INDIAN COMMODITY MARKET-GROUNDNUT1. AN INTRODUCTION The vast geographical extent of India and her huge population is aptly complemented by the size of her market. The broadest classification of the Indian Market can be made in terms of the commodity market and the bond market. The commodity market in India comprises of all palpable markets that we come across in our daily lives. Such markets are social institutions that facilitate exchange of goods for money. The cost of goods is estimated in terms of domestic currency. India Commodity Market can be subdivided into the following two categories: Wholesale Market Retail Market

1.1 MEANING OF MARKET A market is conventionally defined as a place where buyers and sellers meet to exchange goods or services for a consideration. This consideration is usually money. In an Information Technology-enabled environment, buyers and sellers from different locations can transact business in an electronic marketplace. Hence the physical marketplace is not necessary for the exchange of goods or services for a consideration. Electronic trading and settlement of transactions has created a revolution in global financial and commodity markets.

1.2 DEFINITON OF COMMODITY Any product that can be used for commerce or an article of commerce which is traded on an authorized commodity exchange is known as Commodity. The article should be movable of value, something which is bought or sold and which is produced or used as the subject or barter or sale.

1.3 MEANING OF COMMODITY A commodity is a product that has commercial value, which can be produced, bought, sold, and consumed. Commodities are basically the products of the primary sector of an economy. The primary sector of an economy is concerned with agriculture and extraction of raw materials such as metals, energy etc., which serve as basic inputs for the secondary sector of the economy. 1.4 COMMODITY EXCHANGE A commodity exchange is an association or a company or any other body corporate organizing futures trading in commodities for which license has been granted by regulating authority.

1.5 EVOLUTION OF COMMODITY MARKET Commodities future trading was evolved from need of assured continuous supply of seasonal agricultural crops. The concept of organized trading in commodities evolved in Chicago, in 1848. But one can trace its roots in Japan. In 19th century Chicago in United States had merged as a major commercial hub. So that wheat producers from Mid-west attracted here to sell their produce to dealers & distributors. Due to lack of organized storage facilities, absence of uniform weighing & grading mechanisms producers often confined to the mercy of dealers discretion. These situations lead to need of establishing a common meeting place for farmers and dealers to transact in spot grain to deliver wheat and receive cash in return. Gradually sellers & buyers started making commitments to exchange the produce for cash in future and thus contract for futures trading evolved; Whereby the producer would agree to sell his produce to the buyer at a future delivery date at an agreed upon price. Trading of wheat in futures became very profitable which encouraged the entry of other commodities in futures market. This created a platform for establishment of a body to regulate and supervise these contracts. That is why Chicago Board of Trade (CBOT) was established in 1848. In 1870 and 1880s the New York Coffee, Cotton and Produce Exchanges were born. Agricultural commodities were mostly traded but as long as there are buyers and sellers, any commodity can be traded. In 1872, a group of Manhattan dairy merchants got together to bring chaotic condition in New York market to a system in terms of storage, pricing, and transfer of agricultural products. The largest commodity exchange in USA is Chicago Board of Trade, The Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity Exchange and New York Coffee, sugar and cocoa Exchange. Worldwide there are major futures trading exchanges in over twenty countries including Canada, England, India, France, Singapore, Japan, Australia and New Zealand.

1.6 COMMODITY EXCHANGES OF THE WORLD Some of the exchanges of the world are:1 New York Mercantile Exchange (NYMEX).2 London Metal Exchange (LME).3 Chicago Board of Trade (CBOT).4 New York Board of Trade (NYBOT).5 Kansas Board of Trade.6 Dalian Commodity Exchange, China.7 Singapore Commodity Exchange (SICOM).8 Chicago Mercantile Exchange (CME), US. 9 Tokyo Commodity Exchange (TOCOM). 10 Dubai Gold & Commodity Exchange (DGCX).2. COMMODITY MARKET IN INDIA

2.1 HISTORY OF COMMODITY MARKET IN INDIA. The history of organized commodity derivatives in India goes back to the nineteenth century when Cotton Trade Association started futures trading in 1875, about a decade after they started in Chicago. Over the time derivatives market developed in several commodities in India. Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920). However many feared that derivatives fuelled unnecessary speculation and were detrimental to the healthy functioning of the market for the underlying commodities, resulting in to banning of commodity options trading and cash settlement of commodities futures after independence in 1952. The parliament passed the Forward Contracts (Regulation) Act, 1952, which regulated contracts in Commodities all over the India. The act prohibited options trading in Goods along with cash settlement of forward trades, rendering a crushing blow to the commodity derivatives market. Under the act only those associations/exchanges, which are granted reorganization from the Government, are allowed to organize forward trading in regulated commodities. The act envisages three tire regulations:i. Exchange which organizes forward trading in commodities can regulate trading on day-to-day basis; ii. Forward Markets Commission provides regulatory oversight under the powers delegated to it by the central Government. iii. The Central Government- Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution are the ultimate regulatory authority.

After Liberalization and Globalization in 1990, the Government set up a committee (1993) to examine the role of futures trading. The Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17 commodity groups. It also recommended strengthening Forward Markets Commission, and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing option trading in goods and registration of brokers with Forward Markets Commission. The Government accepted most of these recommendations and futures trading was permitted in all recommended commodities. It is timely decision since internationally the commodity cycle is on upswing and the next decade being touched as the decade of Commodities. Commodity exchange in India plays an important role where the prices of any commodity are not fixed, in an organized way.

