
almonds, as this region is reported to be accounting for 99% of the
American production.
Nonpareil is the single largest variety planted in California. Its
production is reported to be 38% of the total output, followed by
Carmel (12%), Monterey (10%), Butte/Padre (9%) and Butte (8%).
The world's largest almond handler is the Blue Diamond Growers
Cooperative, which is located in Sacramento, California. Blue
Diamond is owned by over two-thirds of California growers and
markets one-third of California's crop.
The other producing countries are Australia, Turkey, Chile, European
Union, China and India with a production of 26,000 tonnes, 16,000,
9500, 79,800, 1,500 and 1,200 tonnes on a shelled basis in 2008-09.
Spain is the single largest producer in the European Union.
The annual trade in almonds has been around 4.6 lakh tonnes (on
shelled basis) in the recent years. The major exporters are US,
Australia and Chile with exports of 4,40,000 tonnes, 12,300 tonnes
46. 46
and 6,700 tonnes (on shelled basis) in 2008-09. European Union,
India, Japan, Canada and Turkey are the major importers with
imports of 2,00,000 tonnes, 45,000 tonnes, 21,000 tonnes, 19,000
tonnes and 14,000 tonnes in 2008-09.
While, the peak harvesting period of the Californian crop starts from
mid-August and extends till September that of Australian crop occurs
between February and April.
Indian Scenario
The ever-expanding middle class and increase in health awareness,
has lead the growing consumption of almond in the country in recent
years. The annual rate of increase in India's domestic consumption of
almonds is reported to be around 20%.
More than 95% of almonds consumed by Indians is imported with
more than 80% of imports being sourced from California. The other
major country from which India imports almonds is Australia. While,
Indian imports in 2008-09 is reported to be above 45,000 tonnes, the
imports in 2009-10 are expected to rise to 50,000 tonnes.
India has to resort to imports to meet almost its entire requirements as
domestic production of sweet almonds is only around 1,200 tonnes.
The other almond trees present in the country are of non-descript
variety and mostly produce bitter almonds.
India imports almonds with shells and processes it domestically to
obtain shelled almonds, unlike almost all other importing nations,
which import shelled almonds. This is due to availability of cheap
labour and better appearance and lesser losses in manual shelling of
almonds as against mechanized shelling.
Most of the manual shelling of almonds in India is undertaken at
Bombay and New Delhi, from where the shelled almonds are
transported to other consumption centres.
The Indian festival season extending from September to December is
the peak consumption period for almonds, with maximum demand
witnessed in November. Thus heavy imports of new Californian
almonds are seen from September to meet the strong domestic
demand during the festival season. Imports from Australia pick up
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during April and May after the harvesting season in that country.
Major Indian Trading Centres
Mumbai, New Delhi
Market Influencing Factors
The domestic almond prices are a reflection of global supply-demand
fundamentals, with the annual production at California being the most
important price determining factor.
The Indian traders keep a close track of the Californian crop progress
with special focus kept on forecasts by US agencies, weather, pest
attacks etc. The United States Department of Agriculture and the
California Almond Board makes progressive assessment of crops,
stocks, global supply and demand and releases regular reports, which
are widely looked upon by the global market to determine prices.
Domestically, stock present with traders and the cost at which it has
been acquired is the most important price influencing factor.
The major importers and traders of almond in India are well aware of
the fundamentals of the domestic market requirements and are
usually well-stocked to meet the annual festival demand.
Meanwhile, as almond is not considered as an essential commodity
and there is no local farming community producing this crop, policy
intervention in this commodity is very minimal.
Agriculture Price Policy
1. Although India’s past record in food price stabilisation is good, principally
because of government’s intervention, instability has increased very markedly
in recent years. In real terms (i.e. in terms of the ratio of the wholesale price
index (WPI) for cereals to the all-commodity WPI), cereals prices increased
17.4 per cent between 1997-98 and 1999-00 followed by an almost equally
sharp decline of 13.3 per cent between 1999- 00 and 2001-02. High MSPs have
distorted inter-crop price parities, particularly in favour of wheat, leading to
shift of area from oilseeds and pulses and to high import of these commodities.
