Commodity exchange and volatile kitchen market

Agriculture contributes 20 per cent of the Gross National Product (GNP) and 50 per cent of employment in Bangladesh. The prices of essential commodities have an impact on budgets of most of the citizens having fixed income. Rice constitutes a major share of expenditures for the poor. For example, rice accounts for nearly 40 per cent of expenditures for the poorest three-fifths of the urban population in Bangladesh. Farmers get benefit from stable rice prices because most of them are poor. The farmer is an Investor in an uncertain biophysical environment where risk arrests are Imperfect and cannot guarantee access to credit when needed.

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These volatile conditions are often the result of Inadequate storage facilities or a lack of standardized marketing agreements. In contrast, during sass the economic liberation’s In many countries led to Increasing withdrawal of the government’s intervention from the agricultural commodity sector, which made the agricultural prices dependent on domestic and international market forces. A higher volatility results In an overall welfare loss; this is to some extent an issue of equity, as is the case with consumers.

Bangladesh agriculture-dominated economy is facing yield risks and prices of commodities are mostly dependent on nature by way of its production. The price fluctuation can occur for a number of reasons, that is, due to drought, near record production, an Increase In demand, decreased International production, etc. Chaotic marketing channels result In low quality of products, high post-harvest losses, and high price fluctuations. All these factors have made Imbalances In supply and demand to cause violent price swings in local markets. As a result, producers of within a marketing year.

Many countries have attempted to handle domestic price increases through a combination of buffer stocks and trade policy. In Asia, large rice-producing countries used both food reserves and trade policy to stabilize grain prices and ensure food security. In Africa, maize producing and consuming countries, such as Kenya, Malawi and Zambia, attempted to intervene through a similar mix of policies, but without any success. It is imperative for a country to coordinate its agricultural policies with those related to commodity market development in this area.

The government’s hedging activities, archiving collective activities, seed dissemination activities, inspection activities, and supply management activities are closely related to market success and/or failure. A number of countries chose to intervene directly in the market by managing food reserves in order to stabilize domestic prices. The Bangladesh authorities tried traditional methods such as buffer funds, buffer stocks, international commodity agreements, use of government trading agency (ETC) or fair price shops of Para- military forces to address the problem.

Bangladesh operates a variable rice tariff, tit the level of the tariff varying on an ad-hoc basis depending on the size of the harvest. When domestic production suffered substantial shortfalls as a result of the ‘flood of the century’ in 1998, import tariffs were eliminated and large private sector imports were allowed to flow into the country from India, thus stabilizing domestic prices. An effective policy for demand, supply and pricing is crucial for the nation. The system of production, farm input and supply, food processing, distribution, and retail should be under a policy framework.

Commodity exchanges are defined in varying says. These are defined as centers where futures trade is organized. In a somewhat wider sense, it is taken to include any organized market-place where trade is centralized, that is, funneled through one mechanism, allowing effective competition among buyers and sellers. It may also include auction-type exchanges, but not wholesale markets, where trade is localized, but effectively takes place through many non-related individual transactions between different permutations of buyers and sellers.

Stock and commodity exchange: Stock and commodity exchanges established by law re exchange markets that are open platforms allowing sales and purchases of stocks and other financial products such as commodities and futures. The stock and commodity exchanges provide many people and organizations investment in stock and futures contracts. These platforms also provide a worldwide marketplace for those selling stocks and commodities such as agriculture and precious metals. Ownership is known as equity ownership.

The Joint stock companies raise capital by selling units or portions of the company and its profit to shareholders. In turn, those who purchase these units are its partial owners. A stock exchange provides a platform for buyers to purchase stocks from many different companies while this exchange platform offers a marketplace for sellers to find buyers to purchase their stocks in relatively short time. Commodity exchange: There are some Juice and potato chips manufacturers in Bangladesh buying mango and potato in advance before harvesting periods at an agreed price.

Farmers and growers are benefited due to guaranteed advance sales. This is a primary form of unregulated and UN-organized commodity exchange. These transactions are not regulated to safeguard interests of different stakeholders and sis coverage for breach of contracts due to unforeseen natural disasters. The traditional definition of commodity exchange market is that it is an organized market for purchase and sale of enforceable contracts to deliver commodities such as wheat, rice, gold, or cotton or a financial instrument transacted in stock exchange.

These commodities are traded in regulated commodity exchange under many kinds of market instruments at cash market, future market and future contract. Commodity futures and derivatives have a crucial role to play in the price risk management process, especially in agriculture. The futures market shifts the focus of the present system of ‘production-oriented extension’ to ‘market-oriented extension’. A derivative is a financial contract whose value is derived from an underlying asset or commodity price, an index, rate or event.

They commonly go by names such as ‘forward’, ‘future’, ‘option’, and ‘swap’ and they are often embedded in hybrid or structured securities. Derivatives known as futures and options are traded in exchanges where centralized trading allows everyone in the market to make quotes, observe all other participants’ quotes and execute trades in full view of all other artisans. The exchange-traded derivatives are usually cleared and settled through a central clearing house.

The end-users are the final customers in the derivatives marketplace. They trade in order to hedge some existing risks, to adjust their hedge due to a change in the market or to speculate. End-users include a variety of firms and investors. These include small and medium-sized banks that unlike the larger banks do not act as derivatives dealers and pension fund managers and other institutional asset managers who employ derivatives to manage the risks on their portfolios.

End-users also include non-financial corporations which use derivatives to hedge their market risks (due to variations in interest rates, exchange rates and commodity prices) as well as to structure their financing so as to lower borrowing costs. Non-financial corporations might face the risk of exchange rate volatility if these are importers or exporters, and they might face commodity price volatility if they are producers or part of their investment strategies.

