Commodity Market in India

Commodity Market in India

A commodity futures market is a public market where commodities are contracted for purchase or sale at an agreed price for delivery on a specified date. This process of purchase or sale of commodities must be made through an organized exchange broker and the purchase should be made under the terms and conditions of a standardized futures contract (Choudhry 2004). Commodity, besides being a unique hedging instrument, also provides for efficient portfolio management arising from diversification benefits. These benefits result in improved returns to domestic as well as international investors. The commodity futures market furnishes commercial commodity producers and consumers with a way to express price risk to speculators who have no direct commercial concern in the commodities themselves (Silber, 1985).

Producers‘hedge price risk by assuming short perspectives in futures contracts on the commodity that they produce. A similar hedge demands consumers to take long positions in the futures contracts on their consumption commodities (Jecheche, 2012). Arbitrageurs and speculators prefer to take either long or short positions on a commodity futures contract founded on the market perception (Kuprianov, 1986). There is no long only market function of commodity futures contracts that investors should use as a default inactive system. Furthermore, commodity future prices tend to exhibit momentum as per the economic theory and empirical evidence. Therefore, when a commodity future price presents an upward movement, it constructs sense to take a long position (Long et al., 1990).

A commodity exchange is defined as a market in which multiple buyers and sellers trade commodity associated contracts on the foundation of rules and procedures established by the commodity exchange. Commodity exchanges extend spot trade for contiguous delivery and forward a contract which involves delivery in future markets. This type of exchanges is different from wholesale market where trade is decentralized. The roles of commodity exchanges are security, market information access, positions on exchange and local market operations.

Exchanges can focus on the trade in futures and options contracts, as do most of the exchanges in western countries. Its primarily function is to act as the centers for facilitating physical trade. In both cases, exchanges depict their primary strength from their capacity to act as a focal point for trade transactions, and to increase the security of these transactions. Commodity exchanges help in the price discovery process as they are well-organized exchanges form natural reference points for physical trade. By managing to link different warehouses in the country, a commodity exchange allows trade to take place more efficiently.

The price information exhibited with exchange allowed for a good reference point to evaluate the spot prices and negotiate with traders/agents. In summary, it developed cognizance among the farmers to track the market and form an outlook on prices based on the accessible information. The price discovery process furnished them an idea about price movements. The price movement signals served them in planning their spot operations efficaciously. Commodity exchange will act as a catalyst for bringing the new to the old world by helping to make growth comprehensive. Invariably, small farmers can become part of the national and global marketplace for inputs, credit and outputs.

Growth of Commodity Futures Trading Volume in India:

From Table 2.7.1, it could be realized that the commodity futures markets in India have gained a significant growth over the years. The most prominent commodity exchange in India is the Multi Commodity Exchange of India (MCX), which found a steady increase from Rs.0.63 million to Rs.14.88 million during the period 2005-2012. There are market fluctuations in the volume of trading in other exchanges in India. The National Commodity and Derivatives Exchange Limited (NCDEX) has experienced a double fold increase from Rs.0.88 million to Rs.1.59 million during the period 2005-2012. The National Multi Commodity Exchange of India Ltd (NMCE) has witnessed a growth from Rs.12 crores to Rs. 176 crores during the period 2005-2012. There has been an optimal growth in the others exchanges during the study period.

Why Crude Oil Commodity is Preferable:

Crude oil describes for 35 percent of the world's primary energy consumption. Crude oil is a complex mixture of various hydrocarbons found in the upper layers of the earth's crust, which is often attributed as the ―Mother of all Commodities‖ because of its importance in the manufacturing of a wide variety of materials. Global proven oil reserves in 2011 were around 1652.6 thousand million barrels in which the OPEC had 1196.3 thousand million barrels. Global oil demand was found to be at 88.3 million barrels per day (mmb/d) in 2011, an increase of around 0.7% from the previous year (2010). Crude oil production during the period April-March 2012 was 38.19 million metric tonnes (MMT), as equated with 37.71 MMT during the representative period last year. The total oil consumption in 2010 was approximately 3.34mmb/d. India is the 4th largest consumer of oil and imports more than 70% of its crude oil requirement.

Why Gold Commodity is Trending:

Gold, being the oldest precious metal known to man, is primarily a monetary asset and partly a commodity and the world's oldest international currency. An important element of global monetary reserves, with regard to the investment value, more than two-thirds of total accumulated holdings, the world investment in gold has amounted to 1614 MT in 2012, broadly flat year-on-year, but the approximate value of this demand reached a new record of almost $87 billion. The gold mine production increased from 12 MT to 2848 MT in 2012 and the combined demand for bars & coins dropped from 1515 MT to 1256 MT. India is the world‘s largest market for gold jewellery and a key driver of the global gold demand. The rural parts demand two thirds of the Indian demand for gold.

Why we can’t neglect Silver Commodity:

A brilliant grey-white metal that is soft and malleable is Silver, which has unique properties including its strength, malleability, ductility, electrical and thermal conductivity, sensitivity, high reflectance of light, and reactivity. Lead ore is the main source of silver, though it can also be found associated with copper, zinc and gold and produced as a by-product of base metal mining activities. The worldwide silver fabrication demand was 876.6 million ounces (Moz) in 2011 - down by 1.5% from the value in 2010, but still reaching its second highest level since 2000. Globally, in 2011, the physical silver bar investment grew by 67% to 95.7 Moz, while fabrication of coins and medals rose by almost 19% to an all-time high of 118.2 Moz. Silver is preponderantly traded on the London Bullion Market Association (LBMA) and COMEX in New York. LBMA is the metal‘s main physical market that the global hub of over-the counter trading in silver. About 2500 Metric tons (MT) per year is the average annual demand for silver in India. The country‘s production was around 342.13 MT in 2011.

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