commodity mkts

A report on

Dynamics of Indian commodity market

Submitted By: Group No: 1

Girish

Hitesh

Madhu

Mala

Nirmal

Reshma

Acknowledgement

As any other report the success of this report is the result of active involvement of many people:
From time of inception of an idea till the end. Many brains has worked together to make this
exclusive and informative report on Dynamics of Indian Commodity Market.

With a great pleasure and privilege we are presenting this report with our deepest gratitude to our
institute for providing us this immense.

We would like to acknowledge our sincere thanks, to Dr. Himani Joshi (Academic Coordinator)
for her guidance throughout the project, her interest, enthusiasm and Involvement had been
greatest motivational factor during the study.

It is a privilege to have weighty appreciation to Mrs. Neha Saxena for giving us complete
support and cooperation, and for helping us with the knowledge regarding the planning of the
business and execution of the same.

Special and sincere thanks to all the respondents who co-operated with us and share their
suggestions and recommendation.

Stevens Business School (2009-2011) Page 2

Preface

By working together, ordinary people can perform extraordinary feats; they can push
things that comes in their hands higher up a little further on towards the height of excellence.

We have accepted the above statement and has prepared the report based on our
knowledge and secondary data.

We are very glad to present our report that has all efforts knowledge & hard work
involved in its completion.


Table of Content

Sr. No. Particular Page no.
1 Introduction 5
2 History 8
3 Indian Commodity Market 10
4 Structure of commodity market 13
5 Commodity Traded 16
6 Pricing 18
7 Functioning 21
8 Major Players 25
9 Performance of Commodity Market 30
10 Trends 37
11 Gold – in Indian commodity market 40
12 Characteristics of commodity market 51
13 Strategies for trading in commodities and futures 56
14 How to trade in commodity market 60
15 Commodity exchanges in world 64
16 Commodity exchanges in India 67
17 Conclusion 73
18 References 75


Introduction


1.1- COMMODITY
A commodity may be defined as an article, a product or material that is bought and sold. It can
be classified as every kind of movable property, except Actionable Claims, Money & Securities.
Commodities actually offer immense potential to become a separate asset class for market-savvy
investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity
markets, may find commodities an unfathomable market. But commodities are easy to
understand as far as fundamentals of demand and supply are concerned. Retail investors should
understand the risks and advantages of trading in commodities futures before taking a leap.
Historically, pricing in commodities futures has been less volatile compared with equity and
bonds, thus providing an efficient portfolio diversification option.

1.2- COMMODITY MARKET

Commodity markets are markets where raw or primary products are exchanged. These raw
commodities are traded on regulated commodities exchanges, in which they are bought and sold
in standardized contracts

Commodity market is an important constituent of the financial markets of any country. It is the
market where a wide range of products, viz., precious metals, base metals, crude oil, energy and
soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active
and liquid commodity market. This would help investors hedge their commodity risk, take
speculative positions in commodities and exploit arbitrage opportunities in the market.


1.3- Overview

Despite intermittent curbs, India‘s six-year-old commodity futures market has seen a steady
stream of new entrants, drawn by the promise of richer rewards. The intense growth, even in the
absence of basic reforms, has attracted financial institutions, trading companies and banks to set
up large commodity bourse. Since, Indian Commodity Exchange (ICEX), promoted by India
bulls Financial Services Ltd in partnership with MMTC is going to start its operation from
November 2009; it is expected to create an extensive competition among national level
commodity exchanges. Commodity derivatives market of India is drawing attention from all over
the world, albeit FMC had banned nine commodities since early 2007, out of which 4 are still out
of trade and even financial institutions and foreign entities are barred from trading in the market.
Even, industry players are of the view that commodity market regulator (FMC) should permit
banks and financial institutions to trade in commodity futures, allow options, exchange-traded
indices and some more powers to the market regulator from Ministry of Consumer Affairs to
develop the market.


History


Before the North American futures market originated some 150 years ago, farmers would grow
their crops and then bring them to market in the hope of selling their commodity of inventory.
But without any indication of demand, supply often exceeded what was needed, and un-
purchased crops were left to rot in the streets. Conversely, when a given commodity such as
Soybeans was out of season, the goods made from it became very expensive because the crop
was no longer available, lack of supply.

In the mid-19th century, grain markets were established and a central marketplace was created
for farmers to bring their commodities and sell them either for immediate delivery (spot trading)
or for forward delivery. The latter contracts, forwards contracts, were the forerunners to today's
futures contracts. In fact, this concept saved many farmers from the loss of crops and helped
stabilize supply and prices in the off-season.

Today's commodity market is a global marketplace not only for agricultural products, but also
currencies and financial instruments such as Treasury bonds and securities futures. It's a
diverse marketplace of farmers, exporters, importers, manufacturers and speculators. Modern
technology has transformed commodities into a global marketplace where a Kansas farmer can
match a bid from a buyer in Europe.


Indian Commodity Market


The vast geographical extent of India and her huge population is aptly complemented by the size
of her market. The broadest classification of the Indian Market can be made in terms of the
commodity market and the bond market. The commodity market in India comprises of all
palpable markets that we come across in our daily lives. Such markets are social institutions that
facilitate exchange of goods for money. The cost of goods is estimated in terms of domestic
currency. India Commodity Market can be subdivided into the following two categories:

 Wholesale Market
 Retail Market

The traditional wholesale market in India dealt with whole sellers who bought goods from the
farmers and manufacturers and then sold them to the retailers after making a profit in the
process. It was the retailers who finally sold the goods to the consumers. With the passage of
time the importance of whole sellers began to fade out for the following reasons:

 The whole sellers in most situations, acted as mere parasites that did not add any value
to the product but raised its price which was eventually faced by the consumers.

 The improvement in transport facilities made the retailers directly interact with the
producers and hence the need for whole sellers was not felt.

In recent years, the extent of the retail market (both organized and unorganized) has evolved in
leaps and bounds. In fact, the success stories of the commodity market of India in recent years
has mainly centered on the growth generated by the Retail Sector. Almost every commodity
under the sun both agricultural and industrial is now being provided at well distributed retail
outlets throughout the country.
Moreover, the retail outlets belong to both the organized as well as the unorganized sector. The
unorganized retail outlets of the yesteryears consist of small shop owners who are price takers
where consumers face a highly competitive price structure. The organized sectors on the other
hand are owned by various business houses like Pantaloons, Reliance, Tata and others. Such
markets are usually selling a wide range of articles agricultural and manufactured, edible and


inedible, perishable and durable. Modern marketing strategies and other techniques of sales
promotion enable such markets to draw customers from every section of the society. However
the growth of such markets has still centered on the urban areas primarily due to infrastructural
limitations.
Considering the present growth rate, the total valuation of the Indian Retail Market is estimated
to cross Rs. 10,000 billion by the year 2010. Demand for commodities is likely to become four
times by 2010 than what it presently is.

