eNAM and Futures Exchange Overview

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Questions and Answers

What is one significant benefit of eNAM for farmers?

eNAM provides better price and bargaining power to farmers.

How has eNAM expanded its coverage since its launch in April 2016?

eNAM expanded to cover 13 states and 417 APMCs by March 2017 and reached 1000 APMCs by May 2020.

What role does real-time information play in the eNAM system?

Real-time information of prices and trade enhances competitiveness and decision-making for traders and farmers.

Identify two user groups involved in eNAM.

Farmers and traders are two primary user groups involved in eNAM. Signup and view all the answers

What process is involved in the eNAM transaction sequence?

The eNAM transaction sequence involves Gate Entry, Assaying, Online Trading, Weighment, Online Payment, and Invoicing. Signup and view all the answers

What key finding did Jack Treynor's jelly-beans-in-the-jar experiment reveal about group estimates compared to individual guesses?

The group average estimate was more accurate, at 871, compared to individual guesses, with only one individual being more accurate than the group. Signup and view all the answers

List two characteristics of an electronic modern exchange that contribute to its efficiency.

Key characteristics include automated screen-based trading and a transparent order-driven system. Signup and view all the answers

What is the primary purpose of a futures exchange?

The primary purpose is to facilitate trading of futures and options on futures contracts within a regulated marketplace. Signup and view all the answers

Explain how futures markets contribute to economic infrastructure.

Futures markets improve economic infrastructure by encouraging efficient price discovery and assigning appropriate economic value to activities. Signup and view all the answers

Define a futures contract and its main components.

A futures contract is a binding agreement for delivery of an underlying commodity at a specified future date, with agreed payment terms. Signup and view all the answers

What percentage of total transactions in a mandi is represented by eNAM transactions?

Less than 1% Signup and view all the answers

How does eNAM enhance pricing transparency for farmers?

eNAM records prices for every trade digitally, which can be accessed for analysis and audit. Signup and view all the answers

What is the period of analysis for the crop seasons mentioned?

One season pre-Futures (2004) and one season post-Futures (2005). Signup and view all the answers

In what way does eNAM help to increase the bargaining power of farmers?

By attracting more buyers, eNAM enables farmers to negotiate better prices. Signup and view all the answers

What impact does eNAM have on instances of fraud in agricultural trading?

eNAM reduces instances of fraud and exploitation by providing transparency in the trading process. Signup and view all the answers

How are intra-seasonal price differences calculated?

By averaging the percentage deviations in prices of different spot markets during a crop season. Signup and view all the answers

Identify one crop classified as a Kharif crop.

Rice, Tur, or Urad. Signup and view all the answers

How does eNAM promote quality-based trading among farmers?

It leads to harmonization of quality and encourages farmers to bring better quality produce. Signup and view all the answers

What role do aggregators play in the Single Window Model?

Aggregators facilitate the selling and forward contracts between farmers and markets. Signup and view all the answers

What advantage does eNAM provide to commission agents and traders in terms of market access?

eNAM allows commission agents and traders to access a larger market than traditional methods. Signup and view all the answers

What makes the bidding process easier for traders using eNAM?

Traders can bid for an entire lot at once rather than bidding individually for each lot. Signup and view all the answers

Mention one method of farmer participation in Futures trading.

Direct participation by large farmers or participation through agencies like eNAM. Signup and view all the answers

What is the significance of commodity-backed bank finance in the model?

It provides financial support to farmers based on the value of their stored crops. Signup and view all the answers

How does eNAM simplify payment processes for agricultural transactions?

It allows traders to settle accounts in one go, reducing paperwork and complexity. Signup and view all the answers

What is the minimum exchange requirement for farmers participating through aggregators?

Just 3-4 farmers per aggregator cultivating less than or equal to 4 hectares. Signup and view all the answers

List one external agency that helps farmers participate in futures trading.

ITC e-Choupal. Signup and view all the answers

What changes were observed in the average export price of mentha oil from pre-futures to post-futures?