2.2 PRESENT COMMODITY MARKET IN INDIA Today, commodity exchanges are purely speculative in nature. Before discovering the price, they reach to the producers, endorsers, and even the retail investors, at a grassroots level. It brings a price transparency and risk management in the vital market. By Exchange rules and by law, no one can bid under a higher bid, and no one can offer to sell higher than someone elses lower offer. That keeps the market as efficient as possible, and keeps the traders on their toes to make sure no one gets the purchase or sale before they do. Since 2002, the commodities future market in India has experienced an unexpected boom in terms of modern exchanges, number of commodities allowed for derivatives trading as well as the value of futures trading in commodities, which crossed $ 1 trillion mark in 2006. In India there are 25 recognized future exchanges, of which there are four national level multi-commodity exchanges. After a gap of almost three decades, Government of India has allowed forward transactions in commodities through Online Commodity Exchanges, a modification of traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of commodities.The four exchanges are:i. National Commodity & Derivatives Exchange Limited (NCDEX) Mumbai.ii. Multi Commodity Exchange of India Limited (MCX) Mumbai. iii. National Multi- Commodity Exchange of India Limited (NMCEIL) Ahmedabad. iv. Indian Commodity Exchange Limited (ICEX), Gurgaon.

3. COMMODITY EXCHANGES IN INDIA

3.1 NATIONAL LEVEL COMMODITY EXCHANGES IN INDIA.

1. NATIONAL MULTI-COMMODITY EXCHANGE OF INDIA LTD. (NMCE)

NMCE is the first demutualised electronic commodity exchange of India granted the National exchange on Govt. of India and operational since 26th Nov, 2002. Promoters of NMCE are, Central warehousing corporation (CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat state agricultural Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM) and Neptune Overseas Ltd. (NOL). Main equity holders are Punjab National Bank (PNB). The Head Office of NMCE is located in Ahmedabad. There are various commodity trades on NMCE Platform including Agro and non-agro commodities.

2. NATIONAL COMMODITY & DERIVATIVES EXCHANGE LTD. (NCDEX). NCDEX is a public limited co. incorporated on April 2003 under the Companies Act 1956; it obtained its certificate for commencement of Business on May 9, 2003. It commenced its operational on Dec 15, 2003. Promoters shareholders are: Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India (NSE) other shareholder of NCDEX are: Canara Bank, CRISIL limited, Goldman Sachs, Intercontinental Exchange (ICE), Indian farmers Fertilizer Corporation Ltd (IFFCO) and Punjab National Bank (PNB). NCDEX is located in Mumbai and currently facilitates trading in 57 commodities mainly in Agro product.

3. MULTI-COMMDITY EXCHANGE OF INDIA LTD. (MCX). Headquartered in Mumbai, MCX is a demutualised nation wide electronic commodity future exchange. Set up by Financial Technologies (India) Ltd. permanent recognition from government of India for facilitating online trading, clearing and settlement operations for future market across the country. The exchange started operation in Nov, 2003. MCX equity partners include, NYSE Euro next, State Bank of India and its associated, NABARD NSE, SBI Life Insurance Co. Ltd., Bank of India, Bank of Baroda, Union Bank of India, Corporation Bank, Canara Bank, HDFC Bank, etc. MCX is well known for bullion and metal trading platform.

4. INDIAN COMMODITY EXCHANGE LTD. (ICEX). ICEX is latest commodity exchange of India Started Function from 27 Nov, 09. It is jointly promote by India bulls Financial Services Ltd. and MMTC Ltd. and has Indian Potash Ltd. KRIBHCO and IFC among others, as its partners having its head office located at Gurgaon (Haryana).

3.2 UNIQUE FEATURES OF NATIONAL LEVEL COMMDITY EXCHANGES. The unique features of national level commodity exchanges are:i. They are demutualized, meaning thereby that they are run professionally and there is separation of management from ownership. The independent management does not have any trading interest in the commodities dealt with on the exchange. ii. They provide online platforms or screen based trading as distinct from the open outcry systems (ring trading) seen on conventional exchanges. This ensures transparency in operations as everyone has access to the same information. iii. They allow trading in a number of commodities and are hence multi-commodity exchanges. iv. They are national level exchanges which facilitate trading from anywhere in the country. This is corollary of being an online exchange.

3.3 MAJOR REGIONAL COMMODITY EXCHANGES IN INDIAa. BATINDA COMMODITY & OIL EXCHANGE LTD. b. THE BOMBAY COMMODITY EXCHANGE c. THE RAJKOT SEEDS OIL AND BULLION MERCHAT d. THE KANPUR COMMODITY EXCHANGE e. THE MEERUT AGRO COMMODITY EXCHANGE THE SPICES AND OILSEEDS EXCHANGE (SANGI) f. AHEMDABAD COMMODITY EXCHANGE g. VIJAY BEOPAR CHAMBER LTD. (MUZAFFARNAGAR) h. INDIA PEPPERS AND SPICE TRADE ASSOCIATION (KOCHI ) i. RAJDHANI OILS AND SEEDS EXCHANGE ( DELHI ) j. THE CHAMBER OF COMMERCE (HAPUR) k. THE EAST INDIA COTTON ASSOCIATION (MUMBAI) l. THE CENTRAL COMMERCIAL EXCHANGE ( GWALIOR) m. THE EAST INDIA JUTE & HESSIAN EXCHANGE OF INDIA (KOLKATA)n. FIRST COMMODITY EXCHANGE OF INDIA ( KOCHI ) o. BIKANER COMMODITY EXCHANGE LTD. ( BIKANER ) p. THE COFEE FUTURE EXCHANGE LTD. ( BANGALORE ) q. E SUGAR INDIA LTD. (MUMBAI)

