Lecture 1 & 2 Commodities and Markets Lecture Notes PDF

Commodities – Markets, Ecosystem and Economic Benefits Commodities and the Economy/GDP Quaternary Sector Smoothening Commodity facilitation process to Information and...

Commodities – Markets, Ecosystem and Economic Benefits Commodities and the Economy/GDP Quaternary Sector Smoothening Commodity facilitation process to Information and the end consumers Environmental Technology Facilitating the Tertiary Sector Commodities & processed Provision of services to goods to the consumers consumers and business Processing of Secondary Sector the commodities Transformation of raw-materials into goods – Value adds to GDP Primary Sector Direct dealing in commodities Production of raw-materials Adds to GDP Commodities – Key Characteristics Physical and Tangible – Can Include Intangible Quantitatively Market forces Measurable influenced by and currency rates Qualitatively and interest Assayable rates Commodities Exchangeable Key Characteristics Exhibit high- – Market level of in- Place and elastic Medium of demand Exchange Have defined Finite Supplies production and Storable timelines  Commodities Classification Commodities Soft Commodities Hard Commodities (Agricultural (Non-Agricultural Commodities) Commodities) Unprocessed Livestock & Metal Complex Energy Processed Farm Forestry Complex & (Raw/Farm Produce Precious Others Produce) Dairy, Marine, Metals, Base Oils, Meal Petroleum Wheat, Plantation etc. Metals etc products, Products Soyabean, Sugar etc. Corn, Rice, Spices etc.  Broad Evolutionary Stages of (electronic) Exchange Traded Commodity Derivatives Unorganized o Barter system - Cumbersome means of payment (Barter system) o Need was felt for money as a token of exchange o Lack of regulation of the markets Organized physical o Poor market information system markets o Large number of intermediaries o Monopoly of transportation system, poor storage facilities, etc. Contract/corporate o Mutually decided price farming & forwards o Opaque marketplace o Neither legal binding nor well regulated Exchange traded commodity derivatives o Systematic trading under surveillance system market o Regulated trading on legal grounds o Open Outcry - Traders literally “cry out” their bids/offers Open outcry o Electronic platforms – Bids and offers are matched electronically Electronic platforms & anonymously  What is a Commodity Market? A physical or virtual marketplace for buying, selling, and trading raw or primary products. It has its own set of rules and regulations like any other market. Commodity markets can include - physical trading and derivatives – spot contracts, forwards, futures, and options on futures. A Spot contract is an agreement – bought and sold immediately - where delivery and payment either takes place immediately, or with a short lag not more than few days. Physical trading - trust based on - visual inspection - carried out in physical markets. Futures contracts - oldest way of investing in commodities - Secured by physical assets. Derivatives markets, require the existence of agreed standards and regulatory framework so that trades can be made without visual inspection. There are currently about 50 major commodity markets worldwide that facilitates trade in approximately 100 primary commodities.  Group (open futures market) Outsmarting Individual (closed forward market) Finance professor Jack Treynor ran a classic “Jelly-beans-in- the-jar experiment in his class; He asked a class to make a guess on number of jelly- beans in a jar; Each individual making his own guess with different perspective came up with number; Finally, the groups average came out to be at 871 vs. the actual jelly beans being at 850; Interestingly the group average was better than all individual guesses but for one; The experiment easily concludes the superiority of a group’s estimates vis-à-vis the individuals.  Key Features of Electronic Modern Exchange Automated screen-based trading; National reach; Order-driven trading system; Transparent, objective and fair system of order matching; Identity of the trader undisclosed; 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 - What & Why? What is a Futures Exchange? It is a central marketplace with established rules and regulations where buyers and sellers meet to trade futures and options on futures contracts. Why futures markets? Improve economic infrastructure Encourage ecosystem for efficient price discovery Assign right economic value to ecosystem activities Transfer risks among heterogeneous market participants  Derivative Contracts & Its Functions A futures contract is a binding agreement between a seller and a buyer to give (by the seller) and to take (by the buyer) delivery of the underlying commodity (or a financial instrument) at a specified future date with agreed upon payment terms. Main functions of exchange-traded futures contracts are: Trade guarantee Risk management (hedging) Price discovery Transactional efficiency Liquidity Stature of Spot (OTC) Markets – Complemented by Exchange Traded Derivatives OTC Exchange Traded Spot/Forward Contracts Future Contracts Opaque transaction Transparent transaction No or minimal information Far & wide information dissemination dissemination Long term