UNITED NATIONS
CONFERENCE ON
TRADE AND
DEVELOPMENT
Expert Meeting on the Trade and Development Implications
of Financial Services and Commodity Exchanges (Part I)
Item 3: Trade and Development Implications
of Commodity Exchanges
3 September 2007
"Development implications of commodity exchanges"
by
Mr. Lamon Rutten
Joint Managing Director
Multi Commodity Exchange of India (MCX) Ltd
The views expressed are those of the author and do not necessarily reflect the views of the UNCTAD Secretariat, nor do they imply the
expression of any opinion whatsoever on the part of the secretariat of UNCTAD concerning the legal status of any country, territory,
city or area, or of its authorities or concerning the definition of its frontiers or boundaries.
Development implications
of commodity exchanges
Lamon Rutten
Joint Managing Director
UNCTAD Expert meeting on trade and development
Implications of financial services and commodity exchanges
Geneva, 3 September 2007
An introduction…
Commodity exchanges:
• Inform
• Empower
• Mobilize
• Catalyze
And this is true for all commodity eco-systems:
agriculture, livestock, mining and metals, and
the energy sector. Commodity exchanges
provide their services in an equitable manner:
they level the playing field between big and
small, powerful and oppressed.
I.
The power of
information
Creating a vector for
information flow…
With MCX, it is global farm mandi
Futures trading prepares farmers for WTO regime
Harvinder Khetal
Tribune News Service
Chandigarh, December 4 -- In the one
year since it was established in
November 2003, the Multi
Commodity Exchange of India Ltd
(MCX) has set the farmers on a
revolutionary path of business by
giving them an opportunity of
hedging in the futures market.
As part of its CSR activities, MCX has a
number of pilot projects, e.g. with India
Post, TERI, MSSRF, meant to develop
and demonstrate sustainable ways for
getting markets to the farmer.
Currently:
- ways to effectively disseminate prices
(now reaching over 3,300 mandis, and a
growing number of other sites – e.g.,
100+ village resource centers, and within
3 months, 1,450 Akshaya centers)
- ways to build “aggregation mechanisms”
around ICT.
Improved price information is
making an impact
India : Commodity exchange offers
trading benefits to cotton farmers
Fibre2fashion.com, 19 Apr 2007
Multi Commodity Exchange of India (MCX),
India's first multi-commodity, online exchange
launched its operations in November 2003. It is
now providing knowledge to small cotton
farmers of Gujarat on trading benefits in
futures and reducing business risk. These
centres will provide latest commodity prices
even to small farmers which in turn may help
them to take right decisions.
A technology-savvy market solution can succeed where
donor efforts have failed…
MCX has created its own, non-subsidized market
information system, collecting spot prices from many
dozens of markets three times a day and making them
available to the whole of India almost
instantaneously, through multiple means.
Aid donors have wasted tens of millions of dollars to
try and create such market information systems,
without much success. Once subsidies stopped,
programmes collapsed.
II.
Empowering
the masses
Empowerment comes through two effects of exchanges:
greater choice; and stronger ability to optimize risk exposure
We are moving from a world in which
the big eat the small to one in which
the fast eat the slow.
Klaus Schwab
‘Living at risk is jumping off
the cliff and building your
wings on the way down.’
Ray Bradbury
A new ecosystem empowers the poor to
enter the mainstream of development
One example of the impact of the
“ecosystem” approach
We are enabling a new, bureaucracy-free form of agricultural
finance:
- Our collateral management firm, NBHC, has master agreements
with a number of banks.
- Under these agreements, when a farmer or trader deposits goods
that meet MCX quality requirements, a loan can be provided
automatically.
- Our staff fills out the forms, and the next day the money will be
at the bank.
- We will soon start installing ATMs at our warehouses to make a
visit to the bank completely unnecessary.
III.
Mobilizing
resources
One problem that we see in our
operations in India….
Indian agriculture
(19th Century)
Indian agriculture
(21st Century)
Realizing our vision for agriculture
The synergy of exchanges,
warehouses and a modern
information/communication
system will make it possible to
cross over into a new era for
agriculture.
exchanges
Unresponsive and
non-competitive
agriculture
warehouses
communications
Bridging the
efficiency gap
Flexible and
profitable
agriculture
Using technology, MCX and its parent company, FTIL,
We have trading
are bridging the rural-urban divide.
stations in places
where roads do not
reach…
“Technology is stepping out
of its elitist closet and
shaking hands with the
bricks-and-mortar
infrastructure of the Indian
countryside. It has the
potential to touch and change the lives of at
least 100 million Indians.”