The average export price increased from Rs 438.5 per kg to Rs 607 per kg. Signup and view all the answers

How did the role of brokers change in terms of margins from pre-futures to post-futures?

There was a drop in margins charged by brokers after the introduction of futures trading. Signup and view all the answers

What was one key quality parameter change associated with futures trading?

The standardization of quality parameters became evident after the introduction of futures trading. Signup and view all the answers

Describe the impact of market opacity before futures trading.

Market opacity made it challenging for participants to access clear information regarding prices and quality. Signup and view all the answers

What percentage of commission did village pooling agents charge in the pre-futures context?

Village pooling agents charged a commission of 2%. Signup and view all the answers

What was one potential indirect benefit of futures trading for farmers?

Farmers experienced improved export prices due to the stability offered by futures trading. Signup and view all the answers

What role did transparency play in the context of futures trading?

Transparency allowed market participants to make better-informed decisions. Signup and view all the answers

How did the transition to a transparent platform benefit the overall market?

The transparent platform promoted fairer competition among traders and reduced exploitation. Signup and view all the answers

What role does the primary sector play in the commodities market?

The primary sector involves the production of raw materials, directly dealing in commodities and contributing to GDP. Signup and view all the answers

How do market forces influence commodities?

Market forces affect commodities through changes in currency rates and interest rates, impacting their pricing and demand. Signup and view all the answers

What is a key characteristic of commodities that distinguishes them from other goods?

A key characteristic of commodities is that they are physical and tangible, making them quantifiably measurable and assayable. Signup and view all the answers

Explain the difference between soft and hard commodities.

Soft commodities are typically agricultural products like wheat and livestock, while hard commodities are non-agricultural resources such as metals and energy. Signup and view all the answers

What impact does the secondary sector have on GDP in relation to commodities?

The secondary sector adds value to GDP by processing raw commodities into finished goods. Signup and view all the answers

What does it mean for commodities to exhibit high inelastic demand?

High inelastic demand means that the quantity demanded for commodities does not significantly change with price fluctuations. Signup and view all the answers

How do finite supplies affect commodity trading?

Finite supplies imply that commodities have limited availability, influencing their market value and the strategies traders utilize. Signup and view all the answers

Describe one way commodities can be storable.

Commodities can be stored in various forms, such as grains in silos or metals in warehouses, allowing for future use. Signup and view all the answers

What is the role of the tertiary sector in the commodities ecosystem?

The tertiary sector provides services that facilitate the distribution and consumption of commodities and processed goods. Signup and view all the answers

What does it mean for commodities to have defined production timelines?

Defined production timelines indicate that commodities have specific seasons or cycles in which they can be produced. Signup and view all the answers

Study Notes

Introduction to Commodities

Commodities are raw materials or primary products
Markets for commodities facilitate buying, selling, and trading

Commodities and the Economy/GDP

Commodities are categorized into a hierarchy of sectors
Primary sector: production of raw materials
Secondary sector: transformation of raw materials
Tertiary sector: provision of services
Quaternary sector: information and environmental technology.
Commodities add value to GDP in the secondary sector by processing
Direct dealing in commodities adds to GDP in the primary sector.
The Quaternary sector facilitates the process for consumers.

Key Characteristics of Commodities

Quantitatively and qualitatively measurable
Physically tangible (can be intangible)
Exchangeable - Market place and medium of exchange.
Finite supplies and storable.
High level of in-elastic demand
Market forces are influenced by interest rates and currency exchange rates.

Commodity Classification

Commodities are broadly classified into soft commodities and hard commodities
Soft Commodities: Agricultural commodities (e.g., wheat, soybeans, corn, rice, spices)
Hard Commodities: Non-agricultural commodities (e.g., metals, energy, complex)

Evolution of Exchange Traded Commodity Derivatives

Barter system was the earliest method of payment.
Organized Physical markets had intermediaries, poor storage, and transportation issues.
Contracts and corporate farming/forward agreements emerged.
Exchanges traded commodity derivatives markets emerged; which used systematic trading under surveillance
Open outcry, regulated trading
Electronic platforms offer electronic matching and anonymous bidding/offering.

