A Brief History of Commodities Trading in India

Commodities trading in India has a rich history spanning over 125 years. A significant milestone was the establishment of the Bombay Cotton Trade Association in 1875, which marked the beginning of organized commodity trading in the country. Trade in commodity futures flourished for many years, but it stopped in the mid-1960s due to various factors such as wars, natural disasters, and supply shortages.

However, with the introduction of economic reforms in the 1990s, the importance of commodity trading was rediscovered in India. By the start of 2002, the country saw a resurgence in commodity trading, with around 20 exchanges operating in India, trading in 42 different commodities. Some of these commodities were traded internationally, highlighting India's growing presence in the global commodity market.

Regulatory Framework and Reintroduction of Commodity Futures

The commodity futures contracts and exchanges in India were previously governed by the Forward Contracts (Regulation) Act of 1952. The Forward Markets Commission (FMC) was the regulatory body responsible for overseeing the commodity markets. However, in September 2015, the FMC merged with the Securities and Exchange Board of India (SEBI), which became the unified regulator for the securities and commodity markets.

In 2002, the government permitted the reintroduction of commodity futures trading, and the FMC approved the establishment of three screen-based commodity exchanges. These exchanges enabled the trading of multiple commodities across the country, marking a significant milestone in the development of India's commodity markets.

Investing in Commodities: Diversifying Your Portfolio

Commodities offer a valuable investment opportunity for those looking to diversify their portfolios beyond traditional assets like shares, bonds, and real estate. There are various ways to invest in commodities, including:

• Buying stocks in companies that rely on commodity prices

• Investing in mutual funds, exchange-traded funds (ETFs), or index funds focused on commodities-related companies

• Entering into futures contracts, which bind the holder to buy or sell a commodity at a set price on a future date (the most direct way to invest in commodities)

The good news is that retail investors can now trade in commodity futures without having to hold physical stocks! This makes it more accessible and convenient to explore commodity investments.

Commodities as a Lucrative Asset Class

For the savvy investor, arbitrageur, and speculator, commodities offer immense potential as a distinct asset class. The fundamentals of demand and supply that drive commodity prices are relatively straightforward. However, retail investors must thoroughly understand the risks and benefits of trading in commodity futures before investing.

Historically, commodity futures pricing has been less volatile compared to equities and bonds, making them an attractive option for diversifying a portfolio. A commodity market can be either a physical or virtual platform where raw or primary products are bought, sold, and traded. Globally, there are over 50 significant commodity markets, facilitating trade in nearly 100 primary commodities, and providing a vast landscape for investment opportunities.

Classifying Commodities and Understanding Commodity Markets

Commodities are broadly categorized into two types:

• Hard commodities: Natural resources extracted or mined, such as gold, silver, copper, rubber, and oil.

• Soft commodities: Agricultural products or livestock, like wheat, corn, coffee, soybeans, and sugar.

Commodity markets, whether physical or virtual, operate similarly to other markets, enabling buyers and sellers to trade commodities at current or future dates. Commodity futures play a crucial role in:

• Information pooling and risk sharing

• Facilitating transactions between buyers and sellers

• Informing decisions on storage and consumption

• Enhancing the liquidity of the underlying commodity

By performing these functions, commodity markets efficiently connect buyers and sellers, promoting efficient price discovery and risk management.

Understanding Commodity Futures and Exchanges

Commodity futures trading involves an agreement between a buyer and seller, where the buyer agrees to pay a fixed price for a commodity to be delivered on a predetermined future date. This allows farmers, traders, and investors to manage risk and lock in prices. For instance, a farmer can buy wheat futures to secure a future sale price, while a trader can buy or sell wheat futures to profit from price movements.

In India, commodity trading is facilitated through various exchanges, including:

• NCDEX (National Commodity and Derivatives Exchange Limited)

• MCX (Multi Commodity Exchange)

• NMCE (National Multi-Commodity Exchange of India Ltd.)

• COC (Chamber of Commerce)

• BOOE (Bhatinda Om & Oil Exchange Ltd.)

• ACE (Ace Derivatives & Commodity Exchange Ltd.)

• UCX (Universal Commodity Exchange)

• NSEL (National Spot Exchange Limited)

• ICEX (Indian Commodity Exchange Limited)

These exchanges operate electronically, providing a platform for trading and settlement. They enable investors to participate in commodity markets, managing risk and potentially generating returns.