What is Commodity Futures?

Commodity Futures are contracts to buy/sell specific quantity of a particular commodity at a future date. It is similar to the index futures and stock futures but the underlying happens to be commodities instead of stock and indices.

Commodity futures are introduced a decade ago in India. Aren’t they?

Commodity futures market has been in existence in India for centuries. The government of India banned futures trading in certain commodities in 70s. However trading in commodity futures have been permitted again by the government in order to help in the commodity producers, traders, hedgers and investors. World-wide commodity exchanges have been originated before other financial exchange. In fact most of the derivatives instruments had their birth in commodity.

Who are the major commodity Exchanges?

The Government of India has permitted to establish National level Multi Commodity exchanges in the year 2002 and subsequently three exchanges have come into pictures in the year 2002-03. They are

  • Multi- Commodity Exchange of India Ltd, Mumbai (MCX)
  • National Commodity and Derivatives Exchange of India Mumbai (NCDEX)
  • National Multi Commodity Exchange, Ahmadabad (NMCE)
  • However, there are other regional commodity exchanges functioning all over the country. Later on few more exchanges came into existence at national level and are non functional.
  • Karvy Comtrade Limited has got membership of all the above three national exchanges namely MCX, NCDEX and NMCE
  • At international level there are few major commodity exchanges in U.S.A, Japan, China and U.K.

Some of the most popular exchanges around the world are given below along with major commodities traded:-

New York Mercantile Exchange (NYMEX) Crude oil, Heating Oil etc
Chicago Board of Trade (CBOT) Soy Oil, Soy Beans, Corn etc
London Metal exchange LME Aluminum, Copper, Tin, Lead, Zinc, Nickel, etc
Chicago Board Option Exchange (CBOE) Options on Energy, Interest Rate etc
Tokyo Commodity Exchange (TCE) Silver, Gold, Crude palm oil , Rubber etc
Malaysian Derivative Exchange (MDEX) Rubber, Soy Oil, Crude Palm oil etc
Commodities Exchange (COMEX) Gold, Silver, Platinum, Copper etc
Dalian Commodity Exchange (China) Soy bean, Soy Oil, Palm oil etc
Zhengzhou Commodity Exchange (China) Grains, Sugar, Oil futures etc

Commodity markets are small. Aren’t they?

This is the biggest myth about the commodities market. Commodities (spot) markets size in India only is about Rs 11 trillion worth per annum.

Internationally the futures market in commodities is 15-20 times that of the spot market. Look at the table given below. Even if we assume a 5 times multiple the commodity futures markets can grow up to become Rs.55 trillion per annum.

Markets Annual Physical trade (Rs.Cr.) 3 time multiple (Rs in Cr.) 5 time multiple incr
Bullions 40,000 1,20,000 2,00,00
Metals 60,000 1,80,000 3,00,000
Agriculture 5,00,000 15,00,000 25,00,000
Energy 11,00,000 33,00,000 55,00,000
Per Day* 4400 13200 22000

*Assuming 250 Trading Days.

What are volumes in commodity exchanges recently?

The two exchanges (NCDEX & MCX) have seen tremendous growth since inception. The daily average turnover on these two exchanges put together has now grown to a healthy Rs.25, 000 crores. It has been believed by experts that the volumes on these exchanges would overtake the stock market volumes in the day to come.

Financial Year Exchange Turnover (Rs. in crores) Change (YoY)
2006-07 3,516,036 76.98%
2007-08 3,901,550 10.96%
2008-09 5,121,923 31.28%
2009-10 7,758,777 51.48%
2010-11 11,636,636 49.98%
2011-12 17,941,252 54.18%
2012-13 16,763,493 -6.56%
2013-14 10,084,876 -39.84%
2014-15 6,255,915 -37.97%

What are the working hours for the commodity exchanges?

Commodity Exchange (MCX, NCDEX and NMCE) functions from 10.00 AM to 11.30 PM / 11.55, everyday. Non agricultural commodities get traded till 11.30 / 11.55 pm night. Most of the agri commodities with some exceptions get traded till 5 pm. Some agri commodities like Cotton, CPO, Kapas, Yellow soybean meal, Sugar and Soy refine get traded till 9 pm. Saturday and Sunday are not a trading day.

Who regulates the commodity exchanges?

Now SEBI is a common regulator for both stock and commodity exchanges apart from mutual funds. As per the notifications in Finance Act, 2015 of Govt. of India, SEBI has taken over the commodities regulator role since 28th September 2015. Security word has been amended and it includes commodity derivates also now. Commodities exchanges would be termed as stock exchanges and this now comes under the purview of the Ministry of Finance.

Who benefits from dealing in commodity futures and how?

Commodity futures are beneficial to a large section of the society, be it farmer, businessman, industrialist, Importer and consumer.