What is a Commodity Market?

A physical or virtual marketplace for raw or primary products
Includes physical trading and derivatives (e.g., spot contracts, forwards, futures, options)
Spot contracts are agreements with immediate or short-term delivery and payment
Physical trading involves visual inspection and trust
Futures contracts are oldest method of investing in commodities, are secured by physical assets and trade without visual inspection.
Currently 50 major commodity markets worldwide with around 100 commodities.

Group vs Individual (Experiment)

A class experiment demonstrated that group estimates of jelly beans were more accurate than individual estimates.
Open futures market (Group) outperformed closed forward market (Individual)
Groups give a better overall average than individual estimates.

Key Features of Electronic Modern Exchange

Automate screen-based trading.
It benefits from national reach.
Order-driven trading system.
Transparent and objective system of order matching.
Identifies the trader.
Daily turnover limits for 'buy' and 'sell' for each user linked to deposit.
Flexibility in placing orders.
Complete online real-time market information.
Square-off facility.

Derivatives Market

A futures exchange is a central marketplace where buyers and sellers trade futures and options on futures contracts.
Futures markets improve economic infrastructure.
They encourage efficient price discovery.
They assign economic value to ecosystem activities.
They transfer risks among diverse market participants

Derivative Contracts

Binding agreements between buyers and sellers for future delivery of a commodity (or a financial instrument).
Main Functions are trade guarantee, price discovery, risk management, transactional efficiency, and liquidity.

Stature of Spot (OTC) Markets - Complemented by Exchange Traded Derivatives

Spot/forward contracts: opaque transactions, limited information, daily price discovery, counterparty risk, customisable contracts. Low liquidity, few participants, unregulated.
Exchange traded contracts: transparent transactions, wide information dissemination, long-term price discovery, standardized contracts, high liquidity, many participants, regulated.

Exchange Traded Derivatives

Standardized contracts traded on recognized exchanges.
Counterparties are the holder and exchange.
Contract terms are non-negotiable.
Prices are publicly available.
Predominantly online markets, highly liquid.
Cost is comparatively lower.

Indian Commodity Markets - Structure

Primary Sales (APMCs for agricultural products) - no platform is used for non-agriculture products.
Secondary Sales - absence of regulated platform.
Derivatives Markets - regulated exchanges for futures and options.

Evolution of Agri. Marketing System in India

Shows the evolution of the Indian agricultural marketing system through time.
The timeline starts with the Traditional Market System, then Regulated Markets (APMCs) followed by the advent of Alternative Marketing Options, Digitalization of Markets, and ending at Unified National Market, e National Agricultural Market (eNAM.)

eNAM - The Journey So Far

Details the launch and coverage of states and APMCs for eNAM
User base including farmers, traders, Commission agents, and FPOs
Progress from 14th April 2016 to 15th May 2020

Background - Warehousing

Agriculture needs a proper credit system for development and farmers.
Postharvest credit enhances farmer income.
Efficient warehousing reduces losses and adds monetary value to produces.
Enhanced farmer ability to invest in production.
Effective warehousing needs efficient regulation and legal frameworks.

Importance of Warehousing in the Development of Trade and Commerce

Time gap between production and consumption.
Storage creates time utility.
Enables businessmen to carry on production throughout the year.

Agriculture Ecosystem (Post Harvest)

Shows the flow from Production --> Warehouse ---> Transport ---> Distribution --> Consumption
Activities like growing, storage, packaging, quality check, picking, hub, storing, purchase, consumption occur.
Actors are individual producers, producer associations, warehouse service providers, retailers, and market operators, as well as consumer entities.

Supply Chain Post-Harvest Agriculture Warehouse Marketing

Shows the flow through the supply chain.
Actors like farmers, distributors, warehousing facilities, and mills or processing centers.
Includes transportation between levels

Agriculture Supply Chain

Shows the flow of products through the agricultural supply chain.
Actors include producers, warehouse, mandis, wholesalers, mills, and retailers.
Includes institutional distribution and consumer entities
Shows the flow of goods in and out of warehouse facilities

Types of Warehouses

Based on ownership (private, public, co-operative, climate-controlled, distribution centers).
Based on commodities (special commodities, cold storage, general).

