Commodities are the essential ingredients of our day-to-day life. On being always in demand they hold strong investment opportunity. It is the oldest form of saving/investment. From centuries people have been investing in Gold and Silver with different objectives which include security reason, their ability to retain long term purchasing power and an insurance of unforeseen events.
Gold and other metals can be accessed in number of ways including traditional physical holdings, futures contracts, D-mat forms, ETFs and through correlated markets such as mining stocks. Each mode of holdings has its own advantages and disadvantages but with so many options available, investors of all types should be able to find a product to match their temperament.
Trading in commodities futures has a long history. However, organized trading on an exchange started in 1848 with the establishment of the Chicago Board of Trade (CBOT).
The first milestone in the 150 years rich history of organized trading in commodities in India was the constitution of the Bombay Cotton Trade Association in the year 1875. India had a vibrant futures market in commodities till it was discontinued in the mid 1960's, due to war, natural calamities and the consequent shortages.
Following the introduction of liberalization policy in 1991, the Government of India appointed an expert committee on forward market under the chairmanship of Prof. K. N. Kabra in 1993. The committee submitted its report in 1994 advocating the re-introduction of futures and expanding its coverage to agricultural commodities. It also proposed an expansion for the coverage of futures markets to minimize the wide fluctuations in commodity prices and for hedging the risk arising from extreme price volatilities.
Commodities futures contracts and the exchanges they trade in are governed by the Forward Contracts (Regulation) Act, 1952. The regulator is the Forward Markets Commission (FMC), a division of the Ministry of Consumer Affairs, Food and Public Distribution.
In 2002, the Government of India allowed the re-introduction of commodity futures in India. .
- 1. National Commodity & Derivative Exchange
- 2. Multi Commodity Exchange
- 3. National Multi Commodity Exchange of India
In terms of market share, MCX is today the largest commodity futures exchange in India, with a market share of close to 70%. NCDEX follows with a market share of around 25%, leaving the balance 5% for NMCE.
Exchange traded commodities are;
|METAL||Aluminium, Copper, Lead, Nickel, Sponge Iron, Steel Long (Bhavnagar), Steel Long (Govindgarh), Steel Flat, Tin, Zinc|
|BULLION||Gold, Gold HNI, Gold M, i-gold, Silver, Silver HNI, Silver M|
|FIBER||Cotton L Staple, Cotton M Staple, Cotton S Staple, Cotton Yarn, Kapas|
|ENERGY||Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E. Sour Crude Oil|
|SPICES||Cardamom, Jeera, Pepper, Red Chilli, Turmeric|
|PLANTATIONS||Arecanut, Cashew Kernel, Coffee (Robusta), Rubber|
|PULSES||Chana, Masur, Yellow Peas|
|PETROCHEMICALS||HDPE, Polypropylene(PP), PVC|
|OIL & OIL SEEDS||Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton Seed, Crude Palm Oil, Groundnut Oil, Kapasia Khalli, Mustard Oil, Mustard Seed (Jaipur), Mustard Seed (Sirsa), RBD Palmolein, Refined Soy Oil, Refined Sunflower Oil, Rice Bran DOC, Rice Bran Refined Oil, Sesame Seed, Soymeal, Soy Bean, Soy Seeds|
Guargum, Guar Seed, Gurchaku, Mentha Oil, Potato (Agra), Potato (Tarkeshwar), Sugar M-30, Sugar S-30
Benefits of commodity futures market;
1. Price Discovery:
Based on inputs regarding specific market information, buyers and sellers conduct trading at futures exchanges. This results into continuous price discovery mechanism.
It is strategy of managing price risk that is inherent in spot market by taking an equal but opposite position in the futures market to protect their business from adverse price change.
3. Import- Export competitiveness:
The exporters can hedge their price risk and improve their competitiveness by making use of futures market. A majority of traders which are involved in physical trade internationally intend to buy forwards. The existence of futures market allows the exporters to hedge their proposed purchase by temporarily substituting for actual purchase till the time is ripe to buy in physical market.
4. Portfolio Diversification
Commodity offers at another investment options which is largely negatively correlated with equity and currency and thus could offer great portfolio diversification.
India is one of the top producers of a large number of commodities, and also has a long history of trading in commodities and related derivatives. Despite this fact, commodity futures markets are largely underdeveloped. The reason has something to do with the extensive government intervention in the agriculture sector. Fact is that the production and distribution of several agricultural commodities is still governed by the state and futures trading have only been selectively introduced with stringent regulatory controls.
If futures market has to flourish then market forces will have to be allowed to play their role rather than trying to controlling the prices.