Analysis of Commodity Market with respect to Silver and Sugar

Analysis of Commodity Market with respect to Silver and Sugar

Project Report submitted to:Karvy Comtrade Ltd.

Submitted by:Gautam V. Foria

MET Institute Of ManagementMumbai

AcknowledgementI express my sincere gratitude and thanks to Karvy Comtrade Ltd. for

giving me an opportunity to undertake an important and crucial study related to the analysis of Commodity Market. I am very much confident that this project will go a long way in shaping my future.

I would like to sincerely thank my project guide Mr. Amit Mishra and Mr. Mandeep Singh for their invaluable guidance, constructive suggestions, keen and sustained interest, incessant and constant encouragement in the development, planning and execution of the project and preparation of this report.

I also express my sincere thanks to Mr. Jayprakash Gupta his invaluable suggestions and timely feedback.

I am obliged to Ms. Seema Salvi, Assistant Vice President – HRD, for providing the necessary facilities and co-operation, for helping me complete this project to the best of my abilities.

I also thank the other employees of Karvy for their co-operation and support.

Date: Place:

Gautam V. Foria(Summer Trainee)

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IndexContent Page no.

Executive Summary 4

1. Introduction to Company 51.1. Karvy ltd. 51.2. Karvy Comtrade ltd. 6

1.2.1. Company Analysis 71.2.2. SWOT Analysis 71.2.3. Organization Structure 81.2.4. Financial Details 8

1.2.5. Competitors 8

2. Introduction to Commodity market 9

2.1. Commodity 9

2.2. Derivatives 102.3. Commodity Market 11

2.3.1. History of Commodity Market 112.3.2. International Commodity Market 12

2.3.3. Types of players 132.4. Commodity Market in India 14

2.4.1. National exchanges 182.4.2. The NCDEX Platform 25

2.5. Exchanges: International and Domestic 38

3. Silver 393.1. Supply/Demand Scenario 403.2. Global Scenario for Silver 443.3. Indian Scenario for Silver 483.4. Outlook for Silver 61

4. Sugar 62

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4.1. Introduction 624.2. Global Scenario for Sugar 644.3. Indian Scenario for Sugar 664.4. Outlook for Sugar 74

5. Bibliography 75

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Executive Summery:One may have their debt and equity funds in place, but investing in

commodities could just be the one element to improve their portfolio. Commodity trading provides an ideal asset allocation, also helps one hedge against inflation and also helps buy a piece of global demand growth.

In 2003, the ban on commodity trading was lifted after 40 years in India. Now, more and more people are interested in investing in this new asset class. While price fluctuations in the sector could get rather volatile depending on the category, returns are relatively higher. However, as this is not a primary area of investment for most, there is a lot of apprehension about when and how to invest. The Report seeks to answer all of these questions by comparing Indian commodities market with the Asian markets.The Report specifically takes up Silver and Sugar and analyses the fundamental aspects of both of these commodities thereby highlighting the future price outlook for both the commodities.

The Report examines the case for Silver as a long-term or strategic investment. The role of Silver in asset management is currently very topical. Much of the interest, however, is related to short-term issues such as investing in Silver as an asset. From a longer term perspective a fairly wide consensus exists that Silver retains industrial demand despite considerable fluctuations in the shorter term.

Report is based on the simple economics of “supply and demand” that is consistent with the view that Silver remains the industrial demand in the long-run, yet at the same time allows the price of Silver to fluctuate considerably in the short run. In this model, the total supply of Silver is a function of the production, mining of its base metals, price of gold, industrial demand and currency fluctuation. The short-run demand for Silver is modeled as a function of the price of base metals, the US dollar/world exchange rate, industrial demand, investment in metals and jewellery.

The report also analyses Sugar and its price movements. It seeks to analyze the fundamentals of Sugar and the involvement of the use of sugarcane in production of gasoline so also the cultivation pattern and demand and supply situation in India and the world and thereby gives an insight about Sugar futures on NCDEX and how they are traded.

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1. Introduction to Company:

1.1. Karvy Ltd.:KARVY, is a premier integrated financial services provider, and

ranked among the top five in the country in all its business segments, services over 16 million individual investors in various capacities, and provides investor services to over 300 corporate, comprising the who is who of Corporate India. Karvy covers the entire spectrum of financial services such as Stock broking, Depository Participants, Distribution of financial products like mutual funds, bonds, fixed deposit, Merchant Banking & Corporate Finance, Insurance Broking, Commodities Broking, Personal Finance Advisory Services, placement of equity, IPOs, among others. Karvy has a professional management team and ranks among the best in technology, operations, and more importantly, in research of various industrial segments.

Karvy Group Companies are:

1. Karvy Cunsultants Limited2. Karvy Stock Broking Limited3. Karvy Investor Services Limited4. Karvy Computershare Private Limited5. Karvy Global Services Limited6. Karvy Comtrade Limited7. Karvy Insurance Broking Private Limited8. Karvy Mutual Fund Services9. Karvy Securities Limited

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1.2. Karvy Comtrade Ltd.:Commodities market, contrary to the beliefs of many people, has been

in existence in India through the ages. However the recent attempt by the Government to permit Multi-commodity National levels exchanges has indeed given it, a shot in the arm. As a result two exchanges Multi Commodity Exchange (MCX) and National Commodity and derivatives Exchange (NCDEX) have come into being. These exchanges, by virtue of their high profile promoters and stakeholders, bundle in themselves, online trading facilities, robust surveillance measures and a hassle-free settlement system. The futures contracts available on a wide spectrum of commodities like Gold, Silver, Cotton, Steel, Soya oil, Soya beans, Wheat, Sugar, Channa etc., provide excellent opportunities for hedging the risks of the farmers, importers, exporters, traders and large scale consumers. They also make open an avenue for quality investments in precious metals. The commodities market, as it is not affected by the movements of the stock market or debt market provides tremendous opportunities for better diversification of risk. Realizing this fact, even mutual funds are contemplating of entering into this market. Karvy Comtrade Limited is another venture of the prestigious Karvy group. With well established presence in the multifarious facets of the modern Financial services industry from stock broking to registry services, it is indeed a pleasure for them to make foray into the commodities derivatives market which opens yet another door for Karvy to deliver its service to customers and the investor public at large.

The company provides investment, advisory and brokerage services in Indian Commodities Markets. And most importantly, it offers a wide reach through our branch network of over 225 branches located across 180 cities.

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1.2.1. Company Analysis:

Trade from anywhere in India: Karvy, with its network of branches across the length and breadth of the country, gives the facility to trade from anywhere in India.

Reliable research: Karvy has a dedicated team of research analysts who work round the clock to provide the best research newsletters and advices. It provides daily, weekly and monthly reports.

Personalized Services: Karvy has wide array of personalized services from registry to stock broking for commodities broking. Karvy provides personal relationship managers who your manage customer’s portfolio as per the needs.

State of Infrastructure: The strong IT backbone of Karvy helps it to provide customized direct services through its back office system, nation-wide connectivity and website.

Round the clock operations in commodities trading: Indian commodities market, unlike stock market keeps awake till 11 in the night and Karvy offers round the clock services through its dedicated team of professionals.

No.1 in commodities: Karvy stands as a leader in terms of research, volumes, branches, brokerage and clientele.

1.2.2. SWOT Analysis:

Strength No1. in commodities Trade anywhere in India Free Software for trading Personalized Service

Weakness Hampered reputation due to

bad news in market about Karvy

Opportunity Emerging Commodity Market Increase in customer base

Threats New Entrants New Adverse Regulations

from FMC

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1.2.3. Organizational Structure:

1.2.4. Financial Details:

Average daily turnover is approx 300 crores in terms of volumes.* Profit figures not disclosed.

1.2.5. Competitors:The main competitors to Karvy comtrade are:

Religare India Infoline Kotak Commodities Manfinancial

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Chairman

Board Of Directors

Vice President (commodity)

General Manager

Regional Manager

Branch Manager

Sales ManagerRelationship Manager (RM)

Personal Financial Executives (PFE)

Deputy RMsDeputy PFEs

2. Introduction to Commodity Market

2.1. Commodity:

Definition 1: A physical substance, such as food, grains, and metals, which is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts.

Definition2: 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

Defination3: Commodities, in simple words are any goods that are common and unbranded. Eg: Gold, silver, rubber, pepper, jute, wheat, sugar, cotton etc., are some of the common commodities.

Why commodity?

Commodities market essentially represents another kind of organised market just like the stock market and the debt market. However, commodities market, because of its unique nature lends to the benefits of a wide spectrum of people like investors, importers, exporters, producers, corporate etc.,

What can commodities market offer?

If you are an investor, commodities futures represent a good form of investment because of the following reasons..

High Leverage – The margins in the commodity futures market are less than the F&O section of the equity market.

Less Manipulations - Commodities markets, as they are governed by international price movements are less prone to rigging or price manipulations.

Diversification – The returns from commodities market are free from the direct influence of the equity and debt market, which means that

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they are capable of being used as effective hedging instruments providing better diversification.

If you are an importer or an exporter, commodities futures can help you in the following ways…

Hedge against price fluctuations – Wide fluctuations in the prices of import or export products can directly affect your bottom-line as the price at which you import/export is fixed before-hand. Commodity futures help you to procure or sell the commodities at a price decided months before the actual transaction, thereby ironing out any change in prices that happen subsequently.

If you are a producer of a commodity, futures can help you as follows: Lock-in the price for your produce – If you are a farmer, there is every

chance that the price of your produce may come down drastically at the time of harvest. By taking positions in commodity futures you can effectively lock-in the price at which you wish to sell your produce

Assured demand – Any glut in the market can make you wait unendingly for a buyer. Selling commodity futures contract can give you assured demand at the time of harvest.

If you are a large scale consumer of a product, here is how this market can help you:

Control your cost – If you are an industrialist, the raw material cost dictates the final price of your output. Any sudden rise in the price of raw materials can compel you to pass on the hike to your customers and make your products unattractive in the market. By buying commodity futures, you can fix the price of your raw material.

Ensure continuous supply – Any shortfall in the supply of raw materials can stall your production and make you default on your sale obligations. You can avoid this risk by buying a commodity futures contract by which you are assured of supply of a fixed quantity of materials at a pre-decided price at the appointed time.

2.2. Derivatives:

Definition: A commodity derivative derives its value from an underlying asset which is necessarily a commodity.

Types of Instruments in Derivative Market: Forward contract

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Future Contract Swap Contract Option Contract

2.3. Commodity Market:

Definition: Commodity markets represent the formal system for the interplay of demand for and supply of commodities.

These markets can be broadly classified into spot market and futures market. Commodities for immediate delivery are traded through the spot market. The players in the spot market are the actual producers and the consumers of the commodities.

The other type of market called the ‘Futures market’ is for facilitating contracts for future delivery. These markets make available for trading, the various derivatives based on commodities. Usually traded ones are the futures and options. However in India options on commodities are not available and are expected to be introduced soon.