The size of the commodities markets in India is also quite significant. Of the country's GDP of
Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industries
constitute about 58 per cent. Currently, the various commodities across the country clock an
annual turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of futures trading,
the size of the commodities market grows many folds here on.


STRUCTURE OF COMMODITY MARKET


Consumers

(Retail/
Warehouses Hedger
Institutional)
(Exporters /
Millers Industry)

Producers
(Farmers/Co-
Clearing Bank Commodities operatives/Instituti
Ecosystem onal)

MCX

Traders
Transporters/
(speculators)
Support agencies Quality
arbitrageurs/
Certification
client
Agencies


DIFFERENT TYPES OF COMMODITIES
TRADED


World-over one will find that a market exits for almost all the commodities known to us. These
commodities can be broadly classified into the following:
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

Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E. Sour
Crude Oil
ENERGY

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), Sugar M-30, Sugar S-30


Pricing


Prices and monthly changes Historical Prices Price Forecasts

Commodities Units 02 Dec 2Q 08 4Q 08 1Q 09 2Q 09 3m 6m
Energy

WTI Crude $/bbl 76.60 123.8 59.08 43.32 59.79 85.00 92.00
Oil
Brent Cude $/bbl 77.88 122.79 57.49 45.72 59.90 83.50 90.5
Oil
RBOB $/gal 1.99 3.17 1.34 1.25 1.71 2.16 2.44
Gasoline
USGC $/gal 1.97 3.53 1.84 1.34 1.56 2.16 2.35
Heating Oil
NYMEX $/mmBt 4.53 11.47 6.40 4.47 3.81 5.50 6.00
Nat. Gas u
UK NBP p/th 28.59 63.08 65.59 45.30 27.57 28.60 31.30
Nat. Gas
Industrial Metals

LME $/mt 2157 2995 1885 1401 1530 2160 2260
Aluminum
LME Copper $/mt 7125 8323 3948 3494 4708 7460 8105
LME Nickel $/mt 16300 25859 11118 10625 13147 16640 17590
LME Zinc $/mt 2430 2150 1219 1208 1509 2390 2620
Precious Metals

London Gold $/troy oz 1212 896 795 908 922 1200 1260
London $/troy oz 19.2 17.2 10.2 12.6 13.8 20.0 21.0
Silver
Agriculture

CBOT cent/bu 555 843 552 551 572 500 550
Wheat
CBOT cent/bu 1034 1388 915 9 49 1116 1050 1050
Soybean
CBOT Corn cent/bu 392 629 384 377 406 400 450
NYBOT cent/lb 74 72 47 46 54 70 70
Cotton

NYBOT cent/lb 143 136 112 113 124 140 140
Coffee


Prices and monthly changes Historical Prices Price Forecasts
Units 02 Dec 2Q 08 4Q 08 1Q 09 2Q 09 3m 6m

NYBOT $/mt 3317 2769 2252 2553 2499 2700 2700
Cocoa
NYBOT cent/lb 23.0 11.2 11.6 12.7 14.7 20.0 17.0
Sugar
CME Live cent/lb 82.1 93.7 88.7 83.8 83.0 85.0 90.0
Cattle
CME Lean cent/lb 59.7 72.5 59.1 60.1 63.2 65.0 80.0
Hog


Functioning


The futures market is a centralized market place for buyers and sellers from around the world
who meet and enter into commodity futures contracts. Pricing mostly is based on an open cry
system, or bids and offers that can be matched electronically. The commodity contract will state
the price that will be paid and the date of delivery. Almost all futures contracts end without the
actual physical delivery of the commodity.

7.1- What Exactly Is a Commodity Contract?

Let's say, for example, that you decide to subscribe to satellite TV. As the buyer, you enter into
an agreement with the company to receive a specific number of channels at a certain price every
month for the next year. This contract made with the satellite company is similar to a futures
contract, in that you have agreed to receive a product or commodity at a later date, with the price
and terms for delivery already set. You have secured your cost for now and the next year, even if
the price of satellite rises during that time. By entering into this agreement, you have reduced
your risk of higher prices.

That's how the futures market works. Except instead of a satellite TV provider, a producer of
wheat may be trying to secure a selling price for next season's crop, while a bread maker may be
trying to secure a buying price to determine how much bread can be made and at what profit. So
the farmer and the bread maker may enter into a futures contract requiring the delivery of 5,000
bushels of grain to the buyer in June at a price of $4 per bushel. By entering into this futures
contract, the farmer and the bread maker secure a price that both parties believe will be a fair
price in June. It is this contract that can then be bought and sold in the commodity market.

A futures contract is an agreement between two parties: a short position, the party who agrees to
deliver a commodity, and a long position, the party who agrees to receive a commodity. In the
above scenario, the farmer would be the holder of the short position (agreeing to sell) while the
bread maker would be the holder of the long (agreeing to buy). (We will talk more about the
outlooks of the long and short positions in the section on strategies, but for now it's important to
know that every contract involves both positions.)


In every commodity contract, everything is specified: the quantity and quality of the commodity,
the specific price per unit, and the date and method of delivery. The price of a futures contract is
represented by the agreed - upon price of the underlying commodity or financial instrument that
will be delivered in the future. For example, in the above scenario, the price of the contract is
5,000 bushels of grain at a price of $4 per bushel.

7.2- Profit And Loss - Cash Settlement.

The profits and losses of futures depend on the daily movements of the market for that contract
and is calculated on a daily basis. For example, say the futures contracts for wheat increases to
$5 per bushel the day after the above farmer and bread maker enter into their commodity contract
of $4 per bushel. The farmer, as the holder of the short position, has lost $1 per bushel because
the selling price just increased from the future price at which he is obliged to sell his wheat. The
bread maker, as the long position, has profited by $1 per bushel because the price he is obliged to
pay is less than what the rest of the market is obliged to pay in the future for wheat. On the day
the change occurs, the farmer's account is debited $5,000 ($1 per bushel X 5,000 bushels) and
the bread maker's account is credited by $5,000 ($1 per bushel X 5,000 bushels).

