Abhijit Sen Committee Report on Commodity Futures

Impact of Futures Trading on Agriculture Commodity Prices (Abhijit Sen Report) Link

Small commodities brokerages closing shop

Dilip Jha (C) The Business Standard

Mumbai  Sep 18, 2008

It’s shakeout time in the commodity brokerage space. Many small trading firms, which came up five years ago, alongside the commodities exchanges, have shut shop.

The latest addition to the long list of such companies is Jamnagar-based Madhusudan Commodities, which informed the exchanges a month ago that it has halted trading operations.

These closed brokerage firms are now selling their membership cards and are making a neat profit.

Soon after obtaining the regulator’s permission to launch commodity trading in 2003, exchanges had distributed cards to clients directly at a low price of Rs 2-2.5 lakh. Many individuals had also bought these cards as the exchange’s main focus at that time was to lutre more players into commodities trading.

The small brokerages are now selling these cards for Rs 20-25 lakh.

In contrast, large brokerages are prospering because of their good risk management capability and extensive knowledge dissemination. Religare Enterprises, Kotak Commodities and Angel Broking, for example, have almost doubled their commodities business turnover in the past few months.

“With limited resources adding little value to clients’ investments, smart investors have switched to bigger firms,” said Navin Mathur of Angel Broking.

“In the futures market, intermediation plays a dynamic role in updating customers with the current happenings and alarming about possible future developments. While big broking firms do have good intermediation practices with steady future growth plan. Small broking firms lack this expertise and jumps into execution directly to make a quick buck,” Shyamal Gupta, head, institutional business of Kotak Commodity Services, said.

Regional exchanges may fail FMC accreditation test

Dilip Kumar Jha  (c) The Business Standard

Mumbai August 19, 2008

Even as the Forward Markets Commission (FMC) is all set to introduce norms for regional commodity exchanges to obtain accreditation as national bourses, the move is unlikely to succeed in the prevailing market conditions.

The commodity markets regulator is finalising the norms which will allow regional exchanges to convert to national commodity exchanges, without losing their identity and core competence. FMC sources say the norms will be finalised within a fortnight.

Since the introduction of national online trading platforms, regional commodity exchanges have almost become defunct, as members switched to online trading from the inherent open outcry on regional bourses. With no new members added in the past 3-4 years, trading volumes have dried up.

“Not only did they possess appreciable domain knowledge in the respective regional commodities, they also kept futures trading alive for ages in India. So, protecting their interest is of prime importance to policy-makers,” FMC chairman B C Khatua had said recently.

In the recently-listed norms for accreditation as a national platform, the regulator had introduced a clause that the minimum net worth should be Rs 100 crore. If this is extended to regional commodity exchanges as well, almost all of them will close down.

An analyst from a broking firm said that all of them put together would scarcely have Rs 50 crore of net worth. That means barring the three national commodity exchanges — MCX, NCDEX and NMCE — most of the regional commodity exchanges would have to shut shop.

Apparently, the heads of many regional commodity exchanges are ready to meet on a common platform with their respective commodities.

“All regional commodity exchanges should merge to form a national entity, with the margins of the commodity traded on their respective platform passed on to their respective accounts. Otherwise, none of them would be able to survive alone, especially when the three national exchanges are functioning and another one is shortly launching the platform,” said an analyst.

Shyamal Gupta of Kotak Commodity said that with a net worth of Rs 100 crore, it would be impossible to generate a daily turnover of Rs 2,367 crore, with Rs 400 earned per crore of transaction.

Almost all regional commodity exchanges either offer trading in a single commodity or a majority of their small volumes comes from one contract. As the government’s efforts to delist commodities continue, fear remains whether the next victim is the actively-traded commodity on one of these exchanges.

Though the National Board of Trade (NBoT) survived the recent bout of suspension of soy oil because of the support of India’s largest edible oil producer, Ruchi Soya Industries, the launch of alternate contracts of soybean and soymeal failed to generate equal volumes as soy oil. According to analysts, other commodity exchanges may not be able to survive such sudden suspension of trading.

Retail investors make believe for gold guineas

© The Business Standrad

Mumbai June 06, 2008,

The gold guinea contract introduced recently on the country's largest commodity exchange, the Multi Commodity Exchange of India (MCX), is emerging to be one of the most attractive avenues for retail investors with small savings.

