Rajen Gala

India is predominantly an agrarian economy, ranking second in farm production in the world. While keeping pace with the increasing population, the growing agricultural production over the past several decades has thrown up major challenges in marketing, as well as supply, storage, and distribution. Agri commodity trading takes place via future contracts. These contracts can be used for hedging against risk or an opportunity to profit from speculation. A commodity is an essential product. Agro commodities fall into the category of soft commodities; hard commodities are usually mined products. The agri commodity markets do not exist for every agricultural product. Agri commodity trade takes place only in major commodities on six commodity exchanges in India. These products are generally cash crops. Some frequently traded products are spices, cereals, pulses, oilseeds, rubber, fibers like cotton and jute, dry fruits, etc. Commodity trading in agro products helps to develop efficient hedging and speculation strategies. For instance, if there is a marked change in future prices, because of existing spot prices, an efficient hedging strategy can be made. On the other hand, if changes in future price impact existing spot prices, an efficient speculation strategy can be formulated. Thus, on the basis of current trends in the market, it allows for finding future prices. For both retail and corporate investors, trading in agricultural commodities provides them an opportunity to diversify their portfolios. Trading in commodities has become as easy as trading in conventional stocks and securities. All you need is to open a Demat Account and a Trading Account, and complete the requisite formalities. For making most of your investments in agro commodities, industry experts suggest taking into account supply and demand-based factors along with seasonal and weather-related variables. “Agriculture is our wisest pursuit, because it will in the end contribute most to real wealth, good morals, and happiness” – Thomas Jefferson

A commodity exchange is an exchange where various commodities, agricultural and non-agricultural, tangible or intangible, including their derivate products and other raw materials are traded. The commodity exchanges in India are regulated by the Securities and Exchange Board of India (SEBI) since 2015. Prior to this, the FMC or Forwards Market Commission, overseen by the Ministry of Consumer Affairs regulated the Indian commodity exchanges. Mostly the different commodities are classified into agricultural and non-agricultural commodities. The non-agricultural commodities can be further sub-classified into three different categories – bullion, energy, and base metals. Here’s a brief list of the different types of commodities under each category that is regularly bought and sold in the exchanges. Base Metals – Aluminium, copper, lead, nickel, and zinc Bullion – Gold and Silver Energy – Crude Oil and Gas Agriculture – Black Pepper, Cardamom, Castor Seed, Cotton, Palm oil, Kapas, Wheat, Paddy, Chana, Bajra, Barley, and Sugar, among others. Most commodity markets across the world trade in agricultural products and contracts based on them. These contracts can include spot prices, forwards, futures and options on futures. There are six commodity exchanges in India. National Multi Commodity Exchange, established in 2002, Headquarter : Ahmedabad. Trading Commodities : Castor Seeds, Rapeseed, Mustard, Soyabean, Seasame, Copra, Black Pepper, Gram, Gold, Aluminium, Copper, Lead, Nickel, Zinc, Rubber, Jute, Coffee, Isabgoal,etc. Multi Commodity Exchange of India Ltd. (MCX), established in November, 2003, Headquarter : Mumbai. Trading Commodities : Metal, Bullion, Fibres, Energy, Spices, Plantations, Pulses, Petrochemicals, Cereals,etc. National Commodity and Derivative Exchange Limited (NCDEX), established in December, 2003, Headquarter : Mumbai. Trading Commodities : Cereals & Pulses, Fibres, Oil & Oil Seeds, Spices, Plantation Products,  Gold, Silver, Steel, Copper, Crude Oil, Brent Crude Oil, Poluvinyl Chloride, etc. Indian Commodity Exchange (ICEX), established in November, 2009, Headquarter : Gurgaon. Trading Commodities : Gold, Silver, Copper, Lead, Crude Oil, Natural Gas, Mustered, Soyabean, Soyabean Oil, Jute, Menthe Oil, Iron Ore, etc. Shariah Index, established in December, 2010, Headquarter : Gurgaon. This is the first Shariah index created in India utilizing the strict guidelines and local expertise of a domestic Shariah Advisory Board. The index comprises the 50 largest and most liquid shariah compliant stocks within BSE-500. Universal Commodity Exchange, established in April, 2013. It’s a national level electronic commodity exchange in India. Trading Commodities : Gold, Silver, Crude Oil, Chana, Rubber, Mustard, Soyabean, Refined Soya Oil, Turmeric, etc.

