National Commodities & Derivatives Exchange Ltd (NCDEX), a leading commodity exchange in India, provides a world-class platform for market participants to trade in a range of commodities. Commencing operations in Mumbai from December 15, 2003, NCDEX has introduced contracts in 42 commodities comprising 36 agricultural commodities, 2 bullion commodities, 2 metals and 2 energy products. It caters to its members through 8000 trading terminals accessible from over 550 town and villages spread across India, and is regulated by Forward Market Commission (FMC), a regulatory authority overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. Currently, Agricultural commodities contribute to about 80-85% of the volume traded on NCDEX.
NCDEX came into existence with an aim to provide equal opportunities to all players in the commodities value-chain particularly farmers who were unable to gain from trading owing to the information gap. In mid-sixties, commodity trading was banned in India but however continued in the unorganised sector providing gains to traders instead of farmers.
Benefits for the agricultural community
The introduction and proliferation of futures trading in India has provided a host of benefits to Indian agriculture. Commodity exchanges provide platforms to suit the varied requirements of customers.
Commodity exchanges essentially help in price discovery as players get to set future prices, which are also made available to all participants. For instance, a farmer in southern India is capable of taking informed decisions after knowing the best price prevailing in the countryToday the farmers base their choice for next year’s crop on current year’s price, which should in fact be based on next year’s expected price.
NCDEX researchers have done extensive research to understand the cropping pattern and decision-making process of the farmers. The research has indicated that a cobweb syndrome plagues the farmers today.
The framework given above clearly indicates that farmers decide their cropping pattern based on past prices of commodities. For e.g.; say in Kharif 2003 soybean prices were very high and gave good profits to farmers. Hence, next year, in Kharif 2004, all farmers from that place decide to sow soybean, leading to a glut in the production and thus crash in prices. Further, as there is a poor price realisation in Kharif 2004 in soybean, all the farmers turn to some other crop in Kharif 2005 leading to a shortage of soybean and rise in its prices in 2005. Thus continues this vicious cycle.
NCDEX is making a number of attempts to change this cycle and pattern of sowing amongst farmers. Farmers are encouraged to see the future prices of a commodity before deciding to sow the commodity thus enabling him achieve good returns. So to speak, NCDEX’s efforts of disseminating price information related to commodities in all corners of India have met with great success.
NCDEX futures are now available from 3 months to 12 months depending on the respective commodity. Through this farmers can ascertain the price of their produce while sowing it. At the same time, it is also not necessary for the farmers to sell their produce at the expiry of the contract. It has been observed that futures go into backwardation at the time of harvest. In that case the farmers can square off their position in the futures market and sell spot. Thus they also get the benefit of higher spot prices.
Exchanges enable actual users particularly farmers, agro processors, and industry where the predominant cost is commodity input/output cost, to hedge their price risk given the uncertainty of the future.– This is so especially in agriculture where there is uncertainty regarding the monsoon and hence prices. This holds good also for non-agri products like metals or minerals where global forces could exert considerable influence. Purchasers are also assured a fixed price, which is determined in advance. As such, today price fluctuations in all major commodities in the country mirror both national and international factors and not merely national factors.
By involving the group of investors and speculators, commodity exchanges provide liquidity and buoyancy to the system. These players take advantage of price movements and are able to make a profit given that prices of commodities, both agricultural and non-agro, are fairly volatile.
Lastly, the arbitrageurs play an important role in balancing the market as arbitrage conditions, where they exist, are ironed out as arbitrageurs trade with opposite positions on different platforms and hence generate opposing demand and supply forces which ultimately narrows down the gaps in prices.It must be pointed out that while the monsoon conditions affect the prices of agro-based commodities the phenomenon of globalisation has made prices of other products such as metals, minerals etc., vulnerable to changes in global politics, policies, growth paradigms etc. Commodity exchanges would provide a valuable hedge through the price discovery process as well as act as a profit avenue, thus simultaneously catering to the different kind of players in the market.
Services provided by NCDEX
Price discovery being one of the primary objectives of an exchange, NCDEX focuses on providing price dissemination services to farmers. NCDEX provides near real time spot prices of commodities traded on its platform thus revolutionising the entire system of price discovery in both the spot and futures segments. Spot prices are polled in various principal market places (mandis) two to three times a day to arrive at a benchmark price by ‘bootstrapping’ process. The participants who trade on the exchange can use these near real time spot prices to take decisions on the futures segment.
NCDEX has over 100 electronic price tickers carrying real time prices, which are in local languages (14 such languages are recognised in India). Another 125 are in the process of being installed. The exchange also has an integrated kiosk giving weather information as well as warehouse status.
NCDEX prices are also disseminated through government channels like Doordarshan and All India Radio, which have the largest reach in the country. Agmarknet, the official website of the Government of India, carries NCDEX prices. The Exchange has also tied up with a couple of telecom providers to make commodity prices available on call and a number of mobile service providers to make commodity prices available through SMS. Tie-ups with corporates like ITC e-choupal and n-logue for the same purpose has also yielded good results. Newswires like Reuters, Telerate’s, Telequotes and Bloomberg are also disseminating NCDEX prices. Prices are carried by almost all agri-journals and also by newspapers all over India in regional languages. The exchange is looking forward to associations with many other institutes & centres with similar interests to carry our Price tickers and spread awareness amongst farmers. Efforts are also on for price dissemination by placing tickers in various Agricultural Produce Marketing Committee (APMC) boards at mandi’s, post offices, bank branches, warehouses, FMCG dealer points and agri-extension services like Mahindra Shubhlabh & Rallis. Even the remotest places like the tribal village of Narnur in Andhra Pradesh, Neemkathana and Chirwa in Rajasthan and many more are carrying NCDEX price tickers.