4. COMMODITY FUTURES MARKET.

4.1 MEANING OF COMMODITY MARKET A market where commodities are traded is referred to as a commodity market. These commodities include bullion (gold, silver), non-ferrous (base) metals such as copper, zinc, nickel, lead, aluminum, tin, energy (crude oil, natural gas, etc.), agricultural commodities such as soya oil, palm oil, coffee, pepper, cashew, etc. Existence of a vibrant, active, and liquid commodity market is normally considered as a healthy sign of development of a countrys economy. Growth of a transparent commodity market is a sign of development of an economy. It is therefore important to have active commodity markets functioning in a country.

4.2 COMMODITY FUTURES A Commodity futures is an agreement between two parties to buy or sell a specified and standardized quantity of a commodity at a certain time in future at a price agreed upon at the time of entering into the contract on the commodity futures exchange. The need for a futures market arises mainly due to the hedging function that it can perform. Commodity markets, like any other financial instrument, involve risk associated with frequent price volatility. The loss due to price volatility can be attributed to the following reasons:

1. CONSUMER PREFERENCES. In the short-term, their influence on price volatility is small since it is a slow process permitting manufacturers, dealers and wholesalers to adjust their inventory in advance.

2. CHANGES IN SUPPLY They are abrupt and unpredictable bringing about wild fluctuations in prices. This can especially noticed in agricultural commodities where the weather plays a major role in affecting the fortunes of people involved in this industry. The futures market has evolved to neutralize such risks through a mechanism; namely hedging.

4.3 OBJECTIVES OF COMMODITY FUTURES MARKET1. Hedging with the objective of transferring risk related to the possession of physical assets through any adverse moments in price. 2. Liquidity and Price discovery to ensure base minimum volume in trading of a commodity through market information and demand supply factors that facilitates a regular and authentic price discovery mechanism. 3. Maintaining buffer stock and better allocation of resources as it augments reduction in inventory requirement and thus the exposure to risks related with price fluctuation declines. Resources can thus be diversified for investments. 4. Price stabilization along with balancing demand and supply position. Futures trading leads to predictability in assessing the domestic prices, which maintains stability, thus safeguarding against any short term adverse price movements. Liquidity in Contracts of the commodities traded also ensures in maintaining the equilibrium between demand and supply. 5. Flexibility, certainty and transparency in purchasing commodities facilitate bank financing. Predictability in prices of commodity would lead to stability, which in turn would eliminate the risks associated with running the business of trading commodities. This would make funding easier and less stringent for banks to commodity market players.

4.4 BENEFITS OF COMMODITY FUTURES MARKETSThe primary objectives of any futures exchange are authentic price discovery and an efficient price risk management. The beneficiaries include those who trade in the commodities being offered in the exchange as well as those who have nothing to do with futures trading. It is because of price discovery and risk management through the existence of futures exchanges that a lot of businesses and services are able to function smoothly. The benefits of commodity futures are as follows:

1. PRICE DISCOVERY Based on inputs regarding specific market information, the demand and supply equilibrium, weather forecasts, expert views and comments, inflation rates, Government policies, market dynamics, hopes and fears, buyers and sellers conduct trading at futures exchanges. This transforms in to continuous price discovery mechanism. The execution of trade between buyers and sellers leads to assessment of fair value of a particular commodity that is immediately disseminated on the trading terminal.

2. PRICE RISK MANAGEMENT Hedging is the most common method of price risk management. It is strategy of offering price risk that is inherent in spot market by taking an equal but opposite position in the futures market. Futures markets are used as a mode by hedgers to protect their business from adverse price change. This could dent the profitability of their business. Hedging benefits who are involved in trading of commodities like farmers, processors, merchandisers, manufacturers, exporters, importers etc.

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 purchases made from the physical market might expose them to the risk of price risk resulting to losses. The existence of futures market would allow the exporters to hedge their proposed purchase by temporarily substituting for actual purchase till the time is ripe to buy in physical market. In the absence of futures market it will be meticulous, time consuming and costly physical transactions.

4. PREDICTABLE PRICING The demand for certain commodities is highly price elastic. The manufacturers have to ensure that the prices should be stable in order to protect their market share with the free entry of imports. Futures contracts will enable predictability in domestic prices. The manufacturers can, as a result, smooth out the influence of changes in their input prices very easily. With no futures market, the manufacturer can be caught between severe short-term price movements of oils and necessity to maintain price stability, which could only be possible through sufficient financial reserves that could otherwise be utilized for making other profitable investments.

