ADVERTORIAL
ndia is one of
the largest producer and exporter of cotton in
the world. But the
price fixing of cotton happens at the
US-based Intercon- SUDIP
tinentalExchange.
BANDYOPADHYAY
In spite of being a
CEO and MD,
Destimoney
leading producer,
Securities Private
exporter and conLimited.
sumer, our position
as an underdeveloped commodity exchange in Asia has relegated us to the
status of price takers instead of the
logical and deserving role of price
setters for commodities — a story repeated across the commodity basket,
both agriculture and non-agriculture.
Global commodity exchanges such
as the CME group, London Metal Exchange, etc., have flourished thanks to
high liquidity, large and diversified market participation, forward-looking regulations and reduced time to execute
trades – characteristics which Indian
exchanges have a long way to acquire.
Although the Indian commodity exchanges have had an impressive
growth (turnover of INR 170 trillion at
a CAGR of 37 per cent over FY07-13),
participation is still not very broadbased. Much of the liquidity on the exchanges come from financial participants (retail investors and money managers seeking to diversify client portfolios) rather than from actual producers.
As per an UNCTAD report, for Indian
and Chinese farmers with marginal
holdings, `price risk management
(hedging) may not be the most relevant benefit from trading in commodity futures, but things like broadening
access to markets, empowering farmers’ decision-making capacities, reducing information asymmetries that have
previously advantaged more powerful
market actors, upgrading storage,
grading, technology infrastructure and
expanding access to cheaper sources
of finance, are more important’.
Some bottlenecks which impede
farmer participation are: large contract
sizes, high quality specifications, remote location of warehouses and in-
ALAMY IMAGES/INDIAPICTURE
I
HOW WELL DO WE COMPARE WITH
GLOBAL COMMODITY EXCHANGES?
Why are we price takers instead of the logical and deserving role of price
setters for commodities in the world?
adequate transportation links to reach
them, as well as regulatory constraints
that prohibit options trading and participation of financial institutions in
commodity futures.
Similarly, state government-imposed restrictions on stock holdings
and inter-state movement of goods
impede the futures markets from
reaching the participants outside the
states where the exchanges are located. Just as harmonisation of policies
of different states is needed for developing nationwide commodity markets, independent certified commodity graders are also required to ensure
that poor quality commodity does not
get passed on for physical delivery. In
India, mixing of poor grade commodities with good quality commodities
(say, different grades of wheat) is a
peculiar problem.
Global exchanges, meanwhile, have
attained deep penetration, riding on
the back of innovative products. For instance, products that track a commodity index have become an accepted al-
ternative investment avenue for institutions and pension funds. Links of the
commodity market with the financial
market in the developed world have
become stronger leading to increase in
volumes, reduction in transaction costs
and integration of commodity markets
with other markets. Also, trading in
various commodity markets globally
along with introduction of new financial tools such as Exchange Traded
Products (ETPs) which passively follow
commodity indexes, allow retail and
institutional investors to seamlessly
trade in such markets.
For further development of the Indian commodity derivatives market, the
road ahead will have to be guided by
a policy framework which balances
the twin and disparate views taken of
this market: while commodity derivatives are considered as pure financial
instruments whose liquidity ensures
price efficiency and superior allocation
of resources for productive purposes,
another view links it directly with the
physical market with participation ideally only from physical market stakeholders with no scope for speculation.
With a balanced set of policies, India can become the price setter of
commodities. While global benchmark
derivative markets trade at around 30
times the underlying physical markets,
the Indian commodity futures markets
can easily trade at least at 15 times.
Currently, it is trading at less than 3
times the physical market despite
holding a formidable place in the
world commodity economy.
Views are personal.
COMMODITY
CLASSROOM
MAJOR
INTERNATIONAL
COMMODITY
EXCHANGES
> London Metal
Exchange
> Intercontinental
Exchange
> BM&FBovespa
> Multi Commodity
Exchange of India
> Shanghai Futures
Exchange
> Tokyo Grain Exchange
> The Agricultural
Futures Exchange of
Thailand
> Chicago Mercantile
Exchange
> Minneapolis Grain
Exchange
> Austrian Securities
Exchange
> Dalian Commodity
Exchange
> Zhengzhou
Commodity Exchange
> JSE – SAFEX
Commodity Exchange
> Bursa Malaysia
> Dubai Mercantile
Exchange
> Dubai Gold and
Commodities Exchange
WEEKLY PRICE MOVEMENT OF SELECT COMMODITIES: MARCH 24-31, 2014
Source: MCX; Prices refer to active MCX futures contracts