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Note on Commodity Market

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Note on Commodity Market
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Sunanda K. Chavan
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Note on Commodity Market - September 8th, 2010

INTRODUCTION (COMMODITY)

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

The traditional wholesale market in India dealt with whole sellers who bought goods from the farmers and manufacturers and then sold them to the retailers after making a profit in the process. It was the retailers who finally sold the goods to the consumers. With the passage of time the importance of whole sellers began to fade out for the following reasons:

• The whole sellers in most situations, acted as mere parasites who did not add any value to the product but raised its price which was eventually faced by the consumers.

• The improvement in transport facilities made the retailers directly interact with the producers and hence the need for whole sellers was not felt.

In recent years, the extent of the retail market (both organized and unorganized) has evolved in leaps and bounds. In fact, the success stories of the commodity market of India in recent years has mainly centered on the growth generated by the Retail Sector. Almost every commodity under the sun both agricultural and industrial is now being provided at well distributed retail outlets throughout the country.

Moreover, the retail outlets belong to both the organized as well as the unorganized sector. The unorganized retail outlets of the yesteryears consist of small shop owners who are price takers where consumers face a highly competitive price structure. The organized sector on the other hand is owned by various business houses like Pantaloons, Reliance, Tata and others. Such markets are usually selling a wide range of articles both Agricultural and manufactured edible and inedible, perishable and durable. Modern marketing strategies and other techniques of sales promotion enable such markets to draw customers from every section of the society. However the growth of such markets has still centered on the urban areas primarily due to infrastructural limitations.

Considering the present growth rate, the total valuation of the Indian Retail Market is estimated to cross Rs. 10,000 billion by the year 2010. Demand for commodities is likely to become four times by 2010 than what it presently is.
COMMODITY

A commodity may be defined as an article, a product or material that is bought and sold. It can be classified as every kind of movable property, except Actionable Claims, Money & Securities. Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets, may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option.

In fact, the size of the commodities markets in India is also quite significant. Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent. 7
Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the size of the commodities market grows many folds here on.
COMMODITY MARKET

Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.

DIFFERENT SEGMENTS IN COMMODITIES MARKET

The commodities market exits in two distinct forms namely the Over the Counter (OTC) market and the Exchange based market. Also, as in equities, there exists the spot and the derivatives segment. The spot markets are essentially over the counter markets and the participation is restricted to people who are involved with that commodity say the farmer, processor, wholesaler etc. Derivative trading takes place through exchange-based markets with standardized contracts, settlements etc.

Commodity Futures Trading in India


Derivatives as a tool for managing risk first originated in the Commodities markets. They were then found useful as a hedging tool in financial markets as well. The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. However there are some features, which are very peculiar to commodity derivative markets. In the case of financial derivatives, most of these contracts are cash settled. Even in the case of physical settlement, financial assets are not bulky and do not need special facility for storage. Due to the bulky nature of the underlying assets, physical settlement in commodity derivatives creates the need for warehousing. Similarly, the concept of varying quality of asset does not really exist as far as financial underlyings are concerned. However in the case of commodities, the quality of the asset underlying a contract can vary largely. This becomes an important issue to be managed.

BENEFITS TO INDUSTRY FROM FUTURES TRADING
 Hedging the price risk associated with futures contractual commitments.
 Spaced out purchases possible rather than large cash purchases and its storage.
 Efficient price discovery prevents seasonal price volatility.
 Greater flexibility, certainty and transparency in procuring commodities would aid bank lending.
 Facilitate informed lending.
 Hedged positions of producers and processors would reduce the risk of default faced by banks. * Lending for agricultural sector would go up with greater transparency in pricing and storage.
 Commodity Exchanges to act as distribution network to retail agri-finance from Banks to rural households.
 Provide trading limit finance to Traders in commodities Exchanges.

BENEFITS TO EXCHANGE MEMBER
 Access to a huge potential market much greater than the securities and cash market in commodities.
 Robust, scalable, state-of-art technology deployment.
 Member can trade in multiple commodities from a single point, on real time basis.

 Traders would be trained to be Rural Advisors and Commodity Specialists and through them multiple rural needs would be met, like bank credit, information dissemination, etc.

WHAT MAKES COMMODITY TRADING ATTRACTIVE?
 A good low-risk portfolio diversifier
 A highly liquid asset class, acting as a counterweight to stocks, bonds and real estate.
 Less volatile, compared with, equities and bonds.
 Investors can leverage their investments and multiply potential earnings.
 Better risk-adjusted returns.
 A good hedge against any downturn in equities or bonds as there is
 Little correlation with equity and bond markets.
 High co-relation with changes in inflation.
 No securities transaction tax levied.
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Re: Note on Commodity Market - June 29th, 2015

Definition of Commodity market

A 'commodity market' is a market that trades in primary rather than manufactured products. Soft commodities are agricultural products such as wheat, coffee, cocoa and sugar. Hard commodities are mined, such as gold, rubber and oil.