price discovery Price discovery for the day Exchange bears counterparty risk Counterparty risk Standardised contract Customised contract High Liquidity Poor liquidity Many Players Few Players Regulated Unregulated Price limits, margins, position limits Margins, price limits, position limits applicable largely not applicable Price/Time – A Priority Relationship – A Priority Standard structure Skill to Structure  Exchange Traded Derivatives Price Discovery Standardized contracts traded on recognized exchanges Price Risk Management Counterparties: holder & exchange Commodity Contract terms: non-negotiable Facilitating Derivative Physical trade Prices: Publicly available Markets Enhancing Predominantly online markets Credit Flow Highly liquid Asset Class Cost: Comparatively much lesser 12  Indian Commodities Markets - Structure Commodity Markets Spot / Physical Derivatives Markets Markets Primary Sales - Secondary Sales - Absence of Regulated APMCs for agri Absence of regulated Exchanges for products and no regulated platform for futures and platform for non-agri platform forwards options products Evolution of Agri. Marketing System in India Unified Digitalization National of Markets Market – e National Advent of Agricultural Alternative Market Marketing (eNAM) 2016 Regulated Options Markets Model APMC (APMC) Act, 2003 Traditional Market System 14  eNAM – The Journey So Far Launched on 14th Covered April, 2016, 13 states, covering 8 417 Covered 18 states and APMCs by states & 3 UTs, 21 APMCs March, 1000 APMCs by 2017 15 May 2020 Covered 10 Covered 585 states, 250 APMCs by May, APMCs by 2018 September, 2016 e-NAM user base has swelled to 1.66 crore farmers, 1.31 lakh Traders, 73,151 Commission agents and 1,012 FPOs. 15  Background Agriculture needs a proper credit system for development of economy and farmers Postharvest credit through WR finance can contribute towards increase in farmers’ income Efficient WR helps farmers in avoiding distress sale Scientific storage in a warehouse reduces losses, add monetary value to produce, increase liquidity Enhances farmers ability to invest in production Effective WR regime requires efficient regulatory and legal framework  Importance of Warehousing in the Development of Trade and Commerce Time gap between the production and consumption of products Storage creates time utility Enable the businessmen to carry on production throughout the year  Agriculture Ecosystem (Post Harvest) Agriculture Ecosystem (Post Harvest) Production Warehouse Distribution Consumption Transport Activity Activity Activity Activity Growing Storage Picking Purchase Packaging Hub Consumption Quality Check Store Actors Actors Actors Actors Individual Warehouse Retailers Consumers Producers Service Market Producer Providers Operators Association Supply Chain Post-Harvest Agriculture Warehouse Marketing Supply Chain Post-Harvest Agriculture Warehouse Marketing Farmers Distributors Transportation Transportation APMC Market Ware- house Transportation Transportation Mill Ware- Transportation (Processing house Center)  Agriculture Supply Chain Agriculture Supply Chain Retail Input Distribution Supply Stores / Supermarkets Mandi Consumer Producer Ware- Ware- / house Whole house salers Institutional Distribution Mill (Processing Center)  Types of Warehouses Based on Based on Type of Ownership Commodities Stored Private Warehouse (manufacturers/traders and resellers ) Public Warehouse (government and semi Special Commodity government bodies) Warehouses (tobacco, cotton, Co-operative Warehouses wheat etc.) Climate-Controlled Warehouse (freezers, Cold Storages or Refrigerated humidity-controlled environments) Warehouses Distribution Centers General Warehouses (food- Bonded Warehouses (licensed by the grains, fertilizers) government to accept imported goods for storage until the payment of custom duty) Institutional Warehouses (Banks, Railways, Food Corporation of India)  Functions of Warehousing Procure ment Transpor Sorting tation Grading Breaking and (dividing) branding Functions Storage Processing Making items available for Inventory consignment/ control shipment Material Display handling General Benefits from Warehouses Regular Production Time Financing Utility Benefits Store of Packing Surplus and Goods Grading Price Minimization Stabilization of Risk Features of Ideal Warehouses Proper Location Proper Sufficient Manage Space ment Features of Ideal Proximity Warehouses to the Economical Market Parking Safety Facility Measures  Warehousing (Development and Regulation) Act Enacted the Warehousing (Development and Regulation) Act, 2007 (37 of 2007 2007) GOI had notified the Warehousing (Development and Regulation) Act, 2007 2007 in the Gazette of India, Extraordinary, (20th September 2007) Provisions of the Act was made effective from 25th October 2010 2010 For implementation of the provisions, GoI setup a Warehousing 2010 Development and Regulatory Authority (WDRA) w.e.f. 26th October 2010 Warehousing (Development and Regulation) Act Main Objectives Make provisions for the development and regulation of warehouses Promote professional organisations connected with the warehousing business Negotiability of warehouse receipts Establishment of a Warehousing Development and Regulatory