Way to put brakes on commodity prices
Commodity traders at work at the New York Mercantile Exchange. Photo: Nicholas Whitaker for HeatingOil.com
Agriculture experts believe a commodities exchange and derivatives market can fix the dysfunctional pricing system in rural markets.
"No syndicate will be able to manipulate prices if a farmer sells his produce through a commodities exchange," said an expert.
Our productivity has increased over the last decade but most farmers remain deprived of the benefits. A major reason behind continuing poverty is the dysfunctional pricing system in the local farmers' market.
Most farmers are like helpless puppets in the hands of the powerful syndicates and middlemen. Both the farmers and consumers are victims in regards to price control and benefits reaped from agricultural products. The government has been trying in vain to curb the atrocious deliberations of the middlemen and agro tycoons.
Abdullah Al Mamun, a finance teacher at North South University and an expert in the financial derivatives market in Bangladesh, said, "A commodities exchange and derivatives market could help eliminate this syndicate and middleman menace forever."
"This market would reduce the number of middleman by establishing a direct relationship between farmers and traders," said Mamun.
He said this commodities exchange is very popular in Asian countries such as India.
Professor Mahmud Osman Imam, who teaches finance at Dhaka University, said, "A commodities market would be very helpful in halting drastic price falls of bumper harvests."
Commodity prices will remain stable if the government establishes a commodities exchange, said Osman.
Fakhor Uddin Ali Ahmed, president of the Chittagong Stock Exchange, said, "A commodities exchange would benefit the farmers as it ensures perfect pricings."
Mamun said, "In our country, it is common that after a bumper harvest, the prices of agricultural commodities, like potatoes, fall drastically."
A commodities exchange is an organised market where raw or primary products are traded on either spot or future contracts.
A commodities exchange could be able to protect crop harvests against severe price falls by selling the product in futures markets, he said.
Agricultural commodities such as corn, wheat, maize, barley, cotton, cocoa, sugar, milk, animal feed, fruits, vegetables, beans, hay, livestock, meats, poultry and eggs usually account for most of trade in an exchange.
There are two types of commodities exchanges operating around the world, such as single and multi commodities exchanges.
The single commodity exchange only trades in one listed commodity and the Multi Commodities Exchange trades in multiple commodities that are listed at the particular exchange.
A commodities exchange coordinates and unifies trading activities within a regulated and centralised system.
Every listed product has to be traded through the commodities exchange because farmers cannot sell their listed products in any unauthorised open market if a nation has commodities exchanges.
To establish a commodities exchange, a major infrastructural overhaul is necessary. Some infrastructure that need to be set up are as follows:
- Farmer's cooperative: To trade on an exchange, a farmer must be a registered member of the local cooperative. These cooperatives are not conventional cooperatives but they provide small farmers the ability to trade in his products on an exchange.
Every cooperative will have a trade account/ brokerage account, which will be used to trade their commodities on the exchange. A cooperative is also useful for farmers' education and efficiency improvement.
-Warehouse: A commodities exchange authority will also set up a chain of networked warehouses throughout the country. Every crop surplus area will have a major warehouse. These warehouses will also assess the quality and weight of the products.
After that, farmers will receive a receipt for their products. Warehouses will maintain state-of-the-art inventory management systems and follow a 'first in first out' counting system.
-Commodities rating and ticker symbol: Every commodity will be checked thoroughly by rating agencies. They will be assigned a ticker taped symbol. For example, for maize, the ticker symbol would be MZ. Traders will be able to identify the products by looking at the ticker symbol on the monitor.
-Trading floor: There will be one central trading floor where traders and brokers will meet to buy and sell commodities.
The exchange will use both 'open outcry' and electronic platform methods. The entire biddings and asking prices will be available throughout the country by sub-exchanges, remote access terminal, short message services (SMS), interactive voice response (IVR) and ticker relay.
-Commodities clearing house: A clearing house will work as an intermediary between sellers and buyers. They will maintain all the vouchers for both spot and future trade. Buyers and sellers will receive their money and products from the clearinghouse. Disputes will be settled by the clearing house, if any.
Exchange members will maintain their cash deposits and margin money with them. Clearinghouses will be able to meet clients' obligations from the performance bond and guarantee fund.
Every commodities exchange will perform two types of trade such as spot and future trades. Most trade is spot trade, which is where buyers and sellers settle trade on the spot and same day. Both money and goods will be exchanged right away.
But commodities exchanges also specialise in derivatives trade. Derivatives is a type of future contract that allows parties to lock in future prices. There are three types of derivatives that can be traded in an exchange --future or forward, option and swap.
Derivatives have three functions -- hedging, speculation and arbitrage. Hedging reduces risk exposure, speculation makes profits based on future price movements, depending on prediction, while arbitrage takes advantages of price inefficiency in the market.
Mamun said, "I request the government to establish a commodities exchange to develop agriculture and farmers' lifestyle."
"I am ready to help the government in establishing a good commodities exchange, like in India," said Mamun.
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