National Commodities and Derivatives Exchange (NCDEX)

What Is the National Commodity and Derivatives Exchange (NCDEX)?

The Exchange is used for agricultural commodities where people can do derivative trading in entities owned by the Ministry of Finance, Government of India. It has a client base of more than 2 million people across India.

NCDEX is an exchange based out of India, specifically focusing on agriculture commodities like rice, wheat, soybeans, etc.

It was incorporated on April 23, 2003, as a public limited company and commenced operations on December 15, 2003, as a recognized association under the Forward Contracts (Regulation) Act, 1952.

The Exchange was deemed a recognized stock exchange under the Securities Contracts (Regulation) Act, 1956, under the regulation of the Securities & Exchange Board of India (SEBI). As a result, it became the most significant agricultural derivatives exchange with a market share of 75%.  

A commodity market is a market that trades in the primary economic sector rather than manufactured products. It generally includes three commodities: agricultural, energy, and metals.

A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset or support, in this case, agricultural commodities like soybeans, chickpeas, barley, etc.

So this Exchange helps people in India to trade in the commodities market (agricultural) and the derivative trading in India’s agricultural sector by providing an effective platform for the traders.

It provides us with an efficient platform for price discovery and risk management, consistently demonstrated over the past two decades. In addition, they offered a diverse range of products to do a trade-in.

NCDEX’s Raison d’etre serves as an efficient platform for Price Discovery and Risk Management, consistently demonstrated over the past two decades. 

NCDEX is deeply committed to the national objective of uplifting and developing farmers and the agricultural sector. Our relentless efforts to connect the primary producer to the Exchange have paved the way for sustainable and inclusive growth of our rural economy. 

They allow commodities trading in options futures in goods and index futures that open many opportunities to cater to various sets of participants in the Agri value chain. 

Currently, NCDEX offers derivative contracts on 11 commodities reflecting India's identity as the world's leading producer of agricultural commodities, and the NCDEX price is widely recognized as the International benchmark price.

They provide a broad-based bouquet of permitted commodities aggregating to a total of 23, including pulses, spices, and guar, which are not traded on any platforms in global scenarios and are economically relevant to India.

It helps reduce the monopoly of intermediaries in price determination as it sets a benchmark for all, increases transparency, and allows farmers to grow and access more markets to trade and earn money.

It is owned by many government regulators and institutions such as NSE ( 15%), LIC (11.10%), NABARD (11.10), IFFCO (10%), and PNB (7.29), and many more, with some individuals also Mrs. Pushpa Devi Saraogi by 2.50%.

history of NCDEX

It started way back around 147 years ago, first in India, a trade association named Bombay Cotton Trade Association in 1875, where people used to trade and buy and sell cotton.   

After 25 years of cotton trading, people started trading in oil seeds where they could buy futures and options on oil seeds, which was a remarkable shift at that time and introduced a new concept known as future trade.

In 1920 in Mumbai, people started trading in a new asset class that has been very popular since its discovery and is known as one of the earth's precious metals, gold, and silver, where people started trading futures in gold and silver.

In 1939 to increase cotton import from the UK to India, the British government tried to decrease cotton production and ban the derivative trading in cotton so that people would buy the British-made product.  

This was a substantial economic setback for India as cotton was the most traded commodity in the commodities market then and famous across the globe due to its superior quality.

The British government forced people to buy machine-produced cotton clothes, which were much cheaper than those manufactured in India. Also, people were not allowed to purchase cotton.

After Independence in 1947, the Forward Contracts (Regulation) Act was passed by the government of India in 1952, which removed the ban on cotton futures derivative trading and allowed people to trade in cotton.

In 1955, the whole future and options in the commodities market became very volatile due to the government banning future trading in gold and silver to protect people's interests and reduce the smuggling of gold and silver in India.

The Forward Market Commission (the regulatory body for future trading) states that the marketable stocks of gold and silver traded in the commodity market are way more than the internal production, which makes the market too bullish. 

In 1966, the government banned future trading in most commodities because they felt these practices were very volatile and risky for the people. By stopping the speculation in the market, they could stabilize the market.

In the 1980s, the government started removing the restriction of trading in commodities by first removing it from jute and cotton to removing restriction from most of the entities in 2001.

The government gives licenses to set up national-level multi-commodity exchanges to start regulated trading in commodities. Then finally, in 2003, NCDEX was established to regulate trading.  

Advantages Of NCDEX

The NCDEX is an exchange that plays a vital role in the primary sector in India. It helps farmers, traders, and business people do their business.

It helps reduce the exploitation happening with the farmer with the middleman. Generally, the wholesale prices were always decided by intermediaries, but having the Exchange would decrease their power.

Let us see some of the advantages it brings to the table for all of us. These advantages will help you to understand the significance of the Exchange, which are discussed below. 

It Sets A Benchmark Signal

The predicted prices are almost accurate for the relevant commodities' supply and demand market, and people use these prices as benchmark signals for decision-making while doing business.

The predicted prices are almost accurate for the relevant commodities' supply and demand market, and people use these prices as benchmark signals for decision-making while doing business.

Market Transparency Enables Farmers To Make Well-Informed Decisions

Distress sales fell from 70% to 45% in the last decades, increasing the market's stability.