If you are an investor, commodities futures represent a good form of investment because of the following reasons -

  • Diversification - The returns from commodities market are free from the direct influence of the equity and debt market, which means that they are capable or being used as effective hedging instruments providing better diversifications.
  • Less Manipulations - Most of the commodities, as they are guided by International price movements, are less prone to rigging or price manipulations by individuals.
  • High Leverage - The margins in the commodity futures market are less than the F&O section of the equity market.

If you are an importer or an exporter, commodities futures can help you in the following ways...

  • Hedge against price fluctuations - Wide fluctuations in the prices of Import or export products can directly affect your bottom-line as the Price at which you import/export is fixed before-hand. Commodity Futures help you to procure or sell the commodities at a price decided months before the actual transaction, thereby ironing out any fluctuation in prices that happen subsequently.

If you are a producer of a commodity, futures can help you as follows

  • Lock–in the price for your produce - if you are a farmer, there is every chance that the price of your produce may come down drastically at the time of harvest. By taking positions in commodity futures you can effectively lock-in the price at which you wish to sell your produce
  • Assured demand - any glut in the market can make you to wait for indefinite period to get any buyer. Selling commodity futures contract can give you assured demand at the time of harvest.
  • Increase in holding power - you can store the underlying Commodity in exchange approved warehouse and sell in the futures to realize the future value of the commodity.

If you are a large scale consumer of a product, here is how this market can help you:

  • Control your cost - If you are an industrialist, the raw material cost dictates the final price of your output. Any sudden rise in the price of raw materials can compel you to pass on the hike to your customers and make your products unattractive in the market. By buying Commodity futures, you can fix the price of your raw material.
  • Ensure continuous supply - any shortfall in the supply of raw materials can stall your production and make you default on your sale obligations. You can avoid this risk by buying commodity futures Contract by which you are assured of supply of a fixed quantity of materials at a pre-decided price at the pre determined time.

How risky are these markets compared to stock & bond markets?

Commodity prices are generally less volatile than the stocks and this has been statistically proven. Therefore it’s relatively safer to trade in Commodities.

Also the regulatory authorities ensure through continuous vigilance that the commodity prices remain market-driven and free from manipulations.

However, all investments are subject to market risk and depend on the individual decision. There is a risk of loss while trading in commodity futures like any other financial instruments.

Are the trades/settlement guaranteed by the exchange?

YES, the commodity exchanges guarantees each and every trade. The exchange guarantees the settlement of trades and so eliminates the counter – party risk in the transactions. The exchange for this purpose maintains a settlement guarantees fund akin to the stock exchanges.

Are there any physical deliveries in commodity future exchanges?

YES, the exchanges, in order to maintain the futures prices in line with the spot market, have made available provisions of settlement of contracts by physical delivery. They also make sure that the price of futures and spot prices converges during the settlement so that the arbitrage opportunities do not exist.

How the deliveries are made possible?

The exchanges have enlisted certain cities for specific commodities as the delivery centers. The sellers of commodity futures, upon expiry of the contract may choose to deliver physical stocks instead of settling in cash. In such case seller would be required to deliver the stocks to the specified warehouse. The buyer of the commodity futures, if he is interested in physical delivery, will give buy intention and that would be matched with seller’s intention for stocks at a particular designated warehouse. World-wide commodity futures are generally used for hedging and speculation and hence physical deliveries are negligible. However, the possibility of physical delivery has made these markets more attractive in India. Both NCDEX and MCX have successfully completed physical delivery in bullions and various agro-commodities.

In case of NCDEX it is mandatory to open a demat account with an approved DP by the buyer and seller if they wish to take/give delivery of goods. MCX is also coming out with Electronic Delivery.

Please note the delivery and settlement procedure differs for each exchange and commodity. Read the delivery/settlement procedure carefully and contact head office before deciding to give / take physical delivery.

Do I need to pay sales tax on all trades? Is registration mandatory?

NO, if the trade is squared off no sales tax is applicable. The sales tax is applicable only in case of trade resulting in deliveries. Normally it is seller’s reasonability to collect and pay the sales tax. The sales tax is applicable at the place of delivery.

Are any transaction duty charges imposed on commodity futures contracts, as in case of stocks?

SEBI has imposed Rs.20 per crore as transaction charge. The respective commodity exchanges also levy transaction charges. Transaction charges are fixed by exchanges based on members turnover, which may differ for each commodity exchange.

What is the date of expiry?

Commodity and exchange wise the last day of the trade differs. At NCDEX the contracts expires on 20th day of each month. If 20th happens to be a holiday the expiry day will be the previous working day. At MCX, for Gold and Silver the expiry date is 5th of the contract.

What are the commodities on which futures trading take place*?

At present futures are available on the following commodities.