This multilateral trading environment has a leveling effect of allowing all stakeholders the same view on the market and the same opportunity to trade at the name prices. Considerable trading occurs in over-the-counter (ETC) of commodity exchange markets in which eligible parties enter into contracts directly, without using an exchange. A commodity futures is an agreement between two parties to buy or sell a specified and standardized quantity of a commodity at a certain time in future at a price agreed upon at the time of entering into the contract on the commodity futures exchange.

Futures contracts are like forwards, but they are highly standardized, publicly traded and cleared through a clearing house. Whereas forwards are usually traded over the enter (ETC), the futures contracts are traded in organized exchanges such as Dogma Rice Exchange in Osaka, Japan established in 1710 and the Chicago Produce Exchange established in 1874, and contracts are so standardized that they are fungible – meaning that they are substitutable one for another.

This fungible facilitates trading because all traders know the contents of the identical contracts and the netting of contracts bought and sold reduces margin requirements and counterparts risk. The result is greater trading volume and greater market liquidity. Liquidity, in turn, improves the way in which relevant market information becomes reflected in market prices – a process known as the price discovery process. A cash market involves negotiation or trading of a physical commodity where buyers and sellers agree to the specific terms of a contract.

Cash markets often consist of localized markets where local supply and demand factors dictate the contract terms. Contract terms can take many forms and prices are usually quoted on the basis of a relevant futures contract. A futures market involves the trading of standardized contractual agreements known s futures contracts, which are bought and sold under the terms of a recognized commodity exchange. These contracts may trade in an open, auction type environment with bids and offers made by public outcry or they may trade over an electronic platform.

On the other hand, futures contract is an obligation between buyer and seller to make or take delivery of a set quantity and quality of a commodity at a specific future date and with delivery terms under set rules and regulations of the commodity The exchange system of trading in commodities is of ancient origin. Trading in Saudi Arabia, and Egypt had some of the characteristics of exchange trading. As early as the fourth century, B. C. , the city-state of Athens supervised its markets to assure food supplies and to prevent manipulation of prices.

In the modern era, a commodity exchange is an association or a company or any other body corporate organizing futures trading in commodities for which license is granted by the regulating authority. Bangladesh has cash market for agricultural commodities. Crops such as payday, red chili, and vegetables are either collected by ‘farina’ or commission agents from the reducers and take the products to sell directly in nearby markets. Wholesalers purchase from rural markets through agents and send the produce to the commission agents in big urban wholesale markets, or sell to processors.

The ‘farina’ or commission agents earn a bad name in the society. ‘Farina’ are traders who buy directly from the growers and sell to other traders or to the local markets. They are mostly small-scale seasonal floating traders, and some combine farming with trading. ‘Packers’ are small-scale wholesalers who collect products from small markets and send them to big markets, or sell to near-by radars’ (big wholesalers). ‘Appears’ are rural assemblers who collect goods from growers or local markets and send those to wholesale-UCM retail markets or distant urban wholesale markets.

A commodity futures market is based on inputs regarding specific market information, demand and supply equilibrium, weather forecasts, expert views and comments, inflation rates, government policies, market dynamics, hopes and fears. Buyers and sellers conduct trading at futures exchanges. This transforms into continuous price discovery mechanism. Futures markets perform two essential functions. First, they facilitate transfer of price risk and increase liquidity between agents with different risk preferences. The second major economic function of future markets is price discovery.

Commercial traders, including producers and processors of agricultural commodities, utilities futures contracts to insure their future inventories against the risk of fluctuating prices. Non-commercial traders, such as speculators, operate in futures markets for possible gains from futures price increases. The execution of trade between buyers and sellers leads to assessment of fair value f a particular commodity that is immediately disseminated on the trading terminal. Derivatives markets serve two important economic purposes: risk shifting and price discovery.

Risk shifting -commonly called hedging – is the transfer of risk from one entity which does not want it to another entity that is more willing or able to bear it. Events or certain types of risk. Price discovery might not otherwise occur because of transaction costs, dispersion of the underlying item or the conglomeration of many values or risks into one whole thing. As a result, the need for an effective price risk management mechanism for the retention of commodity sector from price volatility has been realized earnestly.

Changing economic environment, increasing commodity uses through value addition at different stages, raising the number of market participants, evolving demand and supply positions of agricultural commodities and growing international competitions require wider roles for futures markets in an agrarian economy. Therefore, many countries have been establishing and promoting commodity futures market. The need for a futures market arises mainly due to the hedging function that it can perform. Commodity markets, like any other financial instrument, involve risks associated with frequent price volatility.

Commodity futures are excellent portfolio diversifier and, for some, an effective hedge against inflation. In the light of recent evidence suggesting that trading activity enhances short-term profits in futures markets. The main contribution of futures market to an economy is that, through buying and selling of futures contract, it helps in transfer of risks and more precisely in risk management for various traders with various risks and time preferences. The Bangladesh government has amended Security Exchange Commission Act to acclimate establishment of commodity exchange.

A Bangladesh firm has Joined hands with a AAU-based company to float the country’s first ever formal commodity exchange trading facility expecting to increase efficiency and transparency in markets. This will increase market efficiency and liquidity as well as improve transparency in agricultural marketing that remains uncontrolled for long. This is a major development in exchange market and agriculture market as well as economy. The writer is pursuing PhD in Open University, Malaysia. E-mail: [email protected]nglachemical. Com