The Exchange created an ecosystem where the farmers were well-informed of the prevalent prices, empowering them to make better business decisions. In addition, real-time prices assist farmers in resource allocation for coming seasons.

Risk Allocation

It provides the farmers with tools to offset the risk associated with the fluctuation of commodity prices. They can hedge their production to protect themselves from adverse price fluctuations.

The members can transfer their risk to other participants, depending on their risk-taking capacity and willingness to take on more risk. A perfect correlation between the price of futures contracts helps in hedge and spot price.

The exchange correlates with spot prices, making the platform a perfect tool to hedge commodity prices and minimize risk.

Boost The Warehousing Industry

It boosts the warehousing industry as most of the commodities' futures are considered settled when delivered. Hence, the warehouse plays a significant role in commodity trading.

Therefore, the exchange focuses on improved deliveries, which helps increase investment in storage infrastructure development. The approved warehouse becomes the focal point for farmer’s transactions.

It Increases The Accessibility Of The Market For The People

To increase income, farmers need to achieve increased crop yields and sell more products in the market. But, before 2003, it wasn't easy to tap more calls simultaneously.

After 2003, it became easier for farmers to trade in many markets and ensure a return from the products they produced, which increased their accessibility to their needs.

NCDEX organized the "Farmer Education Program" to train small farmers in India on storage techniques, crop management, and mitigation of price risk by controlled market channels.

NCDEX's Impact on the agricultural sector

The Exchange impacted the whole agriculture sector in India. Some of their impacts are given below:

Accessibility

There was a substantial positive impact on the agricultural sector, especially on the farmers. This is because the Exchange allows the farmers to trade across India and not restrict themselves to the nearest or local market.

It increases the accessibility for farmers to start trading their crops in the different markets in India, which increases the sales of products to a very high level, ultimately allowing them to sell all the products without waste.

It also enables them to deal directly with big corporations and retail stores to sell the crops directly without mediators' interference and earn huge profits.

It Increases Transparently

It increases the transparency in the agricultural sector, which enables the farmers to know the correct price of the crop as the Exchange reveals the future price online and shows that the middleman will not fool them.

The price predicted by the Exchange is considered the benchmark for all the commodities market transactions and helps them make the right buying and selling decisions for their crops.  

Price Determination

Due to the live quotes of the products, it becomes very convenient for people to know the proper value of the commodity, which helps them to predict the risk involved in the business.

It helps in risk management for the people and enables them to determine their risk capital so that they can do business according to that and reduce the chances of losses incurred.

Education And Training Program

The NCDEX also started a training program for them to know how to use different facilities provided to them by having a page on their website for learning which helps them to progress.

As we all know, most of these things are still unknown to many farmers; by providing them with the proper guidance and trading, they will be able to utilize these resources and increase the growth of the whole sector.

Without that, there is no use or positive impact in the agricultural sector of the Exchange across the industry; learning will make possible the growth of the primary sector.

How to trade in NCDEX

National Commodities and Derivatives Exchange is a great platform to trade for people interested in agricultural commodities and knowing about the market.

Still, you need to follow some steps to start trading in the market, which is checking whether you are eligible for doing business in NCDEX, then understanding and analyzing different products in it, and then you can start.

But, before beginning this career, you need to do certain things to start trading after being eligible for trading. The steps are given below: 

Choose Your Broker

First, users need to find a broker, as you can do trading on your own. You will need a stockbroker to do transactions as per your command or consent as a middleman.

You need to decide which broker you want: a full-service broker like Angelbroking, Sharekhan, ICICI securities, etc., or a discounted broker like Upstox, Zerodha, Robinhood, etc.

The full-service broker will provide client consulting, research, advice, planning, and tips. On the other hand, discount brokers will not offer these facilities but take discount fees which are comparatively very low.

For foreigners (non-Indian citizens), they can use EFE (Eligible Foreign Entity), which allows them to hedge in the commodity derivative market through Authorized Stock Brokers (ASBs). To know more, click here.

Filling The Application Form

After selecting the stockbroker, you need to fill out an application form to open your account with the chosen broker through their websites or their offline office, depending upon the brokers.

You can also download the form and submit it offline, or you can submit it online, depending on the chosen broker, and you have to provide them with identity and address proof to complete the process.

Verification Process

The third step is to sit back and relax as the verification is to be done by the broker as well as SEBI to verify your identity. Therefore, you need to wait until you are verified; if it is not complete, your account opening process will stop.

It is crucial to ensure that you have submitted the correct document per the broker's instructions so that your verification is completed smoothly and you become verified for trading.

Deposit Margin Money

The last step before starting trading, you are required to make deposits of margin money as soon as your commodities trading account opens.

Now the question is, what is margin money?

So, the margin money is the security money from your side to the broker. If any time you suffer a loss, you will be able to pay that money. It is generally 5% to 10% of the contract value.

So you need to pay some maintenance and brokerage fees to the broker to maintain and do trading in your commodity trading account.

Now you can do trading in the commodity market through NCDC and start to earn money by yourself or with the help of investment advisors.

Researched and authored by Kartikay Agarwal | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Bollinger Bands®
• DAX Stock Index
• Rally
• R-Squared
• Stock Symbol