2.3.1. History of Commodity Markets:

When and where exactly the markets began is still a mystery, but the earliest evidence for the commodity market is found in ancient Sumerian culture. In this culture, people traded the commodity goods using small baked clay tokens shaped as sheep or goats as commodity money. The actual trade took place in this way a trader promised to supply a person certain number say 10 goats and sheep. The trader would then put 10 baked tokens of sheep into a sealed clay vessel and hand it over to the person. The number of tokens put was written on the outside along with the date and time of delivery. This sealed vessel was then made official by getting the signature of the authority, who promised to act as a judge for the above mentioned transaction. This sealed clay vessel is the earliest evidenced commodity money, which can be equated on par with the futures contract used in the commodity markets in the modern days. Thus people of this culture had standardized the trade contracts and the delivery of goods to make the trade smooth and predictable.

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2.3.2. International commodity market:

Agricultural products such as wheat, rice, cattle, pigs, corn, etc., were the first commodities to be traded. As the trade increased, it started occurring at a fixed place in the area. In due course of time, this place was called a market. As the time passed, the market grew in time and space. It took the global form. But the name, commodity market remained the same. In this article let us scan through and find where and how the commodity market started and how it grew through the ages.

International commodity exchanges:

Some of the most popular commodity exchanges in the world are listed below:

London Metals Exchange, LondonNew York Mercantile Exchange, New YorkChicago Mercantile Exchange, ChicagoChicago Board of Trade, ChicagoLondon International Financial Futures and Options Exchange (LIFFE), LondonTokyo Commodity Exchange, TokyoWinnipeg Commodity Exchange, Canada

Some of the most popular exchanges around the world are given below along with the major commodities traded:

EXCHANGE MAJOR COMMODITIES TRADED

New York Mercantile Exchange (NYMEX)

Crude Oil, Heating Oil

Chicago Board of Trade Soy Oil, Soy Beans, Corn

London Metals Exchange Aluminum, Copper, Tin, Lead

Chicago Board Option Exchange Options on Energy, Interest rate

Tokyo Commodity Exchange Silver, Gold, Crude oil, Rubber

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Malaysian Derivatives Exchange Rubber, Soy Oil, Palm Oil

2.3.3. Types of players in Commodity Market:

Hedger: Hedger is a user of the market, who enters into futures contract to manage the risk of adverse price fluctuation in respect of his existing or future asset.

Arbitragers: Arbitrage refers to the simultaneous purchase and sale in two markets so that the selling price is higher than the buying price by more than the transaction cost, so that the arbitrageur makes risk-less profit.

Speculators: A trader, who trades or takes position without having exposure in the physical market, with the sole intention of earning profit is a speculator.

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2.4. Commodity Markets in India:

Evolution of the commodity market in India:

Although India has a long history of trade in commodity derivatives, this segment remained underdeveloped due to government intervention in many commodity markets to control prices. The production, supply and distribution of many agricultural commodities are still governed by the state and forwards and futures trading are selectively introduced with stringent controls. While free trade in many commodity items is restricted under the Essential Commodities Act (ECA), 1955, forward and futures contracts are limited to certain commodity items under the Forward Contracts (Regulation) Act (FCRA), 1952.

The first commodity exchange was set up in India by Bombay Cotton Trade Association Ltd., and formal organized futures trading started in cotton in 1875. Subsequently, many exchanges came up in different parts of the country for futures trade in various commodities. The Gujrati Vyapari Mandali came into existence in 1900 which has undertaken futures trade in oilseeds first time in the country. The Calcutta Hessian Exchange Ltd and East India Jute Association Ltd were set up in 1919 and 1927 respectively for futures trade in raw jute. In 1921, futures in cotton were organized in Mumbai under the auspices of East India Cotton Association (EICA). Many exchanges were set up in major agricultural centres in north India before world war broke out and they were mostly engaged in wheat futures until it was prohibited. The existing exchanges in Hapur, Muzaffarnagar, Meerut, Bhatinda, etc were established during this period. The futures trade in spices was first organized by India Pepper and Spices Trade Association (IPSTA) in Cochin in 1957. Futures in gold and silver began in Mumbai in 1920 and continued until it was prohibited by the government by mid-1950s. Options are though permitted now in stock market, they are not allowed in commodities. The commodity options were traded during the pre-independence period. Options on cotton were traded until they along with futures were banned in 1939 (Ministry of Food and Consumer Affairs, 1999). However, the government withdrew the ban on futures with passage of FCRA in 1952. The Act has provided for the establishment and constitution of Forward Markets Commission (FMC) for the purpose of exercising the regulatory powers assigned to it by the Act. Later, futures

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trade was altogether banned by the government in 1966 in order to have control on the movement of prices of many agricultural and essential commodities.

After the ban of futures trade all the exchanges went out of business and many traders started resorting to unofficial and informal trade in futures. On recommendation of the Khusro Committee in 1980 government reintroduced futures on some selected commodities including cotton, jute, potatoes, etc. As part of economic liberalization of 1990s an expert committee on forward markets under the chairmanship of Prof. K.N. Kabra was appointed by the government of India in 1993. Its report submitted in 1994 recommended the reintroduction of futures which were banned in 1966 and also to widen its coverage to many more agricultural commodities and silver. In order to give more thrust on agricultural sector, the National Agricultural Policy 2000 has envisaged external and domestic market reforms and dismantling of all controls and regulations in agricultural commodity markets. It has also proposed to enlarge the coverage of futures markets to minimize the wide fluctuations in commodity prices and for hedging the risk arising from price fluctuations. In line with the proposal many more agricultural commodities are being brought under futures trading.

The Present Status:

Presently future trading is permitted in all the commodities.  Trading is taking place in about 78 commodities through 25 Exchanges/Associations as given in the table below:-

No. Exchange COMMODITY

1. India Pepper & Spice Trade

Association, Kochi (IPSTA)

Pepper (both domestic and

international contracts)

2. Vijai Beopar Chambers Ltd.,

Muzaffarnagar

Gur, Mustard seed

3. Rajdhani Oils & Oilseeds Exchange

Ltd., Delhi

Gur, Mustard seed its oil &

oilcake

4. Bhatinda Om & Oil Exchange Ltd., Gur

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Bhatinda

5. The Chamber of Commerce, Hapur Gur, Potatoes and Mustard

seed

6. The Meerut Agro Commodities

Exchange Ltd., Meerut

Gur

7. The Bombay Commodity Exchange

Ltd., Mumbai

Oilseed Complex, Castor oil

international contracts

8. Rajkot Seeds, Oil & Bullion

Merchants Association, Rajkot

Castor seed, Groundnut, its

oil & cake, cottonseed, its oil

& cake, cotton (kapas) and

RBD palmolein.

9. The Ahmedabad Commodity

Exchange, Ahmedabad

Castorseed, cottonseed, its

oil and oilcake

10. The East India Jute & Hessian

Exchange Ltd., Calcutta

Hessian & Sacking

11. The East India Cotton Association

Ltd., Mumbai

Cotton

12. The Spices & Oilseeds Exchange Ltd.,

Sangli.

Turmeric

13. National Board of Trade, Indore Soya seed, Soyaoil and Soya

meals,

Rapeseed/Mustardseed its oil

and oilcake  and RBD

Palmolien

14. The First Commodities Exchange of

India Ltd., Kochi

Copra/coconut, its oil &

oilcake

15. Central India Commercial Exchange

Ltd., Gwalior

Gur and Mustard seed

16. E-sugar India Ltd., Mumbai Sugar

17. National Multi-Commodity Exchange Several Commodities

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of India Ltd., Ahmedabad

18. Coffee Futures Exchange India Ltd.,

Bangalore

Coffee

19. Surendranagar Cotton Oil & Oilseeds,

Surendranagar

Cotton, Cottonseed, Kapas

20. E-Commodities Ltd., New Delhi Sugar (trading yet to

commence)

21. National Commodity & Derivatives,

Exchange Ltd., Mumbai

Several Commodities

22. Multi Commodity Exchange Ltd.,

Mumbai

Several Commodities

23. Bikaner commodity Exchange Ltd.,

Bikaner

Mustard seeds its oil &

oilcake, Gram. Guar seed.

Guar Gum

24. Haryana Commodities Ltd., Hissar Mustard seed complex

25. Bullion Association Ltd., Jaipur Mustard seed Complex

Futures trading perform two important functions of price discovery and price risk management with reference to the given commodity. It is useful to all segments of the economy. It is useful to the producer because he can get an idea of the price likely to prevail at a future point of time and therefore can decide between various competing commodities, the best that suits him. It enables the consumer, in that 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 and also cover his purchases by making forward contracts. A future trading is very useful to the exporters as it provides an advance indication of the price likely to prevail and thereby help the exporter in quoting a realistic price and thereby secure export contract in a competitive market. Having entered into an export contract, it enables him to hedge his risk by operating in futures market.

Forward/futures trading involve a passage of time between entering into a contract and its performance making thereby the contracts susceptible to risks, uncertainties, etc. Hence there is a need for the regulatory functions

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to be exercised by an exchange that is the Forward Markets Commission (FMC).

Forward Markets Commission (FMC) headquartered at Mumbai, is a regulatory authority which is overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952.

Exchange is an association of members which provides all organizational support for carrying out futures trading in a formal environment. These exchanges are managed by the Board of Directors which is composed primarily of the members of the association. There are also representatives of the government and public nominated by the Forward Markets Commission. The majority of members of the Board have been chosen from among the members of the Association who have trading and business interest in the exchange. The Board is assisted by the chief executive officer and his team in day-to-day administration.

2.4.1. National Exchanges

In enhancing the institutional capabilities for futures trading the idea of setting up of National Commodity Exchange(s) has been pursued since 1999. Three such Exchanges, viz, National Multi-Commodity Exchange of India Ltd., (NMCE), Ahmedabad, National Commodity & Derivatives Exchange  (NCDEX), Mumbai,  and Multi Commodity Exchange (MCX), Mumbai have  become operational.  “National Status” implies that these exchanges would be automatically permitted to conduct futures trading in all commodities subject to clearance of byelaws and contract specifications by the FMC.  While the NMCE, Ahmedabad commenced futures trading in November 2002, MCX and NCDEX, Mumbai commenced operations in October/ December 2003 respectively.

MCX MCX (Multi Commodity Exchange of India Ltd.) an independent and de-mutulised multi commodity exchange has permanent recognition from Government of India for facilitating online trading, clearing and settlement operations for commodity futures markets across the country.

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Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank Of India, Bank Of Baroda, Canara Bank, Corporation Bank.

Headquartered in Mumbai, MCX is led by an expert management team with deep domain knowledge of the commodity futures markets. Today MCX is offering spectacular growth opportunities and advantages to a large cross section of the participants including Producers / Processors, Traders, Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives, Industry Associations, amongst others MCX being nation-wide commodity exchange, offering multiple commodities for trading with wide reach and penetration and robust infrastructure.

MCX, having a permanent recognition from the Government of India, is an independent and demutualised multi commodity Exchange. MCX, a state-of-the-art nationwide, digital Exchange, facilitates online trading, clearing and settlement operations for a commodities futures trading.

