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Chapter 13: Agricultural Commodities

15 Mins 24 Sep 2022 0 COMMENT

The tea/coffee you sip every morning, the breakfast you eat before going to work, clothes you wear to protect yourself from weather abnormalities, the lunch and dinner you eat to keep yourself fit and healthy, are all possible because of agriculture. Agricultural commodities are broadly classified as follows:

  1.   Cereals
    1. Wheat
    2. Rice
    3. Maize
    4. Millets
  2.   Oilseeds
    1. Soybean
    2. Groundnut
    3. Sunflower
    4. Safflower etc.
  3.  Spices
    1. Turmeric
    2. Coriander
    3. Cumin seeds
    4. Red chillies etc.
  4.   Softs
    1. Sugar
    2. Cotton
  5.    Others
    1. Guar seeds
    2. Guar gum
    3. Cotton seed oil cake
    4. Mentha oil etc.

Did you know?

Chicago Board of Trade is the world’s largest agri commodity exchange, which started its operations in 1848.

Importance of monsoon in Indian agriculture

India is an agrarian economy with 65% of its workforce dependent on agriculture for their livelihood. Of the total 140 million hectares of arable land in India, 51% is rain-fed and the remaining 49% is irrigated. Despite this, Indian agriculture is largely dependent on monsoons for its water requirements. India receives two monsoon rains, one due to southwest monsoon winds and another from northeast monsoon winds. Southwest monsoon brings maximum rainfall covering nearly 90% of India while the remaining part receives rainfall from northeast monsoon winds.

*Source: Ministry of Agriculture, Government of India

Southwest monsoon season usually starts from June 1 every year, and it enters the Indian sub-continent through Kerala. It typically covers a majority part of the country by July 15.

There are three main crop seasons in India. They are Kharif (June-September); Rabi (October-February) and Summer (March-May). Maximum crop production happens during Kharif, followed by Rabi and finally, Summer.

Differences between Kharif and Rabi crops

Kharif crops

Rabi crops

Sowing of Kharif crops starts with the commencement of the southwest monsoon

Sowing of Rabi crops commences immediately after harvesting of Kharif crops, which is the start of the winter season

Nearly 80% of India’s agricultural production comes from Kharif season

About 20% of India’s agricultural production is from Rabi season

Progress and distribution of rainfall is a major driving factor for acreage and production

Rabi crops are grown with soil moisture in the land after the end of monsoons

Major Kharif crops – Paddy, Jowar, Maize, Soybean, Groundnut, Arhar, Urad, Cotton, Sugarcane

Major Rabi crops – Wheat, Mustard seeds, Chana, Barley

Sowing period – Mid-May to end-July

Sowing period – October to November

Harvesting period – September to December

Harvesting period – February to April

Did you know?

Every year, even before the start of the crop season, the Government of India announces Minimum Support Price (MSP) for Kharif and Rabi crops separately to ensure farmers receive fair price for their produce.

Impact of monsoon on agri-commodity prices

India is largely dependent on monsoon for crop production. Therefore, monsoon onset, its progress throughout the entire country as well as its distribution plays a vital role in agri- commodity prices. Monsoon is impacted by geological events such as El Nino and La Nina.

Did you know?

El Nino is an event that reduces rainfall while La Nina brings more rain.

 

If the country receives lower than normal rainfall, it will affect crop production which results in supply shortage of agricultural commodities thereby causing spurt in agri-commodity prices and vice versa.

Agri commodities derivatives

MCX offers trading in four agri commodities: Cotton, Crude Palm Oil (CPO), Mentha Oil and Cardamom. Out of these four commodities, Cotton and CPO are the most widely traded commodities on the exchange. Let us understand them in detail.

Cotton

Cotton is known as ‘White Gold’ since it is one of the most important commercial crops and a major fibre used in the textile industry. Cotton is grown in more than 70 nations, although China, India, the United States of America, and Brazil account for around 70% of global production. After China, India is the world's second-largest cotton grower, accounting for 22% of worldwide production. India is first in terms of cotton acreage; however, it ranks second in terms of production due to lower yield.

Cotton fibre is one of the most important textile fibres, accounting for around 35% of total textile fibre usage globally. Cotton is adaptable enough to be utilised in a wide range of textile items due to its strength, absorbency, and ability to be washed and coloured. Cottonseed cake, which is used in livestock feed, and cottonseed oil, the world's fifth most consumed edible oil, are both made from crushed cotton seeds.

