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Unit 13: Commodity Market

segment is standing as the boon for the global economy today. The promising nature of these Notes
markets has made them an attractive investment avenue for investors.
In the early days people followed a mechanism for trading called barter system, which involves
exchange of goods for goods. This was the first form of trade between individuals. The absence
of a commonly accepted medium of exchange had initiated the need for the barter system.
People used to buy those commodities, which they lacked and sell those commodities, which
they had in excess. The commodities trade is believed to have its genesis in ancient Sumeria. The
early commodity contracts were carried out using clay tokens as medium of exchange. Animals
are believed to be the first commodities, which were traded, between individuals. The
internationalization of commodities trade can be better understood by observing the commodity
market integration occurred after the European voyages of discovery. The development of
international commodities trade is characterized by the increase in volumes of trade across the
nations and the convergence and price related to the identical commodities at different markets.
The major thrust for the commodities trade was provided by the changes in demand patterns,
scarcity and the supply potential, both within and across the nations.

13.1 The Indian Connection

Commodity derivatives in India have had a chequered history. Though the derivative markets
survived the prohibition inflicted from time to time, thanks largely to the grey markets; the
participants have not been able to shrug off the scare of the markets being banned any time in
future. It is not surprising that these markets have not developed as much as the markets in
developed countries or even the securities market in our own country. The exchanges emerging
from an earlier suffocating environment are crying to breathe in a free and liberal regulatory
and policy environment. This article attempts to give an overview of the developments in the
commodity derivative markets and tries to explain the rationale for this, what in the present
times may, perhaps, be considered as, obscurantist and retrograde approach, in an era of detailed
regulation.

Coming back to the Indian scenario, despite a long history of commodity markets, in India, they
are still in their initial stages of development. The essential contributors of this scenario include
stringent regulatory restrictions and intermediate ban on commodity trading and policy
interventions by the government. Commodity markets have a huge potential in the Indian
context particularly because of the agri-based economy. With the government’s initiative for
agricultural liberalization, commodities’ trading in India has gained increased momentum in
activities. To increase the efficiency of the markets the Forward Markets Commission (FMC),
the governing body of commodities trading in India has taken several initiatives for the
establishment of national level multi-commodity exchanges in India. These exchanges serve as
platforms for facilitating transparent trading, trading in multiple commodities, electronic
delivery systems and efficient regulatory mechanisms, creating a world-class environment for
Indian traders. In order to sustain the increasing volumes in commodities trade, the need for
proper clearing and settlement systems, warehousing facilities and efficient pricing mechanisms
has been identified. With the recent boom in commodities markets, Indian participants are
gearing up for exploiting the potential opportunities in the future.

Commodity markets are of great help not only for their participants but also the economy as a
whole. The twenty-year bear market for commodities has drastically reduced the prices of many
commodities to their lowest levels. The present shift in trend in commodity trading
complimented by the global increase in demand will certainly hold a promising future for the
investments in this segment.

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