The Indian Economy Blog

November 25, 2005

Getting To The Future

Filed under: Agriculture,Business,Capital markets — Prashant @ 1:07 pm

Business Week writes about the success of two commodities exchanges in India.

Two years ago government deregulation allowed two competing Indian exchanges, the National Commodity & Derivatives Exchange (NCDEX), which deals mostly with agricultural products, and the Multi Commodity Exchange (MCX), which mostly handles energy and metals, to open for business. The fully electronic exchanges now do a daily volume of $1.5 billion in futures contracts.
[..]

Commodities traders say this is just the beginning. Trading volume could rise to $15 billion a day by 2012 as more companies sign up, estimates CLSA Asia-Pacific Markets. Volumes today are still just a fraction of those on major exchanges such as the New York Mercantile Exchange, or NYMEX, and the Tokyo Commodities Exchange, or TOCOM. But MCX has overtaken TOCOM as the No. 2 trader of silver after NYMEX. And analysts say it may not take long for India — already the top producer, importer, and consumer of some 35 commodities — to become a global hub. “Indian exchanges could become the largest in the world for some commodities,” says Aniruddha Dange, head of research for CLSA in Bombay.
[..]

That would mark a big change from the situation just a couple of years ago, when archaic laws from India’s socialist era controlled commodity prices. What’s more, those prices were completely out of sync with global markets, making it nearly impossible to gauge domestic demand and supply efficiently. Farmers routinely overplanted and sold into gluts or underplanted and missed price spikes. The lack of certainty contributed to exploitation of farmers by layers of intermediaries, who kept up to 70% of the retail price of crops. And companies such as ITC were forced to hedge overseas — even though foreign exchanges don’t trade many popular Indian commodities such as cluster beans and gram.

This is a great example of financial engineering and modernization benefiting everyone concerned — farmers, agribusinesses and ultimately, consumers. By the way, both exchanges are privately owned. There’s lots more that could be done for agriculture (better transport and storage facilities , including refrigeration among other steps) but this is definitely good news.

Q) Does anyone have input on succesful commodity exchanges in other emerging markets?

Update: Also, if anyone’s actually traded on this exchange, would love to hear your experiences.

2 Comments »

  1. Am a newcomer here and am impressed.
    Talking about futures trading in commodities, its but a small step to developing a vibrant options and derivatives market in commodities as well.
    The real deal, from a social impact point of view, on desi agro will happen when we have district HQ level quasi-exchanges. And no, its not as far fetched as it sounds. CB Naidu, Andhra’s ex-CM had ambitious plans to start off with sabji mandis in every district HQs where farmers could bring produce to sell B2C but here’s the twist – these mandis would each be connected to others and were very attractive to those looking for B2B futures deals. Of course, with the good doctor (Not!) YSR in power, the plan was quietly shelved but I still wonder what an electrifyying effect such a grassroots based mandi-cum-exchange system would’ve had, eh?

    Comment by sudhir — November 27, 2005 @ 5:01 pm

  2. Prashant et al,

    As a regular visitor, I continue to be awe struck at the level of intellectual discourse that this site provides. The discussion on the two private-owned commodity exchanges is a case in point. India’s (non-left) intelligentsia has huge insights that are valuable for all of us in its neighborhood. Keep up the good work.

    Prashant, you still retain that sharp incisive mind that you had back in New York. Enjoy your posts.

    Best

    Comment by Jaffna — November 27, 2005 @ 6:19 pm

  3. Prashant et al,

    As a regular visitor, I continue to be awe struck at the level of intellectual discourse that this site provides. The discussion on the two private-owned commodity exchanges is a case in point. India’s (non-left) intelligentsia has huge insights that are valuable for all of us in its neighborhood. Keep up the good work.

    Prashant, you still retain that sharp incisive mind that you had back in New York. I enjoy your posts.

    Best

    Comment by Jaffna — November 27, 2005 @ 6:20 pm

  4. I am really impressed with the content of this bolg. It’s informative and gives you a sense of feeling that things in India will change. The change can come only if we put in the corporate governance and accountabilitiy at each step of beuracracy.

    Comment by Nitin Sharma — April 8, 2006 @ 8:21 am

  5. I just ran across this entry today and was astounded by the number (1.5B) traded every day, and that was a year ago according to the posted date!

    How much has this increased in the past year? As each Futures Exchange gravitates to the “net” there is no doubt that even these number will look tiny in just a few years, especially at the rate of growth being experienced in India today and with the expatriate Indian Community expanding around the trading world and growing more wealthy.

    It looks like the largest democracy in the world is just starting to rumble

    Comment by Busi — August 15, 2006 @ 6:11 am

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