a project on commodity market

8/13/2019 A Project on Commodity Market

1/82

COMMODITY MARKET

Commodity markets are markets where raw or primary products are exchanged. It

covers physical product (food, metals, and electricity) markets but not the ways

that services, including those of governments, nor investment nor debt, can be seen

as a commodity.

HISTORY OF COMMODITY MARKET

Modern Commodity Market have their roots in the trading of agriculturalproducts.

heat and corn, cattle and pigs, were widely tradedusing standard

instruments in the !"th century in the#nited $tates.

%istorically, in ancient times $umerian use of sheepor goats, or other

peoples using pigs, rare seashells, orother items as commodity money, have

tradedcontracts in the delivery of such items, to render tradeitself moresmooth and predictable.

SIZE OF THE MARKET

&he trading of commodities includes physical tradingof food items, 'nergy

and Metals, etc. and trading ofderivatives.

In the five years up to *, the values of global physical exports of

commodities increased by !*+ while the notional value outstanding of

commodity. &C derivatives increased more than -+ andcommodity

derivative trading on exchanges morethan +.

1 nalysis of commodity indices in the global shipping trade


2/82

gricultural contracts trading grew by /+ in *, energy "+ and

industrial metals by /+.

0recious metals trading grew by /+, with higher volume in 1ew 2ork being

partially offset by declining volume in &okyo.

&C trading accounts for the ma3ority of trading in gold and silver.

LIST OF TRADED COMMODITY

gricultural (4rains, and 5ood and 5iber)

6ivestock 7 Meat

'nergy

0recious metals

Industrial metals

Agricultural Products

Corn, ats, 8ough 8ice, $oybeans, 8apeseed, $oybean Meal, $oybean il,

heat, Cocoa, Coffee C, Cotton 1o., $ugar 1o.!!, $ugar 1o.!9.

Livestock and meat

6ean %ogs, 5ro:en 0ork ;ellies, 6ive Cattle, 5eeder Cattle.

Energy

&I Crude il, ;rent Crude, 'thanol, 1atural 4as, %eating il, 4ulf Coast

4asoline, 8;; 4asoline, 0ropane, #ranium.



3/82


4/82

6ondon Metal 'xchange

innipeg Commodity 'xchange

RECENT TRENDS IN COMMODITYMARKET

&he ? global boom in commodity prices @ for everything from coal to

corn @ was fueled by heated demand from the likes of China and India.

$peculation in forward markets.

5armers are expected to face a sharp drop in crop prices as a result of bad

rainfall.

ther commodities, such as steel, are also expected to fall due to lower

demand.

Basics of Futures Trai!"

0erhaps the biggest advantage to trading futures contracts is the leverage provided

by the exchange. %owever, controlling large contracts with relatively low amounts

of capital can create high levels of volatility. s a result, many traders will argue

that leverage is actually a disadvantage. 8egardless of your opinion on leverage

and margin reAuirements, it is important that you fully understand the concepts.

;efore a customer can establish a position he is reAuired to make a minimum

Bgood faith deposit, or margin, to assure the performance of his obligations.

margin deposit is, in essence, a performance bond, which is usually between -+

and !+ of the underlying contract value. good faith deposit indicates the buyer

or sellerDs willingness and capability to compensate the opposite party to a

transaction



5/82

;ecause margin reAuirements are low, hedgers are given the ability to lock in

pricing of cash market goods without tying up a lot of capital. It would be

counterproductive for a hedger who handles large Auantities to put up !+ of thevalue of the hedged commodity. &he exchange grants margin discounts to those

that are deemed to be Bbonefied hedgers, due to the fact that the underlying cash

position is seen as collateral to secure the capital risked in the futures market.

6ow margins make speculation in the futures markets very attractive, without the

advantage of leverage the rate of return on most commodities would be marginal.

&he exchanges are responsible for setting margin reAuirements, but brokerage

firms have discretion to reAuire higher deposits. 4enerally, the initial margin is

sufficient to cover the maximum daily price fluctuations. It is not uncommon for

margin reAuirements to fluctuate with the volatility of the market. maintenance

level is established below the initial margin, usually *-+ of the initial

margin. nce a traderEs good faith deposit falls below this threshold additional

funds must be deposited or positions must be liAuidated. &his is known as a margin

call.

rders

&here are several types of orders that can be placed. In order to maximi:e

efficiency and profitability, traders must be comfortable in executing each of the

following options.

Market rderF &he purpose of a market order is to execute a trade immediately at

the best possible price. $uch orders give traders the ability to enter or exit a trade



6/82

Auickly, but do not guarantee a favorable price. &his order should be used when

time is more valuable than price.

6imit rderF 6imit orders are used to buy or sell at a specified price or better, and

will only be filled at the state price or one that is more favorable. 5or a sell limitorder Bbetter means higher, for buy limit orders Bbetter means lower.

$top rderF &his type of order is usually placed to close a positionG its name is

derived from the fact that, if placed properly, it will Bstop loss should the market

go against a traderDs position. Most traders chose to place a stop order at the time

that they enter a position. ;y definition, a sell stop will be placed below the market

while a buy stop will be placed above. ll orders are day orders unless specified

otherwise and are canceled at the end of the trading day. ;y entering the order

4&C (good Htil canceled), the order will be working in each trading session until

canceled by the trader.

Execution

Many beginning traders are unaware of the mechanics of executing a futures trade.hen you call your broker, an order ticket is completed and time stamped in order

to keep accurate track of the time and specifics of each order. &he broker then

transmits the order to his firmDs trading desk located on the floor of the exchange

either by a computeri:ed trading platform or by phone. &he order clerk then fills

out an order cardG time stamps it, and hands it to a runner who will take it directly

to a broker in the pit. &he pit broker will execute the order by open outcry and

record the execution on the card before it is given back to the runner. &he runner

takes the executed order back to the desk where the order clerk time stamps the

card one more time before the fill is reported to your broker



7/82

THE FIELD

I#BACKGRO$ND OF THE IND$STRY

THE NCDEX PLATFORM

1ational Commodity and >erivatives 'xchange 6td (1C>') is a technology

driven commodity exchange. It is a public limited company registered under the

Companies ct, !"-J with the 8egistrar of Companies, Maharashtra in Mumbai on

pril /, /. It has an independent ;oard of >irectors and professionals not

having any vested interest in commodity markets. It has been launched to provide a

worldKclass commodity exchange platform for market participants to trade in a

wide spectrum of commodity derivatives driven by best global practices,

professionalism and transparency.

1C>' is regulated by 5orward Markets Commission in respect of futures trading

in commodities. ;esides, 1C>' is sub3ected to various laws of the land like the

Companies ct, $tamp ct, Contracts ct, 5orward Commission (8egulation) ct

and various other legislations, which impinge on its working. It is located in

Mumbai and offers facilities to its members in about "! cities throughout India at

the moment.1C>' currently facilitates trading of ten commodities K gold, silver,

soy bean, soy bean oil, rapeseedKmustard seed, expeller rapeseedKmustard seed oil,

and 8;> palmolein, crude 0alm oil and cotton, Medium and long staple varieties,

t subseAuent phases trading in more commodities would be facilitated.



8/82

STRUCTURE OF NCDEX

1C>' has been formed with the following ob3ectivesF

&o create a world class commodity exchange platform for the market

participants.

&o bring professionalism and transparency into commodity trading.

&o inculcate best international practices like de. Modulari:ation, technology

platforms, low cost

$olutions and information dissemination without noise etc. into the trade.

&o provide nationwide reach and consistent offering.

&o bring together the entities that the market can trust

PROMOTERS

1C>' is promoted by a consortium of institutions. &hese include the ICICI ;ank

6imited (ICICI ;ank), 6ife Insurance Corporation of India (6IC), 1ational ;ank

for griculture and 8ural >evelopment (1;8>) and 1ational $tock 'xchange

of India 6imited (1$'). 1C>' is the only commodity exchange in the country

promoted by national level institutions. &his uniAue parentage enables it to offer a

variety of benefits which are currently in short supply in the commodity markets.

&he four institutional promoters of 1C>' are prominent players in their

respective fields and bring with them institution building experience, trust,

nationwide reach, technology and risk management skills.