NMCE

National Multi Commodity Exchange of India Ltd. (NMCE) was promoted by 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 Limited (NOL). While various integral aspects of commodity economy, viz., warehousing, cooperatives, private and public sector marketing of agricultural commodities, research and training were adequately addressed in structuring the Exchange, finance was still a vital missing link. Punjab National Bank (PNB) took equity of the Exchange to establish that linkage. Even today, NMCE is the only Exchange in India to have such investment and technical support from the commodity relevant institutions.

NMCE facilitates electronic derivatives trading through robust and tested trading platform, Derivative Trading Settlement System (DTSS), provided by CMC. It has robust delivery mechanism making it the most

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suitable for the participants in the physical commodity markets. It has also established fair and transparent rule-based procedures and demonstrated total commitment towards eliminating any conflicts of interest. It is the only Commodity Exchange in the world to have received ISO 9001:2000 certification from British Standard Institutions (BSI). NMCE was the first commodity exchange to provide trading facility through internet, through Virtual Private Network (VPN).

NMCE follows best international risk management practices. The contracts are marked to market on daily basis. The system of upfront margining based on Value at Risk is followed to ensure financial security of the market. In the event of high volatility in the prices, special intra-day clearing and settlement is held. NMCE was the first to initiate process of dematerialization and electronic transfer of warehoused commodity stocks. The unique strength of NMCE is its settlements via a Delivery Backed System, an imperative in the commodity trading business. These deliveries are executed through a sound and reliable Warehouse Receipt System, leading to guaranteed clearing and settlement.

NCDEX National Commodity and Derivatives Exchange Ltd (NCDEX) is a technology driven commodity exchange. It is a public limited company registered under the Companies Act, 1956 with the Registrar of Companies, Maharashtra in Mumbai on April 23,2003. It has an independent Board of Directors and professionals not having any vested interest in commodity markets. It has been launched to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. Forward Markets Commission regulates NCDEX in respect of futures trading in commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations, which impinge on its working. It is located in Mumbai and offers facilities to its members in more than 390 centers throughout India. The reach will gradually be expanded to more centers.

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NCDEX currently facilitates trading of thirty six commodities - Cashew, Castor Seed, Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry Green Cocoons, Pepper, Rapeseed - Mustard Seed ,Raw Jute, RBD Palmolein, Refined Soy Oil, Rice, Rubber, Sesame Seeds,  Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow Soybean Meal.

In case of commodity the quality of the asset underlying a contract cab vary largely. This becomes an important issue to b managed. We will have a brief look at this issue:

Domestic Exchanges Market Share:

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Terminology:

Physical settlement Physical settlement involves the physical delivery of the underlying commodity, typically at an accredited warehouse. The seller intending to make delivery would have to take the commodities to the designated warehouse and the buyer intending to take delivery would have to go to the designated warehouse and pick up the commodity. This may sound simple, but the physical settlement of commodities is a complex process. The issues faced in physical settlement are enormous. They are:- Limits on storage facilities in different states. Restrictions on interstate movement of commodities. State level octroi and duties have an impact on the cost of movement of

goods across locations. The process of taking physical delivery in commodities is quite different from the process of taking physical delivery in financial assets. We take a general overview at the process flow of physical settlement of commodities.

Delivery notice period Unlike in the case of equity futures, typically a seller of commodity futures has the option to give notice of delivery. This option is given during a period identified as `delivery notice period'. The intention of the notice is to allow verification of delivery and to give adequate notice to the buyer of a possible requirement to take delivery. These are required by virtue of the fact that the actual physical settlement of commodities requires preparation from both delivering and receiving members.

Typically, in all commodity exchanges, delivery notice is required to be supported by a warehouse receipt. The warehouse receipt is the proof for the quantity and quality of commodities being delivered. Some exchanges have certified laboratories for verifying the quality of goods. In these exchanges the seller has to produce a verification report from these laboratories along with delivery notice. Some exchanges like LIFFE, accept warehouse receipts as quality verification documents while others like BMF-Brazil have independent grading and classification agency to verify the quality.

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Assignment Whenever delivery notices are given by the seller, the clearing house of the exchange identifies the buyer to whom this notice may be assigned. Exchanges follow different practices for the assignment process. One approach is to display the delivery notice and allow buyers wishing to take delivery to bid for taking delivery. Among the international exchanges, BMF, CBOT and CME display delivery notices. Alternatively, the clearing houses may assign deliveries to buyers on some basis. Exchanges such as COMMEX and the Indian commodities exchanges have adopted this method.

Any seller/ buyer who has given intention to deliver/ been assigned a delivery has an option to square off positions till the market close of the day of delivery notice. After the close of trading, exchanges assign the delivery intentions to open long positions. Assignment is done typically either on random basis or first-in-first out basis. In some exchanges, the buyer has the option to give his preference for delivery location. The clearing house decides on the daily delivery order rate at which delivery will be settled. Delivery rate depends on the spot rate of the underlying adjusted for discount/ premium for quality and freight costs. The discount/ premium for quality and freight costs are published by the clearing house before introduction of the contract. The most active spot market is normally taken as the benchmark for deciding spot prices. Alternatively, the delivery rate is determined based on the previous day closing rate for the contract or the closing rate for the day.

Delivery After the assignment process, clearing house/ exchange issues a delivery order to the buyer. The exchange also informs the respective warehouse about the identity of the buyer. The buyer is required to deposit a certain percentage of the contract amount with the clearing house as margin against the warehouse receipt. The period available for the buyer to take physical delivery is stipulated by the exchange. Buyer or his authorised representative in the presence of seller or his representative takes the physical stocks against the delivery order. Proof of physical delivery having been effected is forwarded by the seller to the clearing house and the invoice amount is credited to the seller's account. In India if a seller does not give notice of delivery then at the expiry of the contract the positions are cash settled by price difference exactly as in cash settled equity futures contracts.

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Warehousing One of the main differences between financial and commodity derivatives are the need for warehousing. In case of most exchange-traded financial derivatives, all the positions are cash settled. Cash settlement involves paying up the difference in prices between the time the contract was entered into and the time the contract was closed. In case of commodity derivatives however, there is a possibility of physical settlement. Which means that if the seller chooses to hand over the commodity instead of the difference in cash, the buyer must take physical delivery of the underlying asset. This requires the exchange to make an arrangement with warehouses to handle the settlements. The efficacy of the commodities settlements depends on the warehousing system available. Most international commodity exchanges used certified warehouses (CWH) for the purpose of handling physical settlements. Such CWH are required to provide storage facilities for participants in the commodities markets and to certify the quantity and quality of the underlying commodity. In India, the warehousing system is not as efficient as it is in some of the other developed markets.

Quality of underlying assets A derivatives contract is written on a given underlying. Variance in quality is not an issue in case of financial derivatives as the physical attribute is missing. When the underlying asset is a commodity, the quality of the underlying asset is of prime importance. There may be quite some variation in the quality of what is available in the marketplace. When the asset is specified, it is therefore important that the exchange stipulate the grade or grades of the commodity that are acceptable. Commodity derivatives demand good standards and quality assurance/ certification procedures. A good grading system allows commodities to be traded by specification. Currently there are various agencies that are responsible for specifying grades for commodities. For example, the Bureau of Indian Standards (BIS) under Ministry of Consumer Affairs specifies standards for processed agricultural commodities whereas AGMARK under the department of rural development under Ministry of Agriculture is responsible for promulgating standards for basic agricultural commodities. Apart from these, there are other agencies like EIA, which specify standards for export oriented commodities.

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2.4.2. The NCDEX Platform:

Structure of NCDEX:

Promoters: A consortium of institutions promotes NCDEX. These include the ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). Punjab National Bank (PNB), CRISIL Limited (formerly the Credit Rating Information Services of India Limited), Indian Farmers Fertiliser Cooperative Limited (IFFCO)  and  Canara Bank    by subsciribing to the equity shares have joined the initial promoters as shareholders of the Exchange. NCDEX is the only commodity exchange in the country promoted by national level institutions. This unique parentage enables it to offer a variety of benefits which are currently in short supply in the commodity markets. The four institutional promoters of NCDEX are prominent players in their respective fields and bring with them institution building experience, trust, nationwide reach, technology and risk management skills.

Governance: NCDEX is run by an independent Board of Directors. Promoters do not participate in the day-to-day activities of the exchange. The directors are appointed in accordance with the provisions of the Articles of Association of the company. The board is responsible for managing and regulating all the operations of the exchange and commodities transactions. It formulates the rules and regulations related to the operations of the exchange. Board appoints an executive committee and other committees for the purpose of managing activities of the exchange. The executive committee consists of Managing Director of the exchange who would be acting as the Chief Executive of the exchange, and also other members appointed by the board. Apart from the executive committee the board has constitute committee like Membership committee, Audit Committee, Risk Committee, Nomination Committee, Compensation Committee and Business Strategy Committee, which, help the Board in policy formulation.

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Exchange membership: Membership of NCDEX is open to any person, association of persons, partnerships, co-operative societies, companies etc. that fulfills the eligibility criteria set by the exchange. All the members of the exchange have to register themselves with the competent authority before commencing their operations. The members of NCDEX fall into two categories.

Trading cum clearing members (TCMs)

NCDEX invites applications for (TCMs) from persons who fulfill the specified eligibility criteria for trading in commodities. The TCM membership entitles the members to trade and clear, both for themselves and/ or on behalf of their clients. Applicants accepted for admission as TCM are required to satisfy the following:Particulars (Rupees in Lakh)

1) Interest free cash security deposit 15.002) Collateral Security deposit 15.003) Annual subscription charges 0.504) Advance minimum transaction charges 0.505) Net worth requirement 50.00

Professional clearing members (PCMs)

NCDEX also invites applications for Professional Clearing Membership (PCMs) from persons who fulfill the specified eligibility criteria for trading in commodities. The PCM membership entitles the members to clear trades executed through Trading cum Clearing Members (TCMs), both for themselves and/ or on behalf of their clients. Applicants accepted for admission as PCMs are required to satisfy the following:Particulars (Rupees in Lakh)

1) Interest free cash security deposit 25.002) Collateral security deposit 25.003) Annual subscription charges 1.004) Advance minimum transaction charges 1.005) Net worth requirement 5000.00

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Capital requirements

NCDEX has specified capital requirements for its members. On approval as a member of NCDEX, the member has to deposit Base Minimum Capital (BMC) with the exchange. Base Minimum Capital comprises of the following:1. Interest free cash security deposit2. Collateral security depositAll Members have to comply with the security deposit requirement before the activation of their trading terminal. Members can opt to meet the security deposit requirement by way of the following:

Cash: This can be deposited by issuing a cheque/ demand draft payable at Mumbai in favour of National Commodity & Derivatives Exchange Limited.

Bank guarantee: Bank guarantee in favour of NCDEX as per the specified format from approved banks. The minimum term of the bank guarantee should be 12 months.

Fixed deposit receipt: Fixed deposit receipts (FDRs) issued by approved banks are accepted. The FDR should be issued for a minimum period of 36 months from any of the approved banks.