As the market moves every day, these kinds of adjustments are made accordingly. Unlike the
stock market, futures positions are settled on a daily basis, which means that gains and losses
from a day's trading are deducted or credited to a person's account each day. In the stock market,
the capital gains or losses from movements in price aren't realized until the investor decides to
sell the stock or cover his or her short position. As the accounts of the parties in futures contracts
are adjusted every day, most transactions in the futures market are settled in cash, and the actual
physical commodity is bought or sold in the cash market. Prices in the cash and futures market
tend to move parallel to one another, and when a futures contract expires, the prices merge into
one price. So on the date either party decides to close out their futures position, the contract will
be settled. If the contract was settled at $5 per bushel, the farmer would lose $5,000 on the


contract and the bread maker would have made $5,000 on the contract. But after the settlement
of the wheat futures contract, the bread maker still needs wheat to make bread, so he will in
actuality buy his wheat in the cash market (or from a wheat pool) for $5 per bushel (a total of
$25,000) because that's the price of wheat in the cash market when he closes out his contract.
However, technically, the bread maker's futures profits of $5,000 go towards his purchase, which
means he still pays his locked-in price of $4 per bushel ($25,000 - $5,000 = $20,000). The
farmer, after also closing out the contract, can sell his wheat on the cash market at $5 per bushel,
but, because of his losses from the futures contract with the bread maker, the farmer still actually
receives only $4 per bushel. In other words, the farmer's loss in the commodity contract is offset
by the higher selling price in the cash market--this is referred to as hedging.

Now that you see that a futures contract is really more like a financial position, you can also see
that the two parties in the wheat futures contract discussed above could be two speculators rather
than a farmer and a bread maker. In such a case, the short speculator would simply have lost
$5,000 while the long speculator would have gained that amount. (Neither would have to go to
the cash market to buy or sell the commodity after the contract expires.)


Major Players
In
Commodity market


The players in the futures market fall into two categories:
1) Hedger
2) Speculator
3) Arbitrage

8.1- Hedgers:

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

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

Example:

A silversmith must secure a certain amount of silver in six months time for earrings and bracelets
that have already been advertised in an upcoming catalog with specific prices. But what if the
price of silver goes up over the next six months? Because the prices of the earrings and bracelets
are already set, the extra cost of the silver can't be passed onto the retail buyer, meaning it would
be passed onto the silversmith. The silversmith needs to hedge, or minimize her risk against a


possible price increase in silver. How? The silversmith would enter the futures market and
purchase a silver contract for settlement in six months time (let's say June) at a price of $5 per
ounce. At the end of the six months, the price of silver in the cash market is actually $6 per
ounce, so the silversmith benefits from the futures contract and escapes the higher price. Had the
price of silver declined in the cash market, the silversmith would, in the end, have been better off
without the futures contract. At the same time, however, because the silver market is very
volatile, the silver maker was still sheltering himself from risk by entering into the futures
contract. So that's basically what a hedger is: the attempt to minimize risk as much as possible by
locking in prices for a later date purchase and sale.

Someone going long in a securities future contract now can hedge against rising equity prices in
three months. If at the time of the contract's expiration the equity price has risen, the investor's
contract can be closed out at the higher price. The opposite could happen as well: a hedger could
go short in a contract today to hedge against declining stock prices in the future. A potato farmer
would hedge against lower French fry prices, while a fast food chain would hedge against higher
potato prices. A company in need of a loan in six months could hedge against rising in the
interest rates future, while a coffee beanery could hedge against rising coffee bean prices next
year.

8.2- Speculator:

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


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

Long Short

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

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

In a fast-paced market into which information is continuously being fed, speculators and hedgers
bounce off of--and benefit from--each other. The closer it gets to the time of the contract's
expiration, the more solid the information entering the market will be regarding the commodity
in question. Thus, all can expect a more accurate reflection of supply and demand and the
corresponding price. Regulatory Bodies the United States' futures market is regulated by the
Commodity Futures Trading Commission, CFTC, and an independent agency of the U.S.
government. The market is also subject to regulation by the National Futures Association, NFA,
a self-regulatory body authorized by the U.S. Congress and subject to CFTC supervision.

A Commodity broker and/or firm must be registered with the CFTC in order to issue or buy or
sell futures contracts. Futures brokers must also be registered with the NFA and the CFTC in
order to conduct business. The CFTC has the power to seek criminal prosecution through the
Department of Justice in cases of illegal activity, while violations against the NFA's business
ethics and code of conduct can permanently bar a company or a person from dealing on the
futures exchange. It is imperative for investors wanting to enter the futures market to understand
these regulations and make sure that the brokers, traders or companies acting on their behalf are
licensed by the CFTC.


8.3- Arbitrage:
Arbitrage refers to the opportunity of taking advantage between the price difference between two
different markets for that same stock or commodity.

In simple terms one can understand by an example of a commodity selling in one market at price
x and the same commodity selling in another market at price x + y. Now this y, is the difference
between the two markets is the arbitrage available to the trader. The trade is carried
simultaneously at both the markets so theoretically there is no risk. (This arbitrage should not be
confused with the word arbitration, as arbitration is referred to solving of dispute between two or
more parties.)

The person who conducts and takes advantage of arbitrage in stocks, commodities, interest rate
bonds, derivative products, forex is know as an arbitrageur.

An arbitrage opportunity exists between different markets because there are different kind of
players in the market, some might be speculators, others jobbers, some market-markets, and
some might be arbitrageurs.

In India there are a good amount of Arbitrage opportunities between NCDEX, MCX in
commodities.


Performance
Of
Commodity Market


India‘s inflation fell to near zero levels although it may take some time for it to get reflected in
the prices of essential commodities. Even as the BSE Sensex is moving in a narrow range unable
to break the 9000 mark, India‘s largest commodity bourse created a record by as its turnover
touched Rs 32016 crore on a single day the previous highest being Rs 29,887 crore in September
18, 2008. Angel Commodities, one of the leading commodity brokerages also announced the
crossing of a major milestone of Rs 1000 crore turnover. What ever gains in BSE in recent days
has been attributed to growth in commodity stocks.

Commodity market regulator, Forward Markets Commission (FMC) will install at least 180
display boards at locations such as rural post offices, Krishi Vigyan Kendras and APMCs across
the country in the next 10 days to provide prices of farm com modity futures to farmers.
Meanwhile gold and crude oil continue to generate more volumes in India‘s commodity bourses.

9.1- Precious Metals
Gold prices recovered strongly from its lows during last week and almost touched a high of
$970/oz., as the Federal Reserve's plans to purchase as much as $1.15 trillion in U.S. bonds and
mortgage-backed securities sparked worries of inflation ahead, raising gold's appeal as a hedge
against rising prices. This is the most aggressive plan taken by Fed since the early 1960. Demand
from gold ETF also increased during this week. Holdings in SPDR Gold Trust, world‘s largest
gold ETF, touched an all time high of 1103.29 tons.
The volatility in prices in the Bullion pack has increased greatly over the past few months with
19 March being a highly volatile trading day. Spot Gold is finding excellent support in the zone
of $880-$890 levels which is viewed as value buying zone by investors. Whereas major
resistance zone is seen between $960-$970. The demand for the safe-haven asset is still prevalent
with the USD weakening consistently over the past few trading sessions. Also, the increased
volatility in the Rupee is playing its role in determining domestic bullion prices. In coming
weeks & months, the state of the overall global economic scenario will play a key role in
determining bullion prices as investors evaluate various asset classes to channel their funds. Still
gold remains the best bet under current market scenario. MCX April Gold can face resistance
around Rs.15600 levels, whereas support is seen at Rs. 14850 per 10 gram