9/82

GOVERNANCE

1C>' is run by an independent ;oard of >irectors. 0romoters do not participatein the day to day activities of the exchange. &he directors are appointed in

accordance with the provisions of the rticles of ssociation of the company. &he

board is responsible for managing and regulating all the operations of the exchange

and commodities transactions. It formulates the rules and regulations related to the

operations of the exchange. ;oard appoints an executive committee and other

committees for the purpose of managing activities of the exchange.

&he executive committee consists of Managing >irector of the exchange who

would be acting as the Chief 'xecutive of the exchange, and also other members

appointed by the board.

part from the executive committee the board has constitute committee like

Membership committee, udit Committee, 8isk Committee, 1omination

Committee, Compensation Committee and ;usiness $trategy Committee, which,

help the ;oard in policy formulation.

EXCHANGE MEMBERSHIP

Membership of 1C>' is open to any person, association of persons,

partnerships, cooperative societies, companies etc. that fulfills the eligibility

criteria set by the exchange. ll the members of the exchange have to register

themselves with the competent authority before commencing their operations. &he



10/82

members of 1C>' fall into two categories, trading cum Clearing Members

(&CM) and 0rofessional Clearing Members (0CM)

TRADING CUM CLEARING MEMBERS (TCMS)

1C>' invites applications for &rading cum Clearing Members (&CMs) from

persons who fulfill the specified eligibility criteria for trading in commodities. &he

&CM membership entitles the members to trade and clear, both for themselves andL

or on behalf of their clients. pplicants accepted for admission as &CM are

reAuired to pay the reAuired feesL deposits and also maintain net worth as given in&able

Ta%&e 5eeL deposit structure and net worth reAuirementF &CM

particulars 8upees( in lakh)

Interest free cash security deposit !-.

Collateral security deposit !-.

nnual subscription charges .-

dvance minimum transaction charges .-

1et worth reAuirement -.



11/82

PROFESSIONAL CLEARING MEMBERS (PCM)

1C>' also invites applications for 0rofessional Clearing Membership (0CMs)

from persons who fulfill the specified eligibility criteria for trading in

commodities. &he 0CM membership entitles the members to clear trades executed

through &rading cum Clearing Members (&CMs), both for themselves andL or on

behalf of their clients. pplicants accepted for admission as 0CMs are reAuired to

pay the following feeL deposits and also maintain net worth as given in &able

Ta%&e '#( 5eeL deposit structure and net worth reAuirementF 0CM


particulars 8upees( in lakh)

Interest free cash security deposit -.

Collateral security deposit -.

nnual subscription charges !.

dvance minimum transaction charges !.

1et worth reAuirement -.


12/82

CAPITAL REQUIREMENTS

1C>' has specified capital reAuirements for its members. n approval as amember of 1C>', the member has to deposit ;ase Minimum Capital (;MC)with the exchange. ;ase Minimum Capital comprises of the followingF

!. Interest free cash security deposit

. Collateral security deposit

ll Members have to comply with the security deposit reAuirement before theactivation of their trading terminal

CashF &his can be deposited by issuing a cheAueL demand draft payable at

Mumbai in favour of 1ational Commodity 7 >erivatives 'xchange 6imited.

Bank guaranteeF ;ank guarantee in favour of 1C>' as per the specified

format from approved banks. &he minimum term of the bank guarantee should be! months.

Fixed deposit receiptF 5ixed deposit receipts (5>8s) issued by approved banks

are accepted. &he 5>8 should be issued for a minimum period of /J months from

any of the approved banks.

Government of India securitiesF 1ational $ecurities Clearing Corporation

6imited (1$CC6) is the approved custodian for acceptance of 4overnment of

India securities. &he securities are valued on a daily basis and a haircut of -+ is

levied.



13/82

Members are reAuired to maintain minimum level of security deposit i.e. 8s.!-

6akh in case of &CM and 8s.- 6akh in case of 0CM at any point of time. If the

security deposit falls below the minimum reAuired level, 1C>' may initiate

suitable action including withdrawal of trading facilities as given belowF

If the security deposit shortage is eAual to or greater than 8s. - 6akh, the trading

facility would be withdrawn with immediate effect.

If the security deposit shortage is less than 8s.- 6akh the member would be

given one calendar weeksE time to replenish the shortages and if the same is not

done within the specified time the trading facility would be withdrawn.

Members who wish to increase their limit can do so by bringing in additional

capital in the form of cash, bank guarantee, fixed deposit receipts or 4overnment

of India securities.

THE NCDEX SYSTEM

s we saw in the first chapter, every market transaction consists of three

componentsF

&rading

clearing

$ettlement



14/82

&his section provides a brief overview of how transactions happen on the

1C>'Es market.

TRADING

&he trading system on the 1C>' provides a fully automated screen. ;ased

trading for futures on commodities on a nationwide basis as well as an online

monitoring and surveillance mechanism. It supports an order driven market and

provides complete transparency of trading operations. &he trade timings of the

1C>' are !. a.m. to 9. p.m. fter hours trading has also been proposed for

implementation at a later stage.

&he 1C>' system supports an order driven market, where orders

match automatically. rder matching is essentially on the basis of commodity, its

price, time and Auantity. ll Auantity fields are in units and price in rupees. &he

exchange specifies the unit of trading and the delivery unit for futures contracts on

various commodities. &he exchange notifies the regular lot si:e and tick si:e for

each of the contracts traded from time to time. hen any order enters the trading

system, it is an active order. It tries to find a match on the other side of the book. If

it finds a match, a trade is generated. If it does not find a match, the order becomes

passive and gets Aueued in the respective outstanding order book in the system.

&ime stamping is done for each trade and provides the possibility for a complete

audit trail if reAuired.

1C>' trades commodity futures contracts having one Month, two Month and

three month expiry cycles. ll contracts expire on the th of the expiry month.

&hus a =anuary expiration contract would expire on the th of =anuary and a

5ebruary expiry contract would cease trading on the th of 5ebruary. If the th



15/82

of the expiry month is a trading holiday, the contracts shall expire on the previous

trading day. 1ew contracts will be introduced on the trading day following the

expiry of the near month contract.

CLEARING1ational $ecurities Clearing Corporation 6imited (1$CC6) undertakes clearing of

trades executed on the 1C>'. &he settlement guarantee fund is maintained and

managed by 1C>'. nly clearing members including professional clearing

members (0CMs) only are entitled to clear and settle contracts through the clearing

house.

t 1C>', after the trading hours on the expiry date, based on the availableinformation, the matching for deliveries takes place firstly, on the basis of

locations and then randomly, keeping in view the factors such as available capacity

of the vaultL warehouse, commodities already deposited and demateriali:ed and

offered for delivery etc., Matching done by this process is binding on the clearing

members. fter completion of the matching process, clearing members are

informed of the deliverableL receivable positions and the unmatched positions.

#nmatched positions have to be settled in cash. &he cash settlement is only for the

incremental gainL loss as determined on the basis of final settlement price.

SETTLEMENT

5utures contracts have two types of settlements, the M&M settlement which

happens on a continuous basis at the end of each day, and the final settlement

which happens on the last trading day of the futures contract. n the 1C>',

daily M&M settlement and final M&M settlement in respect of admitted deals in



16/82

futures contracts are cash settled by debitingL crediting the clearing accounts of

CMs with the respective clearing bank. ll positions of a CM, either brought

forward, created during the day or closed out during the day, are market to market

at the daily settlement price or the final settlement price at the close of trading

hours on a day. n the date of expiry, the final settlement price is the spot price onthe expiry day. &he 8esponsibility of settlement is on a trading cum clearing

member for all trades done on his own account and his clientEs trades.

professional clearing member is responsible for settling all the participantsD trades

which he has confirmed to the exchange.

n the expiry date of a futures contract, members submit delivery information

through delivery reAuest window on the trader workstations provided by 1C>'

for all open positions for a commodity for all constituents individually. 1C>' on

receipt of such information matches the information and arrives at a delivery

position for a member for a commodity.