48. 48
2. Agricultural price policy, as it exists in India currently, was conceived of on
the premise of a closed economy where domestic production has to meet
domestic demand in almost every commodity. MSP serves the requirement of
price stability by ensuring that years of glut are not followed by large
production declines leading to high prices in the subsequent year. The procedure
assumes that long-run domestic costs are good indicators of long-run prices and
that stocks accumulated when production exceeds demand in the short-run,
pushing prices below MSP, can in normal course be disposed off without undue
downward pressure on market prices at other times when production falls below
demand.
3. In an open economy, however, long-run domestic prices will increasingly be
affected by trends in international prices although domestic production costs
would still be the dominant determinant in a large economy such as India’s.
Assessment of how India’s costs of production are moving relative to world
prices will, therefore, become progressively more important not only for the
design of domestic price policy but also in areas such as technology
development and trade policy. More importantly for price stability, since world
prices fluctuate considerably around their long-run trends, it would also be
necessary to ensure a mechanism to prevent international price fluctuations
from influencing domestic prices so much as to nullify the domestic price
policy.
4. Traditional system of price stability through MSP mechanism has increased
Government’s food-subsidy burden and is, therefore, unviable. Hence, it is also
necessary to consider very seriously alternative mechanisms of risk
management. One of these is the idea of extending insurance to cover not only
the risks of crop failure and yield loss but also losses stemming from unforeseen
price fluctuations. Futures trading in grains can significantly reduce the risks of
price fluctuations. Futures trading lead to more efficient price discovery by
allowing more agents with relevant information to participate in price formation
than would be possible if all these agents had to bear the fixed costs of physical
trading. Secondly, since risks in physical trading can be reduced through hedge
options, existence of futures markets can reduce costs of insuring against price
risks and encourage more trade in spot physicals.
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Role of Commodity Exchanges in Facilitating Agriculture
1. Price discovery:-
Price discovery refers to the mechanism through which prices come to
reflect known information about the market. The price level established
on the open market can therefore represent an accurate depiction of the
prevailing supply/demand situation in the underlying commodity markets,
whether in the spot market for current deliveries or in the
forwards/futures markets for deliveries at specified future occasions. The
benefits of price discovery can be categorized as those arising from a
more efficient price formation process, and those arising from the wider
supply of more – and more accurate – market information.
The former refers to those benefits arising from the proper alignment of
supply and demand, ensuring that the market pricing signal triggers
efficient production, purchasing and investment decisions by participants
in the sector. The latter refers to those benefits arising from the
publication and dissemination of market information, with the resulting
price transparency providing a readily available, authoritative and neutral
price reference to sector participants.
2. Price-risk management:-
A commodity exchange can provide price-risk management solutions by
offering trade in commodity futures and options contracts. These
instruments address the fact that as Governments have withdrawn from
the sector, commodity sector participants have become increasingly
exposed to the notorious price volatility that has long afflicted global
commodity markets.
Price volatility breeds risk, and vulnerability to risk is recognized as one
of four dimensions that constitute poverty. When farmers receive prices
that are unstable and uncertain, they run price risks from the moment that
they decide to plant a crop and every time that they buy and apply inputs
such as fertilizers or pesticides, or use paid labor. They never know
whether the price that they receive at the end will cover their costs and be
50. 50
worth their efforts. Such risks can deter farmers from making important
investments in upgrading their productive activities, and can instead lock
them into a vicious cycle of low productivity and low returns. Thus, price
volatility creates and sustains rural poverty.
The usage of commodity-linked instruments to hedge commodity price risk
can bring greater certainty over the planting cycle, allowing those active in
the commodity sector to commit to investments that yield longer-term gains,
and increasing the viability of planting higher-risk but higher-revenue crops.
Even in the face of a long-term decline in the prices of their commodity, the
ability to hedge against shorter-term price movements provides farmers with
a window in which to adjust cropping patterns and diversify their risk profile.
3. Venue for investment:-
Commodity futures exchanges also offer a number of wider benefits
as an institutional venue for investment. Firstly, the exchange clearing
house acts as a counterparty to all trades, reducing the risk of
counterparty default and providing a more secure and reliable
investment environment. Secondly, the exchange’s rules, regulations
and governance procedures, coupled with those of its regulators and
intermediary bodies, provide an orderly rule-based framework within
which investment practices can be enhanced and disputes can be
arbitrated. Thirdly, the speculative interest that it generates is usually
necessary to provide the liquidity required for hedging to be effective.