Cotton is grown in almost all states of India and amongst them, Gujarat tops the list with a 28% share followed by Maharashtra at 23%, Telangana at 15%, Haryana, Rajasthan & Andhra Pradesh accounting for 6% each, and Madhya Pradesh and Karnataka with a share of 5% each.

*Source: United States Department of Agriculture and Cotton Association of India

Did you know?

Globally, cotton is largely traded on the Inter Continental Exchange, which sets the global benchmark for cotton trading in the world.

Factors driving cotton price

  1. India has emerged as a large exporter of quality cotton in recent years. Global factors influence cotton prices greatly. World production, consumption, and inventory, all have a bearing on domestic prices.
  2. Domestic demand–supply scenario, inter-crop price parity, cost of production, and international prices are major factors that influence cotton prices.
  3. Weather, pests, diseases and other risk factors associated with agricultural crops also have a bearing on cotton production.
  4. Government policies on import, export, and MSP are significant influencers of cotton prices. 
  5. Global trade is particularly important for cotton. In addition to around 30% of the global cotton fibre produced being traded, it is also traded indirectly as yarn, fabric and clothing.
  6. Procurement and distribution of cotton by the Cotton Corporation of India also dictates cotton prices in the physical market.

Crude palm oil

Crude palm oil is one of the leading edible oils used by Indians and, we are the second largest importers of CPO after China. Palm oil plays a key role in India's edible oil consumption, accounting for more than 40% of the country's annual edible oil demand, almost all of which is imported. In reality, palm oil ranks first in the yearly edible oil import basket (around 60%). Kandla, Haldia, Krishnapatanam, JNPT, Kakinada, Mundra, Chennai, and Mangalore are the key ports for palm oil imports. However, derivatives trading in CPO and some other agri commodities was suspended by SEBI in December 2021 till further notice.

*Source: Solvent Extractors Association of India

Did you know?

Crude palm oil follows the intention matching contract pattern where delivery of the commodity happens upon intention matching by both buyers and sellers.

* Intention Matching: Delivery of the commodity happens on an exchange platform when both buyer and seller agree to exchange the commodity.

Factors driving crude palm oil price

  1. Supply situation in the world’s two largest producers—Malaysia and Indonesia and, demand scenario in China, India and European Union affect CPO prices.
  2. Price trends of rival vegetable oils such as soybean oil as well as crude oil due to the use of palm oil as bio-diesel have a bearing on CPO prices.
  3. Foreign exchange rates of exporting and importing countries impact CPO prices.
  4. CPO prices are also determined by trade policies of exporting and importing nations in the form of tariffs and export/import duties.

Did you know?

Most agricultural commodities are compulsory delivery contracts except edible oil contracts, which are intention matching contracts because of logistical challenges.

Contract specifications

 

Cotton

CPO

Contract size

25 bales

10 MTs

 Quotation base

Rs. / Bale of 170 kgs

Rs. /10 kg

Delivery unit

25 bales

10 MTs

Delivery logic

Compulsory

Both option – Buyer’s and Seller’s delivery intention

 

Expiry date

Last trading day of the month

Last trading day of the month

Tick size

Rs.10

Rs. 0.10

Initial margin

Minimum 8% or based on SPAN, whichever is higher

Minimum 10% or based on SPAN, whichever is higher

Extreme loss margin

Minimum 1%

Minimum 1%

         

Source: Multi Commodity Exchange of India

Please note, actual margin may vary as per prevailing margin guidelines issued by SEBI/MCX. Margin percentage used here is for illustrative purposes.

Summary

  • India is an agrarian economy with 65% of its workforce dependent on agriculture for their livelihood.
  • India is either first or second in production and consumption of one or the other agricultural commodities.
  • Monsoon plays a vital role in deciding crop production in India as 51% of land is rain fed.
  • India receives rainfall from two monsoons namely southwest monsoon and northeast monsoon.
  • Most agricultural commodities are compulsory delivery contracts except a few, which are intention matching contracts.
  • Quality of agricultural commodities varies as they are naturally produced and climate has a major role in deciding the quality of agricultural products.

After having been provided a fair understanding about four major commodity segments such as bullion, energy, base metals and agri commodities, you will be introduced to uses of commodity derivatives. There are majorly three market users namely traders, hedgers and arbitrageurs, all explained with examples in the next chapter.

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