&he seller intending to make delivery takes the commodities to the designated

warehouse. &hese commodities have to be assayed by the exchange specified

assayer. &he commodities have to meet the contract specifications with allowed

variances. If the commodities meet the specifications, the warehouse accepts them.

arehouse then ensures that the receipts get updatedin the depository system

giving a credit in the depositorEs electronic account. &he seller then gives the

invoice to his clearing member, who would courier the same to the buyerEs clearing

member. n an appointed date, the buyer goes to the warehouse and takes physicalpossession of the commodities.



17/82

COMMODITIES TRADED ON THE NCDEXPLATFORM

In >ecember /, the 1ational Commodity and >erivatives 'xchange 6td

(1C>') launched futures trading in nine ma3or commodities.

&o begin with contracts in gold, silver, cotton, soybean, soya oil, rapeL

mustard seed, rapeseed oil, crude palm oil and 8;> palmolein are being

offered.

e have a brief look at the various commodities that trade on the 1C>' and

look at some commodity specific issues. &he commodity markets can be classified

as markets trading the following types of commodities.

!. gricultural products

. 0recious metal

/. ther metals

9. 'nergy

AGRICULTURAL COMMODITIES

&he 1C>' offers futures trading in the following agricultural commodities.

8efined soy oil, mustard seed, expeller mustard oil, 8;> palmolein, crude palm



18/82

oil, medium staple cotton and long staple cotton. f these we study cotton in detail

and have a Auick look at the others

COTTONCotton accounts for *-+ of the fibre consumption in spinning mills in India and

-?+ of the total fibre consumption of its textile industry (by volume). t the

average price of 8s.9-L kg, over !* million bales (average annual consumption, !

bale N !* kg) of raw cotton trade in the country. &he market si:e of raw cotton in

India is over 8s.!/ billion. &he average monthly fluctuation in prices of cotton

traded across India has been at around 9.-+ during the last three years. &he

maximum fluctuation has been as high as !!+. %istorically, cotton prices in India

have been fluctuating in the range of /KJ+ on a monthly basis.

Cotton is among the most important nonfood crops. It occupies a significant

position, both from agricultural and manufacturing sectorsE points of view. It is the

ma3or source of a basic human need, Clothing, apart from other fibred sources like

3ute, silk and synthetic. &oday, cotton occupies a significant position in the Indian

economy on all fronts as a commodity that forms a means of livelihood to over

millions of cotton cultivating farmers at the primary agricultural sector. It is also a

source of direct employment to over /- million people in the secondary

manufacturing textile industry that contributes to !9+ of the countryEs industrial

production, *./+ of the countryEs export earnings and 9+ of its 4>0.

CRUDE PALM OIL



19/82

nnual edible oil trade in India is worth over 8s.99 billion, with the share of C0

being nearly + (8s.?K" billion). &he country is over. >ependent on C0

imports to the extent of over -+ of its annual vegetable oil imports. &here is a

close inter linkage between the various vegetable oils produced, traded and

consumed across the world. &he average monthly fluctuation in prices of importedC0 traded at Oandla (one of the ma3or importing ports in 4u3arat) has been at

".*+ during the past two and a half years, the maximum monthly fluctuation being

as high as -+ during the period.

0alm oil is extracted from the mature fresh fruit bunches (55;s) of oil palm

plantations. ne hectare of oil palm yields approximately 55;s, which when

crushed yields J tons of oil (including the kernel oil, which is used both for edible

and industrial purposes). Crude palm oil (C0), crude palmolein, 8;> (refined,

bleached, deodori:ed) palm oil, 8;> palmolein and crude palm kernel oil (C0O)

are the various forms of palm oil traded in the market

RBD PALMOLEIN

&he 8;> (refined, bleached and deodori:ed) palmolein is the derivative of crude

palm oil (C0), which is obtained from the crushing of 5resh 5ruitKbunches

(55;s) harvested from oil palm plantations. hen C0 is sub3ected to refinement,

8;> palm oil and fatty acids are obtained. 5ractionation of 8;> palm oil yields

8;> palmolein along with stearin, which is a white solid at room temperature.

hile il is a stable derivative saturated fat, solid at room temperature), lein is



20/82

relatively unstable (unsaturated fat, liAuid at room temperature, but low

cholesterol). &he whole Auantity of C0 that is produced and used for human

consumption is in the form of 8;> palmolein. Cropping of growth patterns of

C0 has been already covered.

SOY OIL$oy oil is among the ma3or sources of edible oils in India. f the annual edible oil

trade worth over 8s.99 billion in the country, soy oils share is over .!+ at

8s."." billion in terms of value. ;eing an agricultural commodity, which is often

sub3ected to various production and market related uncertainties, soy oil prices

traded across the world are highly volatile in nature.

&he average fluctuation in spot prices of refined soy oil traded at Mumbai has been

at J.J+ during the past two and a half years, the maximum monthly fluctuation

being as high as !*+ during the period. %istorically, soy oil prices in the ma3or

spot markets across the country have been fluctuating in the range of 9.-.?.-+.

&his offers immense opportunity for the investors to profitably deploy their funds

in this sector apart from those actually associated with the value chain of the

commodity, which could use soy oil futures contract as the most effective hedging

tool to minimi:e price risk in the market.

$oy oil is the derivative of soybean. n crushing mature beans, !?+ oil and

*?.?+ meal is obtained. hile the oil is mainly used for human consumption,

meal serves as the main source of protein in animal feeds. $oy oil is the leading

vegetable oil traded in the international markets, next only to palm. 0alm and soy

oils together constitute around J?+ of global edible oil export trade volume, with

soy oil constituting .?-+. It accounts for nearly -+ of the worldEs total oils and

fats production. Increasing price competitiveness, and aggressive cultivation and



21/82

promotion from the ma3or producing nations have given way to widespread soy oil

growth both in terms of production as well as consumption.

RAPESEED OIL

8apeseed (also called mustard or canola) oil is the third largest edible oil produced

in the world, after soy and palm oils. n crushing rapeseed, oil and meal are

obtained. &he average oil recovery from the seed is about //+. &he remaining is

obtained as oil cakeL meal, which is rich in proteins and is used as an ingredient in

animal feed. Mustard oil, which is known for its pungency, is traditionally the most

favoured oils in the ma3or production tracts world over.

SOYBEAN

&he market si:e of the popularly known miracle bean in India is over 8s.-

crore. ith an annual production of -..-.9 million tons, soybean constitutesnearly -+ of the countryEs total oilseed production. &he average monthly

fluctuation in prices of soybean traded at one of the active soybean spot market at

Indore (Madhya 0radesh) has been at !.*+ during the past two years, the

maximum monthly fluctuation being as high as 9./+ during the period.

%istorically, soybean prices in the ma3or spot markets across the country have been

fluctuating in the range of -."+. $oybean is the single largest oilseed produced in

the world. &he commodity has been commercially exploited for its utility as edible

oil and animal feed. n crushing mature beans, around !?+ oil could be obtainedG



22/82

the rest being the oil cakeL meal, which forms the primesource of protein in animal

feeds.

RAPESEED

8apeseedL Mustard is one of the ma3or sources of oil and meal to India. It supplies

over !.- million tons of oil (!-.!?+ of IndiaEs annual edible oil reAuirement) and

/./. million tons of oil meal, the ma3or protein source in animal feeds. &he

average monthly fluctuation in prices of rapeseed traded at one of the active

rapeseed spot market at =aipur (8a3asthan) has been at ".?+ during the past two

years (=uly ! to =uly /), the maximum monthly fluctuation being as high as

/.9+ during the period. 8apeseedL MustardL Canola is a traditionally important

oilseed. China, Canada and India are the ma3or producers of this commodity. &he

other ma3or producers are 4ermany, 5rance, ustralia, 0akistan and 0oland. &he

commodity has been commercially exploited in the form of seeds, oil (seed to oil

recovery is /".9+) and meal.

PRECIOUS METALS

GOLD

5or centuries, gold has meant wealth, prestige, and power, and its rarity and natural

beauty have made it precious to men and women alike. wning gold has long been

a safeguard against disaster. Many times when paper money has failed, men haveturned to gold as the one true source of monetary wealth. &oday is no different.

hile there have been fluctuations in every market and decided downturns in

some, the expectation are that gold will hold its own. &here is a limited amount of



23/82

gold in the world, so investing in gold is still a good way to plan for the future.