However, the role of speculative participation in commodity futures
markets is heavily contested. In some situations, speculation may be
considered by Government or society to be a wasteful or morally
undesirable activity.
Impacts on farmer;-
A liquid environment in which to effectively hedge.
Speculation may lift price, and therefore farmer return.
Speculation can increase futures market volatility making effective
hedging more challenging.
Tendency for farmers to speculate in ways in which they cannot afford.
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4. Facilitation of physical commodity trade:-
The orthodox theory argues that futures markets evolve after the
development of a well-ordered cash market. However, recent experience
suggests that in certain circumstances, the introduction of a commodity futures
market can stimulate the development of the cash markets. Central to this
experience has been the notion of the exchange as an “island of excellence”,
extending the high levels of performance in its core trading functions to the
physical commodity markets that it serves.
Impacts on farmer
Improved price from intermediaries received by farmers because
availability of neutral & authoritative reference price.
Reduces need for distress sales.
Access to more distant markets through logistics.
Facilitates new sources of commodity finance.
Increases crop’s suitability to end user requirements.
5. Facilitation of financing to the agricultural sector:-
Lack of access to affordable sources of finance is a significant
constraint faced by many entities in the developing world. Financiers often
consider agriculture to be a particularly high-risk and low-profit proposition for
standard modes of bank lending. This means that farmers and other entities in
agricultural sectors typically pay high rates of interest for borrowing, through
both formal and informal channels. Alternatively, they may abstain from
borrowing altogether, and become locked into a cycle of low investment and
low returns. However, forms of commodity finance have been developed that
can reduce financiers’ risks and costs of delivery, by linking traditional financial
tools with commodity exchange services. The lower risks and lower costs that
ensue can enable banks to reduce accordingly the rates of interest charged to the
borrower.
Impacts on farmer
Increases farmers’ access to finance.
Reduces costs of borrowing by reducing risks to borrower & lender.
52. 52
Provides working capital to cover important expenses and avoid distress
sales.
Ultimately enables greater capital for investment Financing becomes
more organized and predictable.
Cash and carry arbitrage provides an alternative cheap source of
financing.
Income stabilization for farmers
Policy options for commodity income stabilization
Diversification strategies: Reducing dependence on limited and volatile
income streams, by diversifying into new crops with unrelated price
development.
Supply management: Controlling the supply of a commodity relative to
demand, in an attempt to influence price.
National revenue management: Budgetary management designed to
smooth government expenditure over time, via stabilization funds and
spending rules.
Compensatory finance: Relief loans or payments to countries triggered
by falls in commodity export revenues.
Market-based risk management instruments: Instruments used to offset
exposure to price risk through financial markets or other institutions.
Situation of the Indian Commodity Exchanges
India does not have a large nation-wide commodity market, but isolated
regional commodity markets. In parallel with the underlying cash
markets, Indian commodity futures markets too are dispersed and
fragmented, with separate trading communities in different regions and
with little contact with one another. While the exchanges have varying
degrees of success, the industry is generally viewed as unsuccessful. The
exchanges – with a few exceptions – have acknowledged that they need
to embrace new technologies, and, above all, modern – and transparent –
methods of doing business. But management often find it difficult to
chart out a route into the future, and have had difficulties in convincing
their membership.
53. 53
Next to the officially approved exchanges, there are many havala
markets. Most of these unofficial commodity exchanges have operated
for many decades and have built up a reasonable reputation in terms of
integrity and liquidity. Some unofficial markets trade 20-30 times the
volume of the “official” futures exchanges. They are often localised in
close proximity to the official exchanges. They offer not only futures, but
also option contracts. Transaction costs are low, and they therefore
attract many speculators and the smaller hedgers. Absence of regulation
and proper clearing arrangements, however, mean that these markets are
mostly “regulated” by the reputation of the main players. Many market
participants feel that as this system has worked well for a long time, there
is no reason to fear a breakdown of this system based on trust. However,
this clearly cannot be the base for government policy, which has a duty to
protect the public against the risks that use of these markets pose.
