WITH question marks hanging over the investment risks in international currency and stock markets, investors have begun exploring new modes of investment in commodities.

Realising this, the Securities and Exchange Commission of Pakistan and the Pakistan Mercantile Exchange, are working on plans to expand the role of the country’s only commodity exchange and deepen domestic commodity market.

The SECP has approved wheat and cotton future trading at the PMEX and transactions would soon begin after reservations of some stakeholders are removed. Preparations are underway for listing maize futures.

The PMEX witnessed a phenomenal growth of 335 per cent in aggregate traded volumes which shot up to Rs802 billion in 2011 from Rs184 billion in 2010. Officials say the growth would have been higher had commodity prices had not eased, particularly in the second half of the last year.

Future trading of gold contributed most to business expansion at the PMEX as prices of yellow metal fluctuated widely between $1310 and $1900 an ounce in the outgoing year.

However, trading in silver, crude oil, palm olein, sugar and Irri rice also increased the trade volumes.

Chairman of Gold Merchants Association Haji Haroon says that since the start of gold and silver trading on the PMEX, a majority of jewellers reinvest money in various types of gold and silver contracts at the PMEX. “So, this is helpful for them in liquidity management as well.”

“But whereas gold and silver currently account for the bulk of traded volumes at the PMEX, the future role of agricultural commodities is immense and crucial for the economy,” says H. A. Majeed, a former chairman of Rice Exporters Association of Pakistan.

“Although I personally don’t trade at the PMEX, theoretically, trading of agricultural commodities is a sure way of stabilising their prices by reducing variations in seasonal and short-term price trends.”

“Sugar and Irri rice trading at the mercantile exchange have helped in setting their market-based indicative future prices and trading of cotton, wheat and maize on the exchange would do the same,” said a the PMEX official. He said that the increase in support prices of agricultural commodities in the last four years had improved income levels in rural areas but it also raised questions about who among the various stakeholders are getting how much benefit.

“Once you have a system in place of continual signalling about future prices you make sure that all stakeholders make informed decisions about their activities in the supply chain.”

After the global recession of 2008-09 food commodity prices had rebounded but in the last year a weakening in the prices has been witnessed. Monitoring of future price trends and hedging against market risks have thus become crucial. This has become all the more important because maintaining food trade balance has emerged as a key priority for nations amidst threats to crops due to rapid climatic changes.

“A vibrant domestic commodity exchange does provide policy makers and market players, the required tools to make better decisions for mitigating market-based risks,” said a commodity dealer at a leading brokerage house.

Former director of the PMEX Zafar Moti laments that because of opposition from “the vested interests,” cotton future trading at the PMEX has so far not started despite approval from the SECP.

“Cotton future trading at the PMEX is essential for price discovery for all the stakeholders from growers to textile exporters,” he asserted and recalled that Karachi Cotton Exchange was closed in 1970s due to pressure from the same vested interests that are active now to delay initiation of cotton future trading at the PMEX. India’s Multi Commodity Exchange (MCX) started cotton future in October last year and an expanded list of commodities eligible for trading has “made MCX the fifth largest commodity exchange of the world.”

The PMEX sources say the main opposition to actual launching of wheat and cotton futures trading comes from big landlords and wealthy middlemen. “They know that timely price discovery would minimise chances for purchasing cotton or wheat at damn cheap rates from growers only to sell the same at high rates in the market,” explained a Karachi-based flour miller who buys the bulk of his wheat requirement direct from growers.

Changes in international benchmark prices of crude oil and palm olein provide timely clues to the industry for making informed decisions as domestic supply of crude oil is very little and that of palm olein is non-existent. In case of gold and silver both of which are recycled domestically and are imported global price movements again point to the direction of possible future movements without taking into consideration domestic supply side issues because of lack of correct assessment of supplies through recycling.

“That is where the role of the PMEX comes into focus. Future gold prices and gold prices for physical delivery to investors quoted on the PMEX also reflect local supply and demand sentiments and thus help in price discovery for stakeholders,” according to the official.

The PMEX (formerly National Commodity Exchange Ltd) would enter into its sixth year of operations in May this year. But within this short span it has emerged as a vibrant commodity exchange with expanding outreach. From a very humble beginning in 2007 it now boasts of more than 300 members and some 100 plus brokers whose daily transactions have not only begun to set benchmark future prices of certain commodities, but has also provided an alternative to thousands of small and medium investors in more than a dozen cities including Karachi, Hyderabad, Lahore, Multan, Faisalabad, Bahwalpur, Peshawar and Islamabad.