Jignesh Shah, MD/CEO of MCX, and the
driving force behind the FTIL Group
Electronic exchanges a vector for agricultural growth
and development
• Electronic exchanges bring
efficiency, and create a
national/global integrated market.
•Without a focused effort to
empower farmers, the benefits of
better organized supply chains
will largely bypass them.
• Electronic marketing and risk
management will make rural ICT
initiatives financially sustainable.
“the farmer of the future
would probably begin his
day by connecting to the
Net”
Hindu Business Line,
24 March 2004
One example… the potato sector
(Economic Times, 16 November 2006)
Cold-storages join party as retailers cook potato futures
POTATOES are getting off the couch and into the thick of action. Large veggie retailers —
Reliance Fresh and Pantaloon — have begun buying potato futures on MCX to get delivery of
high-quality spuds certified by the exchange. With volumes in potato futures increasing
rapidly, cold-storage owners appear delighted with this unique business model. Futures
trading in Agra potatoes has become a winner for MCX, vegetable retailers and traders alike,
with almost 40,000 tonnes traded daily.
“Reliance and Pantaloon have begun buying from our platform. They get two advantages by
buying futures: One, they can be completely confident of the potato quality when they take
delivery at Agra or Tarkeshwar; two, they save on commission paid to traders and middle
men”, said Sanjit Prasad, vice-president of business development at MCX.
As the quality of its delivered potatoes is the crux of MCX’s branding exercise, the exchange
is taking no chances. All selected warehouses will be fitted with a meter to constantly monitor
temperature and moisture. The meter will be connected through a radio antenna with MCX’s
servers in Mumbai. As a result, the minute any meter records a drop in ambient conditions,
alarm bells are expected to ring fast for speedy remedial action.
IV.
The commodity
exchange as a
catalyst
The exchange as a change agent
In the three years of its existence, MCX has grown to a 2.5 billion
dollar a day turnover with a direct presence in 800 cities and towns in
India, and an indirect presence (through its brokers) in hundreds
more. Although still new, its impact has been felt:
- Many physical markets now only start once MCX starts trading, as
everyone wishes to know current market conditions
- Many farmers stop selling when they see that futures prices are too
much above the prices that traders offer them
- Farmers are now demanding the quality of seeds that allow them to
produce goods of a quality that can be delivered to MCX
- Farmers are making planting decisions on the basis of MCX prices.
The exchange as a change agent (2)
- As a result, new money has started flowing to rural areas, and a few
hundred thousand jobs have been created – directly, through the
20,000 trading terminals (plus many Internet terminals) connected to
MCX, and indirectly, through mobile-connected sub-brokers and
many support staff.
- City-based financial investors are now going out and are buying on
the countryside (and investing in storage) when traders offer prices
that are too low.
- New investments are being made in modern storage, grading and
other logistic supports.
- Banks are coming in, providing new forms of crop finance.
Farmers are empowered through better information,
higher competition among buyers, and more flexibility.
… the ultimate scope can be huge
(and all this is in our projections)
Agro
practices &
diseases
Agriculture price
& arrivals
All are
E-Networked
Crop
insurance
Warehousing &
Quality Certifying
information
Agro
inputs
Demand, supply,
crop forecast &
news
Weather
advisory
Markets,
credit
facilities
Markets &
Seasons
Procurement
Information
Rural employment &
government schemes
Conclusion
Be the change you wish
to see in the world.
Mahatma Gandhi
Revolutionizing the commodity sector
• An electronic commodity exchange like MCX is an incarnation
of the modern economy, with technology seamlessly integrated in
business operations.
• This technology is a vector for change. The possibilities offered
on and by the exchange create incentives for people to invest, and
open up new opportunities.
• By its very nature, a commodity exchange will help to make
growth inclusive: it will act as a catalyst for bringing the new to
the old world. Even small farmers can become part of the
national and global market place, for inputs, credit and outputs.
• This model can work in many other countries. Governments and
international agencies should thus consider how they can use
commodity exchanges to leverage their own programmes.
The world we have created is
a product of our thinking; it
cannot be changed without
changing our thinking.
Albert Einstein
Thank You
Lamon Rutten
Joint Managing Director
[email protected]