Risks management in Agricultural Commodity by using future
Risks and transaction costs in agriculture
The Government of India (GOI) Working Group on Risk Management in
Agriculture defines agricultural risk in the following way: “Agricultural
risk is associated with negative outcomes that stem from imperfectly
predictable biological, climatic, and price variables. These variables
include natural adversities (for example, pests and diseases) and climatic
factors not within the control of the farmers. They also include adverse
changes in both input and output prices” (GOI, 2007b: 6). These risks are
exacerbated by deficiencies in infrastructure and market formation,
information asymmetries, and the lack of livelihood resilience that results
from a situation of poverty and its root causes (these include access to
health, education, social security, land and capital).
A range of risks can be identified:
Production risk, associated with uncertainty about quantity and quality of
output;
Price risk, associated with commodity-price volatility that creates
uncertainty about the level of return on investment and assets;
Market risk, associated with uncertainty about whether a purchaser
can be found for farmers’ produce;
54. 54
Counterparty risk, associated with uncertainty about whether other
parties to a transaction will fulfil the terms of a contract;
Credit risk, associated with uncertainty about securing funds to
cover working capital during the course of the season and investment for
next year’s crop;
Institutional risk, associated with uncertainty about changes to
public regulation or to government support regimes that may adversely
affect the producer.
Farmers have a range of mechanisms for dealing with these risks
. From the preceding remarks, it becomes clear that price risk is only one
of the risks that farmers face, and futures contracts are only one of the
mechanisms to deal with these risks. However, it will be argued in this
study that commodity exchanges do not merely provide hedging services
that enable producers to manage price risk – although this is what they are
most “famous” for. Instead, it will be contended that commodity
exchanges are versatile and dynamic entities that enable entities in
agricultural sectors, including small-scale farmers, to address the key
challenges that face their market. It will be shown that they offer a range of
instruments for tackling not just price risk, but also potentially production,
market,
Risks management in Commodity by using future
Benefits of Futures Trading
•Efficient Price discovery
•Price risk managemnt
•Credit mobilization
•Integration of rural, urban and global markets
•Increased awareness about quality standards
•Rising investment in market related infrastructure (e.g., standardization/quality
testing/warehousing) Benefit –Investment, employment generation and
penetration of financial services to rural India.
55. 55
Commodity Price Risk Management
Reduces risks and locks cost.
Results in better cash flow management
Mechanism to identify,
Measure, manage and monitor risk.
Removes speculative element in the business by mitigating exchange rate
risk. Protects business margins
Enhances efficiency and competitiveness
Current status:-
oo Broken links in Agri-chain production
oo Poor extension
oo Low Lack of quality
oo Low capacity utilization Marketing
oo Lack of grading
oo Non transparency in prices
oo Quality inputs
oo Non demand linked production
oo Supply chain
oo Lack of storage
oo Poor transportation
oo High wastages
oo Productivity Multiple intermediaries Processing
oo Low processing
oo Poor returns
oo Poor infrastructure
oo No linkages
Futures Markets-Diversification Tool
Futures markets are centralized and organized markets where futures
contracts and options are traded. All economic agents, both professionals and
speculators, can buy and sell such contracts at low transaction costs and on a
competitive basis. Market liquidity guarantees the quality of the futures prices
as well as the premium values of the put and call options. This means that the
56. 56
futures price incorporates all available information. In other words, at any time
and for a set of current information, the futures price is the best predictor of the
future spot price.
At the time of sowing the farmer has three basic potential strategies:
Strategy 1: Do nothing with the hope of a spot price increase. This position is
usually called speculative.
Strategy 2: Hedge future production by selling futures contract at for a volume
equivalent to the expected crop. The farmer is covering the market price risk
and fixing his financial margin.
Strategy 3: Buy a put option at-the-money, meaning the right to sell for a
premium.
Two possibilities may occur after the farmer’s decision during sowing:
the market price can increase or decrease during the production cycle. As
expected, the speculative strategy (Strategy 1) has the highest result
variability, with very high and very low results with respect to market
behaviour. With no basis risk, the hedging with futures contract (Strategy
2) offers as final payment the value of the target price in both cases.
Finally, the purchase of a put option (Strategy 3) is a good “second best”
strategy, bringing financial results very close to the best results of any of
the above cases. This example presents the basic interest of futures
contract as well as options. Combinations of strategies are required. Risk
diversification comes from the positive correlation between futures and
spot prices as well as asymmetric risk outcomes of options.
