Commodities trading is increasingly becoming the choice of many traders. The prices of commodities and the markets in which they trade are known to behave differently from those of the industrial goods or services. The article examines the role of commodity futures and studies the challenges it is facing. It also provides suggestions to boost commodity futures trading in India.
Developing
countries have been exporting commodities for earning
foreign exchange as well as income. According to the
pragmatic estimates, primary commodities account for
68% of exports of low-income and developing countries,
while it is 44% in case of high-income and developed
countries. Recently, the share of commodity exports
from developing countries has declined, but it is still
quite high. In the global markets, the dependency on
a few commodities for income generation evidently exposes
the traders and producers to commodity price uncertainties.
The variations in commodity prices affect even the traders
who are otherwise known to operate on tight margins.
For instance, a trader who purchased tobacco or coffee
from the local farmers with an intention to export it
faces enormous risk if the international prices collapse
before he sells his stock of tobacco / coffee. Uncertainty
in commodity prices also affects the debt servicing
capacity of the traders and the producers / farmers
of the commodity. This indirectly makes the cost of
their debt prohibitively high, leading to increased
cost of production. Even the availability of credit
may become difficult at times, particularly for the
farmers whose earlier debt remained outstanding, owing
to a previous year's price disaster. The impact of the
price-risk associated with commodities is also seen
in the government revenue. Uncertainty associated with
national revenues ultimately makes the planning exercise
of the government puzzled. Such risk even impacts the
government's debt-servicing ability.
A
futures contract is an agreement to purchase / sell
the commodity at a specific price and on a specific
future date. These are traded in commodity futures exchanges
where the counterparty risk is taken over by the exchange
itself. Unlike in the stock market derivatives, the
settlement in the commodity derivative markets is often
accomplished through physical delivery of the underlying
asset. Secondly, to meet the margin requirements either
under "initial margin" or "market-to-market-margin",
farmers can as well lodge the title pertaining to the
underlying commodity with the exchange / clearing corporation. |