Functions of Warehousing

Procurement, sorting, breaking, storage, material handling, display, grading, branding, processing, and inventory control.

General Benefits from Warehouses

Regular production, financing, storing of surplus goods, price stabilization, and minimization of risks.

Features of Ideal Warehouses

Proper location, space, management, proximity to market, parking facility and safety measures.

Warehousing (Development and Regulation) Act

Enacted in 2007.
Gives guidelines for warehouse development and regulation.
Specifies qualifications, code of conduct and practical training for warehousemen and staff.
Promotes professional organizations.
Makes provisions relating to the efficient process of warehouse businesses.

Warehousing Development and Regulatory Authority (WDRA)

Set up by the Government of India.
Functions include issuing registration certificates, regulating the registration.

Powers and Functions of Authority

Issues registration certificates for warehousemen.
Regulates registration.
Specifics code of conduct for officials of accreditation agencies.
Specifies qualifications, code of conduct and practical training.

Requirements of Warehouses for Registration

Construction standards (BIS, CWC, FCI)
Manpower with warehousing expertise
Essential infrastructure (weighing, grading, preservation)
Standard Operating Procedure (SOP)
Adequate insurance coverage
Net worth
Security deposit
Safety and security arrangements
Adherence to local laws.
KYD Process in place.

New Warehousing (Development and Regulation) Registration of Warehouses Rules, 2017

Simplification of registration process
Reduced accreditation requirements

Surveillance and Monitoring Mechanism for Registered Warehouses

Strong monitoring and surveillance.
Speedy feedback on compliance.
Robust inspection system.
Periodic feedback on warehouse performance.
Online warehouse inspection system.

Different Types of Inspections

Physical inspection (pre-registration).
General inspection (post-registration).
Adhoc/surprise inspections.
Existing inspection checklist.
Online warehouse inspection system.

Electronic Commodity Repositories

National E Repository Limited (NERL), CDSL Commodity Repository Limited (CCRL).
Details the Repository Participants and their role.

Repository Participant Ecosystem

Details the entities that can be involved in account maintenance and pledging

Negotiable Warehouse Receipts (NWRs)

Documents issued by warehouses to secure deposits against commodities.
Negotiable, tradable, used as collateral for borrowing.

Advantages of eNWRs

Easy pledge financing for banks
Access to multiple buyers across the nation.
Reduced cost of intermediation
Enhanced quality standards.
Efficient clearing procedures
Increased price realization for agricultural produce
Ability to split the commodity and transfer a certain amount.
Traded on commodity exchanges.

Elements of a Well Developed WRS

Insurance, Licensing, and inspection, WR Registry, Collateral Management, Indemnity Fund
Includes relationship between licensed warehouses and stakeholders.

Assignments

Includes questions pertaining to benefits of Negotiable Warehouse Receipts (NWR).
Includes requirements for warehouse registration and networth requirements.

Background- Non-Agricultural Spot Market

No unified national level.
E-auction platforms exist.
Operate in unregulated atmosphere.

Non-Agricultural Commodities - Regulatory Overview

Base metals (iron and steel), Precious metals (Gold), Energy (coal and oil).
Details the ministries/acts (MMDR Act, etc.) responsible for overseeing certain types of commodities and the status of the markets.

Status of various Markets for Non-agricultural Commodities

Breakdown by the status of the market, including regulated, unregulated, and controlled markets.

Non-Agriculture Spot Market - Need of the Hour

Necessary discussion for a non-agricultural spot market.

Assaying

Grade standards for agricultural commodities.
AGMARK Standards are notable grade standards.

AGMARK

Certification mark for agricultural products.
Enforced by Agricultural Produce(Grading and Marketing) Act.

