Agridex– a simple way to trade in the commodities market
The much-awaited commodities futures index – the Agridex – is finally available for trading on the NCDEX.
Launched on 26th May 2020, trading in the Agridex kicked off with a turnover equivalent to a robust 3.4% of the total turnover of the NCDEX and can be expected to pick up pace with time and participation.
This index is expected to serve as a benchmark for the Indian agriculture ecosystem. Structured as a return-based agricultural futures index, Agridex tracks and replicates the performance of only 10 commodities – soybean, chana, coriander, cottonseed oil cake, guargum, guar seed, mustard seed, refined soy oil, castor seed and jeera. However, these were chosen because they are the ten most liquid commodities traded on NCDEX’s platform.
The index is expected to reflect the broader market and will be tracked by NSE Indices Limited, a leading index service provider, which will maintain and disseminate real time NCDEX AGRIDEX data/values, as a neutral third party.
Why was this index conceived?
It’s a long story…but we’ll try to keep it simple and stick to relevant facts only.
Farmers in India face uncertainty every year, as their crops are prone to various risks – delayed monsoons, breakdowns in logistics, crop disease, etc – which cause prices to fluctuate. Having a well-regulated futures market, with electronic trading platforms, offers some respite from the price risk they face by allowing them to hedge their produce.
Going a step further, having index futures contracts provides hedgers – who could be traders, producers, farmers producers organisation (FPO)s, individual farmers, institutional participants or even corporates – with the opportunity to hedge their position dynamically. At the same time, it also offers unique trading and arbitrage opportunities to market participants.
The index, which represents a fairly diverse basket of commodities – both in terms of crops and seasonality (Rabi and Kharif) – is a less risky and more predictable investment option when compared to individual commodity futures. Further, trading on the Agridex will improve overall liquidity on the exchange.
Last but not the least, as SEBI regulates the commodities market.
How does it work?
Agridex contracts expire in June, July, September and December. The value of this index is generated based on the spot and futures of the underlying commodities and it is cash settled.
Available in a lot size of 500, investments in the Agridex can range between a minimum order of Rs 500,000 and a maximum of Rs 2.5 crore (order size of 50 lots) at one go.
In order to encourage traders of all magnitudes to participate in Agridex trades, NCDEX requires an initial trade margin of just 6%, with a 99% value at risk (VAR) and transaction cost of one rupee per Rs 1 lakh value traded on the Agridex.
The Agridex does not include the entire basket of agri-commodities produced in India; cash crops like cotton and sugar have been excluded for now. However, the composition of the Agridex is re-balanced in March every year. For any commodity to remain in the composite index, the minimum threshold is an average daily turnover of Rs 75 crore during the past year, with scope for relaxation of 20%. Therefore, a commodity could be replaced with another one from the exchange platform, if it does not meet the minimum criterion.
Opportunity for investors
Beyond its appeal to participants who seek to hedge their agri market positions, the Agridex presents investors, even those who are relatively new to the commodity market, with a low risk investment option. A back-testing study reveals that the annualized volatility of the index has been 12.54% over the past one-year period.
In addition, the index is relatively easy to forecast, based on seasonality trends.
Additionally, Agridex contracts are cash settled and entertain all players from small traders to institutional investors.
The Agridex has been launched at an opportune time as agri commodity prices could receive a boost on account of the ongoing global monetary stimuli. During periods of great recession (2008-09, 2001,1980) internationally, agri-commodity price tend to outperform, mainly due to global central bank monetary stimuli. Going forward, we expect the same trend in the coming years and the Agridex could provide investors with a comfortable vehicle to ride such trends.
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We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.
Beautifully explained – Great validation from our ecosystem.
Stunning post! Thanks for sharing with us.