9.2- Crude Oil

Crude Oil prices traded higher amidst high amount of volatility in the last week. Oil prices
surged to a three month high on account of weak dollar and rally in global equity markets.
Despite bearish inventory data, prices rebounded from its lows, after US Federal Reserve
decided to buy Treasury bonds worth $300bn to ease credit market. Steps taken by Fed rekindled
hopes for economic recovery and rise in energy demand. Crude Oil prices have increased by
more than 20% this year, on account of strict implementation of production cuts by OPEC to
reduce excess supply and weak dollar against major currencies. Volatility in oil prices has
increased sharply in past few trading sessions. We expect that oil prices can witness fierce tussle
between bulls and bears in coming weeks. Factors like falling demand and weak economic data
are favoring bears, but weak dollar, rise in risk appetite amidst strong equity markets are giving
bulls a reason to come back in to market. After last week‘s rally, oil prices can witness profit
booking. During this week, NYMEX May Crude Oil prices are expected to trade in the range of
$42.50 and $53.50.

9.3- Rubber

Rubber prices in domestic and global markets were on a recovery mode this week. In the
weekend covering groups lifted the prices to further highs driven by possibly a speculative
interest. However, 2009 as predicted by many analysts is not going to be a good year for rubber
with consumption to fall 5.5 percent across the globe mainly due to falling automobile sales.
Rubber prices have slumped 50 percent in a year as the global recession slashed tire demand.
Europe‘s car market shrank 7.8 percent in 2008, while U.S. sales contracted 18 percent to a 16
percent year low.

In TOCOM and Shanghai, benchmark natural rubber futures climbed to the highest in more than
two weeks as producers restated proposed output cuts and on speculation China, the world‘s
largest consumer, is adding the commodity to state stockpiles.


Spot rubber flared up on Friday. Sheet rubber RSS 4 moved up to Rs 76.50 from Rs.75.50 a kg,
while the market made all-round improvement even in the absence of enquires from the major
manufacturers. The volumes were comparatively better.
The April futures for RSS 4 firmed up to Rs 77.99 (Rs 77.50), May to Rs 79 (Rs 78.56), June to
Rs 79.99 (Rs 79.67) and July to Rs 79.95 (Rs 79.80) a kg on National Multi Commodity
Exchange (NMCE).

Towards weekend in global markets, RSS 3 slipped further to Rs 73.37 (Rs 73.81) a kg on
Singapore Commodity Exchange. The grade‘s spot weakened to Rs 73.68 (Rs 74.43) a kg at
Bangkok. The physical rubber rates were: RSS-4: 76.50 (75.50), RSS-5: 75 (74), Ungraded:
73.50 (73), ISNR 20: 74 (73.50), and Latex 60%: 57.50 (57).
Meanwhile, India‘s Rubber Board has raised alarm against the rapid growth in tyre imports
mainly from China. A steady trend with an slight upward bias could be expected for rubber next
week.

9.4- Base metals

Base metal prices are moving higher on the back of a weaker dollar and stable equities as both
these factors have improved market sentiments. A weaker dollar makes base metals look
attractive for holders of other currencies. This is providing a strong support to base metal prices
but the upside could be capped as LME inventories have touched a 15-year high. The base
metals market is in an oversupply situation and fundamentals look bearish. However, the current
rise in base metal prices is mainly due to technical buying and short-covering. In the coming
week, base metal prices are expected to remain volatile as the US is expected to announce
economic data like existing home sales, new home sales, 4Q GDP, personal income and
spending.


9.5- Soybean

Refined soy oil futures fell sharply during the last week as government of India scrapped import
duty on soy oil to reduce premium over palm oil. Government of India extended ban on exports
of edible oil. Last year, Govt. of India had banned export soy oil in March to control rise in price.
According to the Solvent Extractor‘s Association of India, India‗s import of edible oil increased
to 7,30,094 metric tonnes in February, 2009, up 69.40% as compared to last year during the same
period. Edible oil imports in the first four months of oil marketing year (November to February)
was 28,24,941 metric tonnes, up 87% as compared to 15,12,695 metric tonnes during the same
period last year. PEC Ltd. has floated two separate tenders for the local sales of 3161 metric
tonnes of crude soy oil. PEC is authorized by the government of India to import edible oils and
sales the local market. Global vegetable oil prices may still fall due to ample global supply. In
the coming week, prices are expected to move lower on account of higher import of edible oil
and scrapped import duty on soybean oil. NCDEX April Refined Soy Oil has support at 430/422
and resistance is seen at 452/460 levels in this week.

9.6- Other Edible Oil

India‘s edible oil and oilseeds Futures recovered from their lower level tracking the global
markets. The Bursa Malaysia Derivative making decent gains in the past few days and CBOT‘s
projection aided market sentiments. It was a firm trend in crude palm oil that lends support to the
oil seeds complex. The June Contract closed at 1985 a gain of 74. Nynex Crude Oil has support
at US $51 per barrel. Mustard Seed and castor seed tracked the gains in soybean and ended on a
mixed to higher note in physical, Futures markets


9.7- Turmeric

Spot prices at Erode and Nizamabad over the past couple of days are being quoted at higher rates
due to better off takes at the domestic market. Prices in the previous week were quoted in the
range of Rs. 4,200-4,350/qtl. Even though the arrivals are more off takes are equally better due to
domestic buying. Arrivals on an average in the previous week were around 25,000 bags daily in
both the major mandis of Nizamabad and Erode. Fear of lower availability of Turmeric in 2009
is supporting the prices to strengthen. Demand from the domestic market especially from local
stockiest is present but the overseas demand has reduced as the prices are at higher levels.
Farmers are hoarding the stocks and not bringing in fresh turmeric to the market in good quantity
in order to reap maximum profits. Turmeric Futures April 09 contract touched a high of
Rs.5,090/qtl tracking spot prices. Prices are ruling at higher levels thus cautious trading is
advisable at futures. Prices have initial support at Rs.4,840/qtl and thereafter at Rs.4,700/qtl.
Resistance could be seen at Rs.5,205/qtl and thereafter at Rs. 5,395/qtl.

9.8- Sugar

Sugar market declined sharply by 15% in the last 3-4 weeks as the Indian government has
adopted various measures to curb spiraling Sugar prices. Besides imposition of stock limits and
duty free impost of Raw Sugar, Government is now considering a proposal to let state-run
trading companies import refined sugar at zero duty to bridge the widening gap between demand
and supply. Final decision by the cabinet regarding the duty free imports of refined Sugar is
expected in the coming week.