Government of India securities: National Securities Clearing Corporation Limited (NSCCL) is the approved custodian for acceptance of Government of India securities. The securities are valued on a daily basis and a haircut of 25% is levied.Members are required to maintain minimum level of security deposit i.e. Rs.15 Lakh in case of TCM and Rs. 25 Lakh in case of PCM at any point of time. If the security deposit falls below the minimum required level, NCDEX may initiate suitable action including withdrawal of trading facilities as given below:

If the security deposit shortage is equal to or greater than Rs. 5 Lakh, the trading facility would be withdrawn with immediate effect.

If the security deposit shortageis less than Rs.5 Lakh the member would be given one calendar weeks’ time to replenish the shortages and if the same is not done within the specified time the trading facility would be withdrawn.Members who wish to increase their limit can do so by bringing in additional capital in the form of cash, bank guarantee, fixed deposit receipts or Government of India securities.

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The System of NCDEX:

Every market transaction consists of three components namely: trading, clearing and settlement. A brief overview of how transactions happen on the market.

Trading

The trading system 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. The trade timings of the NCDEX are 10.00 a.m. to 4.00 p.m. After hours trading has also been proposed for implementation at a later stage. The system supports an order driven market, where orders match automatically. Order matching is essentially on the basis of commodity, its price, time and quantity. 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.

The exchange trades commodity futures contracts having one-month, two-month and three-month expiry cycles. All contracts expire on the 20th of the expiry month. If the 20th of the expiry month is a trading holiday, the contracts shall expire on the previous trading day. New contracts will be introduced on the trading day following the expiry of the near month contract.

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Contract cycle

The figure shows the contract cycle for futures contracts. As can be seen, at any given point of time, three contracts are available for trading - a near-month, a middle-month and a far-month. As the January contract expires on the 20th of the month, a new three-month contract starts trading from the following day, once more making available three index futures contracts for trading.

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Types of Order:

An electronic trading system allows the trading members to enter orders with various conditions attached to them as per their requirements. These conditions are broadly divided into the following categories:

Time conditions Price conditions Other conditions

Time conditions:

Good till day order: A day order, as the name suggests is an order which is valid for the day on which it is entered. If the order is not executed during the day, the system cancels the order automatically at the end of the day.

Good till cancelled (GTC): A GTC order remains in the system until the user cancels it.

Consequently, it spans trading days, if not traded on the day the order is entered. The maximum number of days an order can remain in the system is notified by the exchange from time to time after which the order is automatically cancelled by the system. The GTC order on the exchange is cancelled at the end of a period of seven calendar days from the date of entering an order or when the contract expires, whichever is earlier.

Good till date (GTD): A GTD order allows the user to specify the date till which the order should remain in the system if not executed. The maximum days allowed by the system are the same as in GTC order. At the end of this day/ date, the order is cancelled from the system.

Immediate or Cancel (IOC): An IOC order allows the user to buy or sell a contract as soon as the order is released into the system, failing which the order is cancelled from the system. Partial match is possible for the order, and the unmatched portion of the order is cancelled immediately.

All or none order: All or none order (AON) is a limit order, which is to be executed in its entirety, or not at all.

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Fill or kill order: This order is a limit order that is placed to be executed immediately and if the order is unable to be filled immediately, it gets cancelled.

Price conditions:

Limit order: An order to buy or sell a stated amount of a commodity at a specified price, or at a better price, if obtainable at the time of execution. The disadvantage is that the order may not get filled at all if the price for that day does not reach the specified price.

Stop-loss: A stop-loss order is an order, placed with the broker, to buy or sell a particular futures contract at the market price if and when the price reaches a specified level. Futures traders often use stop orders in an effort to limit the amount of loss if the futures price moves against their position. Stop orders are not executed until the price reaches the specified point. When the price reaches that point the stop order becomes a market order. A buy stop order is initiated when one wants to buy a contract or go long and a sell stop order when one wants to sell or go short. For the stop-loss sell order, the trigger price has to be greater than the limit price.

Other conditions:

Market price: Market orders are orders for which no price is specified at the time the order is entered (i.e. price is market price). For such orders, the system determines the price. Only the position to be taken long/ short is stated.

Market on open: The order will be executed on the market open within the opening range. This trade is used to enter a new trade, or exit an open trade.

Market on close: The order will be executed on the market close. The fill price will be within the closing range, which may, in some markets, be substantially different from the settlement price. This trade is also used to enter a new trade, or exit an open trade.

Trigger price: Price at which an order gets triggered from the stop-loss book.

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Limit price: Price of the orders after triggering from stop-loss book.

Spread order: A simple spread order involves two positions, one long and one short. They are taken in the same commodity with different months or in closely related commodities. Prices of the two futures contract therefore tend to go up and down together, and gains on one side of the spread are offset by losses on the other. The spreaders goal is to profit from a change in the difference between the two futures prices.

One cancels the other order: An order placed so as to take advantage of price movement, which consists of both a stop and a limit price. Once one level is reached, one half of the order will be executed (either stop or limit) and the remaining order cancelled (either limit or stop). This type of order would close the position if the market moved to either the stop rate or the limit rate, thereby closing the trade and at the same time, cancelling the other entry order.

Trading parameters:

Tick size for contracts The tick size is the smallest price change that can occur for the trades on the exchange. The tick size in respect of all futures contracts admitted to dealings on the NCDEX is 5 paise.

Quantity freeze Orders placed have to be within the quantity specified by the exchange regard. Any order exceeding this specified quantity will not be executed but will lie pending with the exchange as a quantity freeze. In respect of orders which have come under quantity freeze, the member is required to confirm to the exchange that there is no inadvertent error in the order entry and that the order is genuine. On such confirmation, the exchange can approve such order. However, in exceptional cases, the exchange may, at its discretion, not allow the orders that have come under quantity freeze for execution.

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Margins for trading in futures Margin is the deposit money that needs to be paid to buy or sell each contract. The margin levels are set by the exchanges based on volatility (market conditions) and can be changed at any time. The margin requirements for most futures contracts range from 2% to 15% of the value of the contract.

Charges Members are liable to pay transaction charges for the trade done through the exchange during the previous month. The transaction charges are payable at the rate of Rs.6 per Rs.one Lakh trade done. This rate is subject to change from time to time. The transaction charges are payable on the 7th day from the date of the bill every month in respect of the trade done in the previous month.

Pricing commodity futures:

Commodity futures began trading on the NCDEX from the 14th December 2003. The market is still in its nascent phase, however the volumes and open interest on the various contracts trading in this market have been steadily growing.

The process of arriving at a figure at which a person buys and another sells a futures contract for a specific expiration date is called price discovery. In an active futures market, the process of price discovery continues from the market's opening until its close. The prices are freely and competitively derived. Future prices are therefore considered to be superior to the administered prices or the prices that are determined privately. Further, the low transaction costs and frequent trading encourages wide participation in futures markets lessening the opportunity for control by a few buyers and sellers.

In an active futures markets the free flow of information is vital. Futures exchanges act as a focal point for the collection and dissemination of statistics on supplies, transportation, storage, purchases, exports, imports, currency values, interest rates and other pertinent information. Any significant change in this data is immediately reflected in the trading pits as traders digest the new information and adjust their bids and offers accordingly. As a result of this free flow of information the market

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determines the best estimate of today and tomorrow's prices and it is considered to be the accurate reflection of the supply and demand for the underlying commodity. The cost-of-carry model explains the dynamics of pricing that constitute the estimation of fair value of futures.

The cost of carry model We use arbitrage arguments to arrive at the fair value of futures. For pricing purposes, we treat the forward and the futures market as one and the same. A futures contract is nothing but a forward contract that is exchange traded and that is settled at the end of each day. The buyer who needs an asset in the future has the choice between buying the underlying asset today in the spot market and holding it, or buying it in the forward market. If he buys it in the spot market today, it involves opportunity costs. He incurs the cash outlay for buying the asset and he also incurs costs for storing it. If instead he buys the asset in the forward market, he does not incur an initial outlay. However the costs of holding the asset are now incurred by the seller of the forward contract who charges the buyer a price that is higher than the price of the asset in the spot market. This forms the basis for the cost-of-carry model where the price of the futures contract is defined as:

F= S + C eq(1)Where: F = Futures price S = Spot price C = Holding costs or carry costsThe fair value of a futures contract can also be expressed as:F = S(1 + r)T eq(2)Where: r = Percent cost of financing T = Time till expiration Whenever the futures price moves away from the fair value, there would be opportunities for arbitrage. If F < (1 + r)T or F > (1 + r)T , arbitrage would exist. In the case of commodity futures, the holding cost is the cost of financing plus cost of storage and insurance purchased. In the case of equity futures, the holding cost is the cost of financing minus the dividends returns.Equation 2 uses the concept of discrete compounding, where interest rates are compounded at discrete intervals, for example, annually or semiannually. Pricing of continuously compounded interest rates is expressed as:F = SerT eq (3)Where: r = Cost of financing (using continuously compounded interest rate) T = Time till expiration e = 2.71828

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The above equations provides for pricing futures in general.

Investment assets An investment asset is an asset that is held for investment purposes by most investors. Stocks and bonds are examples of investment assets. Gold and silver are also examples of investment assets. Note however that investment assets do not always have to be held exclusively for investment. However, to classify as investment assets, these assets do have to satisfy the requirement that they are held by a large number of investors solely for investment. we can use arbitrage arguments to determine the futures prices of an investment asset from its spot price and other observable market variables.

Pricing futures contracts on investment commodities In above equations the storage costs is ignored. The table bellow gives the indicative warehouse charges for accredited warehouses/ vaults that will function as delivery centres for contracts that trade on the NCDEX. Warehouse charges include a fixed charge per deposit of commodity into the warehouse, and a per unit per week charge. The per unit charges include storage costs and insurance charges. We saw that in the absence of storage costs, the futures price of a commodity that is an investment asset is given by F = SerT. Storage costs add to the cost of carry. If U is the present value of all the storage costs that will be incurred during the life of a futures contract, it follows that the futures price will be equal toF = (S + U)erT eq(4)Where: r = Cost of financing (annualised) T = Time till expiration U = Present value of all storage costs

Consumption assets A consumption asset is an asset that is held primarily for consumption. It is not usually held for investment. Examples of consumption assets are commodities such as copper, oil, and pork bellies. For pricing consumption assets, we need to review the arbitrage arguments a little differently. We consider the cost-of-carry model and the pricing of futures contracts on investment assets to determine the price of consumption assets.

