“Commodities market, unlike the stock market is not ‘mood’ or sentiment’ driven. It is rather driven by the demand and supply of the commodity in question.

Again, while the shares of a company are fixed in number, in the case of commodities, the availability would depend on production and the seasonality of demand and supply,” the Vice-President of the National Commodities and Derivatives Exchange (NCDEX) Ltd, V. V. Ganesan, explained at an investor awareness and education seminar in Pollachi.

The seminar, a Business Line initiative and the eighth in the series, was held in association with the Forward Markets Commission (FMC) and NCDEX.

Ganesan, who was speaking on ‘Introduction to Commodity Futures Market,’ put the listeners at ease by asking simple questions such as the price of one kilogramme of potato on Thursday.

Enthusiastic listeners responded instantly, but Ganesan started probing further, asking them if it was the wholesale or retail rate, opening or closing rate, quality and variety of the potato and so on.

Thereafter, he got them interested on the subject.

“This is the spot market rate. How will you determine the price of potato at a specified date in future,?” he asked and engaged the audience in combination of price moves and the probabilities of the buyer or seller dishonouring the contract.

While urging the participants to desist from speculating on the prices, Ganesan said, “you can learn a lot about the price trend/ movement of various agricultural commodities in the exchange. Research and understand the basic concepts and discover the price of a given commodity on some specified date in the future. Since we are linked to the global markets, it is crucial to understand the trend, rather than go by market rumours and speculate,” he said.

He further pointed out that the exchange would not only facilitate trading in commodities, but also help the user track the price of the commodity at some specified future date.

The exchange facilitates trading of 31 commodities via its 42,000 terminals and thousands of buyers and sellers are said to trade at any given time.

When queries were raised about rising price levels, particularly when the trade materialised on the electronic platform, and about physical delivery of the traded commodity, the NCDEX VP said, “there is a perception that no physical delivery happens when commodities are traded on the e-platform. But this is incorrect. Physical deliveries do take place. We have accredited warehouses for facilitating the delivery. And the Forward Markets Commission regulates, supervises the NCDEX. Neither this exchange nor the FMC controls the price of agricultural commodities. Price determination is done by the market forces. We only ensure price discovery and help manage the price risk. The transactions are routed through banks. The system is transparent.”

Commodity education

Emphasising the importance of commodity education, G. Chandrasekhar of The Hindu Business Line said commodity hedging would be the way forward in managing price risk and this has been proven scientifically.

Areas such as food, textile and clothing, housing and infrastructure and energy would witness a tremendous growth in the next few years.

(This article was published on August 10, 2012)
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