Commodity Online
The commodities derivatives markets are deep and broad, presenting both challenges and opportunities in their wakes. It has been the experience of participants that they have been besieged by the vastness of the market and the types of underlying assets available.

Despite millennia of commerce in commodities, we are still perplexed by the questions, “what should we trade in?”, “how much do we buy or sell?”, “how do we give or take delivery of the commodities?”, “when is the ideal time to enter and exit the market” etc.

These asymptomatic behaviours of intermediaries and investors have given naissance to the major commodity markets, as we know them today. Right from the mandis in Asia and Africa to the sophisticated electronic platforms in the Western world, commodities trading have come a long way.

The mode of exchange of the value of commodities has also seen a transformation over the ages – from the rudimentary barter system, trade was revolutionized by the introduction of money, and, yet again with the advancement in electronic transfer of credits called dematerialization.

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While it is true that commodities have dictated the economic passions of sovereign and non – sovereign nations, they have also acted as the vehicles for accumulation of massive wealth for individuals. Some of the most enduring fortunes have been built with commodities.

Among the stars in the galaxy, Mayer Rothschild single handedly built the banking empire by providing vault facilities for storing bullion during World War II. John D. Rockefeller created the first true corporate, Standard Oil Co. by exploring Crude Oil. Andrew Carnegie conglomerated the steel industry in the United States to form US Steel. Abdel – Aziz – Al – Saud, the founding father of Saudi Arabia created the most influential nation on energy products. Jim Rogers, the Ambanis, the Tatas and Laxmi Mittal have all become legends because they had the foresight to invest in commodities.

Nearer home, organized commodity trading had started almost a decade after the Chicago Board of Trade. Unfortunately, it was opined that derivatives possessed the characteristics to influence the physical market and were, therefore, detrimental to the development of a healthy market.

As a result, commodity derivatives were subject to state sanctions, so much so, that in 1952 the entire market was de- recognized. To add insult to injury, in the 1960s severe draughts forced many farmers to default on forward contracts, and as a result, forward trading in many commodities considered primary or essential, was banned.

Consequently, the commodities derivative markets were dismantled and remained dormant for about four decades until the new millennium when the Government, in a complete change of policy, started encouraging the commodity derivatives market.

Roughly 60 percent of the population depends on agricultural commodity production and trading. In the manufacturing segment, there has been a robust growth.

However, the capital goods and consumer durables sub-segment have shown contrasting behaviour. Despite an all-inclusive growth, the commodity markets are still fragmented across the country. At the simplest, each neighbourhood has its own designated location, where producers and buyers meet in order to engage in trade, in an institutional vacuum.

The wholesale spot markets for agricultural commodities, as seen today, very much reflect this history. The only way we have come forward was by registering these designated places as mandis under the Agricultural Produce Marketing Act. If we compare this scenario with the financial sector, the imperceptible institution of organized commodity markets is reminiscent of the state of securities markets in India prior to the reforms of 1993.

A state of affairs like this makes the case strong for institutional development, which would improve the liquidity and efficiency of commodity derivatives markets and thus have an impact not only upon a large fraction of India’s population, but also on industry, trade and commerce.

Indian markets have been internationally linked through trade as evidenced from history and visitors to the country. Indian producers and traders have remained “price takers” despite our significant share in global supply and demand. However, with the ongoing economic liberalization and globalization processes, there is not only a profound need to provide better prices to the farmers but also for providing the participants with a platform for risk transfer. It is essential to have efficient market dynamics in an economy to remain competent, as they help the other sectors to produce goods at least cost, using the most efficient technology available.

Hence, markets would have to be efficient for an economy to remain competent domestically as well as globally. 

With a growing population of over one billion (2001 census), India would remain one of the largest markets for the traders in global commodities, with metals and energy playing a crucial role in the growth and development of the industrial sector of the Indian economy and agricultural products.

At this juncture, institutional development of the commodity markets would create; (a) a “near-perfect” market situation, (b) wider participation by the different segments of the economy, (c) a global hub for trading in commodities due to its strategic geographical location, and, (d) making India a potential “price setter” for many commodities.

Courtesy: Extract from the CII&PwC theme paper on Commodities Markets