Authority (WDRA) and related matters Warehousing Development and Regulatory Authority (WDRA) Chairman Member Member (Full Time) (Full Time) Setup by the GoI from 26th October 2010  Powers and Functions of Authority To issue to the applicants fulfilling the requirements for warehousemen a certificate of registration in respect of warehouses, or renew, modify, withdraw, suspend or cancel such registration; To regulate the registration and functioning of accreditation agency, renew, modify, withdraw, suspend or cancel such registration, and specify the code of conduct for officials of accreditation agencies for accreditation of the warehouses; To specify the qualifications, code of conduct and practical training for warehousemen and staff engaged in warehousing business; To regulate the process of pledge, creation of charges and enforcement thereof in respect of goods deposited with the warehouse; To promote efficiency in conduct of warehouse business; To make regulations laying down the standards for approval of certifying agencies for grading of goods; To promote professional organizations connected with the warehousing business; To call for information from, undertaking inspection of, conducting enquiries and investigation including audit of the warehouses, accreditation agencies and other organizations connected with the warehousing business;  Powers and Functions of Authority To determine the rate of, and levy the fees and other charges for carrying out the provisions of this Act; To regulate the rates, advantages, terms and conditions that may be offered by warehousemen in respect of warehousing business; To specify, by regulations, the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by warehousemen; To maintain a panel of arbitrators and to nominate arbitrators from such panel in disputes between warehouses and warehouse receipt holders; To regulate and develop electronic system of holding and transfer of credit balances of fungible goods deposited in the warehouses; To specify the duties and responsibilities of the warehouseman; To exercise such other powers and perform such other functions as may be prescribed. WDRA Notified Commodities Agricultural Horticultural Commodities Commodities (26) (WDRA Notified Commoditi es 143 ) Pulses Cereals Vegetable Oils Oilseeds Edible Nuts Spices Makhana Miscellaneous  Regulation of Warehousing Business Requirement of registration for warehouses issuing negotiable warehouse receipts Registration of warehouses Registration of accreditation agencies No person shall commence or carry on the business of warehousing issuing negotiable warehouse receipts unless he has obtained a registration certificate after fulfilling the prescribed norms with respect to warehouse(s) concerned granted by the Authority. Section 3 (1) & (2) of Warehousing (Development & Regulation) Act, 2007  Advantages of Warehouses Registered with WDRA May issue Negotiable Warehouse Receipts on which farmers/ depositors may be able to seek loans easily from banks. Warehouses would be following certain norms / requirements and would encourage scientific storage. They will be having trained warehouseman. Registered warehouses would be indicating quality standards / grades of the commodities stored in their warehouses on the NWR.  Requirements for the Warehouses for Registration with WDRA The warehouse should be constructed as per BIS/CWC/FCI standards and is storage worthy. Has got requisite manpower with adequate experience in warehousing. Availability of requisite infrastructure in terms of weighing, grading and preservation. The entity has its own Standard Operating Procedure (SOP) or adopts the model SOP of WDRA. Adequate insurance is taken for the stock against fire, flood, theft, burglary, misappropriation, riots, strikes or terrorism. Possesses Networth as specified by the Authority. Furnishes security deposit as specified by the Authority for securing the negotiable warehouse receipts issued by the warehouse. Has all the safety and security arrangements for the stock and premises. Exhibits compliance to local laws for carrying out the business of warehousing. Has a KYD process in place as prescribed by the Authority.  New Warehousing (Development and Regulation) Registration of Warehouses Rules 2017 Warehousing (Development and Regulation) Warehousing (Development and Regulation) Registration of Warehouses Rules 2010 Registration of Warehouses Rules 2017 Before registration accreditation was No accreditation required before registration. necessary One application essentially had to cover only One application may have one or more than one warehouse. one warehouses of same applicant. Initial registration was for 3 years. Initial registration is for 5 years. Networth was to be only positive Now networth specified as per capacity of the warehouse Security deposit equal to registration fee was More realistic and dynamic security deposit to be submitted. related to aggregate value of NWR issued to ensure trust of banks for pledge financing. Provision of SOP and KYD process was not SOP and KYD defined. there Migration to eNWRs through repository was Migration to eNWRs is provided. not provided.  