National Commodities and Derivatives Exchange (NCDEX)

What is the National Commodities and Derivatives Exchange (NCDEX)?

The National Commodities and Derivatives Exchange (NCDEX) is an agricultural commodity exchange in India. It consists of independent directors and offers an independent online platform for commodity trading. It was incorporated on April 23, 2003, as a public limited company under the Company Act 1956 and started functioning on December 15, 2003. The Securities and Exchange Board of India (SEBI) regulates NCDEX.

Headquartered in Mumbai, the National Commodities and Derivatives Exchange offers facilities from its branches in different zones throughout India – Delhi, Jaipur, Ahmedabad, Indore, Hyderabad, and Kolkata. As of March 2019, the platform listed 387 members across the country.

NCDEX comprises a wide range of commodities – an aggregate of 22 that are permitted to be traded on the online platform. The commodities include spices, pulses, and guars, which are not traded on any other global platform. Hence, the commodities, which are economically pertinent to India, form an important part of the country’s global trade.

National Commodities and Derivatives Exchange Shareholders

Some of the major shareholders of NCDEX include Life Insurance Corporation of India (LIC), Punjab National Bank (PNB), National Stock Exchange of India Limited (NSE), National Bank for Agriculture and Rural Development (NABARD), Indian Farmers Fertiliser Cooperative Limited (IFFCO), and Canara Bank.

Trading on NCDEX

To trade on the NCDEX online platform, farmers need to sign contracts for trading their products at a certain price after a certain time in the future. Hence, commodity trading can be done using futures contracts, which is an agreement between the seller and the buyer. The agreement also specifies the agreed amount that the buyer will pay when the seller delivers the commodity on a pre-decided future date.

At the end of each trading day, each commodity reaches a settlement price, which is compared with the price specified in the agreement. If the settlement price is higher, the differential amount is credited to the trading account. If it is lower, then the difference is debited to the trading account.

NCDEX Benefits

1. Enhances transparency in the market

The prices of commodity futures are made available at the national level on the online trading platform, decreasing the gap between the crop markets and the farmers. The prices predicted are almost accurate for the supply and demand market of the relevant commodities. The participants in the market use the prices as benchmark signals for decision making.

NCDEX provides price signals for about 48% of pulses, 50% of food grains, 58% of spices, and nearly 100% cotton seeds, sugarcane, cotton fiber, oilseeds, and guar seeds yielded in India. Around 2,100 rural markets receive the NCDEX price signals daily.

2. Improves decision making and allocation of resources

Market transparency enables farmers to make well-informed decisions. During the last decade, distress sales fell from 70% to 45%, and arrivals in the rural markets became more stable. NCDEX created a market ecosystem where the farmers are well-informed of the prevalent prices, thus empowering them to make better business decisions. Additionally, the real-time circulation of commodity futures prices assists the farmers in resource allocation for the coming seasons.

3. Minimizes price risk

NCDEX provides the farmers with a tool to offset the risks associated with the fluctuation of commodity prices. The farmers can hedge their produce to protect themselves from adverse price fluctuations. Through hedging, the members can transfer their price risk to other participants, and it depends on the risk-taking capacity and the willingness to take on more risk.

There must be a perfect correlation between the price of futures contracts that the market participants want to hedge and the spot price. Otherwise, it will result in a mismatch between losses and gains from both the accounts, which will make the hedger either better or worse off. The NCDEX commodity futures are greatly correlated with spot prices, which makes the platform a perfect tool to hedge commodity prices and minimize risk.

4. Boosts warehousing industry

Most of the commodities futures are considered settled when delivered; hence, the warehouses play an important role in commodity trading. Furthermore, the focus of NCDEX on improved deliveries helps increase investments from large companies to develop storage infrastructures in different states of India. The warehouses approved by NCDEX become the focal point for farmer’s transactions, food safety standards, the purchase of raw materials, logistics, and transportation.

5. Increases accessibility of markets

To increase income, farmers need to achieve increased crop yields and sell more products in the market. However, the farmers with limited access to formal markets and no assurance of the returns for their efforts prefer not to take the risk by increasing their production. With its nationwide online presence, NCDEX is exceptionally placed to solve a difficult situation.

NCDEX organized the “Farmer Education Program” to train small farmers in several Indian states on storage techniques, crop management, and the mitigation of price risk by controlled market channels and institutions owned by the community. Under the program, about 50,000 poor farmers will be shifted from smallholder agriculture to commercial agriculture tailored to the market. The farmers receive access to NCDEX price signals, support on financing, warehousing, and training on quality standards.

More Resources

CFI is the official provider of the global Capital Markets & Securities Analyst (CMSA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

• Guide to Commodity Trading
• Hard vs Soft Commodities
• New York Mercantile Exchange (NYMEX)
• Trading Mechanisms
• See all derivatives resources