India will have to import 3 million tonnes of Sugar to meet its domestic consumption of 22.5-23
million tonne. But imported sugar is much more expensive than local sweeteners at present,
making the imports unviable. Thus, despite government‘s effort to ease import norms, we don‘t
expect imports to take place in the coming months. Any significant decline in the prices should
be treated as a good buying opportunity as Overall, fundamentals remain supportive for the
prices with lower output forecast in India and a global deficit of more than 4.3 million tonnes.


April Sugar futures are currently trading at around Rs. 2035 levels. Prices are having initial
support at Rs. 1995 and then 1953. Resistance could be seen at Rs. 2080/qtl and thereafter Rs.
2120/qtl.

9.9- Black Pepper

The undertone in the Black Pepper spot and futures counter this week was steady due to
increased buying interest and aided by a tight supply position. Indian parity in the international
market was at $2,225-2,325 a tonne (c&f) as the rupee has strengthened against the dollar on
Wednesday. Overseas reports on Wednesday said that Brazil was firmer and exporters appeared
to reluctant to offer. B Asta was said to have been offered at $2,000 a tonne while B1 at $1,900 a
tone.

Vietnam was reportedly steady at $1,800 a tonne for faq 500 GL. More buying interest was seen
for black and white pepper from industry albeit for nearby deliveries. Lasta was being offered on
replacement basis at $2,200-2,250 a tonne (fob). New Indonesian crop is said to be lower at
15,000 tonne against an estimated 30,000 tonnes last season. However, some substantial quantity
of carry over stock is reportedly available therein the hands of middlemen and exporters.

In the weekend the physical counter traded steady amidst good underlying buying interest. The
domestic as well as the overseas buyers from Europe were active. The stock availability
remained low inducing the Indian traders to purchase from other cheaper origin like Indonesia at
$2100/tonne fob. At the benchmark Kochi markets berries were offered at Rs.10300/qtl for the
ungarbled variety and 10800/qtl for the garbled variety, steady as that of prior trading session.
Around 33.5 tonnes were sold for the arrivals of 25 tonnes. Strengthening rupee against dollar
pushed up Indian parity to $2300/tonne f.o.b while VASTA was offered at $2150/tonne and
BASTA at $1950/tonne f.o.b. Pepper is likely to trade weak during early hours with the
possibility of late recovery.


Trends


Assocham estimates that by 2010 volume on Indian exchanges will cross Rs. 75 lakh crore.


10.1- Commodity-wise Turnover


Gold
(Indian commodity market)


11.1- Introduction
Gold is a unique asset based on few basic characteristics. First, it is primarily a monetary asset,
and partly a commodity. As much as two thirds of gold‘s total accumulated holdings relate to
―store of value‖ considerations. Holdings in this category include the central bank reserves,
private investments, and high-cartages jewelers bought primarily in developing countries as a
vehicle for savings. Thus, gold is primarily a monetary asset. Less than one third of gold‘s total
accumulated holdings can be considered a commodity, the jewelers bought in Western markets
for adornment, and gold used in industry.

The distinction between gold and commodities is important. Gold has maintained its value in
after-inflation terms over the long run, while commodities have declined.

Some analysts like to think of gold as a ―currency without a country‘. It is an internationally
recognized asset that is not dependent upon any government‘s promise to pay. This is an
important feature when comparing gold to conventional diversifiers like T-bills or bonds, which
unlike gold, do have counter-party risk.

11.2- What makes gold special?

 Timeless and Very Timely Investment
 Gold is an effective diversifier
 Gold is the ideal gift
 Gold is highly liquid
 Gold responds when you need it most


11.3- Market Characteristics

 The gold market is highly liquid. Gold held by central banks, other major institutions, and
retail jewelery is reinvested in market.

 Due to large stock of gold, against its demand, it is argued that the core driver of the real
price of gold is stock equilibrium rather than flow equilibrium.

 Effective portfolio diversifier: This phrase summarizes the usefulness of gold in terms of
―Modern Portfolio Theory‖, a strategy used by many investment managers today. Using
this approach, gold can be used as a portfolio diversifier to improve investment
performance.

 Effective diversification during ―stress‖ periods: Traditional method of portfolio
diversification often fails when they are most needed, that is during financial stress
(instability). On these occasions, the correlations and volatilities of return for most asset
class (including traditional diversifiers, such as bond and alternative assets) increase, thus
reducing the intended ―cushioning‖ effect of the diversified portfolio.

11.4- Importance and Uses

Gold has mainly three types of uses: Jewellery Demand, Investment Demand and Industrial
uses.

 Jewellery Demand- Jewellery consistently accounts for around three-quarters of gold
demand. In terms of retail value, the USA is the largest market for gold jewellery,
whereas India is the largest consumer in volume terms, accounting for 25% of demand in
2007.


 Investment demand- Investment demand in gold has increased considerably in recent
years. Since 2003, investment has representing the strongest source of growth in demand,
with an increase in value terms to the end of 2007 of around 280%.

 Industrial Demand- Industrial and dental uses account for around 13% of gold demand
(an annual average of over 425 tonnes from 2003 to 2007 inclusive).

11.5- World Gold Demand & Supply

Year Mine Production Total supply Total demand

2006 2486 3574 3409
2007 2473 3488 3526
2008 2407 3468 3659
Source: GFMS


11.6- Major Gold Producing Countries (2008)

share

China
12%
United State

29% South Africa
10%
Australia

Peru

Russia
10%
Canada
3%
Indonessia
4%
10% Uzbekistan
4%
Ghana
4%
7% 7%
Others

Source: GFMS


11.6- Domestic Scenario
India is arguably the largest bullion market in the world. It has been until now, the undisputed
single-largest Gold bullion consumer, with its own final demand outweighing the next largest
market – China by almost 57 percent. But it seems now, that the Chinese Gold buyers have
caught up during 2008 as Chinese demand is surging rapidly (up by 15 percent year-on-year).
Indian demand fell as Indian Gold sales collapsed by about 65 percent in the year 2008. In spite
of being the largest consumer of gold, India plays no major role globally in influencing this
precious metal's pricing, output or quality issues.

India‘s total gold holdings are between 10,000 tonnes and 15,000 tonnes of which the Reserve
Bank of India has only around 400 tonnes. India has the largest number of gold Jewellery shops
in the world.

11.7- Major Gold Mines in India
There is a huge mismatch between demand and primary supply in India, the balance being made
up by imports. The only major gold mine currently in production is the Hutti mine, owned by
Hutti Gold Mines Company Limited, which produces around 3 tons of gold a year. Hindustan
Copper also produces some gold as a by-product.

11.8- Gold Production in India (in tonNEs):

State 2005-06 2006-07 2007-08
Karnataka 2.846 2.334 2.831
Jharkhand 0.201 0.154 0.027
Gujarat 6.710 10.335 9.135
Total 9.757 12.823 11.993
Source: www.pib.nic.in


As given in the above table, gold production in India is ruling lower in recent years. Karnataka
was the leading producer of this precious metal with the output ranging from 2 to 3 tons per
annum during 2005-06 and 2007-08. Jharkhand also produces small quantity of gold.