Surveillance and Monitoring Mechanism for registered Warehouses Strong monitoring and surveillance system. Speedy feedback on regulatory compliance of the warehouses. Existence of robust inspection system. Periodic feedback on performance of warehouses. Online process for warehouse inspection system.  Different Types of Inspections Physical inspection (pre-registration) – Physical infrastructure. General inspection (post-registration) of infrastructure, stock and SOP (once in a year). Adhoc / Surprise inspection of infrastructure, stock and SOP. Inspection check-list exists for all types of warehouses i.e. conventional, silo and cold storage. Online warehouse inspection system.  Electronic Commodity Repositories National E-Repository Limited (NERL) CDSL Commodity Repository Limited (CCRL) Repository may appoint one or more entities as Repository Participants for carrying all or any of the core activities of repository. Core activities to be carried out by WSPs/Warehouseman Core activities to be carried out by Repository Participant – Account Maintenance Core activities to be carried out by Repository Participant – Pledgee  Repository Participant Ecosystem Repository can appoint as its Repository Participants – Account Maintenance any of the following type of entities: Scheduled Commercial Bank (RBI Act 1934) / Financial institution (licensed under the Banking Regulation Act, 1949) Any intermediary registered with SEBI A warehouseman meeting the requirements that the Repository may specify any entities regulated by PFRDA, IRDA, or any other class of persons permitted Repository can appoint as its Repository Participants – Pledgee any of the following type of entities: Scheduled Commercial Bank (RBI Act 1934) / Financial institution (licensed under the Banking Regulation Act, 1949) Such other financial intermediaries which are permitted by RBI Any custodian as defined by SEBI  Negotiable Warehouse Receipts (NWRs) Warehouse Receipts are documents issued by warehouses to depositors against the commodities deposited in the warehouses, for which the warehouse is the bailee. NWRs can be traded, sold, swapped and used as collateral to support borrowing. WDR Act provides for issuance of Negotiable Warehouse Receipts (NWRs) by the warehouses registered under this Act. Section 2(m) defines a "negotiable warehouse receipt" to mean a “warehouse receipt under which the goods represented therein are deliverable to the depositor or order, the endorsement of which has the effect of transfer of goods represented thereby and the endorsee for which takes a good title.” Rule 27: With effect from such date as may be specified, no warehouseman shall issue any NWR in physical form, and shall register with one or more repositories registered with the Authority for issuing NWR in electronic form. With effect from 1st June 2019, no warehouseman shall issue any NWR in physical form Advantages of eNWRs Facilitate easy pledge financing by banks. Help farmers/depositors to have access to a large number of buyers nationwide with better bargaining powers. Enable multiple transfers without physical movement of goods and alternate channels of marketing to farmers and reduce the cost of intermediation for consumers. Enable consumers (processors, wholesalers, retailers, industries) to procure graded produce at competitive prices. Promote an efficient clearing, settlement and delivery system with transparency in trading of agricultural produce. eNWRs can be split with obligation to transfer only a part of the commodity. eNWRs can be issued by Repositories and traded in commodity exchanges.  Elements of a Well Developed WRS Regulatory Indemnity Insurance Agency Fund Perfecting security Licensing interests on WR Registry Collateral Protection and Inspection against Uninsurable risks WR Licensed Public Warehouse Producers, Bank Depositors, Commodities Traders, Short-term Processors Finance  Assignments A. How the NWR are helpful to farmers? List out the benefits. B. Presume you have a warehouse. What are the requirements for the warehouse for registration with WDRA? C. Assume you own five warehouses A, B, C, D and E of 5,000, 19,000, 25,000, 30,000 and 50,000 tons respectively. Find out the application fee you’ll incurring if you want registration of all the five warehouses with WDRA. Please indicate the networth requirements for each of these warehouses for registration with WDRA.  Background No unified national level (or even state level) spot markets either for agricultural or non-agricultural goods in India. There exist a few e-auction platforms in private sector [NCDEX eMarkets Limited (NeML) for agricultural commodities and Mjunction for base metals (mainly steel)] They operate in an unregulated atmosphere, hence fall short of being called pan-India spot market for commodities. Launch of e-NAM for agricultural commodities In the non-agricultural sector, there exists no such regulated electronic spot market platform (except for the power exchanges under regulation of CERC). 