AGRI COMMODITIES TRADING
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- Shetkari Sanghatana, the farmer’s union recently launched an indefinite agitation outside the office of the Securities and Exchange Board of India (SEBI).
- The protest was against the continued suspension of derivates trading in seven agri commodities.
- Trading, in simple terms, is the act of buying and selling financial instruments (like shares, forex and indices) without directly owning them, in the hopes of making a profit from changes in their price movements.
- A commodity is any essential product; either agricultural or non-agricultural, which can be exchanged or traded. In India, commodities are divided into two categories: soft commodities and hard commodities.
- Soft commodities include agricultural products, like sugar, wheat, rice, soyabean, corn etc. while hard commodities are typically mined. For instance, minerals, oil etc. come under the category of hard commodities.
Commodity Trading in India:
- The beginning of agro commodity trading in India can be traced back to 1875, when the Cotton Trade Association was established in Bombay. Futures’ trading in commodities was suspended from 1952 onwards because of shortage of commodities for domestic consumption.
- Commodity trading recommenced again from 2002. At present, trading in agricultural commodities comprise around 12% of the total commodities trade.
Commodity trading exchanges in India:
One can trade in commodities – comprising livestock and meat, agro products, metals and energy – across six commodity exchanges in the country:
– Multi Commodity Exchange of India Limited (MCX)
– National Commodity & Derivatives Exchange Limited (NCDEX)
– National Multi-Commodity Exchange (NMCE)
– Indian Commodity Exchange (ICEX)
– Ace Derivatives and Commodity Exchange Limited (ACEX)
– Universal Commodity Exchange (UCX)
Out of these commodity exchanges, the NCDEX and NCME focus primarily on agricultural commodities trading.
Regulator for commodities trading:
- The Forward Market Commission (FMC) was constituted in early 1950s to provide a regulatory framework for the commodities trading market in India. It was merged with the Securities Exchange Board of India (SEBI) in September 2015 to provide for a universal financial regulator of the market.
- Subsequently, the SEBI enhanced the operational functionality of the commodity market through a slew of measures, like introducing options contractin commodities trading, allowing stock brokers and some categories of Foreign Institutional Investors (FII) to deal/participate in commodity derivatives, permitting NSE and BSE to introduce commodity derivatives on their trading platforms etc.
Understanding trading in agricultural commodities:
- One can start trading in agricultural commodities through a futures contract. This is simply an agreement to purchase or sell a specified quantity of a particular agricultural commodity at predetermined prices on a future date.
- One can also participate in the fluctuations of agricultural commodities through Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs).
Benefits of trading in agricultural commodities:
- Commodity trading helps to stabilise prices of agricultural products by acting as a link between future and spot prices. Future and spot prices have a direct relationship, and hedging can help mitigate the risks associated with unprecedented price fluctuations. While seasonal variations of prices are minimised, farmers/producers benefit because of stable prices.
- Trading in agricultural commoditiescan help arrive at an accurate, market-oriented price of agricultural products. This is of key importance as, at times, the Minimum Support price (MSP) fixed by the government and the wholesale prices fixed by farmers are not in sync with the existing market patterns.
- For both retail and corporate investors, trading in agricultural commodities provides them an opportunity to diversify their portfolios. Trading in commodities has become as easy as trading in conventional stocks and securities. One needs to open a Demat Accountand a Trading Account, and complete the requisite formalities.
List of the top agricultural commodities traded in India:
There are 29 agricultural-based products which are traded across commodity exchanges. Here is a list of the top products:
- Condiments and sauces
- Cotton and fiber
- Beer ingredients
- Fresh fruits, like apples and grapes
- Pulses, like lentils and beans
- Snacks, like sugar confectionery, chewing gum, chocolates and biscuits
- Nuts like almonds
- Different types of spices
How does the derivatives trade in commodities work?
- Agricultural commodities like cotton, paddy, soyabean, soya oil, mustard seed, etc., are traded on the National Commodities and Derivatives Exchange (NCDEX) and the Multi Commodity Exchange (MCX).
- Derivatives are short-term financial contracts that are bought and sold in the market. Profits are made in the derivatives trade by predicting price movements of the asset that underlies the contract. The derivatives trade can be in futures and options.
- In a futures contract, a supplier pledges to sell a certain quantity at a fixed price at a future date. Also, farmers can put fixed amounts of their produce, which fits the quality standards of the exchange, to be sold at a fixed price — almost like price insurance. Both contracts can be exited by either the producer or the trader by paying a margin price to the exchange.