5. BENEFITS FOR FARMERS/AGRICULTURALISTS Price instability has a direct bearing on farmers in the absence of futures market. There would be no need to have large reserves to cover against unfavorable price fluctuations. This would reduce the risk premiums associated with the marketing or processing margins enabling more returns on produce. Storing more and being more active in the markets. The price information accessible to the farmers determines the extent to which traders/processors increase price to them. Since one of the objectives of futures exchange is to make available these prices as far as possible, it is very likely to benefit the farmers. Also, due to the time lag between planning and production, the market-determined price information disseminated by futures exchanges would be crucial for their production decisions.

6. CREDIT ACCESSIBILITY The absence of proper risk management tools would attract the marketing and processing of commodities to high-risk exposure making it risky business activity to fund. Even a small movement in prices can eat up a huge proportion of capital owned by traders, at times making it virtually impossible to payback the loan. There is a high degree of reluctance among banks to fund commodity traders, especially those who do not manage price risks. If in case they do, the interest rate is likely to be high and terms and conditions very stringent. This possesses a huge obstacle in the smooth functioning and competition of commodities market. Hedging, which is possible through futures markets, would cut down the discount rate in commodity lending.

7. IMPROVED PRODUCT QUALITY The existence of warehouses for facilitating delivery with grading facilities along with other related benefits provides a very strong reason to upgrade and enhance the quality of the commodity to grade that is acceptable by the exchange. It ensures uniform standardization of commodity trade, including the terms of quality standard: the quality certificates that are issued by the exchange-certified warehouses have the potential to become the norm for physical trade.

8. COMMODITIES AS AN ASSET CLASS FOR DIVERSIFICATION OF PORTFOLIO RISK: Commodities have historically an inverse correlation of daily returns as compared to equities. The skewness of daily returns favors commodities, thereby indicating that in a given time period commodities have a greater probability of providing positive returns as compared to equities. Another aspect to be noted is that the Sharpe ratio of a portfolio consisting of different asset classes is higher in the case of a portfolio consisting of commodities as well as equities. Thus, an Investor can effectively minimize the portfolio risk arising due to price fluctuations in other asset classes by including commodities in the portfolio.

9. COMMODITY DERIVATIVES MARKETS ARE EXTREMELY TRANSPARENT Commodity derivatives markets are extremely transparent in the sense that the manipulation of prices of a commodity is extremely difficult due to globalization of economies, thereby providing for prices benchmarked across different countries and continents. For example, gold, silver, crude oil, natural gas, etc. are international commodities, whose prices in India are indicative of the global situation.

10. USEFUL TO THE PRODUCER Commodity trade is useful to the producer because he can get an idea of the price likely to prevail on a future date and therefore can decide between various competing commodities, the best that suits him.

11. USEFUL FOR THE CONSUMER Commodity trade is useful for the consumer because he gets an idea of the price at which the commodity would be available at a future point of time. He can do proper costing/financial planning and also cover his purchases by making forward contracts.

4.5 INSTRUMENTS AVAILABLE FOR TRADING In recent years, derivatives have become increasingly popular due to their applications for hedging, speculation and arbitrage. While futures and options are now actively traded on many exchanges, forward contracts are popular on the OTC market. While at the moment only commodity futures trade on the NCDEX, eventually, as the market grows, we also have commodity options being traded. The following are the instruments available for trading:1. FORWARDS CONTRACT A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. Other contract details like delivery date, price and quantity are negotiated bilaterally by the parties to the contract. The forward contracts are normally traded outside the exchanges. The salient features of forward contracts are:i. They are bilateral contracts and hence exposed to counter-party risk. ii. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality. iii. The contract price is generally not available in public domain. iv. On the expiration date, the contract has to be settled by delivery of the asset. v. If the party wishes to reverse the contract, it has to compulsorily go to the same counterparty, which often results in high prices being charged.

However forward contracts in certain markets have become much standardized, as in the case of foreign exchange, thereby reducing transaction costs and increasing transactions volume. This process of standardization reaches its limit in the organized futures market.

2. FUTURES CONTRACT Futures markets were designed to solve the problems that exist in forward markets. A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. But unlike forward contracts, the futures contracts are standardized and exchange traded. To facilitate liquidity in the futures contracts, the exchange species certain standard features of the contract. It is a standardized contract with standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered, (or which can be used for reference purposes in settlement) and a standard timing of such settlement. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. More than 99% of futures transactions are offset this way.

The standardized items in a futures contract are: Quantity of the underlying Quality of the underlying The date and the month of delivery The units of price quotation and minimum price change Location of settlement

3. OPTIONS CONTRACT Options are fundamentally different from forward and futures contracts. An option gives the holder of the option the right to do something. The holder does not have to exercise this right. In contrast, in a forward or futures contract, the two parties have committed themselves to doing something. Whereas it costs nothing (except margin requirements) to enter into a futures contract, the purchase of an option requires an up-front payment. There are two basic types of options, call options and put options.1. CALL OPTION A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price.

2. PUT OPTION A put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price.

4.6 PARTICIPANTS OF COMMODITY MARKET For a market to succeed, it must have all three kinds of participants hedgers, speculators and arbitrageurs. The confluence of these participants ensures liquidity and efficient price discovery on the market. Commodity market gives opportunity for all three kinds of participants.