4old is homogeneous, indestructible and fungible. &hese attributes set gold apart

from other commodities and financial assets and tend to make its returns

insensitive to business cycle fluctuations. 4old is still bought (and sold) by

different people for a wide variety of reasons. as a use in 3ewelry, for industrialapplications, as an investment and so on.

DEMAND

&he Consumer demand for gold is more than /9 tons per year making it

whopping P9 billion worth. More than ?+ of the gold consumed is in the form

of 3ewellery, which is generally predominated by women. &he Indian demand tothe tune of ? tons per year is making it the largest market for gold followed by

#$, Middle 'ast and China. bout ?+ of the 0hysical gold is consumed in the

form of 3ewellery while bars and coins occupy not higher than !+ of the gold

consumed. If we include 3ewellery ownership, then India is the largest repository

of gold in terms of total gold within the national boundaries.

8egarding pattern of demand, there are no authentic estimates, the available

evidence shows that about ?+ is for 3ewellery fabrication for domestic demand,

and !-+ is for investor demand (which is relatively elastic to goldKprices, real

estate prices, financial markets, tax policies, etc.). ;arely -+ is for industrial uses.

&he demand for gold 3ewellery is rooted in societal preference for a variety of

reasons. religious, ritualistic, a preferred form of wealth for women, and as a hedge

against inflation. It will be difficult to prioriti:e them but it may be reasonable to

conclude that it is a combined effect, and to treat any ma3or part as exclusively a

store of value or hedging instrument would be unrealistic. It would not be realistic



24/82


25/82

price sensitive and as such the dominance of the gold supply through import is in

existence. &he fabricated old gold scraps is price elastic and was estimated to be

near 9- tons in . It rose almost more than 9+ compared to the previous year

because of rise in gold price by more than !-+.

&he demandK $upply for gold in India can be summed up thusF

>emand for gold has an autonomous character. $upply follows demand.

>emand exhibits income elasticity, particularly in the rural and semiKurban

areas.

0rice differential creates import demand, particularly illegal import prior to the

commencement of liberali:ation in !"".

SILVER

&he dictionary describes it as a white metallic element, sonorous, ductile, very

malleable and capable of high degree of polish. It also has the highest thermal and

electrical conductivity of any substance. $ilver is somewhat harder than gold and is

second only to gold in malleability and ductility. $ilver remains one of the most

prominent candidates in the metals complex as far as futuresE trading is concerned.

&hanks to its uniAue volatility, silver has remained a hot favorite speculative

vehicle for the small time traders. &hough futures trading were banned in India

since late sixties, parallel futures markets are still very active in >elhi and Indore.

$peculative interest in the white metal is so intense that it is believed that

combined volume of Indian punters represent almost 9 percent of volume traded

at 1ew 2ork Commodity 'xchange. >elhi, 8a3asthan, M0 and #0 are the active



26/82


27/82

&he supply of silver is based on two facts, mine production and recycled silver

scraps. Mine production is surprisingly the largest component of silver supply. It

normally accounts for a little less than L/ rd of the total (last year was slightly

higher at J?+). 5ifteen countries produce roughly "9 percent of the worldDs silver

from mines. &he most notable producers are Mexico, 0eru, the #nited $tates,

Canada and ustralia. Mexico, the largest producer of silver from mines. 0eru is

the worldDs second largest producer of silver. $ilver is often mined as a byproduct

of other base metal operations, which accounts for roughly fourKfifths of the mined

silver supply produced annually. Onown reserves, or actual mine capacity, is

evenly split along the lines of production. &he mine production is not the solesource. thers being scrap, disinvestments, government sales and producers

hedging. $crap is the silver that returns to the market whenrecovered from existing

manufactured goods or waste. ld scrap normally makes up around a fifth of

supply. $crap supply increased marginally last year up by !.+. &he other ma3or

source of silver is from refining, or scraps recycling. ;ecause silver is used in the

photography industry, as well as by the chemical industry, the silver used in

solvents and the like can be removed from the waste and recycled. &he #nited

$tates recycles the most silver in the world, accounting for roughly 9/.J million

ounces. =apan is the second largest producer of silver from scrap and recycling,

accounting for roughly *.? million troy ounces in !""*. In the #nited $tates and

=apan, threeKAuarters of all the recycled silver comes from the photographic scrap,

mainly in the form of spent fixer solutions and old Kray films.

THE ST$DY

I#OB)ECTI*ES OF THE ST$DY



28/82

+RIMARY OB)ECTI*E

!) &o understand real ist ical ly the pattern of f luctuations of price indices

of two agricultural commodities and the factors behind that

SECONDARY OB)ECTI*E

2) To study the operation of commodity trading in india and assess

its importance

3) To provide a trend analysis of the current MCX & NCDEX indices

II# SCO+E OF THE ST$DY

rgani:ed commodity derivatives in India started as early as !?*-, barely about a decade after

they started in Chicago. %owever, many feared that derivatives fuelled unnecessary speculation

and were detrimental to the healthy functioning of the markets for the underlying commodities.

s a result, after independence, commodity options trading and cash settlement of commodity

futures were banned in !"-. further blow came in !"Js when, following several years of

severe draughts that forced many farmers to default on forward contracts (and even caused some

suicides), forward trading was banned in many commodities considered primary or essential.

ConseAuently, the commodities derivative markets dismantled and remained dormant for about

four decades until the new millennium when the 4overnment, in a complete change in policy,

started actively encouraging the commodity derivatives market. $ince , the commodities

futures market in India has experienced an unprecedented boom in terms of the number of

modern exchanges, number of commodities allowed for derivatives trading as well as the value

of futures trading in commodities, which might cross the P ! &rillion mark in J.

%owever, there are several impediments to be overcome and issues to be decided for sustainable

development of the market. &his paper attempts to answer Auestions such asF



29/82

%ow do price indices fluctuate so easily and how to understand themQ

Is this progress sustainable and what are the obstacles that need urgent attention if the

market is to reali:e its full potentialQ

hy are commodity derivatives important and what could other emerging economies

learn from the Indian mistakes and experienceQ

III# RESEARCH METHODOLOGY

DEFINITION

8esearch is an organi:ed, systematic, dataKbased, critical, scientific inAuiry into a specific

problem that needs a solution. $cientific research has the goal of solving problems and

establishing a stepKbyKstep logical, organi:ed, and rigorous method to identify problems, gathers

data, analyses the data, and draw valid conclusions there from.

,# TY+E OF RESEARCH $SED

&he research undertaken in this problem is descriptive in nature. >escriptive study attempts to

obtain a complete and accurate descriptive of situation, formal design is reAuired to ensure that

the description covers all phases desired. 0recise statement at problem indicates what than be

designed provides for collection of this information under the study

(# NEED OF THE ST$DY

&he empir ica l analys is shows tha t cyc les in economic ac tivi ty a re ma3or

determinants of the shortKrun behavior of shipping freight rates in the year !?-and or ld ar I . Cons is tent with the economic theory, there i s a s tr ik ing

asymmetry between the peaks and troughs of shipping cycles. %owever, there is

a close t iming relat ionship between the upper turning points of the bus iness

cycle, commodi ty pr ices and f reight rates which is par t icular ly shown in the



30/82

peak years !?*-,!??",!",!"!. $o this study on commodity indices and

prices, to an extent would not only help us in understanding the economy of the

country, the growth driving commodities favoring 'IM trade but also for better

understanding the freight market changes and behavior for the future.

'# SO$RCES OF DATA

The data !as collected through

" #econdary data

SECONDARY DATA

Company records$ maga%ines$ ournals and !e'sites !ere made use to collect secondary data

regarding indices$ operations of commodity mar(et and gro!th patterns

A- STATISTICAL TOOLS.

The statistical tools that !ere used for the study is as follo!s

" *eighted +verage and

2 Technical analysis

/EIGHTED A*ERAGE.

The !eighted average stands for the relative importance of the different items The formula for

comparing !eighted mean is

X* ,- X!.!