An Off-Balance Sheet (OBS) usually means an asset or debt or financing activity that is not reflecting on a company\’s balance sheet. In other words, it is a form of financing in which large capital expenditures are kept off a company\’s balance sheet through various classification methods. Companies will often use off-balance sheet financing to keep their debt to equity (D/E) ratios low, especially if the inclusion of a large expenditure would give them a negative debt to equity ratio. So, what is the difference between an on and off-balance sheet? The formal accounting distinction between on and off-balance sheet items can be quite detailed and will depend to some degree on management judgments. But in general terms, an item should appear on the company\’s balance sheet if it is an asset or liability formally owned by the company or if the company is legally responsible for it. Uncertain assets or liabilities must also meet tests of being probable, measurable and meaningful. For Example… Say company A has a subsidiary company B & it offloads all its risky investments in it. Now, any potential losses of the subsidiary company do not reflect in the books of records of the parent company. This helps A to appear financially more stable in the eyes of the public. But it also becomes responsible for any losses that arise in company B. This however is something the public doesn’t know. What company A does is that it puts the risky ventures of its subsidiary company B & any resulting payment/expenses/losses out of its balance sheet & appears healthier. Companies have used off-balance sheet entities responsibly and irresponsibly for some time. These separate legal entities were permissible under tax laws so that companies could finance business ventures by transferring the risk of these ventures from the parent to the off-balance-sheet subsidiary. Now… This was also helpful to investors who did not want to invest in these other ventures. Since the Enron scandal, however, General Accepted Accounting Principles (GAAP) allow these items, whether justifiable or not, to be excluded from the parent\’s financial statements but usually they must be described in footnotes. Giving you another example… We had discussed the concept of ‘Oil Bonds’ in one of my earlier lessons. Oil bonds are paid by the Govt. to oil companies to fund the subsidy on petroleum products. Now, a bond is a promise to pay at a later date. Thus, although the oil companies are paying money upfront for purchases, they are being compensated by means of oil bonds which is a deferred payment. Also… Besides the oil companies’ losses, the Govt. too has to pay up the money at the end of the stipulated time period which often could be a few years later. Thus, what these bonds are doing is just postponing the losses, which have to be repaid someday. And somewhere, at some point in time, the promised doles met out earlier will also eat into the Govt’s revenues, thus adding to the fiscal deficit. But here’s the catch… Did you know that the Govt. does NOT incorporate oil bonds in its balance sheets? What this means is that while the Govt. is liable to pay oil companies at some point in time but this is not reflected in its books of accounts. Simply put, in contrast to loans, debt and equity; the oil bonds do not appear on the balance sheet for the current year as they are future liabilities. This makes the balance sheet appear healthier. To Sum Up What: An Off Balance Sheet (OBS) usually means an asset or debt or financing activity that is not reflecting on a company\’s balance sheet. How: It was permissible under tax laws so that companies could finance business ventures by transferring the risk of these ventures from the parent to the off-balance-sheet subsidiary. Why: Tax laws allow these items to be excluded from the parent\’s financial statements but usually they must be described in footnotes.

Accounting rules are the favourite whipping boys of the financial market during bad times. These days too, it is the presence of what is called ‘the mark-to-market accounting rule’ that is being touted as one of the culprits behind much of the write-downs seen in the financial market. However, before forming any opinion let’s try to understand how the mark-to-market accounting rule works. So, what is a mark-to-market accounting rule? Mark-to-market is a very simple and straightforward accounting rule that prescribes a method for finding out the fair value for all kinds of financial assets. The list of financial assets, as you know, is fairly long – all your stocks, bonds, options, swaps, etc. can be called financial assets. How, you may wonder, does the mark-to-market accounting rule apply to so many different kinds of financial assets? Simply put… the mark to-market accounting rule relies on the use of the current market price of your financial assets to arrive at their fair value. So… So, if you are holding a stock that is currently trading at Rs.100/-, then as per the mark-to-market accounting rule, the fair value of your stock is Rs.100/-. You may have actually acquired the stock by paying Rs.200/- and expect that one day the same stock would trade at a much higher price. But in the realm of the mark-to-market accounting rule, future expectations do not play a role. Therefore… The worth of your asset is always determined by the price at which you can currently sell it in the market. There is no need to look at any other statistic like future earnings, growth potential or any other fact or fiction surrounding your financial asset. Even a blindfolded man can know the fair value of any financial asset by just using the current market price as the yardstick. However… Many skeptics believe that while this may sound good in theory, in reality the free play of market forces may not always reflect the correct price of a financial asset. Sometimes the scale of the market may excessively tip to one side or the other, moving prices away from where they should be. For instance… Distress sales hardly give any chance of selling your asset at the right price. In the worst case, as the experience of the subprime crisis showed, the financial market itself may freeze completely, leaving you with assets for which there are absolutely no takers. In such situations, the mark-to-market accounting rule may become a messenger of death even when your financial assets are generating some income. Then what conclusion can we draw? Should we completely discard the mark-to-market accounting rule when the financial market is in distress? Well… We can’t accept the mark-to-market accounting rule as the last word on valuation of financial assets. Neither can we completely dump the mark-to-market accounting rule. We definitely need to strike a balance. The main attraction of the mark-to-market accounting rule lies in its simplicity and objectivity. The mark-to-market accounting rule compels us to look at the real picture. To Sum Up Mark-to-market is a very simple and straightforward accounting rule that relies on the use of the current market price of your financial assets to arrive at their fair value. Many skeptics believe that the mark-to-market rule does not reflect the effect of market forces on the correct price. But, barring extreme situations, the mark-to-market accounting rule still has the potential to become the best friend of our financial market.