43 Agri. Commodities Market Ecosystem Participants FPOs Govt. Farmers Agencies Commis sion Customer Agents Agri. Commodities Markets Ecosystem Participants Industrial Traders Customer Retailer Miller/ /Retail Processor Bank/ Chain Financier 44  Traditional Agriculture Supply Chain Farmer/ Producer Warehouse Industrial Customer Customer Com. Miller/ Agent cum processor Warehouse trader Retail Retail Chain Retailer Chain Procurement Wholesaler Outlet 45 Agricultural Commodities Markets – Regulatory Framework Ever since Independence, transactions in farm commodities have been regulated notably through the Essential Commodities Act (ECA) and the Agricultural Produce Market Committees Act (APMC Act) ECA imposes restrictions on storage and movement of certain ‘essential’ commodities by private parties, mainly to protect consumers. APMC Act mandated that purchases of certain agricultural commodities be through government-regulated markets (mandis). The Model Agricultural Produce Market Committee (APMC) Act, 2003, was formulated to remove some of the limitations of the old APMC Act. Opening up the markets to private sector and cooperatives and by allowing direct farm sales and contract farming. Envisaged use of technological infrastructure for marketing and online trading of agricultural produce. MoA suggests States to bring in amendments to the APMC Act and adopt the Model Agricultural Produce and Livestock Marketing (Promotion and Facilitation) Act, 2017. 46  Evolution of Agri. Marketing System Advent of Traditional Regulated Alternative Digitalization of Unified National Market System Markets Marketing Markets Market – e Options National Agricultural Berar Cotton Market (eNAM) and Grain Market Act of 1887 &Royal Digital Contract Village Sale Commission Integration at Farming (1928) State Level (Model Agricultural Produce and Enactment of Livestock Agricultural Marketing Produce (Promotion & Market Facilitation) Act, National 2017) Committee Direct commodity Post Harvest (APMC) Marketing derivatives immediate sale through FPOs exchanges, No farm gate / Cooperatives Erakam, NSEL sale by farmers 47  Benefits of Regulated Pan-India Electronic Spot Exchange for Commodities More selling options for farmers. Better monitoring and regulation. For traders, provide access to Better information dissemination larger national market for for all stakeholders. secondary trading. Better realization of fees/cess or Reduce intermediation cost for levies. bulk buyers, processers, Channeling the demand-supply exporters by direct participation. information into a central place For consumers, provide stable prices and availability. Benefits to the Benefits to the value chain Government participants Cohesion between the futures and physical markets. Benefits to the Usher in best practices in Lead to the standardization of ecosystem Other Benefits commodity trading. the quality of commodity. Make bank finance easily Efficient price determination. available against the goods Eliminate the possibility of stored in the warehouse. cartelization. Better risk management Lower operational cost. 48  eNAM - Objectives National Agriculture Market (eNAM) is a pan-India electronic trading portal launched by the GoI, with an objective to network the existing APMC mandis to create a unified national market for agricultural (and allied) commodities. Objectives Better price and bargaining power to farmers Access to more markets for buyer Increase competitiveness Establish quality assaying systems Real time information of prices/trade Transparent and quick financial transactions 49  eNAM – The Journey So Far Launched on 14th Covered April, 2016, 13 states, covering 8 417 Covered 18 states and APMCs by states & 3 UTs, 21 APMCs March, 1000 APMCs by 2017 15 May 2020 Covered 10 Covered 585 states, 250 APMCs by May, APMCs by 2018 September, 2016 e-NAM user base has swelled to 1.66 crore farmers, 1.31 lakh Traders, 73,151 Commission agents and 1,012 FPOs. 50  eNAM Process Gate Entry Online Weighment Assaying Trading Exit Online Payment Invoicing 51  Agri. Commodities Change of Hands – Traditional & eNAM Process Stages Traditional Process eNAM Farmers bring their produce to the mandi, may pay a small fee A lot number is generated Gate Entry for entry at the gate of the mandi A sample from each lot is Traders and CAs perform collected and tested for quality Quality Assaying quality assaying through (as per the quality parameters physical inspection for each lot specified by eNAM), in a lab at before auctioning the mandi, Only the price is fixed at the Traders bid till the end of Traditional Auction time of auction and the mandi auction time. The highest bid official generates a slip for it on a lot closes the deal The farmer receive payments either in cash, check, or in The farmers get a direct transfer Payment & Settlement their accounts to their accounts 52 National Agriculture Market – Screen Snapshot 53  eNAM – Brief Status By January 2019, when the first inter-State trade took place, there were only 585 mandis connected to National Agricultural Market (e- NAM) - As on July 23, 2020 – 1000 Mandis Associated with eNAM eNAM connected mandis, or wholesale markets, up 65% since the lockdown, total mandis connected rose to 1000. 22,000 additional mandis are expected to be linked by 2021-22. Only 5% of farmers completed a transaction on eNAM platform. Buyers: 101,000 Commission agents: 53,163 Sellers (farmers): 73,50,000. Major Commodities - Wheat, chilies, paddy, cotton, potato, castor seed, maize, groundnuts though 100 commodities are available on the eNAM platform. Total transactions conducted through the platform falls between 0% - 4% of the total volume of commodity traded. Total transactions (excluding payments) conducted on eNAM is less than 1% of the total transactions conducted in a mandi. 