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Pricing futures contracts on consumption commodities: The arbitrage argument is used to price futures on investment commodities. For commodities that are consumption commodities rather than investment assets, the arbitrage arguments used to determine futures prices need to be reviewed carefully. Suppose we haveF > (S + U)erT eq(5)To take advantage of this opportunity, an arbitrager can implement the following strategy:1. Borrow an amount S + U at the risk-free interest rate and use it to purchase one unit of the commodity and pay storage costs.2. Short a forward contract on one unit of the commodity.If we regard the futures contract as a forward contract, this strategy leads to a profit of F- (S + U)erT at the expiration of the futures contract. As arbitragers exploit this opportunity, the spot price will increase and the futures price will decrease until Equation 5 does not hold good.Suppose next thatF < (S + U)erT eq(6) In case of investment assets such as gold and silver, many investors hold the commodity purely for investment. When they observe the inequality in equation 6, they will find it profitable to trade in the following manner:1. Sell the commodity, save the storage costs, and invest the proceeds at the risk-free interest rate.2. Take a long position in a forward contract.This would result in a profit at maturity of (S + U)erT - F relative to the position that the investors would have been in had they held the underlying commodity. As arbitragers exploit this opportunity, the spot price will decrease and the futures price will increase until equation 6 does not hold good. This means that for investment assets, equation 4 holds good. However, for commodities like cotton or wheat that are held for consumption purpose, this argument cannot be used. Individuals and companies, who keep such a commodity in inventory, do so, because of its consumption value - not because of its value as an investment. They are reluctant to sell these commodities and buy forward or futures contracts because these contracts cannot be consumed. Therefore there is unlikely to be arbitrage when equation 6 holds good. In short, for a consumption commodity therefore, F <= (S + U)erT eq(7)That is the futures price is less than or equal to the spot price plus the cost of carry.

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Convergence of Future and Spot Price:

The figure shows how basis changes over time. As the time to expiration of a contract reduces, the basis reduces. Towards the close of trading on the day of settlement, the futures price and the spot price converge. The closing price for the April gold futures contract is the closing value of gold in the spot market on that day.

Turnover on Commodity Future Market:

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2.5. Exchanges: International and Domestic

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3. Silver

Silver is a soft white precious univalent metallic element that is highly ductile and malleable having the highest electrical and thermal conductivity of any metal. It is found in the metallic state and also in a large amount of minerals mainly in argentite and in a free form. That is why it is called argentum in Latin.

Silver is one of the oldest found metals on earth and it had been used since 4th millennium B.C. Old books indicate that at that time it was extracted from lead. First attempt to mine silver is said to be have been made around 3000 BC in the areas of Anatolia. A process, ”culpellation” was found out in order to extract silver from silver ores around 2500BC. This led to the discovery of more silver mines around the world.Used in coins and jewelry and tableware and photography. It was used as currency in many civilizations. Silver coin as a currency was first introduced in the eastern Mediterranean in 550 B.C. It started gaining popularity as a medium of exchange since then. The discovery of the American countries marked an important twist in the history of silver as the major silver mines in Mexico, Peru and Bolivia were found.

Silver is a metal that is associated with metals like gold, lead, zinc and copper, though it’s unusual properties makes it very different from them. It is used in making various kinds of jewelry, as it is considered as a precious metal second to gold but its contribution in the various industrial sectors as a raw material makes it unmatchable. No other metal can replace silver as it has an endless number of uses.

There have been important technological improvements till now, which have resulted in the increased production of silver and have made it an unmatchable commodity.

Demand for silver is built on three main pillars; industrial uses, photography and jewelry & silverware. Together, these three categories represent more than 95 percent of annual silver consumption.Today, the demands of modern technology have revealed the remarkable range of electrical, mechanical, optical, and medicinal properties that have placed silver as the key metal in many applications.

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Basic Information:

Symbol: AgMass: 107.868Density @ 293 K: 10.5 g/cm3Melting Point: 961.93 C (1235.1 K)Boiling Point: 2212 C (2428 K)Classification: Transition MetalCrystal Structure: Face-centered CubicColor: silverCharacteristics: soft, ductile, tarnishes

3.1. Supply/demand for silver:

Silver Supply Dynamics:

Like all metals or precisely precious metals, silver cannot be created. It occurs naturally. The source of silver are mine production, government’s central bank reserves (which is also termed as above ground supply of silver) and recycled scrap. Delay, interrupt or reduction in any one of these supply sources result into big market price hikes, as daily demand for silver bullion begins to surpass supply.

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Mine production of silver is the largest component of silver supply. It can be seen that mine production accounts for nearly 72 % of silver supply. Other sources of silver being scrap and sales by government bodies also play their role in meeting the ever-increasing demand of silver. Government sales are most done to stabilize the price of silver or in crisis situations like war or natural disasters. The detailed trend analysis of the various source of silver will facilitate in predicting the future movement of silver production and its repercussions.

World supply for Silver:

When considering the supply of silver from mines it is very important to have a look at the break up of the various source metal mines and their contribution in silver supply. Around 30% of silver comes from mines where the main source of revenue is silver. Such mines are called primary silver mines. This is important as price of silver will have impact on primary output, which means that amount of silver mined is more a function of the price of other source metals.

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Supply from above the ground constitute of Scrap and Government sales. Together they constitute of around 25% of silver supply. Scrap is recovered from industrial waste or existing goods such as photographic chemicals, jewellery, discarded electronic goods such as computers etc.

Disinvestments and government sales comprise of old coins and bars of silver that return to market. Another minor component of supply of silver is producer hedging or early sale one by mining companies of future production by entering into forward contracts. This is done to hedge against the price and quantity risk associated with silver. Like hedging there can also be de-hedging and the effect on supply will be on net basis.

The analysis of literature and statistics of various sources of supply of silver give positive picture for the silver supply but the deficit between the supply and demand is expected to stay and the repercussions of this deficit would be felt only when the inventories fall to zero.

Silver Demand Dynamics:

Demand of silver has three main components namely; Jewellery & Silver are, Industrial Fabrication, Photographic Fabrication.

Another minor component is Coins and medals. Other avenues of demand that are on rise are government purchases and investment. These two are taken on net basis, as there can be government sales and disinvestments of silver also. Since 1992 net purchases by government are not significant but the role of investments in silver has seen dramatic changes. Silver investment is the reason for the recent rally of silver prices.

Silver demand is governed by various application of silver. Sale of the goods in which silver is used like silver batteries; tableware, etc determine the demand of silver in the market. Events like declaration of decline in sales of analog cameras affect the prices of silver. New applications of silver like in medicine and RFID tags used by retail stores also affect the demand and price dynamics of silver.

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Most of the industrial applications of silver, the demand is price inelastic as there it is required in minute quantities where as the demand of silver in jewellery is highly price sensitive.

World demand for silver:

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3.2. Global scenario for Silver:

Silver producing countries:

The below-mentioned figures are the silver production figures of the countries. Clearly, Mexico leads the list of silver producing countries. It contributes to about 15% of the world’s total production. Already mentioned, only 25% of the world’s total production (i.e. 615 million ounces) comes from the primary silver mines and the rest from other sources like refining of other metals and also from scrap recycling. World silver survey done in 1998 depicts that around 152.2 million ounces of silver was separated from the waste for recycling purposes. This percentage of separated silver has improved due to advanced methods of separation. United States is the major silver producing country through scrap and waste followed by Japan.

Mexico (99 million ounces)

Peru (98.4 million ounces)

Australia (71.9 million ounces)

China (63.8 million ounces)

Poland (43.8 million ounces)

Chile (42.8 million ounces)

Canada (40.6 million ounces)

United States (40.2 million ounces)

Russia (37.9 million ounces)

Kazakhstan (20.6 million ounces)

Bolivia (13.1 million ounces)

Sweden (9.4 million ounces)

Indonesia (8.6 million ounces)

Morocco (6.3 million ounces)

Argentina (5 million ounces)

Turkey (3.7 million ounces)

South Africa (3.2 million ounces)

Iran (2.6 million ounces)

Japan (2.4 million ounces)

India (2.1 million ounces)

Silver consuming countries:

The Silver is mainly consumed for the industrial uses. The main uses of silver are Batteries,

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Electroplating, Bearings, Jewellery and Silverware, Brazing and Soldering, Medical Applications, Catalysts Mirrors and Coatings, Coins Photography, Electrical Solar Energy, Electronics Water Purification.

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The countries that are the major consumers of silver are: - 

United states Canada Mexico United Kingdom France Germany Italy Japan India

Grading of Silver:

Silver that is found with some percentage of other elements in it is called impure silver. That is why it is graded upon its fineness. According to the Indian standards, silver is graded into six categories

Grade 9999 9995 999 970 925 916Fineness 999.9 999.5 999 970 925 916

World Markets: London Bullion Market is the global hub of

OTC (Over-The-Counter) trading in silver. Comex futures in New York is where most

fund activity is focused

Contract specifications at Comex exchange:

There are two different contracts of Silver traded on this exchange; they are Silver Futures and Silver Mini Futures.

Contract specification for Silver Future:

Trading Symbol: SI

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Trading Unit: 5,000 troy ounces. Price Quotation: U.S. cents per troy ounce.

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Trading Hours (All times are New York time): Open outcry trading is conducted from 8:25 AM until 1:25 PM.

Electronic trading is conducted from 6:00 PM until 5:15 PM via the CME Globex® trading platform, Sunday through Friday. There is a 45-minute break each day between 5:15PM (current trade date) and 6:00 PM (next trade date). Trading Months: Trading is conducted for delivery during the current calendar month; the next two calendar months; any January, March, May, and September falling within a 23-month period; and any July and December falling within a 60-month period beginning with the current month. Minimum Price Fluctuation: Price changes for outright transactions are in multiples of one-half cent (0.5¢ or $0.005) per troy ounce, equivalent to $25.00 per contract. A fluctuation of one cent (1¢ or $0.01) is equivalent to $50.00 per contract. Last Trading Day: Trading terminates at the close of business on the third to last business day of the maturing delivery month. Delivery: Silver delivered against the futures contract must bear a serial number and identifying stamp of a refiner's officially listed brand. Delivery must be must be made from a warehouse or vault licensed or designated by the Exchange specifically for the storage of silver.

Delivery Period:

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The first delivery day is the first business day of the delivery month; the last delivery day is the last business day of the delivery month. Exchange of Futures for Physicals (EFP): The buyer or seller may exchange a futures position for a physical position of equal quantity by submitting a notice to the Exchange. EFPs may be used to either initiate or liquidate a futures position.

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Grade and Quality Specifications: In fulfillment of each contract, the seller must deliver 5,000 troy ounces (±6%) of refined silver, assaying not less than .999 fineness, in cast bars weighing 1,000 or 1,100 troy ounces each and bearing a serial number and identifying stamp of a refiner approved and listed by the Exchange. A list of approved refiners and assayers is available from the Exchange upon request. Position Accountability Levels and Limits:Any one month/all months: 6,000 net futures equivalent, but not to exceed 1,500 in the spot month. Margin Requirements: Margins are required for open futures positions.

Contract specification for Silver Mini Futures:

Trading Symbol: QI

Trading Unit: 2,500 troy ounces Price Quotation: U.S. dollars and cents per ounce. Minimum Price Fluctuation: $0.0125 per ounce. Trading Hours:The contracts are available for trading on the CME Globex® trading platform from 6:00 PM Sundays through 5:15 PM Fridays, Eastern Time, with a 45-minute break each day between 5:15 PM and 6:00 PM. Trading Months:

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Trading is conducted during the same months as the full-sized silver futures contract (SI), except the current month. Last Day of Trading: Trading terminates at the close of business on the third to last business day of the month preceding the named contract month. Settlement: Financial. Margin Requirements: Margins are required for open futures positions. Major trading centers of silver:

London Zurich New York (COMEX) Chicago (CBOT) Hong Kong Tokyo Commodity Exchange (TOCOM)

3.3. Indian scenario for Silver:

India is primarily a silver importing country, as the production of India is not sufficient to satisfy the ever-growing domestic demand. The production of silver in India stands out at the figure of around 2.1 million ounces placing it at the 20th position in the list of major silver producing countries. The import of silver in India hovers over 110 million ounces that shows the huge size of Indian domestic demand.  

