With the establishment of NCDEX, India's agricultural commodity trade sector made a huge leap towards maturity. NCDEX, which stands for National Commodity & Derivatives Exchange, is dedicated to trading agrarian products. It was established in 2003.
The establishment of NCDEX was a significant event in the Indian commodity market. It allowed agricultural commodities to trade on exchanges like securities, which has transformed the market. It is backed in part by the Life Insurance Corporation of India (LIC), NSE and National Bank of Agricultural and Rural Development [NABARD].
India has a long history of commodity trading. Barter systems based on commodities' values were used by ancient traders to trade commodities. Today, a variety of products can be traded on the global market via various exchanges. India has a high demand for commodities, however, until recently there was no place where commodity futures could have been sold. MCX, or Multi Commodity Exchange, was established in 2003 and controls 80-85 percent to total commodity trade. It is used primarily for metals, energy, bullions and other commodities. MCX trades in agricultural products; however, the need for a separate exchange was long felt, especially for agrarian items.
What is NCDEX, then? It is a commodity exchange that specializes in trading agricultural products. Why did it become necessary? India is a world leader in agricultural production. India is a major producer of products such as wheat, rice and milk. Two reasons make India's potential largely unknown to the rest of the world. India, being a large country, consumes the majority of its produce. Secondly, India's market was scattered and operated locally. It was not possible to trade agricultural products on a national scale through a centralised platform. The NCDEX filled the gap. It is a vital part of India's agricultural sector. Investors have the opportunity to directly invest in a variety of agricultural products while sellers can get year-round price discovery.
NCDEX is second to MCX in terms of both value and the number of contracts traded. Its headquarter is located in Mumbai but it has many offices across India. It trades futures contracts on 19 agricultural products and options on five other commodities. It controls between 75 and 80 percent of agricultural commodities' total trade. Coriander, guarseeds and cumin are some of the most traded commodities.
Changes in the market can cause agricultural products to see their prices rise or fall. Prices of agricultural products are also affected by factors like excessive rain, monsoons, storms, and drought. Imagine a farmer expecting prices to drop in the future, and wanting to hedge against these risks. He signs a futures agreement where he agrees that he will sell his products at a certain price in the future. NCDEX acts as a broker between the buyer and farmer in order to facilitate trade.
Commodity trading has a good margin. This is why it draws many players. NCDEX is still in its infancy and under constant reform. It has established itself as an important player in India's agricultural sector by facilitating the exchange of agrarian products in an active market.