Commodity Analysis

AGRIDEX: A new barometer of agri-trading

Rajalakshmi Nirmal | Updated on June 14, 2020 Published on June 14, 2020

Risk is relatively less in index futures than in futures on a single commodity

Participants in the agri value-chain, including producers, processors and exporters, have one more tool for risk management now. NCDEX, the agricultural commodity futures exchange, recently announced the launch of futures contract on its agri-commodity index, AGRIDEX.

The AGRIDEX index was launched in November 2019. It is India’s only return-based agricultural futures index. Although NCDEX (National Commodity and Derivatives Exchange)has had an agri commodity index named ‘Dhanya’ (renamed ‘NKrishi’) since 2012, it was not available for trading.

AGRIDEX tracks the performance of 10 commodities traded on NCDEX platform — soyabean, chana, coriander, cotton-seed oilcake, guar gum, guar seed, mustard seed, refined soy oil, castorseed and jeera. Each commodity has different weights in the index based on production (last five-year average) in the domestic market and the liquidity of the contract. Currently, the commodities with most weight are soyabean (18.43 per cent), chana (17.81 per cent) and mustard seed (12.12 per cent).

Those with least weights are coriander (3.22 per cent) and jeera (3.89 per cent). A cap of 20 per cent and a floor of 3 per cent are enforced on each component of the index to ensure that the index is well-diversified. Also, it is ensured that none of the related group of commodities (pulses, spices, edible oil and oil seeds, grains, cotton complex, industrial products) constitutes more than 40 per cent of the weight in the index, which is reset every year on April 1.

Commodities will be selected again and weights will also be reassigned.

AGRIDEX futures started trading on May 26; the starting value of the index was 1,000. On Friday, the index’s closing value was 1,038.75.

The average daily turnover in AGRIDEX future since the launch has been around ₹10 crore, with about 200 contracts traded in a day. Though, this is not a big number , trading interest may improve going ahead. Open interest (OI), however, has not changed much, showing the conviction of the traders in the contract.

The advantage for a trader with AGRIDEX futures is that it represents a basket of 10 different commodities. Risk in trading will be relatively less vis-à-vis risk in trading in the futures of a single commodity.

Traders, FPOs (farmer producer organisations) and retail investors who were keeping away from agri-commodities all this while may now show interest in AGRIDEX futures. For retail investors, it can be an effective tool for portfolio diversification and can also be an inflation hedge. However, note that it is not a sample of the entire basket of agri-commodities. Currently, it excludes grains, sugar and cotton. It is not a true representation of the direction of prices in agri-commodities.

Contract specifications

The contract will be cash-settled. There are four contracts available for trading now —expiring in June 2020, July 2020, September 2020, and December 2020. Each lot represents 500 contracts. They will trade Monday through Friday. The initial margin on the contract is 6 per cent. Daily price limit will be (+/-) 4 per cent. Once the 4 per cent limit is reached, after 15 minutes, the limit shall be increased further by 2 per cent. Trading shall be permitted during the 15 minutes within the 4 per cent limit.

Note that in case of a sharp upside/downside movement or increased volatility, an additional/special margin at a percentage, as deemed fit by the regulator/exchange, may be imposed on all outstanding positions. NCDEX’s data on returns of AGRIDEX for last four years show that the index has been moving south.

Published on June 14, 2020
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