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Monday, December 17, 2018
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Blockbuster Times for the Indian Commodity Markets

Sujay Subhash Valanju

A buoyant market sentiment would bolster up happiness index of the entire commodity value chain, ranging right from marginal smallholder farmer to the agri-consumer level. Reasons are aplenty. Primarily, thanks to monsoon god this year for ushering blessings in full force all across the length and breadth of the country. Add to that, encouraging government endeavours in form of farmer-friendly subsidies are sure to pay-off this season with better returns.

 

The onset of kharif crop arrival into mandis amidst rising market sentiments is sure enough to leave commodity playground filled with abundant opportunities. So even for a novice investor thinking to take that elusive first step into the world of commodity trading or someone thinking to make a lateral shift from equity bandwagon onto commodity trading, now indeed is the apt time to take that plunge into the sea of commodity trade.

 

And yes, hold on to your breadth, the stage of agri-commodity trade is all set to welcome a much awaited debut of yet another potent trading tool – ‘Options’ (apart from Futures) that will surely amplify opportunities galore in the commodity world.

 

Agri-commodity Options would be an ideal hedging tool for even the so called lowest denominator of the market that is – the ‘farmer’, as this post-harvest tool will equip average Indian farmer with a choice to sell his agricultural produce in the derivatives market, thereby getting benefit of price protection in case if the price falls below his cost of production and vice-versa, also derive benefit from the price rise. Options gives buyer a right but no obligation to fulfil it. So, for an option buyer, loss is limited (to the premium he pays for the contract) while profits are unlimited. This feature makes it an ideal hedging tool for small participants. This will indeed help the ‘bali raja’ (farmer) to fetch improved returns on his produce.

 

It is here that commodity Exchanges such as NCDEX can help connect farmers to the regulated markets and help improve farm incomes. The synergy of the commodity Exchanges, approved warehouses and a modern information and communication system are making it possible to build a new ecosystem by bridging the efficiency gap between unresponsive, non-competitive agriculture and flexible profitable agriculture, thereby making agriculture an income yielding sector.

 

From an investor perspective, although trading in equities can be regarded as a right handed strategy, yet one will be amazed to know the rocket power one can harness by curating investment strategy in the commodity trade or by simply having a mix between equity and commodity portfolio’s.

 

At the time of excessive volatility, diversification of portfolio seems to be the mantra to meet financial goals and commodity trading offers this scope.

 

The fundamental bias in a commodity trade is much cleaner and lesser complex as compared to equity which is governed by several factors such as corporate stature, news surrounding the corporate, market sentiments revolving around the conduct of corporate officials etc. Whereas, in commodity trade, it is much simpler with certain few factors for consideration such as commodity fundamentals, demand and supply scenario, crop sizes, crop physicality that can help gauge the relative commodity price points.

 

With so many palpable factors ready to boost the commodity landscape, it will be interesting to see how this exciting time unfolds agri-commodity space to its full bloom potential. So this commodity season makes most hay while the sun shines brightly.

 

(The author is the Senior Manager, NCDEX. Views expresses are personal.)