All you need to know about agri futures

What are agri futures ?

Like equity, currency or interest rate futures, they allow you to buy or sell an underlier at a preset price on a future date. All agri contracts end in compulsory delivery. Only informed investors or traders should venture in here. The counterparties are physical market traders, hedgers and more recently alternate investment funds category III — class of funds whom Sebi allows to take leveraged positions. Sebi has also allowed mutual funds and portfolio managers to participate in commodity futures but it’s not clear if they will be allowed to trade agri commodities in the initial phases.



How do they work?

Let’s say you’re bullish guargum. You expect the price of the active month contract to rise from its last traded price of Rs 8768 a quintal (100 kilos) on Friday on the NCDEX to Rs 8900 by mid April . The contract expiry is April 16. If you’re not going to take delivery , you must square off your position on the 10th of the contract expiry month as staggered delivery begins from the 11th of the expiry month . This will mark you for taking delivery.

Assume on April 10 the price rises to Rs 8900 a quintal . You make a gain ex brokerage and relevant taxes of Rs 132 a quintal . Since the contract size is 5 tonnes , you make Rs 6600 at contract level.

However, if guargum corrects by Rs 132 , you lose the same amount apart from brokerage and CTT which is commodity transaction tax, analogous to Stt in equities . Here it may be mentioned that CTT is applied only on processed agri commodities and not essential ones.

What is the margin to trade?

It’s normally 5 per cent but brokers take extra margin in case of volatile and narrow commodities like guar gum , chilli and coriander etc .

What products are available to trade ?

Wheat , sugar , Chana, soyabean, castor , chilli , jeera futures, etc . Edible oil seeds and oils , spices and items like guar are among the more liquid contracts .

Is trading in commodities derivatives risky?

Yes and more risky than equity futures as prices are influenced by a wide variety of factors like global supply demand , weather , trade disputes , forex movement . Only those who are well versed should enter this market .