History of Commodity Market
1848 marked the era of organized trading of commodities in Chicago. This arose with the need of guaranteed supply of seasonal agricultural crops.
Rice tickets: Rice was stored in warehouses for future use. Warehouse holders sold receipts against the stored rice to raise cash. These tickets were treated as commercial currency until rules came into existence.
Chicago in United States had become a chief commercial hub in 19th century. Wheat producers from Mid-west sold their produce to dealers & distributors.
Producers were at the mercy of dealers due to the unavailability of storage facilities, absence of uniform weighing & grading mechanisms. The farmers and dealers met in a common place for transacting wheat for cash.
“Futures trading” came into existence when sellers & buyers started making commitments to exchange the produce for cash in future.
The producer would agree to sell his produce to the buyer at a future delivery date at an agreed upon price. This kind of agreement was beneficial to both producer and the dealer.
The dealer could sell his contract to someone else in case he is not interested in taking delivery of the produce. In the same way, if the producer does not want to deliver his produce to dealer, he can pass on the same to someone else.
The price movement in the wheat market would determine the price of such contract.
Certain modifications were made in the contracts to protect the traders from unexpected price movements and unfavorable climatic factors. This promoted trader’s entry in futures market which would speculate on price movements in market to earn profit.
Chicago Board of Trade (CBOT) was established in 1848 to regulate and supervise the contracts. In 1870 and 1880s the New York Coffee, Cotton and Produce Exchanges were born. Any commodity could be traded if there were buyers and sellers.
In order to bring a proper system of storage, pricing, and transfer of agricultural products in New York, a group of Manhattan dairy merchants got together in 1872.
A merger of four small exchanges was formed in 1993, during the Great Depression – the National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the New York Hide Exchange.
The largest commodity exchange in USA is Chicago Board of Trade, The Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity Exchange and New York Coffee, sugar and cocoa Exchange. Worldwide there are major futures trading exchanges in over twenty countries including Canada, England, India, France, Singapore, Japan, Australia and New Zealand.
Cotton Trade Association started futures trading in 1875 in India. Datives market developed in several commodities in India. Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920).
The parliament passed the Forward Contracts (Regulation) Act, 1952, which regulated contracts in Commodities all over the India. The act prohibited options trading in Goods along with cash settlement of forward trades.
Under the act only those associations/exchanges, which are granted reorganization from the Government, are allowed to organize forward trading in regulated commodities.
The act considered three tire regulations:
(i) Exchange which organizes forward trading in commodities can regulate trading on day-to-day basis.
(ii) Forward Markets Commission provides regulatory oversight under the powers delegated to it by the central Government.
(iii) The Central Government- Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution- is the ultimate regulatory authority.
The Government set up a committee (1993) to examine the role of futures trading after Liberalization and Globalization in 1990.
The Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17 commodity groups. It also recommended strengthening Forward Markets Commission, and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing option trading in goods and registration of brokers with Forward Markets Commission.
The Government accepted most of these recommendations and futures’ trading was permitted in all recommended commodities.
Commodity exchanges are purely speculative today. A price transparency is maintained as they reach to the producers, end-users, and even the retail investors.
By Exchange rules and by law, no one can bid under a higher bid, and no one can offer to sell higher than someone else’s lower offer. That keeps the market as efficient as possible.
The commodities future market in India has experienced an unexpected boom in terms of modern exchanges since 2002.
In 2006, the number of commodities allowed for derivatives trading as well as the value of futures trading in commodities crossed $ 1 trillion mark.
Since 1952 till 2002 commodity datives market was virtually non- existent, except some negligible activities on OTC basis.
In India, there are 25 recognized future exchanges, of which there are three national level multi-commodity exchanges.
Government of India has allowed forward transactions in commodities through Online Commodity Exchanges, a modification of traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of commodities.
The three exchanges are: National Commodity & Derivatives Exchange Limited (NCDEX) Mumbai, Multi Commodity Exchange of India Limited (MCX) Mumbai and National Multi-Commodity Exchange of India Limited (NMCEIL) Ahmedabad. There are other regional commodity exchanges situated in different parts of India.