Commodity exchanges reap a golden harvest

The futures trade in commodities has surged phenomenally over the last one year.

The Multi Commodity Exchange (MCX) has seen the rise of future contracts from approximately 0.06 million in the first quarter of 2004 to 3.51 million in the second quarter of 2005.

Similarly, the futures contract growth on the the National Commodity & Derivatives Exchange (NCDEX) showed a spectacular growth "� from 0.24 million in the first quarter of 2004 to 11.83 million in the second quarter of the current year.

If the current growth rate continues, futures contracts on MCX would reach 5.29 million while the same on NCDEX would touch 16.49 million contracts by the end of the calendar year. With traders and consumers showing tremendous interest, total future contracts on NCDEX in 2004 were hovering at around 10.3 million. They are expected to reach 51.2 million this year.

Similarly, MCX is expected to register 15.3 million future contracts in the fourth quarter of 2005.

Two examples can illustrate the growth story on the commodity exchanges. In February, Sugar M was quoted on MCX at Rs 1,865 per quintal with an open interest of 400,000 quintals.

The turnover on February 7 totalled Rs 7.46 lakh. Six months down the line, in the first week of September, the price surged to Rs 1,891 per quintal and volume zoomed up to 10,00,000 quintals while turnover touched the height of Rs 189.14 lakh.

Similarly, Sugar S in January was quoted at Rs 1,845 per quintal with a volume at 10,000 tonne. In the first week of September, the volume surged to 580,000 quintals and turnover rose to Rs 1.85 lakh.

India's commodity markets have grown during the last five years.

The growth has been spectacular in the last two years with the membership of commodity exchanges swelling and the total traded volume of various commodities reaching new heights.

"In the last two years, Multi Commodity Exchange (MCX) has reached more than 500 cities and operating from more than 5,000 terminals in the country," said Joseph Massey, deputy managing director, MCX .

"The commodity trade has grown vigorously to Rs 6,000 crore from Rs 100 crore five years ago," Joseph added.

Since the beginning of 2004, commodity trading has experienced exponential growth in two of the new exchanges. From a volume of 0.24 million contracts in the first quarter of calendar year 2004, (NCDEX) had facilitated a trade of over 10 million contracts by the end of the last year.

If the current growth rate is maintained, trading at NCDEX, which already has attained a turnover of 20 million contracts in the first half of the current calendar year, could top 50 million contracts. This was the volume of trade recorded by the world's 6th largest commodity futures exchange in 2004.

MCX recorded a turnover of 2.6 million contracts in 2004. If it continues to experience the same explosive growth, trading on this exchange could exceed 15 million contracts in calendar 2005. The world's 12th largest commodity futures exchange had recorded this volume last calendar.

The third national exchange in Ahmedabad, the oldest among the three, has not enjoyed similar levels of success with its traded volumes falling as business has shifted to the Mumbai-based exchanges. In the first quarter of 2005, its volume was under 0.5 million contracts compared with 1.9 million traded over the same period in the previous year.

The largest of the traditional Indian commodity exchanges is the National Board of Trade (NBOT) at Indore. Trading in oilseed futures, NBOT's volume stood at just over 350,000 contracts in 2003 and a similar level was recorded in 2004 too.

Two of the other better-known traditional commodity exchanges are the Bombay Commodity Exchange (formerly the Bombay Oilseeds and Oils Exchange), founded in 1950, and the International Pepper Futures Exchange, set up in 1997.

All three of the traditional exchanges have now been surpassed in terms of volume and importance by the new national exchanges.

Commodity markets have a long history in India. The first organised futures market, for various types of cotton, appeared in 1921. In the 1940s, trading in forward and futures contracts as well as options was either outlawed or rendered impossible through price controls.

This situation remained until 1952, when the government passed the Forward Contracts Regulation Act, which to this date controls all transferable forward contracts and futures.

During the 1960s, the government either banned or suspended futures trading in several commodities. The policy slackened in the late 1970s and trade in commodities futures was fully legalised in April 2003. Options trade is still prohibited, as no exchange or person can organise or enter into or make or perform options in goods.

Towards consolidation:
India's commodities markets are no longer that scattered as the situation was a decade earlier. But, India being one of the major industrial commodities and agri commodities manufacturers, the overall consolidation is impossible.

A large number of new exchanges were created during the past decade in developing countries including India in order to provide traders a platform where they can trade the commodities of their interest as per their own convenience. Not all of them have progressed to the level of futures trading, and many have rapidly disappeared.

Today, there are 25 commodities exchanges and 7,500 marketing yards in the country operating from almost all manufacturing centres and catering to the consumers and traders. Out of 25 exchanges, the MCX, NCDEX and NMCE are large exchanges and MCX is the biggest among them.

Earlier, all the sellers and buyers of a commodity used to come to a common market place for trading. While a buyer could judge the amount of produce that year while a seller could judge the demand for a commodity.

Thus, they could dictate their terms and the counter-party was left with no choice. The commodity exchanges came into being to offer a facility to hedge against this unfavourable price movement.

Futures trading is a natural corollary to the problems associated with maintaining a year-round supply of seasonal products such as agricultural crops.

It provides solutions for these problems, as well as new opportunities. Exchanging traded futures and options provide several economic benefits, including the ability to shift or otherwise manage the price risk of market or tangible positions.

With the liberalisation of agricultural trade and the withdrawal of government support to agricultural producers outside of the OECD there is in many countries a new need for price discovery and even physical trading mechanisms, a need that can often be met by commodity exchanges.

Hence, recent years have seen the rapid creation of new commodity exchanges and the continuing expansion of existing ones. At present, there are major commodity futures exchanges in over 20 countries, including the United States, the United Kingdom, China, Japan, India, South Africa, Malaysia and Brazil .

Physical trade was the only option for traders to hedge, book or sell the commodity. But everytime it was impossible to visit the trading market physically to sell or buy.

Now, technical advancement has benefited a wide gamut of customers through online trading. Sitting in one part of a country, a trader can hedge on the other side just sitting on a terminal, irrespective of having physical delivery.

Thus, technological advancement has benefitted not only the customers at large to do their business smoothly but also exchanges to control irregularities and facilitate best possible service to the customers.