Monday, August 27, 2007

Another First in Bihar : First spot market could change face of commodities trade

First spot market could change face of commodities trade

The National Commodity and Derivatives Exchange (NCDEX) will open the country’s first spot market, or mandi, for commodities in Bihar in August in a move that promises to change the face of commodities trading in a country where more than 60% of the population still earns its livelihood from agriculture.

Experts say the spot exchanges will ensure farmers get a fair price for their produce, remove middlemen from the trade and render the entire process of agricultural sourcing more efficient. That should help companies, such as Reliance Industries Ltd, Bharti Enterprises Ltd and the Aditya Birla Group, which have entered or are entering the fresh produce retailing business.

India produces agricultural commodities worth Rs7.5-8 trillion, including grains, vegetables and fruits, but these are traded through either informal marketplaces or government controlled Agriculture Produce Marketing Committee (APMC) outlets. Private companies, such as cigarette and consumer goods maker ITC Ltd have created mandis or commodity buying platforms, but while there are multiple sellers in these markets there is usually only one buyer—the company.
NCDEX and rival exchange Multi Commodity Exchange (MCX), through its spot trading arm National Spot Exchange, had both asked the government for permission to set up spot trading markets.

The government currently only allows futures trading in commodities. Spot trading would help farmers and buyers price products far more accurately than they now do, said an expert. “Usually, futures prices follow spot prices. But here (in India) we do not have a clear sense of spot prices because prices can vary from one region to another. If this is successful, we can see authentic price discovery,” said Kishore Narne, vice-president for commodities research at Anand Rathi Securities, a domestic brokerage.
“If you don’t have physical delivery and do not promote it, you’re not going to have a futures market in its proper form,” said minister of state for commerce Jairam Ramesh in a recent interview with Mint.
NCDEX has acquired the requisite approvals from the government for the Bihar exchange and started enrolling farmers and traders who will participate in the mandi which will deal in maize and sugar. The Bihar spot market is one of nine that the exchange wants to operate across as many states and NCDEX’s managing director P.H. Ravikumar said it would “slowly extend” its network.

The spot trading exchanges NCDEX and MCX want to set up will have warehouses where produce can be stored. Farmers will take their produce to the warehouse, have its quality ascertained and certified, look up spot prices and future prices, and search for buyers. The farmers will get the money the day the produce is sold. These mandis will “help to create a benchmark for prices across the country,” said Joseph Massey, deputy managing director at MCX.

NCDEX’s Bihar mandi will have an electronic board listing spot prices. Farmers also have the option of selling on the futures markets through NCDEX terminals at the mandi, thereby ensuring that they get a certain price for their produce when it is ready to be sold. The process “will lead to a stability in prices and cutting down of intermediaries,” said Madan Sabnavis, chief economist at NCDEX.

Concerned that futures trading in commodities was resulting in speculation and a rise in prices, the government has banned such trades in certain commodities. It has also set up a committee to study the issue.

Both NCDEX and MCX have announced plans to set up sophisticated national networks for spot trading, but regulatory hurdles have held them back. All spot trading exchanges are required to report trades to APMCs.
Rathi’s Narne said a spot exchange would succeed if it had a nationwide presence and enough liquidity. “But that won’t pick up unless there are trades,” he added

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