X is the varia'les values ie$ X"$ X2/Xn



31/82

* represents the !eights attached to values

TECHNICAL ANALYSIS.

It is important to note that the &echnical nalysis verview provided does not attempt to be a

comprehensive treatment of Charting or &echnical nalysis methods. &here are numerous, wellK

written books on Chart Interpretation and &echnical nalysis. ;rief and simplistic reviews of

some basic charting concepts are provided for reference or to stimulate further study. 0lease

contact your broker for a recommended reading list on Charting and &echnical nalysis.

&echnical nalysis makes the assumption that history repeats itself. ny

trading method or system that works well on a broad sample of historical data may have validity

when applied to future trading environments. ne should keep in mind that the markets are

dynamic. &he forces that motivate price movement are dynamic, and the participants are

dynamic. &herefore any system which has performed well on past historic data may decline in

value as the evolving dynamics of the markets change over time.

&he assumption is made that trading results can be improved when trading skills are improved.

&his reAuires practiceR $urely any time spent learning to trade on past historical data will not be

wasted when it comes to preparing to trade for the future.

B-LIMITATIONS OF THE ST$DY

") The research holds validity for the particular period only



32/82

2) The research is e0tended to particular commodities only

ANALYSIS AND INTER+RETATION OF DATA

3) To understand realist ical ly the pattern of f luctuations of pr ice indices

of t!o agricultural commodities and the factors 'ehind that

S$GAR

sweet white (or brownish yellow) crystalline substance, of a sandy or granular consistency,

obtained by crystalli:ing the evaporated 3uice of certain plants, as the sugar cane, sorghum, beet

root, sugar maple, etc. It is used for seasoning and preserving many kinds of food and drink.

rdinary sugar is essentially sucrose.

*arieties of Su"ar

hite, refined sugar

Caster sugar

Icing sugar

Icing mixture

;rown sugar

>ark brown sugar

8aw sugar



33/82

4olden demerara

4olden syrup

&reacle

Molasses

Caramel

Decoratio! a! s0ecia&t1 su"ars

Ma3ority of the sugarcane produced in India is of the following hybrid varietiesF $ $inense, $.

;arberi, CK!/, C /, C /!, C /!/, C 9!", C !!9?, C *9 and C$ *J*

Su"ar 0rouci!" areas i! I!ia

In India the ma3or sugar cane producing areas are ndhra 0radesh, ssam, ;ihar, 4u3arat,

%aryana, Oarnataka, Oerala, Madhya 0radesh, Maharashtra, rissa, 0un3ab, 8a3asthan,

&amilnadu, #ttar 0radesh and est ;engal.



34/82

INDIA2S S$GAR AND S$GARCANE +ROD$CTION



35/82

S$GAR +RICES IN DELHI MARKET

FACTORS INFL$ENCING S$GAR MARKETS

0rice 8efinery activity

Consumer income

Candy and confectionery sales

Changing eating habits

$ugars use in new technologies, such as ethanol production for automobile fuel.



36/82

IM+ORTANT /ORLD S$GAR MARKETS

;ra:il

ustralia

#.$

Cuba

0hilippines

China

;angladesh

Iran

INTERNATIONAL TRADE

ver the past fifty years, especially, the international trade in sugar has changed dramatically.

$ince it is either imported or exported by every country on earth, sugar has become an integral

component of the economic relationships among nations. ;ecause of that uniAue position, the

trade in sugar has both reflectedKand been affected byKa wide range of divergent forces, including

global politics, health consciousness, the emergence of developing nations as suppliers and

consumers, and many others.

0erhaps the greatest change in the international sugar trade has been the trend toward price

stabili:ation. %istorically at the mercy of everything from war to weather, the price of sugar has

always been extremely volatile. &he International $ugar &rade contains the most essential and



37/82


38/82

&echnical analysis

!an- MarF

Su00ort

+ hori%ontal floor !here interest in 'uying a commodity is strong enough to overcome

the pressure to sell Therefore a decrease in price is reversed and prices rise once

again Typically$ support can 'e identified on a chart 'y a previous set of lo!s

A"r # !un$

Resista!ce

+ hori%ontal ceiling !here the pressure to sell is greater than the pressure to 'uy

Therefore$ an increase in price is reversed and prices revert do!n!ard Typically

resistance can 'e located on a chart 'y a previous set of high

!uly - %e"

Su00ort

+ hori%ontal floor !here interest in 'uying a commodity is strong enough to overcome

the pressure to sell Therefore a decrease in price is reversed and prices rise once

again Typically$ support can 'e identified on a chart 'y a previous set of lo!s



39/82

ct # Dec

I!c&i!i!"

The inclining channel is a formation !ith parallel price 'arriers along 'oth the price

ceiling and floor 1nli(e the side!ays channel the inclining channel has an increase in'oth the price ceiling and price floor

S$GAR +RICES (335

&echnical analysis

!an- MarF

Brea6a7a1 Ga0s

ccur !hen prices gap higher or lo!er out of a congestion pattern in the direction of the

prevailing trend

A"r # !un$

Measuri!" or Ru!!i!" Ga0s

Difficult to identify$ 'ut usually occur at the midpoint in a price rally or decline

!uly # %e"



40/82

Fa&&i!" or Dec&i!i!"

This formation occurs !hen the slope of price 'ar highs and lo!s oin at a point forming

an declining !edge The slope of 'oth lines is do!n !ith the upper line 'eing steeper

than the lo!er one To trade this formation$ place an order on a 'rea( up and out of the

!edge or a sell order on a 'rea( do!n and out the !edge alling !edges$ !ith a prior

uptrend$ are anticipated to 'rea( up and out$ rather than do!n and out

ct # Dec

Tri0&e Botto8

+nticipates a change in trend from do!n to up

S$GAR +RICES (339

!an- MarF

Dec&i!i!"

The declining channel is a formation !ith parallel price 'arriers along 'oth the price

ceiling and floor 1nli(e the side!ays channel the declining channel has a decrease in

'oth the price ceiling and price floor

A"r # !un$



41/82

Asce!i!" Tria!"&e

+ formation in !hich the slope of price highs and lo!s come together at a point outlining

the pattern of a 4ight Triangle The hypotenuse in an +scending Triangle should 'e

sloping from lo!er to higher and from left to right To trade this formation$ place a 'uy

order on a 'rea( up and out of the triangle or a sell order on a 'rea( do!n and out of

the triangle +scending triangles$ !ith a prior do!ntrend$ are anticipated to 'rea(

do!n and out$ rather than up and out

!uly # %e"

+e!!a!ts

#imilar to a #ymmetrical Triangle 'ut generally stu''ier or not as elongated+ formation

in !hich the slope of price 'ar highs and lo!s are converging to a point so as to outline

the pattern in a symmetrical triangle To trade this formation$ you can place orders at

'oth the 'rea( up and out of the pennant and 'rea(

do!n and out of the pennant

ct # Dec

Tri0&e Botto8

+nticipates a change in trend from do!n to up



42/82

S$GAR +RICES (33:

!an- MarF



A"r # !un$

+e!!a!ts



the pattern in a symmetrical triangle To trade this formation$ you can place orders at'oth the 'rea( up and out of the pennant and 'rea(

do!n and out of the pennant

!uly # %e"



43/82

Desce!i!" Tria!"&e


the pattern of a 4ight Triangle The hypotenuse in an Descending Triangle should 'e

sloping from higher to lo!er and left to right To trade this formation$ place a 'uy order

on a 'rea( up and out of the triangle or a sell order on a 'rea(do!n and out of the

triangle Descending triangles$ !ith a prior uptrend$ are anticipated to 'rea( up and out$

rather than do!n and out

ct # Dec

Dec&i!i!"

