A Buoyancy in the Commodity Trading – A Road Map

Abstract

Commodity trading is nothing but trading in commodity derivatives (futures or options). Commodity derivatives are traded at the commodity exchanges. There are currently 2 major commodity exchanges NCDEX (National Commodity and Derivative Exchange) and MCX (Multi-Commodity Exchange). Gold, Silver, Agri-commodities including grains, pulses, spices, oils and oilseeds, mentha oil, metals and crude are some of the commodities that the exchanges deal in. Trading in commodities futures is quite similar to equity futures trading. Commodity market is a promising avenue for investments offering huge opportunities and enabling diversification of portfolio. Commodity trading is a kind of financial trading in which primary products, such as food, metals and energy, are bought and sold. Trading in commodities is mostly undertaken on contracts that are based on such commodities. Commodities trading is also called futures trading. India, among the top five producers of most of the agricultural commodities and a leading consumer of bullion and energy products, would immensely benefit from a robust commodity futures market. While the commodity derivatives markets have been in existence in the country for a while now, the gradual withdrawal of prohibition on futures trading since 2003 has paved way for the development of new exchanges and adoption of modern technologies and international practices. The agricultural commodities dominated the futures trading market in the initial years, bullion and metals have overtaken in terms of volumes post 2006-07. Future may bring to focus energy and electricity-sector-oriented products. The efficacy of the futures markets to deliver benefits to the economy can be enhanced through a strong regulatory framework, wide-spread dissemination of futures and spot prices all over the country and education, training and awareness programmes for the various stakeholders, particularly the farmers. Limited direct participation by farmers in the future markets has resulted in the potential benefits being restricted to traders, large corporates and speculators. Attention would need to be given to complex contract designs, lack of access to price information, restricted credit access, etc. that have limited farmers’ participation. This paper gives a birds eye view on the commodity trading in the global scenario.