1. HEDGERS A Hedger can be Farmers, manufacturers, importers and exporter. A hedger buys or sells in the futures market to secure the future price of a commodity intended to be sold at a later date in the cash market. This helps protect against price risks. The holders of the long position in futures contracts (buyers of the commodity), are trying to secure as low a price as possible. The short holders of the contract ( sellers of the commodity) will want to secure as high a price as possible. The commodity contract, however, provides a definite price certainty for both parties, which reduces the risks associated with price volatility. By means of futures contracts, Hedging can also be used as a means to lock in an acceptable price margin between the cost of the raw material and the retail cost of the final product sold. Someone going long in a securities future contract now can hedge against rising equity prices in three months. If at the time of the contract's expiration the equity price has risen, the investor's contract can be closed out at the higher price. The opposite could happen as well: a hedger could go short in a contract today to hedge against declining stock prices in the future.

2. SPECULATORS. Other commodity market participants, however, do not aim to minimize risk but rather to benefit from the inherently risky nature of the commodity market. These are the speculators, and they aim to profit from the very price change that hedgers are protecting themselves against. A hedger would want to minimize their risk no matter what they're investing in, while speculators want to increase their risk and therefore maximize their profits. In the commodity market, a speculator buying a contract low in order to sell high in the future would most likely be buying that contract from a hedger selling a contract low in anticipation of declining prices in the future. Unlike the hedger, the speculator does not actually seek to own the commodity in question. Rather, he or she will enter the market seeking profits by off setting rising and declining prices through the buying and selling of contracts.

3. ARBITRAGEURS. A central idea in modern economics is the law of one price. This states that in a competitive market, if two assets are equivalent from the point of view of risk and return, they should sell at the same price. If the price of the same asset is different in two markets, there will be operators who will buy in the market where the asset sells cheap and sell in the market where it is costly. This activity termed as arbitrage, involves the simultaneous purchase and sale of the same or essentially similar security in two different markets for advantageously different prices. The buying cheap and selling expensive continues till prices in the two markets reach equilibrium. Hence, arbitrage helps to equalize prices and restore market efficiency. Since the cash and futures price tend to move in the same direction as they both react to the same supply/demand factors, the difference between the underlying price and futures price is called as basis. Basis is more stable and predictable than the movement of the prices of the underlying or the Futures price. Thus, arbitrageur would predict the basis and accordingly take positions in the cash and future markets.

5. TRADING, CLEARING AND SETTLEMENT

5.1 TRADING The trading system on the Commodities exchange provides a fully automated screen-based trading for futures on commodities on a nationwide basis as well as an online monitoring and surveillance mechanism. It supports an order driven market and provides complete transparency of trading operations. After hours trading has also been proposed for implementation at a later stage. The NCDEX system supports an order driven market, where orders match automatically. Order matching is essentially on the basis of commodity, its price, time and quantity. All quantity fields are in units and price in rupees. The exchange specifies the unit of trading and the delivery unit for futures contracts on various commodities. The exchange notifies the regular lot size and tick size for each of the contracts traded from time to time. When any order enters the trading system, it is an active order. It tries to find a match on the other side of the book. If it finds a match, a trade is generated. If it does not find a match, the order becomes passive and gets queued in the respective outstanding order book in the system; Time stamping is done for each trade and provides the possibility for a complete audit trail if required.

5.2 CLEARING Clearing of trades that take place on an exchange happens through the exchange clearing house. A clearing house is a system by which exchanges guarantee the faithful compliance of all trade commitments undertaken on the trading floor or electronically over the electronic trading systems. The main task of the clearing house is to keep track of all the transactions that take place during a day so that the net position of each of its members can be calculated. It guarantees the performance of the parties to each transaction. Typically it is responsible for the following: Effecting timely settlement. Trade registration and follow up. Control of the evolution of open interest. Financial clearing of the payment flow. Physical settlement (by delivery) or financial settlement (by price difference) of contracts. Administration of financial guarantees demanded by the participants.

CLEARING MECHANISM The clearing house has a number of members, who are mostly financial institutions responsible for the clearing and settlement of commodities traded on the exchange. The margin accounts for the clearing house members are adjusted for gains and losses at the end of each day (in the same way as the individual traders keep margin accounts with the broker). Only clearing members including professional clearing members (PCMs) are entitled to clear and settle contracts through the clearing house. The clearing mechanism essentially involves working out open positions and obligations of clearing members. This position is considered for exposure and daily margin purposes. The open positions of PCMs are arrived at by aggregating the open positions of all the TCMs clearing through him, in contracts in which they have traded. A TCM's open position is arrived at by the summation of his clients' open positions, in the contracts in which they have traded. Client positions are netted at the level of individual client and grossed across all clients, at the member level without any set-offs between clients. Proprietary positions are netted at member level without any set-offs between client and proprietary positions.

5.3 SETTLEMENT Futures contracts have two types of settlements, the MTM settlement which happens on a continuous basis at the end of each day, and the final settlement which happens on the last trading day of the futures contract. Daily settlement price: Daily settlement price is the consensus closing price as arrived after closing session of the relevant futures contract for the trading day. However, in the absence of trading for a contract during closing session, daily settlement price is computed as per the methods prescribed by the exchange from time to time. Final settlement price: Final settlement price is the closing price of the underlying commodity on the last trading day of the futures contract. All open positions in a futures contract cease to exist after its expiration day.

SETTLEMENT MECHANISM Settlement of commodity futures contracts is a little different from settlement of financial futures which are mostly cash settled. The possibility of physical settlement makes the process a little more complicated.