The contract maturing on July 31 recorded a 170 per cent jump in open interest in the last two weeks, indicating that small investors are keen to save for the future, especially in assets. Currently, the small gold coin contract is open for trade for July and August deliveries.

Available for trading in as small as one lot (a coin weighing 8 gm), open interest for the July contract jumped sharply to 8,304 lots yesterday as compared with 3,078 lots on May 23.

"Retail participants are either keen on playing on commexes for a long periodor opt for delivery at the expiry of the contract. Being a small-price contract, traders would prefer delivery to feel pride in owning gold," said Naveen Mathur, head - commodities, Angel Broking.

Most importantly, traders may be assured of the quality of the coins delivered through the exchange.

The gold guinea contract on the MCX would be attractive to investors for three basic factors: rate transparency, does not require high holding capacity and having the benefit of cashing in at any point of time, says Jigar Pandit, senior manager - commodities sales, Sharekhan.

Witnessing a daily turnover of between Rs 5-10 crore on this contract, the MCX has exempted vaulting or storage charges on guinea to be delivered via the platform until December 31.

Launched on Akshaya Tritiya, an auspicious day in the Hindu calendar, gold guinea is a comfortable trade option for retail investors.

Trading is simple, where the investor needs to pay just 4-5 per cent of the upfront margin. If the price comes down, he is required to pay less. If the price goes up, the investor earns profit, which will be directly credited to his DMAT account.

Gold guinea contracts will help supplement and complement the electronic spot trading platform, set for launch soon.

"It will make the spot market electronically-transparent, creating a common Indian market, similar to the European Union market," said Shyamal Gupta, head - institutional business, Kotak Commodities.

Meanwhile, retail participation is likely to grow if the mandatory sales tax issue for gold guinea delivery is resolved, said Pandit.

The exchange has been arranging a number of awareness programmes in urban, semi-urban and rural areas to educate the public about this trade.

Commodity traders still wary of futures

Nidhi Sharma  The Economic Times

Mumbai - 01 May, 2008

The long-awaited Abhijit Sen Committee report is out but market participants still seem to be apprehensive of trading in commodity futures. Experts feel volumes at the exchanges can only pick up once the contents of the report are discussed thoroughly at political level and a clear view emerges. 

Although the report mentioning that the rise in wholesale and retail prices of farm commodities cannot be attributed to futures trading, the supplementary note by Mr Sen said the ban on trading in four sensitive commodities — urad, tur, wheat and rice — should continue. He has also called for a discussion regarding futures trading in edible oil and sugar. 
“There is a dilemma in the mind of traders whether they should enter the market. The report, per se, has nothing negative about commodity futures trading apart from the personal note by the chairman of the committee that has left traders indecisive,” Angel Commodities head Naveen Mathur said. He feels market sentiment might improve once a clear view emerges.
Agri-commodity volumes have declined on the exchanges. However, edible oil complex rang in good volumes, especially in the January-March period this year following the strong upside in international markets. During the same period there was also a bull run in the metals counter and crude oil that increased the overall volumes on the domestic exchanges compared to the corresponding period last year.
High volumes in soya oil, soybean and rape-mustard seed may not have gone unnoticed by the committee as Mr Sen made special mention of it in the report. He called for more discussion on the hedging benefits that processors derive from futures markets, and accordingly take a decision regarding edible oils and sugar.

Earlier, high inflation figures and government measures thereafter to control prices had also triggered negative sentiments and affected trading on the futures counter. Government slashed import duties of various edible oils, imposed stock limits on food grains and pulses and banned export of non-basmati rice.
Religare Commodities head Jayant Manglik feels volumes would pick up once the discussion on the Abhijit Sen Committee report are completed. “Agri-commodities volumes have especially been affected and they will reach higher levels once the debate on the report gets over,” he added.
Even Shyamal Gupta from Kotak Commodity Services agrees all is dependent on how the contents of the report are interpreted. “If there is clarity of communication in policy making and the way futures market needs to be taken forward there would not be confusion in the minds of market participants,” Mr Gupta said. 

Bears will make money, Bulls will make money, Pigs will get killed

The bull market in commodities, now in its fifth year, has produced a rally not seen in more than five decades. Copper five times over the past five years, gold more than quadrupled and oil tripled

Profiling: Unlike stock market, the commodities market has three main kinds of participants, Arbitrageurs, Speculators and Hedgers. If one has to participate in this market it is important to profile the participant. Internationally, the commodity index funds have done extremely well however, India does not offer any of these fund based solution to the investor class (due to regulatory reason) to participate on the commodities market hence the profiling become all the more important for protecting the interest of the participants.