This hedging activity should be managed as a dynamic position. The
question is when to sell futures contract. Should the farmer sell the entire
expected crop quantity when planting seeds? Should he choose a time
between sowing and harvest? In fact, the farmer must diversify the
hedging times in order to really diversify price risk and manage yield
risk. A satisfactory hedging programme could be utilizing futures market
at various stages of crop production and spreading the risk over the
duration of the crop.
Optimal hedging has been studied extensively by academics, first in the
seventies/early eighties using purely futures contracts and then in the late
eighties/nineties using option contracts. The models are increasingly
complex but are all based on price correlation between the futures and the
57. 57
local spot prices. They give important information on the quantity to be
hedged with respect to both the cash position and the correlation
coefficient between the futures and the spot prices. Practical analysis also
gives useful information on the diversification potential of futures
markets. This is called hedging effectiveness computed as the reduction
in variance that results from maintaining a hedged position rather than an
unhedged position. All these types of practical computations are bridging
the gap between theoretical analysis of risk management and practical use
of futures markets.
The Role of Government
Most strategies that farmers can use to reduce income risk are likely to
increase their production cost or might not be sufficient in the case of natural
catastrophes. Such market failures have been used to justify government
intervention in risk management in agriculture.
Risk in agriculture is often considered as having specific characteristics
that explain the more frequent government intervention in risk
management than in other sectors. Specifically, the relationship with
nature, in particular the dependence on climate and biological processes,
makes risk more difficult to control than with mechanical processes.
Inelasticity of both demand and supply also contribute to fluctuations in
agricultural commodity prices. In consequence, variability in agricultural
prices is often higher than that in other products and annual income from
agricultural activities can vary to a large extent in the absence of
offsetting policy interventions. However, futures markets help to reduce
price volatility but do not prevent longer- term price downturns.
When government intervention in risk management involves elements of
support, as has often been the case in OECD countries, farm families
have no incentive to adopt risk strategies at the production and
consumption level, or to use market-based approaches. This in turn
hampers the development of market, risk-shifting solutions. In addition,
reducing risk faced by farmers may encourage them to take production
decisions that are not sustainable. Hence, it is argued that some degree of
instability can be good as it encourages technical progress and innovation
in marketing. Various underlying elements contribute to increasing the
costs of intervention and lower its efficiency. Appreciating these
concerns, some governments have tried to encourage farmers to use
58. 58
futures markets. It is established widely that futures markets, where they
exist, help to reduce price fluctuations within a given year. Recognizing
this, government’s first contribution could be to provide information on
prices and contracts, and training programmes to farmers on how to use
futures markets. In some cases, governments have acted as intermediaries
between farmers and futures exchanges, with or without subsidy.
60. 60
FINDINGS
The important findings of the study & the conclusion drawn these
from are presented below.
Really commodity exchanges play a vital role for the growth of the
agricultural sector
Because agriculture provides 1/6th to GDP & employs largest no of labour
force around the country
Commodity exchanges provide a basic future mechanisms which helps
the hedgers, producers, processors to minimise the risk.
The commodity exchanges are now trying to establish a direct interaction
platform with the farmers
The most important facility which provided by the commodity exchanges
are saving the farmers from unexpected future price fluctuation, moreover
only for the betterment of the agriculture sector& provides various
mechanisms like,
Price discovery
Price risk management
Venue for investment
Facilitation of physical commodity trade
Facilitation of financing to the agricultural sector
61. 61
SUGGESTION & RECOMMENDATION
Regulatory Perspectives: -
What Should the ForwardMarkets CommissionFocus On?
The FMC needs a new focus, a stronger role, and an improved
day-to-day oversight of exchanges. The Forward Contracts (Regulation) Act,
1952, does not properly allow for many of these changes. Certain parts of the
FR (C) Act would become superfluous if the changes mentioned below were
adopted (e.g., the references to transferable delivery contracts), others need to
be changed (e.g., the ban on options), and the FR (C) Act does not provide the
FMC to take on necessary new roles, e.g. properly regulating brokerage activity.
FMC may therefore consider the overhaul of the FR (C) Act, as long as this
does not slow down those changes that are both necessary, and possible under
the Act.
