NCDEX Meaning & Definition

We can say that India’s agricultural commodity trading sector took a gigantic step towards maturity with the establishment of NCDEX. NCDEX meaning National Commodity & Derivatives Exchange is dedicated to trade agrarian products, started operating in 2003.

Setting up of NCDEX was a transformative event in Indian commodity market. It has changed its landscape by allowing agricultural commodities to trade in exchange like securities. It is backed by several leading financial institutions of India, including Life Insurance Corporation of India (LIC), NSE, and National Bank of Agricultural and Rural Development (NABARD).

A background of commodity trading

Commodity trading has a long history in India. Ancient traders traded commodities under a barter system based on their values. Today a wide range of products are exchanged in the global market through various exchanges. In India, commodities have a considerable demand, but until recently,  there was no exchange where commodity futures could be sold. Founded in 2003, MCX or Multi Commodity Exchange is the largest commodity exchange in India, controlling 80-85 percent of total commodity trade.  But it is mainly for other commodities like metal, energy, bullions, and the like.  MCX also trades in agricultural items; but the need to have a separate exchange, especially for agrarian products was long felt.

What Is NCDEX?

So, what is NCDEX? It is a commodity exchange, specialised for trading in agricultural products. Why was it needed? India is a world power in producing agricultural products. It is one of the major producers of items like wheat, rice, milk, lentils, and several types of fruits and vegetables. But India’s potential is mostly hidden from the world because of two reasons. Firstly, India being a populous country, consumes most of its produces. And secondly, the Indian market was mostly scattered, operating locally. There was no centralised platform to trade agricultural products at the national level. NCDEX has filled up the gap. It plays a critical role in India’s growing agricultural sector, allowing investors an opportunity to invest in a wide range of agricultural items directly while facilitating seller with year-round price discover.

In terms of value and number of contracts traded, NCDEX is second only to MCX. Though its headquarter is in Mumbai, it operates through its many offices located across the country. In 2020, it trades futures contracts on 19 agrarian products and options on five commodities. It controls 75-80 percent of total trading on agricultural items. Some of the highly exchanged commodities are coriander, guarseeds, cumin, castor seed, kapas, Bengal gram, moong dal, and more.

What Does NCDEX Do?

Prices of agricultural products rise and fall with changes in the market. Factors like excess rain, the arrival of monsoon, storms, or drought also impact prices of agrarian products. Now think of a farmer who expects prices to fall in future and wants to hedge against risks. He enters into a futures contract where he agrees to sell his products in a future date at a predetermined price. NCDEX acts as the middleman between an interested buyer and the farmer to facilitate a trade.

Benefits  Of Trading In NCDEX

  • – NCDEX has allowed market transparency – helping Indian farmers with a year-round facility to discover prices for crops.
  • – It helps farmers to hedge against risks and anticipated losses.
  • – NCDEX has helped in improving India’s agricultural practices by standardising product quality through various contracts.
  • – SEBI, as the regulator is preparing to make physical settlement of contracts mandatory for most of the commodities.
  • – It practices mark to market settlement. Everyday commodity prices change, goes up or down depending on the market. At the end of the trading day, it is compared with the price quoted in the contract. As rates rise or fall – price increase for sellers or decrease for buyers – the difference is adjusted from the other account to balance out any difference.
  • – NCDEX has made it possible for even retail and small traders to invest in agricultural commodities using futures contracts speculations.

Commodity trading offers a decent margin, which is why it attracts many players to it. NCDEX is relatively new and still reforming. But it has already established itself as a critical player in the Indian agricultural sector by facilitating agrarian products exchange in an active market.