However, this import level fell sharply as a result of the decline in demand due to rise in silver prices and inconsistent monsoon on which the income of the rural sector depends. But, even this

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sharp decline could not affect India’s reputation of being one of the largest consumer countries of silver in the world. India stands third after United States and Japan among the leading consumers of silver in the world. By contrast with United States and Japan, Indian industrial off take for fabrication in hardcore industrial applications like electronics and brazing alloys accounts for only 15 % and the rest being for foils for use in the decorative covering of food, plating of jewelry and silverware and jari.

The countries from which India imports silver and maintain the flow of silver in the market are: -

China United Kingdom European Union Australia Dubai

Over 50% share of import of silver in India is held by Chinese silver. The major importing center of silver in India was Mumbai but now it has been shifted to Ahmedabad and Jaipur due to high sales tax and octroi charges.

Production of silver in India:

India hardly produces any silver and is basically a silver importing country. It holds the 20th place in the list of silver producing countries and the total production of silver in India in 2004 was around 2.1 million ounces. The three major silver producing states in India are: -

Rajasthan Gujarat Jharkhand

Rajasthan is the leading silver producing state in India with a production of around 32 thousand

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tons. Gujarat follows on the second place with a production of around 20 thousand tons.

In India, silver is traded at the following places:

Delhi Indore Rajasthan Madhya Pradesh Mathura (Uttar Pradesh) Rajkot (Gujarat)

Also, silver is traded in the Indian commodity exchanges like National Commodity & Derivatives Exchange ltd, Multi Commodity Exchange of India ltd. and National Multi Commodity Exchange of India ltd.

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Silver at MCX:

Though the silver futures are traded on NCDEX and MCX, bigger volumes are traded on MCX. So we will have a look on silver specification on MCX. There are three different types of silver contracts traded on MCX; they are Silver future, Silver HNI Futures and Silver Mini Futures.

Specification of Silver Futures Contract:

Symbol: SILVER

Description: SILVERMMMYY

Contracts available for trading:March contract: 16th March of the previous year to 5th March of the contract yearMay contract: 16th May of the previous year to 5th May of the contract yearJuly contract: 16th July of the previous year to 5th July of the contract yearSeptember contract: 16th September of the previous year to 5th September of the contract yearDecember contract: 16th December of the previous year to 5th December of the contract year

Trading period: Mondays through Saturdays

Trading session:Mondays to Friday: 10.00 a.m. to 11.30 p.m.Saturday: 10.00 a.m. to 2.00 p.m.

Trading unit: 30 kg

Quotation/Base Value: 1 kg

Price Quote:Ex-Ahmedabad (inclusive of all taxes and levies relating to import duty, customs , if applicable but

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excluding Sales Tax / VAT, any other additional tax or surcharge on sales tax, local taxes and octroi.

Maximum order size: 600 kg

Tick size (minimum price movement): Re. 1 per kg

Daily price limit: 4%

Initial margin: 5%

Special Margin:In case of additional volatility, a special margin at such percentage, as deemed fit, will be imposed immediately on both buy and sale side in respect of all outstanding position, which will remain in force for next 2 days, after which the special margin will be relaxed.

Maximum Allowable Open Position: For individual client: 50 MT collectively for all

contracts in Silver (i.e. including Silver M and Silver HNI contracts)

For a member collectively for all clients: 150 MT or 15% of the market-wide open position, whichever is higher.

(As per FMC letter no. 6/3/2006/MKT-II (VOL II) dated August 18, 2006)

Delivery unit: 30 kg

Delivery period margin: 25%

Delivery center(s): Ahmedabad at designated Clearing House facilities.

Quality specifications:Grade: 999 and Fineness: 999 (as per IS 2112: 1981) No negative tolerance on the minimum fineness

shall be permitted. If it is below 999 purity it is rejected.

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It should be serially numbered silver bars supplied by LBMA approved suppliers or other suppliers as may be approved by MCX.

Delivery and Settlement Procedure of Silver:

Last Day of Trading: 5th day of the contract expiry month.

Tender Period: 1st to 6th day of the contract expiry month.

Delivery Period: 1st to 6th day of the contract expiry month.

Buyer’s intention: On 1st, 2nd, 3rd & 4th of the contract expiry month by 6.00 p.m.

Tender Notice by Seller:The seller will issue tender notice along with evidence of delivery to the Exchange in a specified format by 6.00p.m. The seller is also required to submit the certificate issued by the supplier in original.

Dissemination of information on tendered delivery and buyers interest:The Exchange will inform members through Trader Work Station (TWS) regarding tender and delivery intentions of the buyer members and the seller members by 7.00 p.m. on the respective tender days.

Tender and Delivery Period Margin:Tender and Delivery period margin of 25% will be imposed with effect from the beginning of the tender period.

Exemption from Delivery Period Margin:Delivery Period Margin is exempted if goods tendered on designated tender days of the contract

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month and seller submits all the documentary evidence.

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Delivery Logic:Compulsory Delivery. Any seller having open position on the expiry date fails to deliver on the next day then a penalty of 5% shall be imposed out of which 90% will be passed on to the buyer.

Delivery Pay-in:On any tender days by 6.00 p.m.Funds Pay-inT+1 working day by 11.00 a.m. (T stands for tender day).Funds Pay-outT+1 working day by 05.00 p.m.Delivery Pay-out:T+1 working day after completion of pay-in funds.

Mode of Communication: Fax or Courier

Allocation of Delivery:On the respective tender days after the end of the day.

Delivery Order Rate: Settlement/closing price on the date of allocation and the due date rate on expiry date. Buyer’s obligation:The buyer shall not refuse taking delivery and such refusal will entertain 5% penalty out of which 90% of the penalty amount shall be passed on to the seller.10% will be retained by the Exchange.

Close out of outstanding positions:All outstanding positions on the expiry of contract not settled by way of delivery in the aforesaid manner, will be settled as per the due date rate with penalty of 5% and out of which 90% shall be passed on to the buyer.

Verification by the buyer at the time of release of delivery:

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At the time of taking delivery, the buyer can open the sealed packets in front of Group 4 personnel. If he is satisfied with the quantity, weight and quality of material, then he will issue receipt of the metals instantly. If he is not satisfied with the metal, he can insist for assaying by any of the approved assayers available at that center.

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Legal obligation:The members will provide appropriate tax forms wherever required as per law and as customary and neither of the parties will unreasonably refuse to do so.

Duties, Cess and Levies:Ex-Ahmedabad, inclusive of all charges / levies relating to import duty, customs to be borne by Seller. But excluding Sales Tax / VAT, any other additional tax or surcharge on sales tax, local taxes and octroi to be borne by the Buyer.

Vault, Insurance and Transportation charges:Borne by the seller upto Funds Pay-out date.Borne by the buyer after Funds Pay-out date.

Evidence of Stocks in Possession:At the time of issuing the Delivery order, the Member must satisfy MCX that he holds stocks of the quantity and quality specified in the Delivery Order at the declared delivery center by producing warehouse receipt.

Validation Process:On receipt of delivery, the Group 4 personnel will do the following validations:a. whether the person carrying Silver is the designated clearing agent of the member;b. whether the selling member is listed in the statement forwarded by the Exchange as a delivering memberc. whether the quantity being delivered by the seller is exactly the same quantity as communicated by the Exchange;d. whether the serial no of all the bars is mentioned in the seller’s bill;e. whether the original certificates are accompanied with the Silver Bars

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f. whether the serial nos listed in the certificate tally with the nos written inscribed on the barsg. whether the seller has issued individual bills of relevant quantity in favour of each of the buyerAny other validation checks, as they may desire.

Delivery Process:In case any of the above validation fails, the Group 4 Securitas will contact the Exchange office and take any further action, only as per instructions received from the Exchange in writing. If all validations are through, then the Group 4 personnel will put the Silver in bag/s and seal the same in front of the customer with unique tamper-proof seal/s. Then the custodian of Group 4 will cut a serially numbered Group 4 receipt (in triplicate consisting of White, Pink and Yellow slips), get the signature of the seller’s clearing agent and signing the same for authorization, hand over the Pink slip to seller’s clearing agent, send by courier the third copy (Yellow Colour slip) while retaining the White for the records of Group 4 Securitas. The receipt details in full are then entered into the package supplied by MCX and is uploaded to MCX server for authorization and further processing. Group 4 in front of the selling member’s clearing agent deposit the said metal into a bag and seal it with a tamper-proof unique numbered Group 4 seal and give a copy of the same to the customer, send the second one to MCX for its records and third copy of the receipt for its record. The sealed bag will be vaulted in the same condition with Group 4 Securitas until further delivery to MCX customer. Even in case if the metal has to be sent to various destinations, it shall be done in same bag only. Each bag shall not contain not more than 30 kg of Silver and where the depository is more than 30 kg, the same will be stored in multiple bags with each having individual seals with unique number. If the metal delivered by a seller has to go to 10 different buyers, 10 individual packets

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will be made for each buyer and unique numbers will be assigned to each packet.

Quality adjustment:The price of Silver is on the basis of 999 purity.If the quality is less than 999, it is rejected.

Quantity adjustment:The tolerance limit will be +/- 3 kg. The weight of Silver bar must be between 27 kg to 33 kg.

Appointment of Clearing Agent of Buyer’s and Sellers:For the purpose of effecting delivery of Silver, every member will be entitled to appoint a maximum number of two Clearing Agents, who will be entitled to receive and deliver precious metals on behalf of such member. These Clearing members have to submit requisite form, four photographs, a copy of their ration card / driving license or other document, as may be specified by the Exchange. The Exchange will issue a photo identity card for each Clearing Agent, which will be duly signed and stamped by the Exchange and the member with lamination. At the time of giving or receiving delivery of precious metal, the Clearing Agent will be required to show this Card to Group 4 Securitas persons. A list of all such Clearing agents will be forwarded by the Exchange to Group 4 Securitas in advance.

Intimation about the Clearing Agents:On last day of contract maturity, the buyer will be required to inform name of the Clearing agent, who will visit Group 4 Securitas office for lifting delivery. This information will be compiled by the Exchange and will be forwarded to Group 4 Securitas by 12.00 noon on 1st day of the contract maturity month.

Endorsement of Delivery Order:

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The buying member can endorse delivery order to a client or any third party with full disclosure given to MCX. Responsibility for contractual liability would be with the original assignee.

Extension of Delivery Period:As per Exchange decision due to a force majeure or otherwise.

Due Date Rate:Due Date Rate is calculated on 5th day of the contract month. This is calculated by way of taking simple average of last 5 days of the spot market of Ahmedabad.