25 Food Grains 13 Oil seeds 14 Spices 29 Fruits 40 Vegetables 29 Misc Total – 150 Products 54  eNAM – Value Proposition for Farmers (1/2) The price can be recorded for every trade and can be accessed for analysis and audit, Transparency of compared to the current practice where it is recorded manually and has a limited pricing digital trail. Increase in eNAM will attract more buyers eventually and this will increase the bargaining bargaining power of farmer. power Reduction in Transparency in the entire trading will reduce instances of fraud and the exploitation fraud and of farmers exploitation eNAM will lead to a harmonization of quality and will encourage farmers to bring Quality-based better quality produce to the mandi trading Linked to the quality of produce and market-determined prices, as compared to Better price what local traders or commission agents force them to sell at. realization 55  eNAM – Value Proposition for Farmers (1/2) eNAM enables the commission agents and traders to access a larger Access to a larger market, giving them a chance to increase their business. market eNAM enables CAs and traders to work from the comfort of their Ease of doing trade shops and offices and help them save their time and resources. eNAM enables traders to bid for the entire lot in one go, as opposed to the traditional process, where they have to bid one by one for Ease in conducting the bidding process every lot. eNAM enables traders to settle their account with farmers, CAs, and Ease of payment mandi officials in one go and reduces paperwork. 56 Non-Agricultural Commodities Markets Absence of electronic spot exchange results in opacity in price discovery process. Base Metals - Primary markets are dominated by a few sellers or manufacturers / refiner of the commodities. Precious Metals – Highly fragmented, unorganised and family owned business. All transactions are largely linked to benchmark global prices. Local prices are highly dependent on the LME/CME prices. Lack of storage facilities for metals. Inability to monetize warehouse receipts increases pressure on the entire value chain. Lack of adequate infrastructure and transport facilities limit movement and delivery of metals. Consumer side is largely fragmented with the presence of a huge number of SMEs and MSMEs that operate in an unstructured manner across industries. 57 Non-Agricultural Commodities – Regulatory Overview Base Metals Ministry of steel is dedicated ministry which regulates iron and steel industry in the country. Presently there is no dedicated ministry which regulates non- ferrous metals industry/sector. Regulations for the mines fall under the purview of the Ministry of Mines. The Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act), lays down the legal frame-work other than petroleum and natural gas. Precious Metals Absence of an electronic spot exchange. Vaults providing storage services for precious metals are not regulated by any regulator or agency. Lack of regulated assaying and refining facilities. 58 Non-Agricultural Commodities – Regulatory Overview Energy Ministry of Coal (MoC) is responsible for overseeing the management of India’s coal industry Upstream oil and gas industries are overseen by the Ministry of Petroleum and Natural Gas (MoPNG). The Petroleum and Natural Gas Regulatory Board Act, 2006 (“PNG Act”) notified on April 3, 2006, set-up of the Petroleum and Natural Gas Regulatory Board (PNGRB). PNGRB regulates the refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas. The PNG Act provides for a legal framework for downstream gas sector regulation and development of natural gas pipelines and city or local gas distribution networks. 59 Status of various Markets for Non-agricultural Commodities Regulated Unregulated Controlled Primary Markets Gold Imports Secondary or Scrap Derivatives Market Markets for the Storage Oil and Natural Gas Non-agricultural Infrastructure Commodities Electronic platform (if any) Mining of Non- Logistics and agricultural Transportation Commodities 60 Non-Agriculture Spot Market – Need of the Hour 61  Assaying The grade standards of 213 agricultural commodities have been notified in 105 Commodity Grading and Marking Rules. The grade standards notified under the provisions of the Agricultural Produce (Grading and Marking) Act, 1937 are popularly called ‘AGMARK Standards’. Grading and marking under AGMARK is voluntary as per the provisions of the Act. Certification of blended edible vegetable oils and fat spreads is mandatory under AGMARK as per he Food Safety and Standards Act, 2006. 62  AGMARK AGMARK is a certification mark on agricultural products in India, assuring that they conform to a set of standards approved by the Directorate of Marketing and Inspection, an agency of the GoI. AGMARK is legally enforced in India by the Agricultural Produce (Grading and Marking) Act, 1937. AGMARK standards cover quality guidelines for 205 different commodities spanning a variety of Pulses, Cereals, Essential Oils, Vegetable Oils, Fruits and egetables, and semiprocessed products. So far Agmark standards have been framed and notified in respect of 163 commodities. 