What is a Commodity Exchange? A Commodity Exchange (similar to the stock exchange) is an association or a company or any other body organizing trading in commodities. The trading may be spot trading, future trading or options. Future trading is a kind of forward trading done in special exchanges. It is an important concept that can be explained with the help of following example: The price of Rice is say Rs 5000 per ton as on February 4th. A person X believes that the price of rice is going to increase and in August it will be say Rs. 5100 per ton. So he puts an order to buy one ton of rice at Rs 5000 in August from any other person who is willing to sell it at that price. The moment a seller is obtained the deal is completed and thus a future trade is done well in advance. Now there are two scenarios: if the price increases (as predicted) the X will make a profit or he will make a loss. The commodity market includes agricultural produce, metals, minerals, etc., however lets stick to the agricultural part in this discussion.
Where is the farmer in this whole process? The commodities market appears to be encouraging only speculative gambling involving the broker and the traders. It is not entirely true. The prices of the commodities are decided by the market forces just like in case of the stock prices of companies (the regulatory authorities can intervene). These price discoveries are based on factors like whether forecast, government policies on agriculture, the international demand, etc and they are hence they give the farmers a good estimate on what price he is most likely to get at that time in the future. This enables the farmers to make wise decisions about which crop to grow depending on the profitability of the crop and market demands of the future. The farmers get into deals with the buyers selling their produce even before the seeds are sown thus hedging against the risk of a prices falling in the future. The obvious doubt that arises is that what if the farmer gets into a deal at a lower price and the spot price in the market at the time of deal expiry is higher. In that case the farmer has the option to square up his position and sell the actual produce in the spot market at the higher price thus making even more profit.
The commodities exchanges in India are namely the National Commodities and Derivatives Exchange (NCDEX) and the Multi Commodity Exchange of India (MCX) started in 2003 and are regulated by the Forward Market Commission (FMC), a regulatory authority overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. The NCDEX currently facilitates the trading of around 50 commodities while the FMC facilitates for about 90 commodities with a daily turnover of around 2 Billion $.
Is it really uplifting the Indian farmer? Indian farming has its own problems of small farms (due to property division), lack of irrigation facilities, lack of know-how about the advancements in agriculture, etc. Most of the Indian farmers are extremely poor and cannot produce enough to trade in the exchanges. Also apart from a few states (Maharashtra, Punjab and Haryana), the farmers in other states do not have the means of communication to gain access to price dissemination of the goods in the markets and are hence still exploited by the traders. It is only the rich farmers who are actually benefiting out of these exchanges and the poor ones are still as isolated to the market as before. Also the price speculation tends to increase the prices of commodities; the perfect example is when due to inflationary pressure the regulators had to suspend trading of rice and wheat last year to prevent the prices from soaring after a significant rise.
If the real motive behind starting the commodities market is to help the farmers then the first step should be to consolidate Indian agriculture by reducing the percentage of population engaged in farming. This can be done by bringing industries in the villages and providing alternate job opportunities for the ultra poor farmers thus trimming the population based on agriculture for their living. With a lesser percentage of population involved, the benefits of this exchange will be truly realised.
-Mayank
5/2/2008
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