Applicability of Business Rules:The general provisions of Business Rules and decisions taken by FMC / Board / Executive Committee in respect of matters specified above will apply mutatis mutandis. The Exchange may further prescribe additional measures relating to delivery procedures, warehousing, quality certification, margining, risk management from time to time. In case of any interpretational dispute or clarifications the decision of the Exchange shall be final and binding on the members and others.

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Specification of Silver HNI Futures Contract:

Symbol:SILVER

Description:SILVERHNIMMMYY

Trading unit: 50 kg

Quotation/Base Value: 1 kg

Maximum order size: 600 kg

Tick size (minimum price movement): Re. 1 per kg

Daily price limits: 6%

Initial margin: 5 %

Maximum Allowable Open Position: For individual client: 50 MT collectively for all

contracts in Silver (i.e. including Silver and Silver Mini contracts)

For a member collectively for all clients: 200 MT or 20 % of the market’s open position in a contract at any point of time

Delivery unit: 150 kg

Delivery margin: 25%

Delivery logic: Both Option

Delivery period margin: 25% margin will be imposed during tender and delivery period on both buyers and sellers on matched quantity.

Delivery pay-in: On tender days

Delivery pay-out: E+3 working day by 11.00 a.m. (E stands for expiry date of the contract)

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Pay-in of funds: E+2 working day by 11.00 a.m.

Pay-out of funds: E+3 working day by 11.00 a.m.In case the buyer opts for second sampling, he has to inform the Exchange on E+2 working day by 6.00p.m and in such case the pay-out of funds will be released only after completion of sampling procedure.

Specification of Silver Mini Futures Contract:

Symbol: SILVERM

Description: SILVERM MMMYY

Trading unit: 5 kg

Quotation/Base Value: 1 kg

Maximum order size: 600 kg

Tick size (minimum price movement): Re. 1 per kg

Daily price limits: 4%

Initial margin: 5%

Maximum Allowable Open Position For individual client: 50 MT collectively for all

contracts in Silver (i.e. including Silver and Silver HNI contracts)

For a member collectively for all clients: 150 MT or 15% of the market-wide open position, whichever is higher.

(As per FMC letter no. 6/3/2006/MKT-II (VOL II) dated August 18, 2006)

Delivery unit: 30 kg

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Delivery center(s): Office of Group 4 Securitas at Ahmedabad.

Delivery logic: Both Option

Delivery period margin;25% margin will be imposed during tender and delivery period on both buyers and sellers on matched quantity.

Exemption from delivery period margin:Delivery period margin is exempted if the Seller provides with documentary evidence of the delivery at the Exchange’s designated delivery center.

Delivery allocation:- Date- RateOn expiry date of the ContractAt due date rate (DDR)

Delivery pay-in: On tender days

Delivery pay-out: E+3 working day by 11.00 a.m.

Pay-in of funds: E+2 working day by 11.00 a.m.

Pay-out of funds: E+3 working day by 11.00 a.m.

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Factors influencing the price of Silver:

Demand – Supply Price movements of other metals Income level of the rural sector of the

economy Fluctuation in deficits and interest rates Inflation Monsoon, Agricultural output

Currency fluctuation

Biggest Price Movement since 1995

Between February 4 - 6, 1998, daily prices rocketed by 22.3%, based on a noted US financier had

accumulated nearly 130 ounces of physical silver. Note: Post September 1999 daily silver prices have

shown more than 5% movement not once and weekly silver prices only once.

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3.4. Outlook on Silver:

The price of silver has shown a downward trend in last few weeks. The various reasons for the same are: The decisions of interest rates in US and its focus

on inflation rate due to which investors began to move away from the precious metals segment into treasuries

Lower industrial demand in the India Price fluctuation of gold The sliding demand of photography industry due

to the growing demand of digital world.

Buts still there is a bullish sentiment awaiting for silver for the following reasons: The falling silver production and declining silver

inventories Rising investment in metals and jewellery As investors learn about silver's intrinsic

properties People will buy silver without regard to price, or

they will buy simply because prices are going up

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The tiniest bit of investment demand will drive prices sky high

VIEW: Silver may have a downward tread for a short duration but will be a good bet to invest in near future.

4. Sugar

4.1. Introduction:

Sugar is a sweet white (or brownish yellow) crystalline substance, of a sandy or granular consistency, obtained by crystallizing the evaporated juice of certain plants, as the sugar cane, sorghum, beet root, sugar maple, etc. It is used for seasoning and preserving many kinds of food and drink. Ordinary sugar is essentially sucrose. Sugar or sucrose is a carbohydrate that is derived as an end product of the process called photosynthesis, a process from which plants convert sun’s energy to produce their food. Sugar is used by the plant cells as a source of energy. That is why it naturally occurs in all the fruits and vegetables. The word is taken from the Sanskrit word 'sharkara' which means a sweetener only.

Sugarcane, the main source of sugar, is said to have originated in New Guinea. This crop spread over rest of the world in the pre-historic times but initially it was consumed raw. The process of sugar production, i.e. by evaporating the cane juice, came from India in around 500BC. In Alexander’s reign, the people from west termed this process as “honey produced without bees”.

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For a long time, the rest of the world did not know the process of cane sugar production because it was kept as a secret as it earned them a good amount of profits. Finally Arabs broke this secret and started growing sugarcane in Spain and other parts of Europe and Africa around 7th century AD. It started gaining popularity in the European continent and it was considered a luxurious product at that time. A large amount of sugar was imported from the East as it started giving competition to honey as a sweetening agent. Christopher Columbus was the person who took sugarcane to the new world. This is how the concept of sugar production spread in Europe and with the European invasions in the rest of the world; sugarcane was especially cultivated to extract sugar from it.

Initially, the cane was beaten up to extract the juice but after the invention of a press, the quantity extracted was raised to almost a double. The concept of extracting sugar from the sugarbeet or beetroot came into notice in the eighteenth century in Germany. With other inventions, modern methods of extracting juice from the cane and sugar from the juice were developed.

Sugar is a very important sweetening agent that is widely used and traded throughout the world. It has gained its importance gradually with time and now no cuisines in any culture can consider itself complete without sugar. The main sources from which sugar is extracted are sugarcane (bamboo like grass) and sugarbeet (small tubular plants with white tap root), providing the maximum sugar level than any other crop i.e. 12 to 20% of the dry weight of the plant. Sugar from sugarcane is produced in the warmer regions of the world and sugar from sugarbeet is produced in the cooler areas. The processes of production from these different sources are very much different unlike the final output i.e.

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refined sugar produced. Sugarcane and sugarbeet contribute in production of sugar in the ratio 3:1 respectively. In fact this ratio is further moving into the direction of dominance of sugarcane in the production process as producing sugar from sugarbeet is relatively expensive. Generally sugar is consumed to add sweet taste to many cuisines and recipes and also for preserving them.

Cultivation pattern:

Sugar is mostly derived from sugarcane and sugarbeet crops and the cultivation pattern of both these crops are quite distinguished from each other. While sugarcane is generally grown in the tropical regions of the world that are featured with hot and humid climate, sugarbeet is cultivated in the temperate areas featuring much cooler climate than tropical areas.

Sugarcane needs a minimum of 8 months of high temperatures and frost-free weather conditions to prosper. Both heavier soil with adequate irrigation and lighter soils with heavy clays and proper drainage are suited for sugarcane cultivation. The level of production of this crop is dependent upon the extent of the rainfall received. It is an annual crop that is planted in the months of February to April and harvested during the months of October to March.

The sugarbeet, on the other hand, is a crop, the roots of which are used to produce sugar. It is sown in the months of March and April and harvested in the months of September to December.

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4.2. Global scenario of Sugar:Over the past fifty years, especially, the

international trade in sugar has changed dramatically. Since it is either imported or exported by every country on earth, sugar has become an integral component of the economic relationships among nations. Because of that unique position, the trade in sugar has both reflected-and been affected by-a wide range of divergent forces, including global politics, health consciousness, the emergence of developing nations as suppliers and consumers, and many others.

Sugarcane is produced in around 120 countries of the world and the world’s total production of sugar figures around 135 to 145 million tons. Brazil stands at the top regarding the production level followed by India and the European Union. Over 3/4ths of the total sugar produced is consumed domestically in the countries in which it is produced, and the rest is traded around the globe which is often termed as World Sugar. The consumption figures of sugar in the world have shown an increasing trend during the last few years.

Sugar producing countries:

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As most of the sugar producing countries are indulged in self consumption of sugar, the exports of sugar are concentrated among a very few countries. Major sugar exporting countries are: -

Brazil European Union India Thailand

Australia Cuba United states China

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60% of world’s sugar production is concentrated in seven countries, with the top four producers – Brazil, India, China and the EU, accounting for almost 50% of the total world production. However, two of the top four producers – India and China – are not among the top exporters due to large domestic demand. 70% of sugar exports are accounted by Brazil, Thailand, Australia and the EU.

The world exports of sugar hover around 40 million tons and the leading sugar exporting country is Brazil exporting to around 55% of its total produce. Brazil is followed by European Union, Thailand, Australia and Cuba in this list. These top five exporting countries constitute almost 65% of the world total exports. Australia’s dependency on its sugar exports is much higher than that of any country as it exports over 75% of its total sugar production.

Unlike exports, imports of sugar are diversified in nature, among more than 100 countries. The sugar imports account to around 38 million tons. The major importers of sugar in the world are: -

Russia Indonesia European Union Japan USA

Korea Malaysia China Algeria Iran

The leading sugar importing country is Russia with an average of 6 million tons. Indonesia, European Union, Japan, Korea stand on 2nd, 3rd, 4th and 5th place respectively in the context of sugar imports. Being so much of imports taking place throughout the world, there are different sugar import and production policies practiced by different

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nations to protect their domestic produce from competition. A voluntary body named International Sugar Organization looks upon the trade of world sugar.

Important World Sugar Markets:

BrazilL Australia U.S. Cuba

Philippines China Bangladesh

Iran

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4.3. Indian scenario:As history foretells, India had been connected

to sugar for a long time. In fact, it is known as the place of origin of sugar. India maintains this reputation of sugar connection by producing the second largest quantity of sugar in the world and also being the largest consumer of sugar. Indian sugar industry is the largest processing industry for agricultural products constituting of both organized and unorganized sectors.  

India had been the largest producer of sugar in the world for 7 out of 10 years but now Brazil has taken a lead from India. Indian production from both the sectors sums up to 22 million tons. Indian share in the world’s total production has shown an increasing trend in the past few years and currently India is contributing to around 14%. The country has been indulged in the production of cane sugar rather than beet sugar as India’s tropical weather conditions support sugarcane production. Maharashtra holds the lead in the production of cane and sugar in the country. The consumption level of sugar in India reaches up to 18.5 million tons annually making India the largest consumer of sugar in the world. This demand and consumption level is still showing a rising trend. The government largely controls the demand and supply of sugar in India and the prices fluctuate according to the government releases of sugar.  

India had been an exporter of sugar but the export-import policy depends on the production-demand mismatch in the country. The crushing period difference between India and other countries gives an advantageous edge to Indian exports. Exports from India show a rising trend as a result of the upcoming policies of free international trade. The trade figures of India correspond to the mark of 1.5

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million tons. The Indian sugar industry has successfully satisfied the domestic demand till now. That is why India no imports of sugar were done during the past few years.