A. DAILY MARK TO MARKET SETTLEMENT Daily mark to market settlement is done till the date of the contract expiry. This is done to take care of daily price fluctuations for all trades. All the open positions of the members are marked to market at the end of the day and the profit/ loss is determined as below: On the day of entering into the contract, it is the difference between the entry value and daily settlement price for that day.

On any intervening days, when the member holds an open position, it is the difference between the daily settlement price for that day and the previous day's settlement price. On the expiry date if the member has an open position, it is the difference between the final settlement price and the previous day's settlement price.

B. FINAL SETTLEMENT On the date of expiry, the final settlement price is the spot price on the expiry day. The spot prices are collected from members across the country through polling. The polled bid/ ask prices are bootstrapped and the mid of the two bootstrapped prices is taken as the final settlement price. The responsibility of settlement is on a trading cum clearing member for all trades done on his own account and his client's trades. A professional clearing member is responsible for settling all the participants trades which he has confirmed to the exchange.

5.4 REGULATORY FRAMEWORK INDIAN COMMODITY MARKET The need for regulation arises on account of the fact that the benefits of futures markets accrue in competitive conditions. Proper regulation is needed to create competitive conditions. In the absence of regulation, unscrupulous participants could use these leveraged contracts for manipulating prices. This could have undesirable influence on the spot prices, thereby affecting interests of society at large. Regulation is also needed to ensure that the market has appropriate risk management system. In the absence of such a system, a major default could create a chain reaction. The resultant financial crisis in a futures market could create systematic risk. Regulation is also needed to ensure fairness and transparency in trading, clearing, settlement and management of the exchange so as to protect and promote the interest of various stakeholders, particularly non-member users of the market. After independence, the Constitution of India brought the subject of "Stock Exchanges and futures markets" in the Union list. As a result, the responsibility for regulation of commodity futures markets devolved on Govt. of India. A Bill on forward contracts was referred to an expert committee headed by Prof. A.D.Shroff and Select Committees of two successive Parliaments and finally in December 1952 Forward Contracts (Regulation) Act, 1952, was enacted. The Act provided for 3-tier regulatory system;

a. An association recognized by the Government of India on the recommendation of Forward Markets Commissionb. The Forward Markets Commission (it was set up in September 1953) c. The Central Government.

Forward Contracts (Regulation) Rules were notified by the Central Government in July, 1954.The Act divides the commodities into 3 categories with reference to extent of regulation, viz.:(a) The commodities in which futures trading can be organized under the auspices recognized association. (b) The Commodities in which futures trading is prohibited. (c) Those commodities which have neither been regulated for being traded under the recognized association nor prohibited are referred as Free Commodities and the association organized in such free commodities is required to obtain the Certificate of Registration from the Forward Markets Commission.

6. TRADING IN AGRI-COMMODITY: GROUNDNUT

6.1 INTRODUCTION Groundnut is an important crop both for oil and food. It is grown in over 100 countries in the world and plays an important role in the economy of several countries. About two thirds of the crop produced in the world is crushed to extract oil and one-third is used to make other edible products. India accounts for 40 per cent of the world area and 30 per cent of world output of groundnut. On the other hand groundnut and groundnut oil is the most illiquid commodity in the commodity exchanges in India. Therefore the focus of the study is to understand the trade volume of groundnut as a commodity in commodity exchanges all over the world and gain knowledge about various factors governing supply, demand and price of these commodities in Indian market.

6.2 OVERVIEW Groundnut is considered to be the one of the most important oilseed crops in the world. It is grown in over 100 countries of the world and plays a crucial role in the world economy. The seeds are a good source of edible oil and proteins present in the groundnut oil cake. The percentage of oil and protein are extracted from the seed are approximately 55% and 28% respectively. The oil cake meal left after the extraction of the oil is used as an animal fodder and fertilizer. The peanut oil is primarily needed as a cooking agent but it also has some industrial uses like in paint, varnish, lubricating oil, soap, furniture polish etc. the peanut seeds are also consumed directly in roasted form, as butter, in brittle and candies etc. Groundnut production has reached the mark of around 34 million tons. China followed by India is the largest producer of this oilseed crop in the world. The groundnut oil production hovers around 8 million tons annually. These two countries are also responsible for the highest consumption of groundnut. The list depicting the major groundnut consuming countries is given below: China India Nigeria United States European Union

Except European Union, all the countries lie in the list of major groundnut producing countries as well. European Union countries are the largest consumer of groundnuts where the crop is not produced. The major demand i.e. around 75% comes from the food sector and the rest from other sectors. As European Union is the largest consumer of the oilseed where it is not produced, it has to rely on imports and that makes the countries in the union the largest importers of groundnut. The trade done in the world in the context of groundnuts is estimated to about 1 lakh tons per year. The leading groundnut exporting countries are: Argentina China Senegal Vietnam Nigeria South Africa India Gambia United States

The countries mentioned above contribute to about 90% of the world exports. Argentina makes the largest groundnut exporter to the world. The major countries that satisfy their domestic consumption demand by importing groundnuts are: Belgium United States France Germany United Kingdom Ireland Sweden Italy Indonesia Netherlands Canada Malaysia Philippines Singapore Japan