Bullions Gold and Silver
Oil& Oil seeds Castor Seeds, Soy Seeds, Castor Oil, Refined soy oil, crude palm Oil, muster seed, Cottonseed, Menta Oil.
Spices Red Chilly, jeera, Turmeric, Cardamom, Coriander.
Metals Copper, Nickel, Aluminum, Lead and Zinc.
Fibre Kapas, Cocud
Pulses Chana
Cereals Wheat, Maize.
Energy Crude Oil ,Natural gas
Others Guar Seed, Guargum, Sugar

*Since the exchanges continue to add new products, the above list may be out dated.

How much are the margins on these Commodity future contracts?

Generally commodity futures require 4-6 % of the contract value as initial margin. The exchange may levy additional and special margin in case of excess volatility. The margin amount varies between exchanges and commodities. Therefore they provide great benefits of leverage in comparison to the stock and index futures traded on the stock exchanges. The exchanges also requires the daily profits and losses to be paid in / out on open positions (Mark to Market or MTM) so that the buyers and sellers do not carry a risk of more than one day.

Below tables showing the details regarding major commodities traded on MCX & NCDEX

Commodity Quotation Units Lot Sizes Expiry date Basis Delivery Centre P/L Per Rupee movement
Gold 10 gm 1 Kg 5th of the contract month Ahmedabad 100
Silver 1 Kg 30 Kg 5th of the contract month Ahmadabad 30
Copper 1 Kg 1MT 30th/31st Mumbai 1000
Zinc 1 kg 5MT 30th/31st Mumbai 5000
Lead 1 Kg 5MT 30th/31st Mumbai 5000
Aluminum 1 Kg 5MT 30th/31st Bhiwadi 5000
Crude Oil 1 Barrel 100 Barrel 15th Mumbai 100
Natural Gas 1 mmBtu 1250 mmBtu 20th   1250
Mentha Oil 1 Kg 360 Kg 3th/31st Chandusai 360
Commodity Quotation Units Lot Sizes Expiry date Basis Delivery Centre P/L Per Rupee movement
Guar seed 100 kg 10 MT 20th Jodhpur 100
Guar Gum 100 kg 10 MT 20th Jodhpur 50
Chana 100 kg 10 MT 20th Delhi 100
Soy Oil- refined 10 Kg 10 MT (from December,15) 20th Indore 1000
Soya Bean 100 kg 10 MT 20th Indore 100
Rmseed 100 kg 10 MT 20th Jaipur 100
Castor Seed 100 kg 10 MT 20th Deesa 100
Jeera 100 kg 3 MT 20th Unjha 30
Chilli 100 kg 5 MT 20th Guntur 50
Turmeric 100 kg 5 MT 20th Nizamabad 50
Sugar 100 Kg 10 MT 20th Kolhapur 100
Maize 100 kg 10 MT 20th Nizamabad 100
  • SPAN margins which could be between 4-6% depending on volatility.
  • The above specification is subject to change by the exchanges / SEBI.
  • The above egs. covers only the popular commodities and not exhaustive.

Are options also allowed in commodity derivatives?

No. Options in commodities are presently prohibited. No exchange or person can organize or enter into or make or perform options in goods. However the market expects the government to permit options trading in commodities soon.

Contract Specified Simplified

Commodity Price Quote Lot Sizes Price Contract Value ( as on 19th Oct.15) P/L Re 1 Move
MCX Gold 10 gm 1 Kg 26962 2696200 100
MCX Silver 1 Kg 30 Kg 36958 1108740 30
MCX Copper 1 Kg 1 MT 344.4 344400 1000
MCX Nickel 1 kg 250 kg 678.5 169625 250
MCX Zinc 1 kg 5 MT 114.8 574000 5000
MCX Lead 1 Kg 5 MT 115.95 579750 5000
MCX Alumunium 1 Kg 5 MT 98.45 492250 5000
MCX Crude Oil 1 Barrel 100 Barrel 3080 30800 100
MCX Natural Gas 1 MMBTU 1250 MMBTU 159.8 199750 1250
MCX Mentha Oil 1 Kg 360 kg 892 321120 360
MCX Cardamom 1 kg 100 kg 785 78500 100
MCX CPO 10 kg 10 MT 411.8 411800 1000
NCDEX Guarseed 100 kg 10 MT 3986 398600 100
NCDEX Chana 100 kg 10 MT 5092 509200 100
NCDEX Soy Oil- refined 10 Kg 10 MT 622.3 622300 1000
NCDEX Soya Bean 100 kg 10 MT 3907 390700 100
NCDEX Rmseed 100 kg 10 MT 4926 492600 100
NCDEX Jeera 100 kg 3 MT 16125 483750 30
NCDEX Turmeric 100 kg 5 MT 8104 405200 50
NCDEX Sugar 100 Kg 10 MT 2727 272700 100
NCDEX Maize 100 kg 10 MT 1409 140900 100

*Assumed Price.

The above is only indicative and not exhaustive.

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