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Production of sugar in India:

The production of sugarcane in India has increased during the last ten years and is still on an increasing trend. The productivity of sugarcane in the northern areas of the country is lower than the productivity in southern areas. In India, sugar is grown over 4 million hectares of land.

India is the second largest producer of sugar in the world after Brazil and is indulged in the production of cane sugar and not beet sugar. It produces approximately 22 million tons of sugar annually. The major states that are producing sugarcane in India are: -

Maharashtra Uttar Pradesh Karnataka Tamil Nadu Andhra Pradesh Gujarat

These states contribute around 85% sugarcane production of the country. The other important producers of sugar in the country are Assam, Bihar, Gujarat, Haryana, Kerala, Madhya Pradesh, Orissa, Punjab, Rajasthan and West Bengal. The production of sugar in the country highly depends upon the availability of sugarcane. The leading producer of sugar is Maharashtra producing about 6 million tons of sugar followed by Uttar Pradesh and Karnataka. Uttar Pradesh constitutes the maximum area covered and the sugarcane production in the country. Two grades of sugar namely S-30 and M-30 are produced in India; grade S-30 dominating the share in total production.

In India, sugar is traded at the following markets

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Muzzafarnagar Mumbai Delhi Ludhiana

Kolkata Hyderabad Chennai

Also, sugar is traded at the commodity exchanges in India namely National Commodity & Derivatives Exchange ltd, Multi Commodity Exchange of India ltd and National Multi Commodity Exchange of India ltd.

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Ethanol:

Ethanol is produced through biochemical processes based on fermentation using cane juice or molasses as a feedstock (or a mixture of cane juice and molasses). After preparation of a mash with the appropriate concentration of sugars and solids, the sugars are transformed into alcohol using yeasts as the catalyst.

After fermentation, the ethanol is distilled from other by-products, resulting in a level of purity of approximately 95%. This is often referred to as hydrous ethanol because it contains 5% water. Hydrous ethanol can be commercially used, but cannot be blended with gasoline. An additional reactant, such as cyclohexane, is needed in order to dehydrate the ethanol, by forming a tertiary azeotropic mixture with water and alcohol. Anhydrous ethanol is nearly 100% pure and can therefore be blended with gasoline.

Based on the relative economic value of sugar vs. ethanol, along with the size of the two product markets, co-producing sugar and ethanol is often accomplished by co-locating (annexing) the distillery with the sugar factory. Molasses or a mixture of cane juice and molasses is used as the primary feedstock. The value of molasses from a sugar factory is generally much greater as an ethanol feedstock on-site than the value of exporting the molasses to a separate distillery. A distillery without access to a sugar factory must obtain feedstock from another source, thereby incurring transportation costs and transaction costs. In addition, the ethanol distillery often supplies fertilizer for the cane fields.

India is one of the largest sugarcane producers in the world. The Indian sugar industry has been carrying large sugar stock for past few years. However in view of the present change in cropping pattern and shift from sweeteners like gur and

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khandsari to consumption of sugar, the use of cultivable land for growing sugarcane may increase with simultaneous reduction in diversion of sugarcane for production of alternate sweeteners.  Such a trend may lead to an unabated increase in sugar productionAs there is concern about the rate of increase in the global warming India through its large sugarcane industry can play a pro-active role in mitigating the same. The advantages of using green fuel for generation of power and use of gasohol to reduce automobile emissions have led sugar mills and the Government of India is taking steps to encourage manufacture of Ethanol for the purpose of doping motor fuel to reduce air pollution. The Indian sugar industry is taking various steps to make use of this opportunity for its sustainable growth.Sugar on NCDEX:

There are two types of sugar traded on NCDEX, S-30 and M-30. The volume of sugar traded is more in NCDEX then MCX.

Specification for Sugar M Grade:

Symbol: SUGARMMZR

Trading system: NCDEX Trading System

Basis: Ex-Warehouse Muzaffarnagar inclusive of all taxes

Unit of trading: 10 MT

Delivery unit:10 MT net basis packed in 50 kgs new A Twill Bags/PP bags Also deliverable in 100 kgs new A Twill jute bags.

Quotation/Base value: Rs/Quintal

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Tick Size: Re. 1

Quality Specification:Sugar in crystal form manufactured by vacuum pan method with:Moisture: 0.08% MaxPolarization: 99.80% MinICUMSA > or = 150 ICUMSA and < 200 ICUMSA as determined by GS9/1/2/3-8 prescribed in Sugar Analysis ICUMSA Method BookGrade: MGrain Size: Medium as determined by the methods prescribed in IS: 498-2003

Quantity Variation: +/- 5%

Delivery Center: Muzaffarnagar (up to 50 km from city limits)

Additional delivery centres:Ahmedabad, Belgaum, Chennai, Delhi, Erode, Indore, Jaipur, Kanpur, Kolhapur, Kolkata, Pune, Vijaywada and Vizag.

Hours of Trading: Mondays through Fridays: 10:00 AM to 5:00 PM Saturdays: 10.00 AM to 2.00 PM

Due date/Expiry date: 20th day of the delivery monthIf 20th happens to be a holiday, a Saturday or a Sunday then the due date shall be the immediately preceding trading day of the Exchange.

Delivery specification:Compulsory delivery: Upon expiry of the contracts, all open positions will be settled by taking or giving delivery as the case may be.

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Closing of contract:Upon expiry of the contract all the outstanding open position would result in compulsory delivery.

Opening of contracts:Trading in new contract will open on the 10th day of the month in which near month contract is due to expire. If the 10thday happens to be a non-trading day, contracts would open on the next trading day No. of active contracts:Minimum 2 contracts and maximum 12 contracts running concurrently Price Band:Daily price fluctuation limit is (+/-) 4%. If the trade hits the prescribed daily price limit there will be a cooling off period for 15 minutes. Trade will be allowed during this cooling off period within the price band. Thereafter the price band would be raised by another 50% of the existing limit i.e. (+/-) 2% and trade will be resumed. If the price hits the revised price band (6%) again during the day, trade will only be allowed within the revised price band. No trade/order shall be permitted during the day.

Position limits:Member-wise: 30,000 MT for all contracts or 15% of market - wide open interest whichever is higherClient-wise: 10,000 MTThis limit will not apply to bonafide hedge limit if granted by the Exchange)

Near Month LimitsThe following limits would be applicable for one month prior to the expiry of a contract Member-wise: 7,500 MTClient-wise: 2,500 MT Special margins:

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Special margin of 10% of the value of the contract, whenever the rise and fall in price exceeds 20% from the first day's closing price, depending upon whether price rise or fall respectively. The margin shall stay in force so long as price stays beyond 20% limit and will be withdrawn as soon as the price is within 20% band. Premium/Discount:M grade sugar with ICUMSA 100 - 150 could be accepted as good delivery but with no premium. Sugar with ICUMSA more than 200 shall be rejected.

Specification for Sugar S Grade:

Ticker symbol: SUGARSKOL

Trading system: NCDEX Trading System

Basis: Ex- Warehouse Kolkata inclusive of all taxes

Unit of trading: 10 MT

Delivery unit:10 MT net basis packed in 50 kgs new A Twill Bags /PP bags. Also deliverable in 100 kgs new A Twill jute bags.

Quotation/Base value: Rs/Quintal

Tick Size: Re. 1

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Quality Specification: Sugar in crystal form manufactured by vaccum pan method with:Moisture: 0.08% MaxPolarization: 99.80% MinICUMSA > or = 100 ICUMSA and < 150 ICUMSA as determined by GS9/1/2/3-8 prescribed in Sugar Analysis ICUMSA Method BookGrade: SGrain Size: Small as determined by the methods prescribed in IS:498-2003

Quantity Variation: +/- 5%

Delivery Center: Kolkata (upto 50 Kms of the city limits)

Additional delivery centres:Ahmedabad, Belgaum, Chennai, Delhi, Erode, Indore, Jaipur, Kanpur, Kolhapur, Muzaffarnagar, Pune, Vijaywada and Vizag.(Upto 50 Kms of City limits)No location premium and discount shall be applicable.

Hours of Trading:Mondays through Fridays: Trading Hours - 10:00 AM to 05:00 PM Saturdays: Trading Hours - 10.00 AM to 2.00 PM

Due date/Expiry date: 20th day of the delivery monthIf 20th happens to be a holiday, a Saturday or a Sunday then the due date shall be the immediately preceding trading day of the Exchange.

Delivery specification:Compulsory delivery: Upon expiry of the contracts, all open positions will be settled by taking or giving delivery as the case may be.

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No. of active contracts:Minimum 2 contracts and maximum 12 contracts running concurrently

Price Band: Daily price fluctuation limit is (+/-) 4%.

Position limits:Member-wise: 30,000 MT for all contracts or 15% of market - wide open interest whichever is higher

Client-wise: 10,000 MT (This limit will not apply to bonafide hedge limit if granted by the Exchange)Near Month LimitsThe following limits would be applicable for one month prior to the expiry of a contractMember-wise: 7,500 MTClient-wise: 2,500 MT Special margins:Special margin of 10% of the value of the contract, whenever the rise and fall in price exceeds 20% from the first day's closing price, depending upon whether price rise or fall respectively. The margin shall stay in force so long as price stays beyond 20% limit and will be withdrawn as soon as the price is within 20% band. Discount:S grade sugar with ICUMSA more than 150 shall be rejected. S grade sugar with ICUMSA less than 100 is also accepted as good delivery but with no premium.

Factors influencing the price of sugar:

Refinery activity Candy and confectionery sales

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Sugars use in new technologies, such as ethanol production for automobile fuel.

Factors pertaining to the climatic conditions and rainfall

Production of sugarcane in the country Political factors

Income of the consumer

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3.4. Outlook on Sugar:The current volatility in sugar prices has led

the market to believe that sugar is not being guided by its own fundamentals but by the world energy prices and policy developments.

The key dynamic governing the sugar market currently is ethanol Brazil’s decision on how much cane to be diverted for ethanol production.The new market structure in the EU reforms also plays an important role in the price movement of sugar.

Global prices have declined 30% from their peak as global supply has expanded in response to spikes in sugar prices.

India has enters a phase of domestic surplus and the ability of producers to export the surplus remains uncertain as low global prices make exports unattractive and catalysts for higher global prices are not obvious.

Also various factors like a ban on sugar exports, anticipation of excess production, and price decline with the onset of the crushing season showed the decline in sugar prices.

But various policies by Indian government like increase in buffer stocks and relief in export policies have eased the pressure on sugar prices.

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Thus the declining trend of sugar price will remain to be range bound depending in various factors as below: The surplus production of sugar has prompted the country to export. More stock to release. Upcoming monsoon. World energy prices and policy developments.

VIEW: Sugar price will see a downward trend for this season.

5. Bibliography:www.karvycomtrade.com

www.mcxindia.com

www.ncdex.com

www.nymex.com

www.kitco.com

www.crnindia.com

www.bloomberg.com

www.google.com

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