The declining channel is a formation !ith parallel price 'arriers along 'oth the price

ceiling and floor 1nli(e the side!ays channel the declining channel has a decrease in

'oth the price ceiling and price floor

S$GAR +RICES (33;

!an- MarF Hori


44/82

+ hori%ontal or side!ays is a formation that features 'oth resistance and support

#upport forms the lo! price 'ar$ !hile resistance provides the price ceiling

A"r # !un$Resista!ce

+ hori%ontal ceiling !here the pressure to sell is greater than the pressure to 'uy

Therefore$ an increase in price is reversed and prices revert do!n!ard Typically

resistance can 'e located on a chart 'y a previous set of high

!uly # %e"

Asce!i!" Tria!"&e





the triangle +scending triangles$ !ith a prior do!ntrend$ are anticipated to 'rea( do!n

and out$ rather than up and out

ct # Dec

Hea a! S=ou&ers Botto8

+nticipates a rise in prices on a 'rea( a'ove the Nec(line

CONCL$SION



45/82

>espite the economic recession world over, sugar consumption growth was less impacted and

remained positive. &he supplyKdemand diseAuilibrium has been caused essentially by the strident

slippage in Indian production, exacerbated by the decline in '# and other sian countries.

&he correction after surging surplus for two years in a row has come as good relief to sugar

producerDs world over. $uch tightness in supply is sure to be witnessed during "K! as well.

;ra:ilDs share in world export is expected to overshoot the half way mark to -/+ this year as

against "+ a decade ago.

1ew 2ork raw sugar futures as on th1ovember "



46/82

>elivery month Close price #$ cLlb

=an ! .

Mar ! .*9

May ! !.?J

=uly ! .9/

Mar !! !".//

Mar ! !J.J/

orld production is now expected to be 9.*9 mln tons lower than world consumption as against

/.JJ mln tons pro3ected in 1ovember. ConseAuently, the statistical outlook for the market till

the end of the season in $eptember " remains constructive and supportive to the market

values. &he I$ puts world export availability for ?L" at 9".J? mln tons raw value, as

against 9J.- mln tons in the previous crop cycle $maller output in importing countries and in

India, in particular, is expected to trigger additional import demand which is expected to reach

9".J! mln tons, up /.J*/ mln tons

/HEAT

heat is a cereal grain that belongs to the grass family of the genus H&riticumD. dry, one

seeded fruit named kernel is obtained from this spiky grass like grain, which is ground to make

flour and is consumed throughout the world as one of the most important staple food. It is the

second largest cereal grain consumed on earth and that is why it is widely cultivated in more than

/ varieties.



47/82

heat is important especially for making breads and other bakery products as it has got the

maximum number of glutens as compared to any other grain. &his crop is also grown as a forage

crop for the livestock

O>er>ie7

heat is a very important edible cereal grain crop. s already mentioned, it is the second largest

grain crop consumed after rice. &he cultivation of wheat has its own advantages like it has a very

good yield per unit area, has a relatively short growing duration period and the production of

wheat is comparatively easier than the other grain crops as it grows well in the temperate

regions. &hat is why it serves as a very good cash crop and proves its dominance in the world

commerce. 4luten, which is a primary constituent in raised bread, is found in wheat and that is

why most of the bakery products are made from wheat only.

&he world production of wheat figures over -?- million tons annually. &he largest producer of

wheat in the world is the 'uropean #nion followed by China, India and #nited $tates of

merica. &he total wheat production of the world is slightly concentrated is clear from the fact

that these four producers contribute to around J+ of the total production. &he consumption of

wheat in the world is a huge -? million tons but is successfully kept satisfied with an eAually

high production figures. Consumption has been constantly increasing during the last ! years

with the increase in population, and alarmingly, the consumption is prepared to shoot up further

and is expected to reach up to **- million tons in . heat is consumed all through the globe

and the leading countries in this list are 'uropean #nion, China

India

8ussia

#nited $tates of merica

0akistan

&he above list makes it clear that the largest producers of wheat in the world are also the largest

consumers of the world, which means, most of the wheat production is consumed at the place of

production. &he export market of wheat is getting competitive with the new entrants like India



48/82

into it and the export figures hover around million tons. &he ma3or exporting countries of

this crop areF K


ustralia

Canada

'uropean #nion

rgentina

&he imports of wheat are done by the countries, which have a high domestic demand and a

fluctuating production level. &hat is why the countries shuffle in the list of highest wheat

importing countries. &he world import figures sum up to ! million tons and are currently done

by more than ! countries. &he ma3or countries are

'uropean #nion

China

'gypt

=apan

;ra:il

Mexico

Indonesia

lgeria

0hilippines IraA

Cu&ti>atio! 0atter!

heat was one of the first crops that were cultivated in the world thanks to its adaptability to

wider range of climatic conditions and soils making it a very easy to produce crop in that timewhen man didnDt even know the basics of living. heat reAuires a cooler weather and a good

level of moisture in the early plantation period and once the grain is formed, it needs a warmer

weather to dry up. &hat is why the bestKsuited climate needed for the wheat crop to prosper is the

temperate climate.



49/82

In #$, the wheat seeds are sown in the months of $eptember and ctober. fter 5ebruary,

when the snow in those areas starts to melt, the wheat crop starts to shoot up and during summers

it is left to develop and finally it is harvested in the months of =une, =uly and $eptember. In India,

wheat is cultivated as a 8abi crop and it is planted in the month of ctober. It is harvested in the

months pril and May.

/=eat 0rouci!" cou!tries

&he world production of wheat sums up to over -?- million tons annually. s mentioned above,

the production of wheat is slightly concentrated in the hands of a few countries as the top four

producers of the world contribute around J+ of the worldDs total production. &he productionK

wise list of the ma3or producers of wheat is given below

'uropean #nion

China

India


8ussia

Canada

ustralia

0akistan

&urkey

rgentina

Iran

&he largest producer of wheat in the world is 'uropean #nion that contributes to around !L9th

share to the worldDs total production. s it is said that the demand of wheat increases with the

increase in population, the nations having the largest population in the world i.e. China and India

stand at the nd and /rd position in the largest wheat producing nationsD list in order to satisfy

the domestic consumption demand. &hese two countries contribute !9 + and !+ respectively in

the worldDs total production. India has shown a high rise in production of wheat after the green

revolution and taken a lead from #$ in recent times.



50/82

heat is produced on approximately .- million sAuare kilometers of the world. &he maximum

area in the total cultivated area of wheat is constituted by India at around !/+. &he other ma3or

countries that have a significant impact on the total area contributed for wheat production are

'uropean #nion

8ussia

China

#$

ustralia

Canada

Oa:akhstan

Production of wheat in India

&he following areas in India are the ma3or wheat producing areas in the country and contribute to

around "+ of the total production in the country

#ttar 0radesh

%aryana

0un3ab

8a3asthan

Madhya 0radesh

4u3arat

;ihar

India produces around *- million tons of wheat every year and stands at the third position in the

list of the ma3or wheat producers in the world. India also stands at the top in the world in terms

of area covered in production of wheat. #ttar 0radesh is the leading producer state in India



51/82

followed by 0un3ab and %aryana. heat occupies a ma3or share of /-+ production in the total

production of crops cultivated and J-+ of total cropped area in the country. &his share in

production and area covered of the crop has increased since independence and is also constantly

rising. &he yield of wheat in kilograms per hectare has also risen significantly from - kgLha in

!"-L-! to !JkgLha in !""?L""

I!ia! 7=eat 8ar6et

India is the third largest producer of the wheat crop. It has been successfully fulfilling its large

domestic consumption demand in the past few years and has been exporting the surpluses to give

the ma3or exporters of the world a good competition. India produces an average of *- million

tons wheat each year but the production of this crop is generally fluctuating due to the

uncertainty of the rainfall. &he state of #ttar 0radesh leads the production in the country. 5or

selfKconsumption purposes, the farmers retain around 9?+ of their production and hence it is not

entered into the total production figures of the country.

Indian wheat is generally medium hard bread wheat. It is a staple food of this country. &hat is

why almost all of the wheat produced is consumed. India holds the third position in the ma3or

wheat consumerDs list after 'uropean #nion and China consuming around * million tons of

wheat. &he demandKsupply flows with in the country are largely interfered by the government of

the country so as to make sure that the grain supplies be stable and prices do not get affected.

ith the introduction of the new technologies in the agricultural sector, there has been a constant

increase in the productivity of wheat produced and hence there has been a growth in the surplus

level of the country and conseAuently a rising trend in the wheat export. orld market sees a

dependable supplier of wheat in the form of India. &he ma3or exporters of the world namely #$

and ustralia have lost their share in the worldDs export with the coming of India in the exporting

scenario. &he export figures of India in /K9 were - million tons.

