What do New York, London, Amsterdam, Shanghai, Singapore, Hong Kong, Mumbai, and Karachi all have in common?

They are the financial capitals of their respective countries. They are also port cities. Historically port cities turned into business and financial capitals because of their proximity to commodity trading and shipping routes. As a matter of fact, commodity exchanges precede both stock and bond markets. Usually, a port city turns into a commodity market, then with formal banking services gets a bond market, and later a stock market with proper legal frameworks. Chittagong, for various reasons never went through this cycle, which adversely affected the prospects of both the city and the country. But CSE (Chittagong Stock Exchange) has recently struck an agreement with MCX (Multi Commodity Exchange). In this deal, MCX will help CSE launch the first-ever commodity exchange in Bangladesh. 

Let’s dig deep now. What’s a commodity exchange and why does CSE want to build one?

Commodity exchange is simply a marketplace where you can buy-sell commodities like 

1. Metals- Gold, silver, iron ore, nickel, etc
2. Energy- Crude Oil, Natural Gas, LNG, etc
3. Agricultural crops and grains- Rice, wheat, corn, cotton, onion, soybean, etc
4. Live animals- Poultry, cattle, etc

But you cannot really buy-sell them in their physical forms. Instead, you buy and sell rights to purchase these as contracts. Let’s give an example.

Let’s say a farmer grows rice and is expecting his crop 6 months from now. But he doesn’t know what the price condition will be then. So he wants to fix a price now. To do that, he finds a buyer for his rice who will buy 5 tons of his rice at BDT 40K/ton, 6 months later. This contract is called a futures contract. It states the quantity amount, the price, and the time when the transaction will take place. 

Now think of a hypothetical scenario where a drought caused the rice to see low yield countrywide. And rice is supposed to have a lower than expected supply and higher price over the next few months. The buyer of the contract still has the right to buy rice at 40K/ton. If he wants, then he can sell it to another company that needs rice as a raw ingredient for their products. They can come to a deal where the company buys the contract at BDT 10K. Here the person that entered the initial contract with the farmer can make a BDT 10K profit. And the company will buy the right to purchase 5 tons of his rice at BDT 40K /ton. 

A commodity exchange is just an efficient and secure way to find buyers/ sellers and brokers for these kinds of contracts. The contracts are more standardized and anyone can buy and sell them. This also means, for the first time in Bangladesh’s history, anyone can easily invest in these commodities or even try to reduce the risk of price increases in daily lives

Why is CSE doing this? Because they need something to be their niche business. Currently, they have a stock exchange. But their market share is only 5% whereas DSE controls 95%. Given CSE’s proximity to the port, it puts them in a sweet spot to coordinate warehousing, logistics, financing, and settlements for commodities.

MCX will initially work on locating which commodities to start with. And the settlements will be cash only. This means when it comes to paying for the crop, the buyer and the seller can transact the difference between the contract price and the current price instead of the full price transaction and physical delivery of the commodity. 

The government hopes this will help restrain daily necessity prices. Whether it will really happen is up for debate. But futures market is extremely volatile. And it requires gentlemen’s agreement to uphold terms of the contracts. The cash settlement will also encourage bad market actors to participate in gambling, which will also have to be contained. The rest is yet to be seen.