Commodities Defined

• Every kind of movable good excluding

monies, securities and actionable claims
• Commodities include
• Metals (Bullion & Other Metals)
• Agro Products
–Perishable / Non Perishable
–Consumable / Non Consumable

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 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.
These are the place where raw materials & primary products are
exchanged.
These raw commodities are traded on regulated commodity
exchanges, in which they are bought & sold in standardised
contracts.
 Commodity Derivatives

• Derivatives Defined : Contracts (Futures

or Options) the value of which is derived
from the underlying assets are called
Derivatives.
• Commodity Derivatives : Derivative
contracts where the underlying assets are
Commodities are called Commodity
derivatives

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 Global Classification

Precious Metals: Gold, Silver, Platinum, etc.

Other Metals: Nickel, Aluminum, Copper, Zinc,
etc.
Agro-Based Commodities: Wheat, Rice, Corn,
Cotton, Oils, Oilseeds, etc.
Soft Commodities: Coffee, Cocoa, Sugar, etc.
Petrochemicals: High Density Polyethylene,
Polypropylene.
Live-Stock: Live Cattle, Pork Bellies, etc.
Energy: Crude Oil, Natural Gas, Gasoline, etc.
 Benefits of Future Trading

• Process of Price Discovery of commodities

• Hedge against uncertain movement in
prices
• Future trading for Speculative Gains
• Leverage in Trading
• Avoidance of Counter party risks
• Trading on Quality Specific Commodities

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 How is Indian Market Moving?
• Turnover in agriculture grew 375 per cent over the past two years.
• There are 18 commodity exchanges in India.
• Multi Commodity Exchange of India Ltd (MCX), located at Mumbai.
• National Commodity and Derivatives Exchange Ltd (NCDEX), located at Mumbai.
• National Board of Trade (NBOT), located at Indore.
• National Multi Commodity Exchange (NMCE), located at Ahmedabad.
• Currently, the commodity market in India clocks a daily average
turnover of Rs 14,000-16,000 crore.
 Global Markets

• CBOT, CME, NYMEX, NBOT, COMEX, LME

are some of the major Exchanges in the
Western Countries.
• The volume of Future Market is 10 times
than that of Spot Market

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Commodities Traded on NCDEX
• Metals
– Bullion
• Gold
• Gold Kilo
• Silver
• Mega Silver
– Other Metals :
• Other metals to be added soon

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 Commodity Derivatives

• Derivatives Defined : Contracts (Futures

or Options) the value of which is derived
from the underlying assets are called
Derivatives.
• Commodity Derivatives : Derivative
contracts where the underlying assets are
Commodities are called Commodity
derivatives

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Spot trading
Spot trading is any transaction where delivery either takes place immediately, or with a
minimum lag between the trade and delivery due to technical constraints. Spot trading
normally involves visual inspection of the commodity or a sample of the commodity, and
is carried out in markets such as wholesale markets. Commodity markets, on the other
hand, require the existence of agreed standards so that trades can be made without
visual inspection.
Futures contracts
A futures contract has the same general features as a forward contract but is transacted
through a futures exchange.
Commodity and futures contracts are based on what’s termed forward contracts. Early on
these forward contracts — agreements to buy now, pay and deliver later — were used as a
way of getting products from producer to the consumer. These typically were only for food
and agricultural products. Forward contracts have evolved and have been standardized
into what we know today as futures contracts. Although more complex today, early
forward contracts for example, were used for rice in seventeenth century Japan. Modern
forward, or futures agreements, began in Chicago in the 1840s, with the appearance of the
railroads. Chicago, being centrally located, emerged as the hub between Midwestern
farmers and producers and the east coast consumer population centers.
In essence, a futures contract is a standardized forward contract in which the buyer and
the seller accept the terms in regards to product, grade, quantity and location and are only
free to negotiate the price[2].
 futures trading in commodities allowed efficient price discovery
and will not fuel inflation, articulating the need for a clear policy
on this sensitive issue.

Futures trading in agri commodities have often been blamed for

high prices and the government has even banned or suspended
trading occasionally. Trading in sugar futures was suspended till
June 2010 when prices began to rise in May last year.
Rice, urad, and tur are other commodities in which futures trading
have been suspended. You cannot link the two ( commodity
futures and inflation)
Even the government has admitted in Parliament that
commodities in which there are no futures trading have also
shown sharp acceleration in price rise. Futures trading in urad and
tur were suspended in January 2007 but the prices of these
commodities rose sharply.
Forward Contracts (Regulation) Act, 1952 does not prohibit futures trading in any
commodity. At present, 106 commodities are notified for forward trading.

The government's storage and release mechanism of foodgrains needed to be improved to

manage the prices

We need to give much more thought on foodgrains management to protect the most
vulnerable section of the population...I think this mechanism can be improved by bringing in
private sector into play,

commodity prices in India seem to be influenced more by other drivers of price changes,
particularly demand-supply gap in specific commodities, the degree of dependence on
imports and international movements in these commodities.“
The RBI has carried out tests on six farm commodities — sugar, urad, tur, wheat, chana and
potatoes — to find out whether futures trading impacted spot prices and vice-versa. The
tests relate to monthly data on these commodities for the period of 2004-2009. For
commodities such as urad and tur on which bans were imposed, data for the 2004-2007
period were used.

The causality tests show that futures prices have causal impact on spot prices in the case
of sugar and urad and that spot prices impact futures prices in case of urad, chana, wheat
and sugar.

The RBI diagnosis reinforces what has been held all along by the futures market that
futures prices do not cause spot price inflation and, hence, cannot be held responsible for
food inflation in essential commodities