The FMC should allow Option trading in commodity market in India.
The FMC has to take some steps to increase the awareness of future
commodity trading India.
The FMC has to encourage the mutual fund companies and institutional
investors to invest in commodity market in India.
The government has to allow FIIs to invest in commodity market in India
in future market not in option.
The FMC should have concrete plan to stop “Dabba trading” in
commodity market in India.
The FMC should increase the range of commodities in future
commodities in commodity market in India.
To motivate the commodity business in India the FMC should come up
with some rebate in taxes.
The FMC should increase the delivery centres of commodities in India.
As commodity market is very potential for business, the angel co. should
think about various ways to attract the customers.
Trading Members: These members execute buy and sell orders in
the trading ring of the exchange on their account, on account of ordinary
members and other clients.
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Trading-cum-Clearing Members: They have the right to trade and
also to participate in clearing and settlement in respect of transactions carried
out on their account and on account of their clients.
Institutional Clearing Members: They have the right to participate
in clearing and settlement on behalf of other members but do not have the
trading rights.
Designated Clearing Bank: It provides banking facilities in respect
of pay-in, payout and other monetary settlements.
The composition of the members in an exchange however varies. In some
exchanges there are exclusive clearing members, broker members and
registered non -members in addition to the above category of members.
RECOMMENDATIONS
For developing-country Governments:
• Where a commodity exchange (or commodity exchanges) do not exist already,
appraising the feasibility of establishing a commodity exchange (or commodity
exchanges); determining whether to perform registration and trade facilitation
services or to provide markets for cash, forwards, financing and/or futures
instruments;
• Ensuring an overarching regulatory framework that upholds the transparency
and integrity of commodity markets, protects market participants from
unscrupulous practices, and effectively manages the risks that arise from market
operations;
• Ensuring that the wider legal–economic framework provides legal certainty for
exchange operations and is free of impediments that unduly restrict exchange
functions, except where superseded by other fundamental or strategic national
development imperatives;
• Developing elements of physical infrastructure that support commodity
exchange and market development – including information and communications
technology, electricity, storage and logistics;
63. 63
• Recognizing that a rules- or principles-based approach to regulation – as
opposed to a discretionary or ad hoc approach – is an essential foundation for
market development and exchange success;
For established exchanges in the developing world:
• Increasing awareness of the actual and potential development impacts arising
from commodity exchange services in developing countries, and recognizing
that pursuit of these impacts represents a win–win solution for both the
exchange and the wider economy;
• Educating key stakeholders about exchange functions, operations, services and
benefits – including market users, commodity sector participants, government,
the media, academia and civil society;
• Deepening and broadening the exchange’s development impact through the
innovative application of products, services, technologies and capacity-building
programmes;
• Partnering with other entities that are well placed both to deliver exchange
services to market users and also to enhance impact on market users, especially
rural communities. Such entities may include farmer cooperatives/associations,
government agencies, research institutes, extension agencies, financial and
microfinance institutions, and civil society organizations;
CONCLUSION
Last but not the least what I found personally from the above study want to
conclude that, India is the second largest populated and first agriculture oriented
country whose more than 70 percentage of the population are depending upon
agriculture. As far as the study concerned India have developed from both
technologically as well as infrastructurally.
Nationalised commodity Exchanges like MCX, NCDEX, UCE, ACE,
ICEX AND NMCE, with the developed features like robust technology &
scalable infrastructure, the exchanges have added International 1st records to
their history, but the most important thing is the proper communication and
networking with the grass root level farmers, which can only be possible if
Regional Commodity Exchanges actively participate in competition.
64. 64
In most of the states the farmers are least aware of the commodity
exchanges and other mechanisms. Basically the farmers of the Drought and
flood affected states face a huge loss, which ultimately enhance the dearth of
commodities and creates inflation.
Therefore, the most important ingredient about the commodity
exchanges is establishing a two way communication with the small holder
farmers of the country. Which will facilitate the following:-
o Stabilizing the prices-enabling information flow-wider participation
o Overall strengthening of financial markets -portfolio diversification -
hedging risks
o Efficient markets-(financial/commodities)-financial stability
economic stability-political stability
o Commexes-essential function-efficient allocation of primary sector
resources