National Commodity & Derivatives Exchange Limited (NCDEX) is an Indian online commodity and derivative exchange based in India. It is under the ownership of Ministry of Finance. It has an independent board of directors and provides a commodity exchange platform for market participants to trade in commodity derivatives. It is a government company, incorporated on 23 April 2003 under the Companies Act, 1956.
It facilitates deliveries of commodities through a network of over 594 accredited warehouses through eight warehouse service providers, with holding capacity of around 1.5 million tonnes and offers average deliveries of 1 lakh MT at every contract expiry. NCDEX has offices in Mumbai, Delhi, Ahmedabad, Indore, Hyderabad, Jaipur, and Kolkata.
Multi Commodity Exchange of India Ltd (MCX)
Multi Commodity Exchange of India Ltd (MCX) is a commodity exchange based in India. It is under the ownership of Ministry of Finance. It was established in 2003 and is currently based in Mumbai, Maharashtra . It is India's largest commodity derivatives exchange. MCX offers options trading in gold and futures trading in non-ferrous metals, bullion, energy, and a number of agricultural commodities (mentha oil, cardamom, crude palm oil, cotton, and others).
Commodities traded include -
§ Metal - Aluminium, Copper, Lead, Nickel, Zinc
§ Bullion - Gold, Gold Mini, Gold Guinea, Gold Petal, Gold Petal ( New Delhi), Gold Global, Silver, Silver Mini, Silver Micro, Silver 1000.
§ Agro Commodities - Cardamom, Cotton, Crude Palm Oil, Kapas, Mentha Oil, Castor seed, RBD Palmolien, Black Pepper.
§ Energy - Crude Oil, Natural Gas.
SEBI permitted stock exchanges to launch 'Option in goods' in their commodity derivatives segment, in addition to existing 'options on commodity futures'. MCX has launched Gold Mini Options with Gold Mini (100 grams) bar as the underlying, and plans to launch Silver Mini 5 Kg 'option in goods' contract soon. MCX also provides live feeds for all traded commodities.
What are the Agri Commodities in which futures trading has been banned by SEBI?
- SEBI has banned futures trading in seven Agri commodities, including the derivatives of two produce.
- The banned commodities are non-basmati paddy, wheat, chana (Bengal gram), mustard seed and its derivatives, soyabean and its derivatives, crude palm oil and moong (green gram).
Why were they banned? Since when has the ban been in force?
- They have been banned because spot market prices of these commodities have been ruling higher over the last few years.
- The ban has been in force since December 20, 2021. The ban was initially imposed after edible oil prices doubled. The Centre was flooded with complaints that too much speculation, particularly in mustard seed and its derivatives, resulted in high open market prices. In December 2022, the ban was extended for another year, i.e., until December 20, 2023.
- The Centre, in particular, and SEBI extended the ban on concerns over inflation. High rice and wheat prices have forced the Centre to extend the same.
What have been the impact of the ban?
- Prices of mustard seed and its derivatives, soyabean and its derivatives, and crude palm oil have dropped.
- Oilseed prices have declined mainly since edible oil supplies are no more a concern. India imports over 60 per cent of its edible oil demand.
Has the move affected commodity exchanges?
- The ban has affected the turnover of commodity exchanges. MCX has been affected by the ban on crude palm oil. NCDEX, on the other hand, has been badly hit. It was conducting trading in the other six commodities.
Why are farmers protesting against the ban?
- The futures trends provided by the exchange are an important indicator for farmers. Physical markets or mandis often follow the trend, and farmers base their offloading plans on it. More than individual farmers, the Farmers Producer Companies (FPCs) trade on the exchanges.
- The Shetkari Sanghatana has always been against government intervention in agri markets. According to the farmer’s union, the SEBI’s action is anti-farmer, and has been taken at the behest of a few traders who want to control the markets.
- Given the exchanges work on technology and allow for the participation of traders from across the country, price discovery is better than in physical markets, they say.
- The farmer’s union has said that the ban on the futures trade has taken away the only price indicator they had.
- They have claimed that ever since the ban kicked in, price discovery and realisation in the markets has been low.
- Trade bodies including the Solvent and Extractors Association (SEA), a body of manufacturers and importers of edible oil, too have protested against the ban.
Note: Read Basic Books of Economy to understand concepts like Derivatives, Future Trade, Speculation etc.