FSSAI

Established under the Food Safety and Standards Act, 2006.
Regulates and supervises food businesses in India.
Mandatory license for food business operators, distributors, retailers, and storage houses.

Issues of Indian Farmers

Traditional cropping patterns, price fluctuations, asymmetric price information, dependency on monsoon, irregular credit flow, reliance on money lenders
Warehousing, grading, marketing, and APMC laws and absence of common economic market.

Pre-harvest Concerns

Choice of crop, cobweb syndrome, MSP influence, grades and standards, price risks, volumetric risks, yield dependence on monsoon, limited credit availability, crop failure, default on crop loans

Can Cropping Pattern Be Changed?

Crop selection based on future prices.
Leads to cobweb syndrome (overproduction, lower prices, and income).
Diversification to other crops yielding better returns.

The "Cobweb" Syndrome

Cycle of price fluctuations leading to overproduction, price crashes, and poor income.

Economic Benefits of Futures Trading

Reflection on the future direction of markets
Efficient price discovery and price dissemination
Integration of rural, urban and global markets
Enhanced Price risk management.
Benefits to the Financial and Economic Development.
Efficient value chain.
Better credit mobilization.
Increased awareness about quality standards.
Warehouse-based funding.
Investment in related markets (standardization, quality testing, warehousing)

Price Dissemination

Ticker boards, SMS, Exchange real-time price feed (CNBC, Aawaaz, and others), news sources, and web-portals.

Use of Price Information

Farmers use price discovery to determine cropping and sale times.
Risk management for farmers with futures trading to hedge against future price falls.

Direct Benefits of Futures Trading

National market with wide access and availability.
Predictable future pricing helps in crop and sales planning.
Easy access to finance based on hedged positions
Simplified and improved supply chain enhances farmer realisations
Risk management through contract expiry close to harvest.

Indirect Benefits of Futures Trading

Futures and spot movement together
Access to National Reference Price
Increased understanding of quality standards.
Improved returns and reduced wastage
Efficient value chain formation
Providing scientific warehousing facilities and ensuring collateral management.
Stimulates infrastructure development.

Are Farmers Going to Be Directly or Indirectly benefited by Futures Trading?

Large farmers benefit directly, small farmers indirectly.
Futures price correlation for spot markets supports long-term pricing that empowers farmers.
Increased access to finance.

The Utility of Price Discovery @ MCX

The average accuracy is 3.47% for mentha oil, 0.71% for refined soya oil, and 6.64 % for oil.

Integration of Fragmented Spot Markets

Correlation in prices in pre and post futures trades.

Single Window Model: Pre-Harvest

A diagram outlining a single window model for pre-harvest support for farmers.

Participation of Farmers in Futures Trading

Direct participation (large farm cash crops), National Spot Exchange, pooling (e.g., ITC e-Choupal) and by corporates, FCI, and by individuals.

Case Studies of Mentha Oil and Cardamom & other agri commodities pre & post Futures Trading.

Detail studies about mentha and cardamom pre and post Futures Trading.

Supply-chain Transformations in Indian Commodity Markets - Cardamom.

Prior structure and evolving structure of value chain for cardamom.

Market Inclusive Development of Cardamom Growing Regions

Details the shift in cardamom delivery to increase processing, storage, and grading facilities.

Empowering the Farmers – Warehouse Receipts (WR)

Warehouse Receipts (WR) collateral management allows farmers to unlock capital by storing commodity stocks and being able to secure loans.

Mentha Oil Value Chain - Pre & Post Futures*

Details the breakdown of the Value chain in Pre and Post Futures trading.

Mentha Oil – Indirect Benefits of Futures Trading

Key metrics for Pre and Post Futures trading.

Cardamom – Indirect Benefits of Futures Trading

Metrics for Pre and Post Futures Trading

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Description

This quiz explores the functionalities and benefits of eNAM, launched in April 2016, focusing on its role in enhancing farmers' bargaining power and pricing transparency. Additionally, the quiz covers key concepts related to futures exchanges and their contribution to economic infrastructure.