We can say that India’s agricultural commodity trading sector took a gigantic step towards maturity with the establishment of NCDEX. The setting up of NCDEX was a transformative event in the Indian commodity market. It has changed its landscape by allowing agricultural commodities to trade in exchange, similar to securities.
NCDEX, meaning National Commodity & Derivatives Exchange, is dedicated to the trade of agrarian products and started operating in 2003. It is backed by several leading financial institutions of India, including the Life Insurance Corporation of India (LIC), NSE, and the National Bank of Agricultural and Rural Development (NABARD).
A Background of Commodity Trading
Commodity trading has a long history in India. Ancient traders traded commodities under a barter system based on their values. Today, a wide range of products are exchanged in the global market through various exchanges. In India, commodities have a considerable demand, but until recently, there was no exchange where commodity futures could be sold.
Founded in 2003, MCX or Multi Commodity Exchange, is the largest commodity exchange in India, controlling 80-85% of total commodity trade. But it is mainly for other commodities like metal, energy, bullion, etc. MCX also trades in agricultural items, but the need for a separate exchange, especially for agrarian products, was long felt.
What is NCDEX?
It is a commodity exchange specialised for trading in agricultural products. India is a world power in producing agricultural products. It is one of the major producers of items like wheat, rice, milk, lentils, and several types of fruits and vegetables.
But India’s potential is mostly hidden from the world because of two reasons. Firstly, India, being a populous country, consumes most of its produce. And secondly, the Indian market was mostly scattered, operating locally. There was no centralised platform to trade agricultural products at the national level. NCDEX has filled up the gap. It plays a critical role in India’s growing agricultural sector, allowing investors an opportunity to invest in a wide range of agricultural items directly while facilitating sellers with year-round price discovery.
In terms of value and number of contracts traded, NCDEX is second only to MCX. Though its headquarters is in Mumbai, it operates through its many offices across the country. In 2020, it traded futures contracts on 19 agrarian products and options on five commodities. It controls 75-80% of total trading on agricultural items. Some highly exchanged commodities are coriander, guar seeds, cumin, castor seed, kapas, Bengal gram, moong dal, and more.
What does NCDEX do?
Prices of agricultural products rise and fall with changes in the market. Factors like excess rain, the arrival of monsoons, storms, or drought also impact the prices of agrarian products. Now, think of a farmer who expects prices to fall in future and wants to hedge against risks. They enter into a futures contract where they agree to sell their products on a future date at a predetermined price. NCDEX acts as the middleman between an interested buyer and the farmer to facilitate a trade.
Benefits of Trading in NCDEX
- NCDEX has allowed market transparency – helping Indian farmers with a year-round facility to discover crop prices.
- It helps farmers to hedge against risks and anticipated losses.
- NCDEX has helped in improving India’s agricultural practices by standardising product quality through various contracts.
- SEBI, as the regulator, is preparing to make physical settlement of contracts mandatory for most of the commodities.
- It practices mark-to-market settlement. Every day, commodity prices change depending on the market. At the end of the trading day, it is compared with the price quoted in the contract. As rates rise or fall – price increase for sellers or decrease for buyers – the difference is adjusted from the other account to balance any difference.
- NCDEX has made it possible for even retail and small traders to invest in agricultural commodities using futures contract speculations.
How to Trade in NCDEX?
Trading in NCDEX is simple. You need to have a commodity trading account with a trusted stock broker who is registered with NCDEX. Once you open the account, link it to your Demat account and start trading. Just make sure you have enough funds in your account to trade.
Conclusion
Commodity trading offers a decent margin, which is why it attracts many players to it. NCDEX is relatively new and still reforming. However, it has already established itself as a critical player in the Indian agricultural sector by facilitating agrarian products exchange in an active market.
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FAQs
How does NCDEX work?
NCDEX is a commodity exchange where participants can trade commodity futures contracts. To trade on the National Commodity and Derivatives Exchange, buyers and sellers enter into commodity futures, specifying the quantity, quality, and delivery details. The electronic settlement and delivery mechanisms of NCDEX ensure the smooth execution of the contracts.
What is the significance of NCDEX for the agriculture sector?
NCDEX is critical for the growth of the agricultural commodity market in India:
- The primary objective of the platform is to pave the way for the sustainable and collective growth of the commodity market.
- It provides an efficient platform where farmers and traders can trade, hedge, and manage their price risks better.
- Its market price discovery mechanism allows farmers and traders to reduce price volatility and encourage effective risk management.
- NCDEX facilitates spot and futures market integration, enabling farmers and other stakeholders to get better price signals and make informed decisions.
Do we need a Demat account for NCDEX trading?
Yes. Along with the Demat account, you also need to have a commodity trading account to trade in NCDEX. You need to find a reputed stock broker who is registered with NCDEX along with SEBI.
What commodities are traded in NCDEX?
There are several commodities that are traded in NCDEX, such as castor seed, dhaniya, cotton seed, kapas, jeera, turmeric, chana, wheat, bajra, moong, groundnut, refined castor oil, barley etc.
