However, with the announcement of the government to set up futures exchanges in a number of commodities, professionals have started entering the commodities market.

Kushal Thaker is one such trader whose firm `Prophecy Investments' is a member of not only the Bombay Oilseeds and Oils exchange but many other futures exchanges in the country as well. Kushal not only trades in commodities in the futures exchanges but also in the open market. He has a research outfit that tracks almost all commodities, excluding grains.

Kushal manages afund for investment in commodities but continues to be actively involved in stock market operations.

In an interview with The Financial Express, Thaker talks about the reasons for diversifying into commodities trading from stocks and also about the outlook for various commodities.

On some of the characteristics of the futures markets in India.

As a thumb-rule the price variation in the futures market is five times that of the variation in the spot market. This can vary from commodity to commodity. For example, in the case of castorseed futures, the fluctuations are as high as 10 times, while that for cotton it is only two times. Such large fluctuations are there because futures market price quotations consist of not only the spot price but also other factors like holding costs, transportation costs, etc.

The futures markets are very liquid, with trading volumes reaching as high as 25 times the crop production. This substantially reduce transaction costs. Price fluctuations in the market arevery high as there are no circuit breakers. Prices in the turmeric futures market (the most liquid among all futures market) in Sangli fluctuate by as much as Rs 250 on a day. This is because the uses of the commodity are many and production is not high in spite of India being the largest producer. The manufacturing process too is long and cumbersome. Further, any idea about crop failure takes time to surface because of the nature of the process.

On the characteristics of other commodity markets. Movements in the cotton market are the slowest. While upward movements in prices are comparable to other commodities, downward price movements are very slow. As for the oils and oilseeds market, most of the oils in India generally follow the movement of groundnut oil, which is one of the main oils in the country. Groundnut oil is the trendsetter; further it is a secondary cultivation plant and can grow along with other crops (it takes one month for the crop to grow).

One of the first oils that moves in line withgroundnut oil is castor oil. This is because normally 20 per cent of castor oil is added to groundnut oil (which is a standard practice and not adulteration). If prices of groundnut oil move up, more castor oil is needed for adding to groundnut oil, which moves the price of the commodity too.

On the likely trend of commodities in the coming year. The star performer in the year to come will be castorseeds, as there are reports of a crop failure. Pepper is likely to remain stable, while groundnut oil is likely to firm up. Jute is likely to go through a good phase, so will sugar and cotton. If deregulation of sugar takes place, the market will be worth watching. In a nutshell the year will be good for agricultural commodities.On why he took to commodities.

Even while I was into trading of shares, I had a fascination for the commodities market. I use to read a lot of foreign magazines and books on the commodities market and financial derivatives like futures and options. Abroad, the volume of trading incommodities is five times as much as in shares. This, however, is not the case in India.

When I studied commodities, I saw a strong correlation between movements in the commodities market and the stock market. While studying price movements in aluminium in CBOT (Chicago Board of Trade), I noticed that the price movement in Cadelco (the largest American producer of aluminium) was in the same direction as that of the metal, though with a time lag.

I was able to predict the price movement within a time span of about seven months. Thus even before price movement starts on the stock exchanges one can make a killing by catching it on the commodity market. If one can make normal profits on the commodity market, then it is possible to make super-normal profits in the stock market. I improved my success rate in the stock market by studying the commodity market.

After studying the international market, I shifted my attention to the Indian market. I spoke to some of the active participants in the market and readabout the fundamentals of the market. What attracted me to futures was the fact that there is money to be made on both sides of the price movement (both buy and sell futures contracts can be traded and held for a long time) as against only upward moves in the stock market.

At this point of time I decided to test the water and joined a fund that was actively involved in commodity trading. I was with them for a period of four months after which I decided to operate on my own. Today I have my own fund, and am a member of all major futures exchanges in the country (except the international pepper exchange). I also trade in bullion and metals. However, I prefer to stay away from the grain market because of high government intervention in the sector.

On public participation in the commodity market.

Public participation in the commodity markets, specially futures, was hardly there a few years back. However, the trend has started to change with more and more people being attracted to the commodity markets. Manytraders from the stock exchanges have moved to commodities. The most attractive proposition for small investors is that there is no question of bad delivery in commodity exchanges and also the activities of the exchanges are very transparent. By investing only in margin money they can hold on to a contract in some cases for as long as 90 days.

On the various tools required for the commodity market, the players, and the risks involved in trading in commodities. The tools required for the commodity market are more or less the same as those required for the stock market. Mathematics, i.e. statistics, is the most important tool around. No market can be gauged without the statistical tools. Other than that there is the fundamentals of a commodity, the farmer's attitude, shifts in production, and rainfall (both timing as well as quantity) -- all these play a very important part in agricultural commodities. Then there is the political factor, as most of agro-commodities are politically sensitive.As for the playersin the futures market, like the share market it is dominated by speculators. There are also genuine buyers and sellers, the general trader, export houses and funds. Around 75 per cent of the market's liquidity is provided by speculators. It may be noted that the futures market is meant for hedging; hence only five per cent of the contracts traded in India result in deliveries. The figure for LME is zero per cent. However, there is an understanding between buyers and sellers while fixing a deal that the price at which goods will change hands will be fixed at 50 per cent of the spot price and 50 per cent of the futures price at the 90th day (or the last day of the futures contract).

As far as the risk associated with the market is concerned, the most important is the execution risk. The commodities bourses follow an open outcry system and by and large the individual trading positions are known to everyone; so entry and exit from positions can become risky especially if brokers decide to corner a buyer orseller or if the transaction is unusually large, or, for that matter, if the trader has made an error and is seeking to correct it by reversing his position. Besides execution risk, the other common risks of settlement risk and counter-party risk practically do not exist as the exchanges are very strict with trading limits and the system of daily margins is very strictly enforced. Besides, the exchanges have a clearing house which guarantees individual trades.