11.9- Gold Demand in India
Gold, the ultimate safe haven in troubled times, remained the hot commodity throughout the
year. It scaled new heights in the global markets and in India, which is the largest buyer of the
metal.
Year India (IN TONNES) World (IN TONNES) % share of World
Demand

2004 617.7 2961.5 20.86

2005 721.6 3091.9 23.34

2006 721.9 2681.9 26.92

2007 769.2 2810.9 27.36

2008 660.2 2906.8 22.71

Source: GFMS

Indian demand for Gold accounts for on an avg. 25% share of world gold demand. In 2008,
demand for gold has decreased in India because of high price amid global financial crisis.


11.10- Gold Imports in India

India imports around 500-800 tonnes of gold on an average every year. In 2008, India‘s gold
imports dipped by 45 per cent to touch 450 tons. However, buying of gold Jewellery has fallen
sharply in January, February & March month of the year 2009, leading to a slump in the yellow
metal‘s imports.

11.11- Gold Prices

There are many factors, which affect the gold prices in domestic as well as international market.
However, it is highly correlated with the US dollar, the world's main trading currency. Gold has
long been regarded by investors as a good protection against depreciation in a currency's value,
both internally (i.e. against inflation) and externally (against other currencies). Gold is widely
considered to be a particularly effective hedge against fluctuations in the US dollar, the world's
main trading currency.


The gold price has been found to be negatively correlated with the US dollar and this relationship
appeared to be consistent over time. It is a consistently good protection against the economic
instability and the exchange rate fluctuations.

11.12- Factors influencing Gold Prices

 World macro economic factors including US Dollar, interest rate and so on
 Global gold mine production
 Demand by Central banks
 Domestic demand, which is linked to agricultural prosperity and festivals/marriages etc
 Producer / miner hedging interest
 Comparative returns on stock markets
 US dollar movement against other currencies
 Indian rupee movement against the US dollar
 Geopolitical tensions
 Global economic situation


CHINESE COMMODITY MARKET (GOLD)
Introduction
Gold plays a vital role in Chinese culture. The Chinese have a strong affinity to gold when
compared with Western countries. Gold has been present in Chinese history since the time of the
Han Dynasty and even today is regarded as a sign of prosperity, an ornament, a currency and an
inherent part of Chinese religion. Weddings are important gold-buying occasions amongst the
Chinese. Gold is also traditionally bought as a gift during the Chinese New Year.

According to the Chinese lunar calendar, 2010 is the Year of the Tiger and the year which started
on 14 February 2010, promises to be a year of excitement, prosperity and potential good luck for
almost everyone. Those who make a real effort will enjoy an auspicious wave of success when
the brave and resilient Tiger rules. Some Chinese also describe 2010 as the Golden Tiger Year.

Today, China is the second largest gold consumption market and the world‘s largest producer.
Gold demand from China‘s two largest sectors, (jewellery and investment) reached a combined
total of 423 tonnes in 2009. However, total domestic mine supply contributed only 314 tonnes
during the same year. WGC studies indicate that in the long term, gold demand is likely to
continue to accelerate, driven by investment demand in China, while current jewellery
consumption is likely to continue to grow despite higher gold prices. Gold could also gain further
momentum from central bank purchasing.

Chinese gold demand is catching up with Western consumption levels. This is because market
liberalization tends to have a dramatic impact in a local market. In India, for example, its gold
consumption more than doubled from around 300 tonnes in the early 1990s to over 700 tonnes at
the end of 2008 when the liberalization process was in full swing. WGC estimates that a
substantial increase in gold demand would take place if demand in China were to rise to
Japanese, USA or Taiwanese levels. In this case, total annual incremental demand ranges from
another 1,000 tonnes at USA and Japanese per capita consumption levels, and still more, if
Chinese consumption per capita were to rise to Taiwanese levels.


Jewellery is by far the most dominant category of Chinese gold demand, accounting for almost
80% of all gold consumption in China in 2009. Chinese gold jewellery off-take increased 6%
year-on-year to 347.1 tonnes in 2009 and China was the only country to experience an
improvement in jewellery demand last year. WGC estimates that current per capita consumption
of gold jewellery in China is around 0.26gm. This level is low when compared to countries with
similar gold cultures. If gold were consumed in China at the same rate per capita as in India,
Hong Kong or Saudi Arabia, annual Chinese demand could increase by at least 100 tonnes to as
much as 4,000 tonnes in the jewellery sector alone.


Characteristics of Commodity
Market


In commodity futures market, the calculation of profit and loss will be slightly different than on a
normal stock exchange. The main concepts in commodity market are:

1) Margins.

In the futures market, margin refers to the initial deposit of good faith made into an
account in order to enter into a futures contract. This margin is referred to as good faith because
it is this money that is used to debit any losses.

When you open a futures account, the futures exchange will state a minimum amount of money
that you must deposit into your account. This original deposit of money is called the initial
margin. When your contract is liquidated, you will be refunded the initial margin plus or minus
any gains or losses that occur over the span of the futures contract. In other words, the amount in
your margin account changes daily as the market fluctuates in relation to your futures contract.
The minimum-level margin is determined by the futures exchange and is usually 5% to 10% of
the futures contract. These predetermined initial margin amounts are continuously under review:
at times of high market volatility, initial margin requirements can be raised.

The initial margin is the minimum amount required to enter into a new futures contract, but the
maintenance margin is the lowest amount an account can reach before needing to be
replenished. For example, if your margin account drops to a certain level because of a series of
daily losses, brokers are required to make a margin call and request that you make an additional
deposit into your account to bring the margin back up to the initial amount.

E.g. - Let's say that you had to deposit an initial margin of $1,000 on a contract and the
maintenance margin level is $500. A series of losses dropped the value of your account to $400.
This would then prompt the broker to make a margin call to you, requesting a deposit of at least
an additional $600 to bring the account back up to the initial margin level of $1,000.


Word to the wise: when a margin call is made, the funds usually have to be delivered
immediately. If they are not, the commodity brokerage can have the right to liquidate your
Commodity position completely in order to make up for any losses it may have incurred on your
behalf.

2) Leverage

Leverage refers to having control over large cash amounts of a commodity with comparatively
small levels of capital. In other words, with a relatively small amount of cash, you can enter into
a futures contract that is worth much more than you initially have to pay (deposit into your
margin account). It is said that in the futures market, more than any other form of investment,
price changes are highly leveraged, meaning a small change in a futures price can translate into a
huge gain or loss.