63  FSSAI FSSAI is an agency or a division of the Ministry of Health & Family welfare. FSSAI was established under the Food Safety and Standard Act, 2006. FSSAI helps to regulate and it also supervises the functioning of the food businesses in India, and in order to monitor and to promote public health. FSSAI is thus mandatory for all the food business operators, distributors, retailers and the storage houses to get an FSSAI license. FSSAI oversees the conditions of manufacturing, storing and for warehousing, distribution, developing of sanitary standards and also for promoting awareness among the consumers. 64 Issues of Indian farmers Traditional cropping pattern (subsistence farming) Income variation due to price fluctuations o Asymmetric price information Dependency on monsoon Irregular flow of credit o Reliance on money lender, adathiya Stocking infrastructure o Warehouses, grading, etc. Marketing o APMC laws, absence of common economic market  Pre-harvest Concerns Choice of crop o Cobweb syndrome o Influence of MSP o Grades and standards Price risk Volumetric risk o Yield dependent on monsoons Credit availability limited o Crop failure ▪ Default on crop loans Can cropping pattern be changed? Selection of crop to be based on futures prices – Present tendency is to choose crop based on spot price – Leads to cobweb syndrome of overproduction, lower prices and income Subsequent shift to other crops which yield better returns – Can be eschewed if futures prices are used as a signal for cropping pattern Subsequently can be hedged on the commodity exchange to lock in the price..for this, the first requirement is to have access to prices  The “Cobweb” Syndrome Bandwagon Glut in effect production Current price Crash in prices determines future crop The starting choice point Poor income realization Prices rise Shortage in Change of earlier crop crop Futures prices would help farmers migrate to demand-led-cropping pattern Economic Benefits of Futures Trading Reflect a view on the future direction of the market Efficient Price discovery Price dissemination Integration of rural, urban and global markets Price risk management Derivatives Enhance Financial & Economic Development Efficient Value Chain Better credit mobilization Increased awareness about quality standards Warehouse based funding Rising investment in market related infrastructure (e.g., standardization/quality testing/warehousing)  Price Dissemination Ticker Boards installed in some markets Availability of Futures & Spot prices of commodities on SMS Exchanges real time price feed is disseminated through o CNBC Aawaaz, ZEE Business News, DD News, TV9 o Approx. 50 national & local newspapers o Rural kiosks supported by institutions like MSSRF, “Gramin Suvidha Kendra”, Kerala State IT Mission etc. o Available on web-portals displaying the commodity market information; e.g. www.agmarknet.nic.in Distribution Channels – TV, Internet, Newsprint, Bank Branches, Post Offices, Co-operatives, Warehouses, Procurement agencies, Mandis, etc.  Use of Price Information Players Action Benefit Price Discovery Farmers Follow Futures Prices Decide on cropping Farmers Follow Futures Prices Decide on time of sale Price Risk Management Farmers Sell in Futures for upcoming crop Protection against price fall Farmers & Traders Sell in Futures for stored quantity Protection against price fall Buy in Futures for export Exporters commitment Protection against price rise Buy in Futures for input Domestic Users requirements Protection against price rise Direct Benefits of Futures Trading National Market o Around 5,00,000 participants in futures market across India from over 1000 cities Expected future prices of commodities known in advance o A farmer can plan his crop and sales by looking at prices prevailing in the futures market Easy availability of finance o Based on hedged positions farmers can get easy financing from the banks o Streamlined supply chain enhances farmers realisation Risk Management o Farmers can sell in the contract expiring close to the harvest date, to lock-in the current price. Indirect Benefits of Futures Trading Futures and Spot move in tandem o Farmers benefits either directly from futures or indirectly from spot Access to National Reference Price o Integration of domestic market through the reference price o Increased awareness of quality standard ▪ Improved return and reduced wastage o Formation of efficient value chain o Providing Scientific Warehousing services o Development of collateral management o Stimulate infrastructure development Are farmers Going to Benefit Directly or Indirectly? Large farmers do get this price directly Small farmer could use consolidator for direct participation – banks/ warehouse/ pool operators Spot – futures - High correlation - enables the farmers to get futures linked prices in spot market Long-term price curve empowers farmers Value chain gets empowered by the price information emanating from futures markets – Shrinks marketing margins - Removes redundant participants in the chain Markets cause development of infrastructure which encourages