&he ma3or importers of Indian wheat are the southeastern sian countries and the gulf countries.

India was an importer of wheat in the "s as it the domestic demand was too high but now this

situation has been overcame and overturned.



52/82

Mar6et i!f&ue!ci!" factors

eather conditions

4overnment policies and regulations

0rices fluctuations of the competitive and substitute products

$eason of harvesting and peak season

&echnological improvements

Crop si:e

orld demand for wheat

*arieties of /=eat

&he three principal types of wheat used in modern food production areF

&riticumvulgare K it provides the bulk of the wheat used to produce flour for bread

making and for cakes and biscuits (cookies).

&riticum durum K >urum is the hardest of all wheat. Its density, combined with its high

protein content and gluten strength, make durum the wheat of choice for producing

premium pasta products

&riticumcompactum

T=e %asics of 7=eat eco!o8ics

hen supplies of a commodity are excessive, prices decline. hen demand for the commodity

increases, so does the price. &ypically, companies invest from -+ to *+ of their gross revenues

to product promotion.

Individually, wheat farmers have little impact on demand, but putting all the heads together can

make a significant difference in product demand and market price. nd that leads to the ultimate

goal of the improved income for wheat producers.

/HEAT +RICES (339



53/82

&echnical analysis

!an- MarF

Hori


54/82

No!?S188etrica&

formation in which the slope of price highs and lows are converging to a point so as to

outline the pattern in a nonK symmetrical triangle. &o trade this formation, place a buy order on a

break up and out of the triangle or a sell order on a break down and out of the triangle

ct # Dec

Asce!i!" Tria!"&e





the triangle +scending triangles$ !ith a prior do!ntrend$ are anticipated to 'rea(

do!n and out$ rather than up and out

/HEAT +RICES (33:

&echnical analysis



55/82

!an- MarF

Risi!" or I!c&i!i!"

This formation occurs !hen the slope of price 'ar highs and lo!s oin at a point forming

an inclining !edge The slope of 'oth lines is up !ith the lo!er line 'eing steeper than

the higher one To trade this formation$ place an order on a 'rea( up and out of the

!edge or a sell order on a 'rea( do!n and out the !edge 4ising !edges$ !ith a prior

do!ntrend are anticipated to 'rea( do!n and out$ rather than up and out

A"r # !un$

S188etrica&

+ formation in !hich the slope of price highs and lo!s are converging to a point so as to

outline the pattern in a symmetrical triangle To trade this formation place a 'uy order

on a 'rea( up and out of the triangle or a sell order on a 'rea( do!n and out of the

triangle

!uly # %e"

+e!!a!ts



the pattern in a symmetrical triangle To trade this formation$ you can place orders at

'oth the 'rea( up and out of the pennant and 'rea( do!n and out of the pennant

Oct @ Dec

Bu&& F&a"



56/82

+ formation consisting of a small num'er of price 'ars !here the slope of price 'ar

highs and lo!s are parallel and declining 5ull lags are identified 'y their characteristic

pattern and 'y the conte0t of the prior trend 6n the case of a 5ull lag the trend leading

to the formation of the 5ull lag is up To trade this formation$ place orders on the 'rea(

up and 'rea( do!n points$ leaving your unfilled order as your stop loss

/HEAT +RICES (33;

&echnical analysis

!an- MarF

,?(?' A?B?C- Botto8

+nticipates a change in trend from do!n to up on a 'rea( a'ove the

num'er 2 point



57/82

A"r # !un$



!uly # %e"

Desce!i!" Tria!"&e


the pattern of a 4ight Triangle The hypotenuse in an Descending Triangle should 'e

sloping from higher to lo!er and left to right To trade this formation$ place a 'uy order

on a 'rea( up and out of the triangle or a sell order on a 'rea( do!n and out of the

triangle Descending triangles$ !ith a prior uptrend$ are anticipated to 'rea( up and out$

rather than do!n and out

Oct @ Dec

Tri0&e To0

+nticipates a change in trend from up to do!n



58/82

/HEAT +RICES (3,3

!an- A"rF

,?(?' A?B?C- To0

+nticipates a change in trend from up to do!n on a 'rea( 'elo! the num'er 2 point

G&o%a& Sce!ario &he world wheat production in the recent years has been observed to be hovering

between -JK-? million tons a year.

&he biggest cultivators of wheat are '#K-, China, India, merica, 8ussia, ustralia,

Canada, 0akistan, &urkey and rgentina. India, '#K-, China, India and #$, the fourlargest producers account for around -?+ of the total global production.

orld wheat consumption is consistently growing with growth in population, as it is one

of the ma3or staple foods across the world. &he ma3or consuming countries of wheat are'#, China, India, 8ussia, #$ and 0akistan.

round !JK!"+ of the world wheat production is traded annually between countries. &he

annual world trade in wheat is to the extent of !K!J million tons. merica, ustralia,Canada, '#K- and rgentina are the five largest exporters of wheat in the world.

Ma3or importing countries that tops in the figures are 'uropean #nion, China, 'gypt,

=apan, ;ra:il and 'uropean #nion. ther importing nations are Mexico, Indonesia,



59/82

lgeria, 0hilippines, and IraA. %owever the import amount varies year to year dependingupon the domestic production.

CONCL$SION

India has the largest area in the world under wheat. %owever, in terms of production, we

are only the third largest behind '#K- and China. India produces about J-K*- million

tons of wheat a year, which is about /-+ of IndiaEs total food grain production of !K

! million tons. $ince wheat and rice are grown in separate seasons, they do not

compete for area. &he ma3or wheat producing states of India are #ttar 0radesh, 0un3ab,

%aryana, Madhya 0radesh, 8a3asthan and ;ihar. hich together account for around "/+

of total production. heat is sown during 1ovember to =anuary and harvested during

March to pril. &he wheatKmarketing season in India is assumed to begin from pril

every year.

Indian wheat is largely softLmedium hard, medium protein, bread wheat. India also

produces around !.- million tons of durum wheat, mostly in central and western India,

which is not segregated and marketed separately .4overnment, announces Minimum

$upport 0rices (M$0), which is the minimum price at which procurement has to be

carried. &he total procurement of wheat by 4overnment agencies ranges from ? to

million tons, accounting for only !-K+ of the total production. &he support price

operation and the 0ublic >istribution $ystems (0>$) play a significant role in

maintaining reasonable and stable food grain prices in the country for both the producers

and consumers. India consumes around *K* million tons of wheat a year. Most

domestic wheat consumption is in the form of homemade chapatti or rotiDs using custommilled tta, although usage of branded packaged atta marketed by large companies is

increasing in cities. &here are around large flourmills in India, with a milling

capacity of around !- million tons.



60/82

India exported around * million tons subsidi:ed by 4ovt in *K?, as a result of surplus

stock. %owever, current 4ovt. policies are not in favour of exports. $outheast sia and

4ulf countries are ma3or importers of Indian wheat.

2) To study the operation of commodity trading in india and assess its

importance

Introduction

&he Indian economy is witnessing a mini revolution in commodity derivatives and risk

management. Commodity options trading and cash settlement of commodity futures had been

banned since !"- and until commodity derivatives market was virtually nonKexistent,

except some negligible activity on an &C basis. 1ow in $eptember -, the country has /

national level electronic exchanges and ! regional exchanges for trading commodity

derivatives. s many as eighty (?) commodities have been allowed for derivatives trading. &he

value of trading has been booming and is likely to cross the P ! &rillion mark in J and, if all

goes well, seems to be set to touch P- &rillion in a few years.

Che&ured 'istory

&he history of organi:ed commodity derivatives in India goes back to the nineteenth century

when the Cotton &rade ssociation started futures trading in !?*-, barely about a decade after

the commodity derivatives started in Chicago. ver time the derivatives market developed in

several other commodities in India. 5ollowing cotton, derivatives trading started in oilseeds in

;ombay (!"), raw 3ute and 3ute goods in Calcutta (!"!), wheat in %apur (!"!/) and in

;ullion in ;ombay (!").