Futures positions are highly leveraged because the initial margins that are set by the exchanges
are relatively small compared to the cash value of the contracts in question (which is part of the
reason why the futures market is useful but also very risky). The smaller the margin in relation to
the cash value of the futures contract, the higher the leverage. So for an initial margin of $5,000,
you may be able to enter into a long position in a futures contract for 30,000 pounds of coffee
valued at $50,000, which would be considered highly leveraged investments.

You already know that the futures market can be extremely risky, and therefore not for the faint
of heart. This should become more obvious once you understand the arithmetic of leverage.
Highly leveraged investments can produce two results: great profits or even greater losses.

Due to leverage, if the price of the futures contract moves up even slightly, the profit gain will be
large in comparison to the initial margin. However, if the price just inches downwards, that same
high leverage will yield huge losses in comparison to the initial margin deposit. For example, say


that in anticipation of a rise in stock prices across the board, you buy a futures contract with a
margin deposit of $10,000, for an index currently standing at 1300. The value of the contract is
worth $250 times the index (e.g. $250 x 1300 = $325,000), meaning that for every point gain or
loss, $250 will be gained or lost.

If after a couple of months, the index realized a gain of 5%, this would mean the index gained 65
points to stand at 1365. In terms of money, this would mean that you as an investor earned a
profit of $16,250 (65 points x $250); a profit of 162%!

On the other hand, if the index declined 5%, it would result in a monetary loss of $16,250—a
huge amount compared to the initial margin deposit made to obtain the contract. This means you
still have to pay $6,250 out of your pocket to cover your losses. The fact that a small change of
5% to the index could result in such a large profit or loss to the investor (sometimes even more
than the initial investment made) is the risky arithmetic of leverage. Consequently, while the
value of a commodity or a financial instrument may not exhibit very much price volatility, the
same percentage gains and losses are much more dramatic in futures contracts due to low
margins and high leverage.

3) Pricing and Limits

Contracts in the Commodity futures market are a result of competitive price discovery. Prices are
quoted as they would be in the cash market: in dollars and cents or per unit (gold ounces,
bushels, barrels, index points, percentages and so on).

Prices on futures contracts, however, have a minimum amount that they can move. These
minimums are established by the futures exchanges and are known as ticks. For example, the
minimum sum that a bushel of grain can move upwards or downwards in a day is a quarter of
one U.S. cent. For futures investors, it's important to understand how the minimum price


movement for each commodity will affect the size of the contract in question. If you had a grain
contract for 3,000 bushels, a minimum of $7.50 (0.25 cents x 3,000) could be gained or lost on
that particular contract in one day.

Futures prices also have a price change limit that determines the prices between which the
contracts can trade on a daily basis. The price change limit is added to and subtracted from the
previous day's close, and the results remain the upper and lower price boundary for the day.

Say that the price change limit on silver per ounce is $0.25. Yesterday, the price per ounce closed
at $5. Today's upper price boundary for silver would be $5.25 and the lower boundary would be
$4.75. If at any moment during the day the price of futures contracts for silver reaches either
boundary, the exchange shuts down all trading of silver futures for the day. The next day, the
new boundaries are again calculated by adding and subtracting $0.25 to the previous day's close.
Each day the silver ounce could increase or decrease by $0.25 until an equilibrium price is found.
Because trading shuts down if prices reach their daily limits, there may be occasions when it is
NOT possible to liquidate an existing futures position at will.

The exchange can revise this price limit if it feels it's necessary. It's not uncommon for the
exchange to abolish daily price limits in the month that the contract expires (delivery or spot
month). This is because trading is often volatile during this month, as sellers and buyers try to
obtain the best price possible before the expiration of the contract.

In order to avoid any unfair advantages, the CTFC and the Commodity futures exchanges impose
limits on the total amount of contracts or units of a commodity in which any single person can
invest. These are known as position limits and they ensure that no one person can control the
market price for a particular commodity.


Strategies for Trading
In
Commodities and Futures


Futures contracts try to predict what the value of an index or commodity will be at some date in
the future. Speculators in the futures market can use different strategies to take advantage of
rising and declining prices. The most common strategies are known as going long, going short
and spreads.

1) Going Long
When an investor goes long, that is, enters a contract by agreeing to buy and receive delivery of
the underlying at a set price, it means that he or she is trying to profit from an anticipated future
price increase.

For example, let's say that, with an initial margin of $2,000 in June, Joe the speculator buys one
September contract of gold at $350 per ounce, for a total of 1,000 ounces or $350,000. By
buying in June, Joe is going long, with the expectation that the price of gold will rise by the time
the contract expires in September.

By August, the price of gold increases by $2 to $352 per ounce and Joe decides to sell the
contract in order to realize a profit. The 1,000 ounce contract would now be worth $352,000 and
the profit would be $2,000. Given the very high leverage (remember the initial margin was
$2,000), by going long, Joe made a 100% profit!

Of course, the opposite would be true if the price of gold per ounce had fallen by $2. The
speculator would have realized a 100% loss. It's also important to remember that throughout the
time the contract was held by Joe, the margin may have dropped below the maintenance margin
level. He would have thus had to respond to several margin calls, resulting in an even bigger loss
or smaller profit.


2) Going Short

A speculator who goes short, that is, enters into a futures contract by agreeing to sell and deliver
the underlying at a set price, is looking to make a profit from declining price levels. By selling
high now, the contract can be repurchased in the future at a lower price, thus generating a profit
for the speculator.

Let's say that Sara did some research and came to the conclusion that the price of Crude Oil was
going to decline over the next six months. She could sell a contract today, in November, at the
current higher price, and buy it back within the next six months after the price has declined. This
strategy is called going short and is used when speculators take advantage of a declining market.

Suppose that, with an initial margin deposit of $3,000, Sara sold one May crude oil contract (one
contract is equivalent to 1,000 barrels) at $25 per barrel, for a total value of $25,000.

By March, the price of oil had reached $20 per barrel and Sara felt it was time to cash in on her
profits. As such, she bought back the contract which was valued at $20,000. By going short, Sara
made a profit of $5,000! But again, if Sara's research had not been thorough, and she had made a
different decision, her strategy could have ended in a big loss.

3) Spreads

As going long and going short, are positions that basically involve the buying or selling of a
contract now in order to take advantage of rising or declining prices in the future. Another
common strategy used by commodity traders is called spreads. Spreads involve taking


advantage of the price difference between two different contracts of the same commodity.
Spreading is considered to be one of the most conservative forms of trading in the futures market
because it is much safer than the trading of long / short (naked) futures contracts.

There are many different types of spreads, including:

 Calendar spread - This involves the simultaneous purchase and sale of
two futures of the same type, having the same price, but different delivery dates.

 Inter-Market spread - Here the investor, with contracts of the same
month, goes long in one market and short in another market. For example, the investor
may take Short June Wheat and Long June Pork Bellies.