6.3 GROUNDNUT PRODUCING COUNTRIES Groundnut is one of the vastly produced oilseed crop in the world as it is cultivated in more than 100 countries in the world and that is why it is referred to as a universal crop. The areas in the tropical belt of the earth enjoy the major share in this groundnut crop production as this type of weather conditions suit well to it. It is estimated that around 65% of the crop produced in the world is crushed to extract groundnut oil and the rest is used in making other edible products. The world production of groundnut seeds hovers around 34 million tons per year in the current scenario. The groundnut oil is produced to an extent of around 8 million tons. The major producers of groundnut in 2005 along with their production figures are1. CHINA (14408500 TONS)11. Chad (450000 tons)

2. INDIA (5900000 TONS)12. Ghana (389649 tons)

3. NIGERIA (2937000 TONS)13. Congo (368110 tons)

4. United States of America (2112700 tons)

14. Guinea (300000 tons)

5. Indonesia (1469000 tons)

15. Brazil (291966 tons)

6. Sudan (1200000 tons)16. Burkina Faso (245307 tons)

7. Senegal (820569 tons)17. Cameroon (225000 tons)

8. Myanmar (715000 tons)18. Egypt (190000 tons)

9. Argentina (593000 tons)

19. Mali (163900 tons)

10. Vietnam (453000 tons)

20. Malawi (161162 tons)

In context of the production of groundnut oil, China again tops the chart with a production of around 2.5 million tons India following with the production of around 2 million tons. The other regions where groundnut oil is produced includes sub-Saharan African countries and central and southern America. The maximum area that is used for the production of this oilseed is bagged by India with around 8 million hectares that accounts up to 30% share in the total area of around 26.5 million hectares. The country that gets maximum yield from the groundnut crop is USA which has a yield of approximately 3540 Kg/ hectare. The world production has been in the up- trend since last decade and still, it is rising steadily.

6.4 PRODUCTION OF GROUNDNUT IN INDIA India has been producing groundnut since it has been introduced in Asia in the 16th century. The weather in the Indian subcontinent suited well to the crop and India transformed into an important contributor to the world production. The country ranks 2nd in the world groundnut production scenario with an annual groundnut seed production of 5.9 million tons and annual groundnut oil production of 1.5 million tons in 2007. Also, India has the maximum area covered under groundnut cultivation. The major states in India that are indulged in the production of this crop along with their production figures are: Gujarat (2.5 million tons) Tamil Nadu (1 million tons) Andhra Pradesh (1 million tons) Karnataka (0.5 million tons) Maharashtra (0.5 million tons) Madhya Pradesh Orissa Rajasthan

The Indian production and area covered is largely concentrated in the above-mentioned states. Today, groundnut has a share of approximately 25% in the total Indian oilseed production. But this share is constantly reducing since India got independent, as it was around 70% in 1950s. A quick summary of area under cultivation, production and yield of groundnut crop is provided in the tables below:

YEAR WISE AREA UNDER CULTIVATION OF GROUNDNUT IN INDIA

PRODUCTION OF GROUNDNUT IN INDIA

6.5 INDIAN GROUNDNUT MARKET India has been a land where oilseeds have much importance than any other crop. Groundnut constitutes one of the major oil seed in India. As already mentioned, it accounts to about 25% share in the total oilseeds production in India. The country produces around 6 million tons of groundnuts annually; Gujarat being the leader in the production of the crop producing over 40% of the crop produced India. The groundnut oil production in India hovers around 1.5 million tons per year. The production of groundnut seed in the country has shown fluctuations quite often largely due to the monsoon behavior. India places 2nd in the world groundnut consumption list. The country actually consumes all most all of its groundnut yield produced that is around 30% of the worlds total consumption. The main demand of groundnut and derivatives generate from the western and southern parts of the country. This consumption pattern of the country contracts the Indian groundnut export size and does not allow it to gain dominance over the world market even though a high production level. Earlier it was an important exporter of groundnut and its by-products in 1970s. But with time it lost all its importance due to its high prices and increasing competitiveness. The Indian exports of groundnut oil to the world showed a fluctuating trend in the last decade. In 2003-04 India exported around 1 lakh tons of groundnut oil due to a crop failure in Argentina and Senegal. The imports in the country are second to none as the production level is quite sufficient for the domestic demand level in the country.

MARKET INFLUENCING FACTORS Weather conditions in major groundnut producing regions. Monsoon status in the country. Price fluctuations of the other competitive edible oils. International price movements. High consumption in festive seasons and celebrations.

MAJOR TRADING CENTERS OF GROUNDNUT The major trading centers of groundnut and derivatives in India are: Rajkot (Gujarat) Mumbai (Maharashtra) Ahmedabad (Gujarat) Indore (Madhya Pradesh) Gondal (Gujarat) Delhi Junagarh (Gujarat) Adoni (Andhra Pradesh)

