Commodity Exchange to Stabilize Volatility of Prices of Ago – Products
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Commodity Exchange to stabilize volatility of agro-
productWali-ul-Maroof Matin
Member, CARES
Philosophy first
• Capitalism or Market Economy• Laissez Faire vs Regulated
Competition • Price Fixation vs Price Discovery
Philosophy first
Committee of Action for Research, extension and Services, July 2012
Define Commodity and Commodity Exchange• A Commodity is a product which has a commercial value. It
can be produced, bought, sold and consumed.
• A commodities exchange is an exchange, just like any Stock Exchange where various commodities and derivatives products are traded. Most Commodity Exchanges across the world trade in agricultural products and other raw materials
• To be traded on an Exchange must meet certain specification regarding self life, quality standard, demand and supply and some more.
Committee of Action for Research, Extension and Services, July 2012
Time dimension of markets
Committee of Action for Research, Extension and Services, July 2012
History: market is a natural development• First organized futures market Osaka Rice
Exchange – 1730 • First organized futures trading in US, Chicago
Board of Trade – 1848• Standardized Futures Contract in US – 1865• The Chicago Butter and Egg Exchange – 1898.
This Exchange evolved into Chicago Mercantile Exchange in 1919. The number one now.
History: market is a natural development
Committee of Action for Research, extension and Services, July 2012
Some important Commodity Futures ExchangesExchange Main Products
Chicago Board of Trade (CBOT) Wheat, Corn, Soybean, Soy Oil, Mini Gold, Mini Silver, Live Cattle, Pork Belly, Ethanol
New York Board of Trade (NYBOT) Sugar, Cotton, Coffee, Cocoa, Orange Juice, Ethanol
New York Mercantile Exchange (NYMEX) Light Sweet Crude Oil, Gasoline, Heating Oil, Gold, Silver, Platinum, Palladium, Copper, Electricity
Intercontinental Exchange Brent crude, light sweet crude, gasoline, Natural Gas, Coal, Electricity
Bursa Malaysia Berhard Crude Palm Oil, RBD palmolein
Dubai Gold & Commodity Exchange (DGCEX)
Gold, Silver, Steel, Freight rates, Cotton
Multi Commodity Exchange, India Gold, Silver, Energy, Agricultural Products
Committee of Action for Research, Extension and Services, July 2012
Trading in Commodity Futures is almost similar to trading in
stocks• Trading in Commodities and that in stocks
both require you to research the stock or commodity that you plan to trade in and in both cases you need to have the capital to invest.
• In both cases, the Exchanges help to mitigate risks of trading as they stand as surety for the trades that take place via their Systems
Committee of Action for Research, Extension and Services, July 2012
Farmers & Farmer Cooperatives
(Hedgers)
Investors(Speculators)
Traders(Arbitrageurs)
Public Warehouses
Private Sector Warehousing Companies
Warehouse Receipt System
Commodity Exchange
Spot Markets
Testing & Certifying Companies
Logistics Companies
Storage & Transport RequirementsQuality Certification Requirements
Lending Agencies
USERS SUPPORT AGENCIES
Commodity Information
info
The Ecosystem
Committee of Action for Research, extension and Services, July 2012
Benefits of Commodity Futures trading
• Balanced investment portfolio management• Transparent and fair price discovery• Platform for risk management• Helps to improve cropping patterns• Assures hedgers fixed prices• Inventory management• Replace minimum support prices as a mean of
hedging• Means of implementing food security• Security against default• Standardization of commodities
Committee of Action for Research, extension and Services, July 2012
Inverse relation between commodity and stock prices• Raw material form a key element. The
increase in raw material cost increases overall input costs and weights down the earning for most companies. This adversely impacts the share price of the company.
SteelConstruction
Committee of Action for Research, Extension and Services, July 2012
Players in Commodity Exchange
Committee of Action for Research, Extension and Services, July 2012
Farmers’ risks
• Production risk– Adverse weather– Pest
• Price Risk– Domestic Demand Shock– Too much of production– Manipulation by middlemen
Committee of Action for Research, extension and Services, July 2012
Price & Sowing Decisions
Committee of Action for Research, extension and Services, July 2012
Trading and Settlement
SELLER BUYER
Unmatched orders pending in the system
Bank 1 Bank 21 1
2 2
3 3Matching Engine
4
EXCHANGE
5 5
6 6
Committee of Action for Research, extension and Services, July 2012
Delivery Mechanism
Open short and long positions not marked for delivery will be settled at
the due date rate
WarehouseSELLER BUYER
Unmatched orders pending in the system
1 5
3 3
Matching for delivery
EXCHANGE
2 5
Intent Willingness3 3
77
4
54
Default X% on due date rate
6
Committee of Action for Research, extension and Services, July 2012
SEC’s ( Regulator) roles:
Approve, and regulate ExchangesOversee the risk managementPromote the business as wholeBring manipulation attempts to justice
Committee of Action for Research, Extension and Services, July 2012
Committee of Action for Research, Extension and Services, July 2012
Thanks for your patience
Committee of Action for Research, extension and Services, July 2012
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