 Inter-Exchange spread - This is any type of spread in which each
position is created in different futures exchanges. For example, the investor may create a
position in the Chicago Board of Trade, CBOT and the London International Financial
Futures and Options Exchange, LIFFE.


How to trade
in
commodity market


You can invest in the futures market in a number of different ways, but before taking the plunge,
you must be sure of the amount of risk you're willing to take. As a futures trader, you should
have a solid understanding of how the market works and contracts function. You'll also need to
determine how much time, attention, and research you can dedicate to the investment. Talk to
your broker and ask questions before opening a futures account.

Unlike traditional equity traders, futures traders are advised to only use funds that have been
earmarked as risk capital. Once you've made the initial decision to enter the market, the next
question should be, how? Here are three different approaches to consider:

 Self Directed
 Full Service
 Commodity pool

1) Self Directed: - As an investor, you can trade your own account, without the
aid or advice of a Commodity broker. This involves the most risk because you become
responsible for managing funds, ordering trades, maintaining margins, acquiring research, and
coming up with your own analysis of how the market will move in relation to the commodity in
which you've invested. It requires time and complete attention to the market.

2) Full Service: - Another way to participate in the market is by opening a

managed account, similar to an equity account. Your broker would have the power to trade on
your behalf, following conditions agreed upon when the account was opened. This method could
lessen your financial risk, because a professional broker would be assisting you, or making
informed decisions on your behalf. However, you would still be responsible for any losses
incurred and margin calls.


3) Commodity Pool: - A third way to enter the market, and one that offers the

smallest risk, is to join a commodity pool. Like a mutual fund, the commodity pool is a group of
commodities which can be invested in. No one person has an individual account; funds are
combined with others and traded as one. The profits and losses are directly proportionate to the
amount of money invested. By entering a commodity pool, you also gain the opportunity to
invest in diverse types of commodities. You are also not subject to margin calls. However, it is
essential that the pool be managed by a skilled broker, for the risks of the futures market are still
present in the commodity pool.


DIFFERENT SEGMENTS IN COMMODITIES MARKET
The commodities market exits in two distinct forms namely the Over the Counter (OTC) market
and the Exchange based market. Also, as in equities, there exists the spot and the derivatives
segment. The spot markets are essentially over the counter markets and the participation is
restricted to people who are involved with that commodity say the farmer, processor, wholesaler
etc. Derivative trading takes place through exchange-based markets with standardized contracts,
settlements etc.


LEADING COMMODITY MARKETS OF WORLD


Some of the leading exchanges of the world are:
s. no. Global commodity exchanges

1 New York Mercantile Exchange (NYMEX)
2 London Metal Exchange (LME)
3 Chicago Board of Trade (CBOT)
4 New York Board of Trade (NYBOT)
5 Kansas Board of Trade
6 Winnipeg Commodity Exchange, Manitoba
7 Dalian Commodity Exchange, China
8 Bursa Malaysia Derivatives exchange
9 Singapore Commodity Exchange (SICOM)
10 Chicago Mercantile Exchange (CME), US
11 London Metal Exchange
12 Tokyo Commodity Exchange (TOCOM)
13 Shanghai Futures Exchange
14 Sydney Futures Exchange
15 London International Financial Futures and Options Exchange (LIFFE)
16 National Multi-Commodity Exchange in India (NMCE), India
17 National Commodity and Derivatives Exchange (NCDEX), India
18 Multi Commodity Exchange of India Limited (MCX), India
19 Dubai Gold & Commodity Exchange (DGCX)
20 Dubai Mercantile Exchange (DME), (joint venture between Dubai holding and
the New York Mercantile Exchange (NYMEX))


Regulators
Each exchange is normally regulated by a national governmental (or semi-governmental)
regulatory agency:

Country Regulatory agency

Australia Australian Securities and Investments Commission

Chinese mainland China Securities Regulatory Commission

Hong Kong Securities and Futures Commission

India Securities and Exchange Board of India and Forward Markets
Commission (FMC)
Singapore Monetary Authority of Singapore

UK Financial Services Authority

USA Commodity Futures Trading Commission

Malaysia Securities Commission


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


1) 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.

2) 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) 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 commodity mainly in Agro
product.


3) MCX (Multi Commodity Exchange of India Ltd.)
Headquartered in Mumbai, MCX is a demutualised nation wide electronic commodity future
exchange. Set up by Financial Technologies (India) Ltd. permanent recognition from
government of India for facilitating online trading, clearing and settlement operations for future
market across the country. The exchange started operation in Nov, 2003.

MCX equity partners include, NYSE Euronext, State Bank of India and its 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.

4) ICEX (Indian Commodity Exchange Ltd.)
ICEX is latest commodity exchange of India Started Function from 27 Nov, 09. It is jointly
promote by Indiabulls Financial Services Ltd. and MMTC Ltd. and has Indian Potash Ltd.
KRIBHCO and IFC among others, as its partners having its head office located at Gurgaon
(Haryana).

Regulator of Commodity exchanges:-

FMCL forward Market commission headquarter in Mumbai, is regulation authority which is
overseen by the minister of consumer affairs, food and public distribution Govt. of India, It is
station body set up in 1953 under the forward contract (Regulation) Act 1952.


Market share of commodity exchanges
in India (APPROX)

% of market share of exchange
OTHERS
NBOT
NMCE
2%
1%
1%

NCDEX
22%

MCX
74%


Risk associated with Commodities Market
No risk can be eliminated, but the same can be transferred to someone who can handle it better
or to someone who has the appetite for risk. Commodity enterprises primarily face the following
classes of risk. Namely: The price Risk, the quantity risk, the yield/output risk and the political
risk, talking about the nationwide commodity exchanges, the risk of the counter party not
fulfilling his obligations on due date or at any time therefore is the most common risk.

This risk is mitigated by collection of the following margins:-

 Initial margins
 Exposure margins
 Mark to Market on daily positions
 Surveillance.


Conclusion


The commodity Market is poised to play an important role of price discovery and risk
management for the development of agricultural and other sectors in the supply chain. New issue
and problems Govt. regulators and other share holders will need to proactive and quick in their
response to new developments. WTO regime makes it all the more urgent to develop these
markets to enable our economy, especially agriculture to meet the challenge of new regime and
benefits from the opportunities unfolding before U.S. with risks not belong absorbed any more
the idea is to transfer it as the focus is shifting to ―Manage price change rather than change prices
the commodity markets will play a key role for the same.‖


References
 http://www.oxfordfutures.com/futures-education/futures-price.htm
 December 3, 2009, Commodities, Goldman Sachs Global Economics, Commodities and
Strategy Commodities
 USDA, Goldman Sachs Global ECS Research
 GFMS
 World Gold Council (WGC)
 International Monetary Fund (IMF)
 http://en.wikipedia.org/wiki/Commodity_market
 http://www.mcxindia.com/
 http://www.icexindia.com/profiles/gold_profile.pdf


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