How do Indians Benefit from Commodities Boom: The Indian market offers two options either participation through futures market or spot market. While cash and carry flourished initially however due to runaway prices, the govt sword and promulgation of Essential Commodities Act keeps hanging against the participants. Agriculture being on the concurrent list and each State having its own Agriculture Produce Marketing Act (APMC), the complications will necessarily evolve in the delivery, which is part and parcel of the spot trade.

Inflation Hedge & Global Indicators: Strong returns in commodities in 2008 are offsetting losses elsewhere for institutional investors’ portfolios and attracting a record level of fresh funds into the asset class. According to bankers in London and New York, fears over rising global inflation, robust fundamentals and the weakness of the dollar are other reasons for the strong interest. With stocks losing money, people had instead been buying bonds and in particular commodities, which have been stratospheric. Traders bought commodities as a hedge against inflation. High commodity prices guarantee upward pressure on inflation. But the slowdown predicted by stocks and bonds reduces commodity demand. So buying commodities to hedge against economic woes looks like a self-defeating strategy.

Volatility and Margins: No wonder, volatile trading conditions have become persistent in the commodity markets; yet activity in this sector is hardly slowing. Most recently inspite of market moving in favour of “longs” the volatility has caused huge margin call resulting in de-leveraging of positions by many. Since participation in commodities futures is leveraged the losses and profits are also leveraged.

Risk Appetite and Portfolio size: While stock market participants can rely on the market “tips”, this market requires deeper understanding of the underlying. Passive investment with small risk capital is possible in stocks however one requires a comparatively larger capital and active tracking of the market.

The success in this market will be in a disciplined approach to balanced portfolio creation with stop loss limits and proper assessment of the portfolio risk. Rather than having targeted prices the participants should have benchmarked profit with stop-losses triggers with unemotional attachment to the positions in the market.

Published in The Times of India, Ahmedabad

Crash in commodities market may be temporary

© Copyright 2000 - 2009 The Hindu Business Line

M.R. Subramani Chennai, March 23

Last week, the commodities market witnessed its steepest weekly fall in the last five decades. Gold fell eight per cent, crude dropped 6.35 per cent and wheat prices in the US market slipped below the psychological mark of $10 a bushel. Most of the commodities that peaked late last month or early this month have come off with soft ones such as soyabean, wheat and crude palm oil slipping by over 20 per cent.

Does the fall signify the end of commodities boom? Not really, say analysts and experts. The trend actually is a fallout of the crash in equity markets. Funds are booking their profits in commodities so that they will have the necessary liquidity and can overcome any loss in equities, says Mr V. Shanmugham, Chief Economist of the Multi Commodity Exchange.

A shake-out

“It is also more of a long overdue correction,” he says. “The sell-out in the commodities is to add liquidity and this is seen as a shake-out. This will eliminate small players in the market, who would be forced to de-hedge their positions,” says Mr Shyamal Gupta, Head (Institutional Business) of Kotak Commodity Services Ltd. Analysts see the current phase as a temporary one where the commodities could see a fall for the time being, consolidate, and then rebound.

“What we are witnessing is a new orbital in commodities. The prices will recover and the players are likely to take them to a new level,” said Mr Gupta.

Recession fears

“Currently, fears of recession gripping the US are mainly driving crude lower. As a result, other commodities such as soyabean, crude palm oil and corn – all seen as alternative sources of crude oil – have crashed. Vegetable oils had found new peak levels as they were diverted for bio-fuels. Diversion of acreage to crops such as corn, besides the vagaries of weather, saw the wheat counter on boil.

“In between, fears of inflation and economic slowdown have seen the funds and players buy into gold. “Physical buying will have to be at higher levels after the markets rebound from this fall. Soft commodities will touch new highs,” said Mr Gupta. “Gold, on the other hand, belongs to asset class. Its glitter will remain and demand growth will keep crude firm,” he says. Increasing demand, especially from emerging nations, is seen driving the prices of commodities further up.

And Mr Gupta sums up the likely trend saying: “Commodities is the only avenue for funds to make money for sometime to come.”