Advantages of Commodity market

1) Lower margin requirement

2) Attractive premiums

3) Liquidity

4) Diversification
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Re: Note on Commodity Market - January 10th, 2016

Quote:
Originally Posted by sunandaC View Post
INTRODUCTION (COMMODITY)

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

The traditional wholesale market in India dealt with whole sellers who bought goods from the farmers and manufacturers and then sold them to the retailers after making a profit in the process. It was the retailers who finally sold the goods to the consumers. With the passage of time the importance of whole sellers began to fade out for the following reasons:

The whole sellers in most situations, acted as mere parasites who did not add any value to the product but raised its price which was eventually faced by the consumers.

The improvement in transport facilities made the retailers directly interact with the producers and hence the need for whole sellers was not felt.

In recent years, the extent of the retail market (both organized and unorganized) has evolved in leaps and bounds. In fact, the success stories of the commodity market of India in recent years has mainly centered on the growth generated by the Retail Sector. Almost every commodity under the sun both agricultural and industrial is now being provided at well distributed retail outlets throughout the country.

Moreover, the retail outlets belong to both the organized as well as the unorganized sector. The unorganized retail outlets of the yesteryears consist of small shop owners who are price takers where consumers face a highly competitive price structure. The organized sector on the other hand is owned by various business houses like Pantaloons, Reliance, Tata and others. Such markets are usually selling a wide range of articles both Agricultural and manufactured edible and inedible, perishable and durable. Modern marketing strategies and other techniques of sales promotion enable such markets to draw customers from every section of the society. However the growth of such markets has still centered on the urban areas primarily due to infrastructural limitations.

Considering the present growth rate, the total valuation of the Indian Retail Market is estimated to cross Rs. 10,000 billion by the year 2010. Demand for commodities is likely to become four times by 2010 than what it presently is.
COMMODITY

A commodity may be defined as an article, a product or material that is bought and sold. It can be classified as every kind of movable property, except Actionable Claims, Money & Securities. Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets, may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option.

In fact, the size of the commodities markets in India is also quite significant. Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent. 7
Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the size of the commodities market grows many folds here on.
COMMODITY MARKET

Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.

DIFFERENT SEGMENTS IN COMMODITIES MARKET

The commodities market exits in two distinct forms namely the Over the Counter (OTC) market and the Exchange based market. Also, as in equities, there exists the spot and the derivatives segment. The spot markets are essentially over the counter markets and the participation is restricted to people who are involved with that commodity say the farmer, processor, wholesaler etc. Derivative trading takes place through exchange-based markets with standardized contracts, settlements etc.

Commodity Futures Trading in India


Derivatives as a tool for managing risk first originated in the Commodities markets. They were then found useful as a hedging tool in financial markets as well. The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. However there are some features, which are very peculiar to commodity derivative markets. In the case of financial derivatives, most of these contracts are cash settled. Even in the case of physical settlement, financial assets are not bulky and do not need special facility for storage. Due to the bulky nature of the underlying assets, physical settlement in commodity derivatives creates the need for warehousing. Similarly, the concept of varying quality of asset does not really exist as far as financial underlyings are concerned. However in the case of commodities, the quality of the asset underlying a contract can vary largely. This becomes an important issue to be managed.

BENEFITS TO INDUSTRY FROM FUTURES TRADING
 Hedging the price risk associated with futures contractual commitments.
 Spaced out purchases possible rather than large cash purchases and its storage.
 Efficient price discovery prevents seasonal price volatility.
 Greater flexibility, certainty and transparency in procuring commodities would aid bank lending.
 Facilitate informed lending.
 Hedged positions of producers and processors would reduce the risk of default faced by banks. * Lending for agricultural sector would go up with greater transparency in pricing and storage.
 Commodity Exchanges to act as distribution network to retail agri-finance from Banks to rural households.
 Provide trading limit finance to Traders in commodities Exchanges.

BENEFITS TO EXCHANGE MEMBER
 Access to a huge potential market much greater than the securities and cash market in commodities.
 Robust, scalable, state-of-art technology deployment.
 Member can trade in multiple commodities from a single point, on real time basis.

 Traders would be trained to be Rural Advisors and Commodity Specialists and through them multiple rural needs would be met, like bank credit, information dissemination, etc.

WHAT MAKES COMMODITY TRADING ATTRACTIVE?
 A good low-risk portfolio diversifier
 A highly liquid asset class, acting as a counterweight to stocks, bonds and real estate.
 Less volatile, compared with, equities and bonds.
 Investors can leverage their investments and multiply potential earnings.
 Better risk-adjusted returns.
 A good hedge against any downturn in equities or bonds as there is
 Little correlation with equity and bond markets.
 High co-relation with changes in inflation.
 No securities transaction tax levied.
Hey sunanda, as per my view it is the safe and secure source of investing because at the time of economic crises commodity market can provides us more security. I am also uploading a document of some important notes on commodity market.
Attached Files
File Type: ppt CommoditiesMarkets(1).ppt (1.08 MB, 0 views)
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Re: Note on Commodity Market - January 22nd, 2016

Falling crude oil prices are indeed good for the Indian economy and markets, but too low a price as $30 a barrel is something that investors back home would start getting worried about.

Crude oil price is a major component of the import bill and if the average price goes down, the government saves a lot, which can also help strengthen fiscal position, cool off inflations and bring down cost of commodities, where crude is one of the major raw material component.

Commodity Market Live
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