CONCLUSION Prices of all commodities are heading northwards due to rapid increase in demand for commodities. Developing countries like China are voraciously consuming the commodities. Thats why globally commodity market is bigger than the stock market. India is one of the top producers of large number of commodities and also has a long history of trading in commodities and related derivatives. The Commodities Derivatives market has seen ups and downs, but seems to have finally arrived now. The market has made enormous progress in terms of Technology, transparency and trading activity. Interestingly, this has happened only after the Government protection was removed from a number of Commodities, and market force was allowed to play their role. This should act as a major lesson for policy makers in developing countries, that pricing and price risk management should be left to the market forces rather than trying to achieve these through administered price mechanisms. The management of price risk is going to assume even greater importance in future with the promotion of free trade and removal of trade barriers in the world. As majority of Indian investors are not aware of organized commodity market; their perception about is of risky to very risky investment. Many of them have wrong impression about commodity market in their minds. It makes them specious towards commodity market. Concerned authorities have to take initiative to make commodity trading process easy and simple. Along with Government efforts NGOs should come forward to educate the people about commodity markets and to encourage them to invest in to it. There is no doubt that in near future commodity market will become Hot spot for Indian farmers rather than spot market. And producers, traders as well as consumers will be benefited from it. But for this to happen one has to take initiative to standardize and popularize the Commodity Market.BIBLIOGRAPHY

ANNEXURE1: COMMONLY USED TERMS IN COMMODITY MARKET

Accruals: Commodities on hand ready for shipment, storage and manufacture Arbitragers: Arbitragers are interested in making purchase and sale in different markets at the same time to profit from price discrepancy between the two markets. At the Market: An order to buy or sell at the best price possible at the time an order reaches the trading pit. Basis: Basis is the difference between the cash price of an asset and futures price of the underlying asset. Basis can be negative or positive depending on the prices prevailing in the cash and futures. Basis grade: Specific grade or grades named in the exchanges future contract. The other grades deliverable are subject to price of underlying futures Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a weighted average of a basket of assets. Equity index options are a form of basket options. Bear: A person who expects prices to go lower. Bid: A bid subject to immediate acceptance made on the floor of exchange to buy a definite number of futures contracts at a specific price. Breaking: A quick decline in price. Bulging: A quick increase in price. Bull: A person who expects prices to go higher. Buy on Close: To buy at the end of trading session at the price within the closing range. Buy on opening: To buy at the beginning of trading session at a price within the opening range. Call: An option that gives the buyer the right to a long position in the underlying futures at a specific price, the call writer (seller) may be assigned a short position in the underlying futures if the buyer exercises the call. Cash commodity: The actual physical product on which a futures contract is based. This product can include agricultural commodities, financial instruments and the cash equivalent of index futures. Close: The period at the end of trading session officially designated by exchange during which all transactions are considered made at the close. Closing price: The price (or price range) recorded during the period designated by the exchange as the official close. Commission house: A concern that buys and sells actual commodities or futures contract for the accounts of customers. Consumption Commodity: Consumption commodities are held mainly for consumption purpose. E.g. Oil, steel Cover: The cancellation of the short position in any futures contract buys the purchase of an equal quantity of the same futures contract. Cross hedge: When a cash commodity is hedged by using futures contract of other commodity. Day orders: Orders at a limited price which are understood to be good for the day unless expressly designated as an open order or good till canceled order. Delivery: The tender and receipt of actual commodity, or in case of agriculture commodities, warehouse receipts covering such commodity, in settlement of futures contract. Some contracts settle in cash (cash delivery). In which case open positions are marked to market on last day of contract based on cash market close. Delivery month: Specified month within which delivery may be made under the terms of futures contract. Delivery notice: A notice for a clearing members intention to deliver a stated quantity of commodity in settlement of a short futures position. Derivatives: These are financial contracts, which derive their value from an underlying asset. (Underlying assets can be equity, commodity, foreign exchange, interest rates, real estate or any other asset.) Four types of derivatives are trades forward, futures, options and swaps. Derivatives can be traded either in an exchange or over the counter. Differentials: The premium paid for grades batter than the basis grade and the discounts allowed for the grades. These differentials are fixed by the contract terms on most exchanges. Exchange: Central market place for buyers and sellers. Standardized contracts ensure that the prices mean the same to everyone in the market. The prices in an exchange are determined in the form of a continuous auction by members who are acting on behalf of their clients, companies or themselves. Forward contract: It is an agreement between two parties to buy or sell an asset at a future date for price agreed upon while signing agreement. Forward contract is not traded on an exchange. This is oldest form of derivative contract. It is traded in OTC Market. Not on an exchange. Forward contract is generally settled by physical delivery. In this case delivery is carried out at delivery center specified in the customized bilateral agreement. Futures Contract: It is an agreement between two parties to buy or sell specified and standardized quantity and quality of an asset at certain time in the future at price agreed upon at the time of entering in to contract on the futures exchange. It is entered on centralized trading platform of exchange. It is standardized in terms of quantity as specified by exchange. Contract price of futures contract is transparent as it is available on centralized trading screen of the exchange. Here valuation of Mark-to-Mark position is calculated as per the official closing price on daily basis and MTM margin requirement exists. Futures contract is more liquid as it is traded on the exchange. Futures contract is generally cash settled but option of physical settlement is available. Delivery tendered in case of futures contract should be of standard quantity and quality as specified by the exchange. Futures commission merchant: A broker who is permitted to accept the orders to buy and sale futures contracts for the consumers. Futures Funds: Usually limited partnerships for investors who prefer to participate in the futures market by buying shares in a fund managed by professional traders or commodity trading advisors. Futures Market: It facilitates buying and selling of standardized contractual agreements (for future delivery) of underlying asset as the specific commodity and not the physical commodity itself.

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