The exchange has spearheaded pilot projects in the states of Gujarat and Andhra Pradesh whereby farmers will be enabled to sell forward their produce of cotton immediately after sowing /prior to harvesting through an aggregator who/which will be selected for this purpose. The exchange also initiated a pilot for soya farmers in Madhya Pradesh wherein at the time of harvest, farmers could sell their crop forward on the exchange and get finance against the electronic warehouse receipt up to 85 % of the value of the crop from banks. In Rajasthan, the exchange has tied up with a private telecom provider for price dissemination at local PCOs as well as provides price feeds in their call centres. Similar pilots are also being planned for other crops in different states.
NCDEX has also made provision for education of farmers about its products/services, and introduction of a certification course as well. Over 450 awareness programmes covering nearly 60,000 participants have been conducted by NCDEX’s product and relationship teams all over India. Every aspect of commodities trade is covered in these programmes. These are covered in every region in the native language. Besides, the exchange has also introduced a certification course that is analogous to the certification courses followed in the equity segment of the capital market and is conducted by the NSE’s Certification in Financial Markets (NCFM).
Other Ancillary Services provided by NCDEX
NCDEX has made provision for warehouse receipt based financing. It has over 130 accredited warehouses all over the country and number is expanding almost every month. Farmers can bring their produce to these warehouses. However, NCDEX has a prescribed specification for quality and grade of each commodity. Only such commodities (with some premium for superior quality and discount for inferior ones in a limited band) are accepted in the warehouses. NCDEX has appointed recognised assayers in all its warehouses to scientifically test the quality of the goods that come to its warehouses. To carry on this work in a full-fledged manner at a larger scale, NCDEX has promoted a separate collateral management company called as National Collateral Management Services Ltd. (NCMSL), which has taken over the work of accreditation of warehouses, assaying and tying up with banks to accept their warehouse receipt. Against every delivery in the warehouse a warehouse receipt (WR) is issued. Since NCDEX (and hence NCMSL) is a known national level multi-commodity exchange, its receipt gives more credibility than any other warehouse receipt. A farmer can then get soft loans from banks against these receipts in the interim period. The banks also benefit since such a lending is as good as a risk-free lending. Currently, the banks have given loans worth Rs 9,000 crores against commodities. The potential of this kind of lending can be seen to be in the region of at least Rs 150,000 crore.
NCDEX has realised the need for a neutral aggregator to hedge forward the price risk of small and marginal farmers, who find it difficult to directly trade with the exchange due to issues like membership and quantities handled by them. Hence, NCDEX is in talk with banks, commodity boards, co-operatives and agri-extension service providers to play the role of aggregators, who can collect all the produce and trade on the exchange on behalf of the farmers in every village.
In some of the pilots conducted by NCDEX, the farmers themselves came forward asking for options in trading. In fact, NCDEX strongly proposes that Minimum Support Price (MSP) can be replaced by the options. Instead of incurring so many costs on procurement and storage etc., the government can pay the option premium for farmers. Thus the farmers will exercise their right to sell when the spot prices are unfavorable, instead of selling to the government. In addition, in case at the time of expiry the market price is higher than the strike price, the farmers can simply sell in the open market, just as what they are doing in the current system of MSP.
NCDEX is actively contemplating launching trading in weather derivatives but is being prevented because of definitional gaps that exist in the Forwards Commission Regulation Act (1952) that governs the commodity markets. All the current instruments in the commodity derivative market only cover the price risks associated with the commodities. However, there cannot be a perfect market for agricultural commodities unless volumetric risks are also covered. Indian farmers are exposed to vagaries of monsoons and other climatic disturbances. Farm insurance, though seen in some pockets of the country is still not all pervasive and weather derivatives could fill in this lacuna for the farmers.
NCDEX has introduced a rainfall index as a first attempt towards accustomising and popularising its products. As such, with the onset of the Southwest monsoon on 1st June 2005, NCDEX has displayed on its website a rainfall index for Mumbai. The index encompasses rainfall at both Colaba and Santa Cruz weather stations and is structured on the basis of past rainfall data. The NCDEX Rainfall Index at any point of time will tell us what percentage of cumulative normal expected rainfall (till the date of the index) it has actually rained. NCDEX is looking forward to expanding the scope of the index to make it an all India level representative index over a period of time.
Response of the agricultural community
NCDEX has improved the welfare of the farming community at large. Through price and information dissemination, better warehousing and grading facilities farmers have been able to realise higher incomes. Direct farmer participation on the exchange is limited to the larger ones on account of issues such as membership, size of the produce etc. The smaller and marginal farmers are benefiting through better price knowledge.
NCDEX is indeed doing pioneering work in the field of commodity trading in India. Right from disseminating price information, educating the participants to making available ancillary facilities like storage services and warehouse financing NCDEX is trying to provide a comprehensive suite of services to develop the commodity trading market.