value addition – Improves price realization – Reduced wastage Ultimate solution – National Spot Exchange (eNAM)  The Utility of Price Discovery @ MCX Converged Predicted Spot & Sowing Spot Price Futures Prices Futures Price Prediction Commodity Period (Sowing) (Sowing) (Harvest) Accuracy Mentha Oil (Rs/Kg) Apr-07 588.33 537 519 3.47 Chana (Rs/qtl) Dec-07 2759 2230 2246 0.71 Refined Soy Oil (Rs/10 kg) Aug-07 487.6 478 512 6.64 Note: Signs are ignored to emphasize on the strength of the relationship Futures and spot prices are the monthly average prices of a particular contract on MCX of a particular month Prediction accuracy is % deviation between predicted futures price at the time of sowing and converged spot and futures prices post harvest Source: CMIE, India Harvest  Integration of Fragmented Spot Markets Commodity Pre-Futures (2004) Post - Futures (2005) Intra-seasonal price Intra-seasonal price Price Correlation Price Correlation difference difference Rice 0.00 - 23.00 4.84 0.00-70.00 4.32 Tur 0.00 - 27.00 7.47 0.00 - 80.00 6.18 Wheat 0.00 - 82.00 10.59 0.00 - 94.00 8.79 Urad 0.00 - 0.61 23.88 0.00 - 0.85 23.81 Note: All figures in percentage Price correlation refers to the range of correlation in prices among different spot markets. The period of analysis is one season pre-Futures (2004) and one season post-Futures (2005). Season refers to the crop season for all the commodities. The respective crop seasons for the respective crops can be classified as: Rice - July to June (Kharif crop) Tur - July to June (Kharif crop) Wheat - November to October (Rabi crop) Urad - July to June (Kharif crop) Intra-seasonal price difference is arrived at by taking the average of percentage deviation in prices of different spot markets in a crop season (pre and post Futures) mentioned above. Source: CMIE, India Harvest  Single Window Model: Pre-harvest Price Hedge MSF1 Comexes Banks MSF2 Aggregators Insurance Exchange MSFn Weather Coll. Mgmt Derivatives/Ins urance /Crop Insurance Volume Hedge * MSF: Marginal & Small farmers Just 3-4 farmers per aggregator =< 4 hectares, meeting minimum exchange requirements as well MAKING MARKETS ACCESSIBLE FOR ALL  Single Window Model: Pre-harvest MSF1* A Sell G forward G Comexs MSF2 R Storage E WSPs facility G MSFn A Banks Assaying & T grading O R Commodity S backed bank finance (WR) * MSF: Marginal & Small farmers Participation of Farmers in Futures Trading Direct participation by farmers o Large farmers or more farmers growing cash crops Other solutions o National Spot Exchange (eNAM) o Pooling of produce and participation by an external agency, e.g.: ITC e-Choupal o Participation by corporates & procuring from farmers e.g.: Markfed, Cargill, Australian Wheat Board, Britania, etc. o Participation by FCI as a Commodity Pool o Participation by farmers themselves after pooling of produce through aggregator  Case Studies of Mentha Oil and Cardamom & other agri commodities pre & post Futures Trading Supply-chain Transformations in Indian Commodity Markets - Cardamom Prior - 2004 - 05 Post - 2007 - 08 Source: MCX field research  Market Inclusive Development of Cardamom Growing Regions Shift in Delivery Center- Vandanmedu, largest cardamom auction center One MCX warehouse (NBHC facilitated)- better and scientific Capacity- 380 tons, meant for delivery of traded contracts Non MCX warehouses in the area are not customized for cardamom storage Overall, 19 grading centers in the region (4 post MCX) Promoted storage activity in producing area Led to value addition activity shift to growing area Empowered farmers against exploitation by middlemen Empowering the Farmers – Warehouse Receipts (WR) Collateral management -empowered to store the commodity and to unlock the capital Warehouses issue a WR against the stored stocks Banks like AXIS bank and HDFC have financed against these WR NBHC currently involved in a formal tie up with Federal Bank – a bank with wider presence in the Cardamom growing areas  Mentha Oil Value Chain - Pre & Post Futures* More nos. of intermediaries Lessening of nos. of intermediaries Quality parameters unknown – measured crudely Standardization of quality parameters Higher margins Drop in margins charged by brokers Market opacity Transparent Platform Pre Futures^ Farmers Post Futures* 7% FARMER Commission 2% Village pooling Agent Agent 1% 1% 3% Traders BROKER Brokers 1% 2.5% 2.5% 2% 2.5% 2.5% TRADER MANUFACTURER/ INVESTOR Manufacturers Exporters 0.004%, 4% MCX ^ - 2004 - 05 Exporters * - 2007 - 08 Source: MCX field research Mentha Oil – Indirect Benefits of Futures Trading Parameters Pre-Futures (2004-05) Post-Futures (2007-08) Avg. Export Price 438.5 607 (Rs/Kg) No. of Terminals Nil 300 Area (ha) 1,00,000 3,00,000 Production (tons) 12000 30000-32000 Quality Standard (GLC 5 40-45 labs count) Value Chain Margin 11-12 7.5-10.5 (percent) Source: Spices Board India, MCX Survey and Trade Sources Cardamom – Indirect Benefits of Futures Trading Parameters Pre-Futures (2004-05) Post-Futures (2007-08) Avg. Export Price 368 495 (Rs/Kg) No. of Terminals Nil 60 Quality Standard Nil 4 (Grading and standardization labs) Value Chain Margin 15-20.5 3-4 (for people trading (percent) on Commex) Source: Spices Board India, MCX Survey and Trade Sources Thank You