%owever, many feared that derivatives fuelled unnecessary speculation in

essential commodities, and were detrimental to the healthy functioning of the markets for the

underlying commodities, and hence to the farmers. ith a view to restricting speculative activity



61/82

in cotton market, the 4overnment of ;ombay prohibited options business in cotton in !"/".

6ater in !"9/, forward trading was prohibited in oilseeds and some other commodities including

foodKgrains, spices, vegetable oils, sugar and cloth.

fter Independence, the 0arliament passed 5orward Contracts (8egulation) ct, !"- which

regulated forward contracts in commodities all over India. &he ct applies to goods, which are

defined as any movable property other than security, currency and actionable claims. &he ct

prohibited options trading in goods along with cash settlements of forward trades, rendering a

crushing blow to the commodity derivatives market.

#nder the ct, only those associationsLexchanges, which are granted recognition by the

4overnment, are allowed to organi:e forward trading in regulated commodities. &he ct

envisages threeKtier regulationF (i) &he 'xchange which organi:es forward trading incommodities can regulate trading on a dayKtoKday basisG (ii) the 5orward Markets Commission

provides regulatory oversight under the powers delegated to it by the central 4overnment, and

(iii) the Central 4overnment K >epartment of Consumer ffairs, Ministry of Consumer ffairs,

5ood and 0ublic >istribution K is the ultimate regulatory authority.

&he already shaken commodity derivatives market got a crushing blow

when in !"Js, following several years of severe draughts that forced many farmers to default on

forward contracts (and even caused some suicides), forward trading was banned in many

commodities considered primary or essential. s a result, commodities derivative markets

dismantled and went underground where to some extent they continued as &C contracts at

negligible volumes. Much later, in !"*s and !"?s the 4overnment relaxed forward trading

rules for some commodities, but the market could never regain the lost volumes.

Change in (overnment Policy

fter the Indian economy embarked upon the process of liberali:ation and globali:ation in !"",

the 4overnment set up a Committee in !""/ to examine the role of futures trading. &he

Committee (headed by 0rof. O.1. Oabra) recommended allowing futures trading in !*

commodity groups. It also recommended strengthening of the 5orward Markets Commission,



62/82

and certain amendments to 5orward Contracts (8egulation) ct !"-, particularly allowing

options trading in goods and registration of brokers with 5orward Markets Commission. &he

4overnment accepted most of these recommendations and futures trading were permitted in all

recommended commodities.

Commodity futures trading in India remained in a state of hibernation for nearly four decades,

mainly due to doubts about the benefits of derivatives. 5inally a reali:ation that derivatives do

perform a role in risk management led the government to change its stance. &he policy changes

favoring commodity derivatives were also facilitated by the enhanced role assigned to free

market forces under the new liberali:ation policy of the 4overnment. Indeed, it was a timelydecision too, since internationally the commodity cycle is on the upswing and the next decade is

being touted as the decade of commodities.

)hy are Commodity Derivatives *e&uired+

India is among the topK- producers of most of the commodities, in addition to being a ma3or

consumer of bullion and energy products. griculture contributes about + to the 4>0 of the

Indian economy. It employees around -*+ of the labor force on a total of !J/ million hectares of

land. griculture sector is an important factor in achieving a 4>0 growth of ?K!+. ll this

indicates that India can be promoted as a ma3or center for trading of commodity derivatives.

It is unfortunate that the policies of 5MC during the most of !"-s to !"?s suppressed the very

markets it was supposed to encourage and nurture to grow with times. It was a mistake other

emerging economies of the world would want to avoid. %owever, it is not in India alone that

derivatives were suspected of creating too much speculation that would be to the detriment of the

healthy growth of the markets and the farmers. $uch suspicions might normally arise due to a

misunderstanding of the characteristics and role of derivative product.

It is important to understand why commodity derivatives are reAuired and the role they can play

in risk management. It is common knowledge that prices of commodities, metals, shares and



63/82

currencies fluctuate over time. &he possibility of adverse price changes in future creates risk for

businesses. >erivatives are used to reduce or eliminate price risk arising from unforeseen price

changes. derivative is a financial contract whose price depends on, or is derived from, the

price of another asset.

&wo important derivatives are futures and options.

(i) Commodity Futures Contracts$ futures contract is an agreement for buying or selling a

commodity for a predetermined delivery price at a specific future time. 5utures are standardi:ed

contracts that are traded on organi:ed futures exchanges that ensure performance of the contracts

and thus remove the default risk. &he commodity futures have existed since the Chicago ;oard

of &rade (C;&, www.cbot.com) was established in !?9? to bring farmers and merchants

together. &he ma3or function of futures markets is to transfer price risk from hedgers to

speculators. 5or example, suppose a farmer is expecting his crop of wheat to be ready in two

monthsD time, but is worried that the price of wheat may decline in this period. In order to

minimi:e his risk, he can enter into a futures contract to sell his crop in two monthsD time at a

price determined now. &his way he is able to hedge his risk arising from a possible adverse

change in the price of his commodity.

(ii) Commodity Options contracts: 6ike futures, options are also financial instruments used

for hedging and speculation. &he commodity option holder has the right, but not the obligation,

to buy (or sell) a specific Auantity of a commodity at a specified price on or before a specified

date. ption contracts involve two parties @ the seller of the option writes the option in favour of

the buyer (holder) who pays a certain premium to the seller as a price for the option. &here are

two types of commodity optionsF a HcallD option gives the holder a right to buy a commodity at an

agreed price, while a HputD option gives the holder a right to sell a commodity at an agreed price

on or before a specified date (called expiry date).



64/82

&he option holder will exercise the option only if it is beneficial to himG otherwise he will let the

option lapse. 5or example, suppose a farmer buys a put option to sell ! Suintals of wheat at a

price of P- per Auintal and pays a HpremiumD of P.- per Auintal (or a total of P-). If the price

of wheat declines to say P before expiry, the farmer will exercise his option and sell his wheat

at the agreed price of P- per Auintal. %owever, if the market price of wheat increases to say P/

per Auintal, it would be advantageous for the farmer to sell it directly in the open market at the

spot price, rather than exercise his option to sell at P- per Auintal.

5utures and options trading therefore helps in hedging the price risk and also provide investment

opportunity to speculators who are willing to assume risk for a possible return. 5urther, futures

trading and the ensuing discovery of price can help farmers in deciding which crops to grow.

&hey can also help in building a competitive edge and enable businesses to smoothen theirearnings because nonKhedging of the risk would increase the volatility of their Auarterly earnings.

&hus futures and options markets perform important functions that can not be ignored in modern

business environment. t the same time, it is true that too much speculative activity in essential

commodities would destabili:e the markets and therefore, these markets are normally regulated

as per the laws of the country.

Modern Commodity Exchanges

&o make up for the loss of growth and development during the four decades of restrictive

government policies, 5MC and the 4overnment encouraged setting up of the commodity

exchanges using the most modern systems and practices in the world. $ome of the main

regulatory measures imposed by the 5MC include daily mark to market system of margins,

creation of trade guarantee fund, backKoffice computeri:ation for the existing single commodity

'xchanges, online trading for the new 'xchanges, demutuali:ation for the new 'xchanges, and

oneKthird representation of independent >irectors on the ;oards of existing 'xchanges etc.

8esponding positively to the favourable policy changes, several 1ationKwide MultiKCommodity

'xchanges (1MC') have been set up since , using modern practices such as electronic

trading and clearing. $elected Information about the two most important commodity exchanges



65/82

in India TMultiKCommodity 'xchange of India 6imited (MC), and 1ational MultiKCommodity

7 >erivatives 'xchange of India 6imited (1C>')U is given in 'xhibitK! and 'xhibitK.

M,LI-CMMDI. E/C'AN(E 0 INDIA LIMIED

1MC/2

MC an independent and deKmutuali:ed multi commodity exchange has permanent recognition

from 4overnment of India for facilitating online trading, clearing and settlement operations for

commodity futures markets across the country. Oey shareholders of MC are 5inancial

&echnologies (India) 6td., $tate ;ank of India, 1;8>, 1$', %>5C

a project on commodity market

Documents