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Basics of farm futures

You can roll over your position or square it off before the tender period begins.

, ET Bureau|
Mar 04, 2019, 09.24 AM IST

Commodity Summary

Farm or agri futures are instruments that allow you to take an informed view on future price movements of an underlier like wheat, maize, cotton , sugar, rubber, jute etc. ET sails you through the basics.

1. Where can one trade agri futures and who is the regulator of commodity derivatives exchanges?
The National Commodity & Derivatives Exchange (NCDEX) and to a lesser extent NMCE, which offers jute and rubber futures, and MCX, which offers futures in cardamom, cotton, mentha etc. NCDEX was set up in 2003 and over the years has become the largest agri derivatives marketplace. Sebi regulates commexes.

2. What products can one trade on the NCDEX?
Derivatives of sugar, wheat, castor and its oil, soyabean and its oil , Guarseed , guargum, spices like jeera, pepper, chilli , etc.

3. Are the contracts delivery based?
Yes, all agri futures are compulsory delivery contracts . For example, if you want to buy chana next month and think price will rise, you purchase a chana futures contract expiring on April 16 at say Friday’s closing price of Rs 4,152 per quintal (100 kilo). The tender period , where open positions are marked for delivery, begins on the 11th of a contract expiry month. Say, on April 16, chana futures expires at Rs 4,300, you can get delivery at your locked in rate of Rs 4,152 and sell it in the physical market for Rs 4,300, gaining a gross Rs 148 a quintal in the bargain.

However, if chana falls to Rs 4,000 on April 16, you will have to pay Rs 4,152 which was your lock-in price . In this case, you lose Rs 152 a quintal and Rs 15,200 at the contract level. The seller gains what you lose, which makes futures trading a zero sum game.

4. What if you just want to hedge and don’t want delivery?
You can roll over your position or square it off before the tender period begins. If you’re rolling over your position, you have to pay rollover charges.

5. Can those having an equity trading account also trade commodity derivatives?
Yes, as your securities broker can now offer commodities trading without setting up a separate commodity subsidiary. However, your broker should be registered with one of the commodity exchanges . If not, then you cannot trade. If so, the broker will initiate some paperwork to enable you trade on the segment. Also your F&O segment should be activated by the broker.

6. Is trading riskier than equities?
Yes, as most ordinary investors have no clue of the dynamics of commodity supply and demand. Also, unlike shares commodities are subjected to a whole host of factors , including global demand-supply, etc.
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