Commodity exchanges in India have brought revolution in the way commodities were traded. In earlier system of trading goods had to be presented before the buyer who would analyse or evaluate the goods and offer the price. In case of commodity exchanges the goods are bought and sold without being seen or touched, simply on the basis of information and standardisation. The rights to buy and sell the underlying goods are traded; they derive their value from the underlying asset. Imagine the kind of efficiency it has created; goods are being bought and sold by the people risk free because there is concept of Novation where exchange or the clearing house takes the guarantee of all counterparty obligations. The goods are being sold forward before they are produced. Price uncertainty is removed because price is locked in advance. The compulsory deliveries take place but only for open positions and during delivery period, seller and buyer in the meantime could buy from and sell to their preferred clients at preferred location and square their position on the commodity exchange and thus become free from the obligation but still realize the locked price. This is price risk management. The technology has made these commodity exchanges national and all inclusive, the stakeholders from all over the country participate at the same time and no one has locational advantage of being in the metro over others who operates from rural India. Both get the same information at the same time. The national commodity exchanges have annihilated the state boundaries and most of the impediments in commodity transaction. It has significantly brought down the transaction cost of commodities.

A lot of positive steps have been taken by the regulator and commodity exchanges which are supporting the growth of commodity exchanges.

Continuous growth despite bans & without FCRA amendment: The three National Commodity Exchanges, representing over 95 per cent of derivatives business, recorded a business of Rs 51.58 trillion in 2008-09 as compared to Rs 39.11 trillion in 07-08. Turnover at Indian commodity bourses rose 47.93 per cent to Rs 77.65 trillion in the 2009/10 fiscal year ending March2010. This is indicator that exchange business would grow much faster if enablers are provided. This success under the duress is proof of the potential this market holds. Physical commodity market is estimated to be about 320 Billion USD hence exchange business at maturity may go 30 to 40 times of underlying asset thus may reach 14 to 15 trillion USD.

Empowerment of farmers with transparency in the market: Commodity market was highly opaque. Few middlemen and traders who could form cartel among themselves used to decide the price for the farmer’s produce and he had no say. He used to toil in the field for the whole season and his product’s price was decided by middlemen in a few minutes. Now with the commodity exchanges the farmers are empowered to decide the price of their produce, they decide when to sell, at what price to sell. They don’t need to carry the goods to sell, the buyer doesn’t decide the quality, and it is decided by neutral third party. He doesn’t need to go place to place to find the buyer, the best buyers from the whole nation are brought to him by the commodity exchanges on his screen and the best buyers price is displayed and he is free to choose whether he wants to sell or not.

Novation has been the great booster: There was no way for farmer to check the creditworthiness of his buyer. Hence he was always attached to one Adhatiya for generations who was exploiting him and not letting him get out of indebtedness. In commodity exchanges there is concept of Novation which means the risk is transferred from buyer and seller to the exchange’s clearing house, which is the counterparty to all transactions. Thus farmer can sell to the highest bidder without getting worried about payment. He would be paid immediately by the exchange.

Serves as platform for Price discovery and price risk management: Commodity exchanges are truly serving as the platform for price discovery where thousands of buyers from all over the country keep giving their bid and the best bidder gets the chance to buy. The price keeps changing with new information. Price discovery is possible without physical product now because of technology. The continuous publication of quotations in the futures
markets all over the country ensures a close integration of prices between different centers and even between allied commodities.

This is also the platform for the risk management because buyer can buy in advance and seller can sell in advance if he likes the price and it is far above his cost of production. He doesn’t produce under price uncertainty. He doesn’t need to sell his produce only after harvest at throwaway price.

Physical flow and information flow has been separated: In earlier system of commodity trading price of the commodity was with the physical commodity. Physical flow and information flow was together with the commodities. Now in commodity exchanges it has been separated. Information can’t be hidden from the farmer, all the information gets reflected in the price. Farmers can take benefit of the price without ‘bringing the physical goods which he can tender later at delivery date if he so desires and can take advantage of higher price. He can trade his produce in advance without having harvested. This has revolutionised commodity trading and made it more efficient.

More studies available that commodities give better return than stocks & bonds : Gary Gorton of The Wharton School and K. Geert Rouwenhorst of School of Management Yale university have compared the returns on Stocks, Bonds and Commodities for very long period of 45 years and found that commodities give better return as depicted in the chart below. Slowly now investment in commodities is getting more interest but it has potential for exponential growth.

No discrimination: There is no discrimination between buyers and sellers on the basis of their financial or social status, location or size, there is no human intervention and the system takes care of the order and matches the best buyer and the best seller to make the deal. This makes commodity exchanges as all inclusive market platforms.

Abhijit Sen Committee Report: The commodity exchanges and futures markets were blamed for inflation without any fact simply on the basis of perception and due to ignorance. The Government appointed Abhijit Sen committee to find out the truth. The detailed finding of this committee has proved that there is no evidence to prove that futures market is responsible for inflation. With this evidence in hand, Government would be more prudent and avoid knee jerk reaction of bans and at opportune time bring more reforms to bring more stakeholders, which in turn would bring more liquidity and depth by large scale participation.

More data to support th futures is not responsible for the price rise :at Now there is enough data available to prove that commodity futures is not responsible for the price rise but fundamental factors like shortage of supply and increase in demand of commodities was responsible for price rise. The commodities which were banned for future trade saw price rise despite ban. Rubber saw price rise despite ban, pulses saw the price rise despite ban on futures. Chana was reopened and saw less volatility and price rise as compared to other pulses. Sugar was banned and price rise was much sharper after the ban. Banning commodities did not control the price rise. Commodities which were banned had more price rise and price volatility. In future government would take the cue from the futures market and balance the supply demand rather than resorting to ban.