Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchange

Commodities exchange

A commodities exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials and contracts based on them...

s, in which they are bought and sold in standardized contracts.

This article focuses on the history and current debates regarding global commodity

Commodity

In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....

 markets. It covers physical product (food, metals, electricity) markets but not the ways that services, including those of governments, nor investment, nor debt, can be seen as a commodity. Articles on reinsurance markets, stock market

Stock market

A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...

s, bond market

Bond market

The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and...

s and currency markets cover those concerns separately and in more depth. One focus of this article is the relationship between simple commodity money

Commodity money

Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....

 and the more complex instruments offered in the commodity markets.

See List of traded commodities for some commodities and their trading units and places.

History

The modern commodity markets have their roots in the trading of agricultural products. While wheat and corn, cattle and pigs, were widely traded using standard instruments in the 19th century in the United States, other basic foodstuffs such as soybeans were only added quite recently in most markets. For a commodity market to be established, there must be very broad consensus on the variations in the product that make it acceptable for one purpose or another.

The economic impact of the development of commodity markets is hard to overestimate. Through the 19th century "the exchanges became effective spokesmen for, and innovators of, improvements in transportation, warehousing, and financing, which paved the way to expanded interstate and international trade."

Early history of commodity markets

Historically, dating from ancient Sumer

Sumer

Sumer was a civilization and historical region in southern Mesopotamia, modern Iraq during the Chalcolithic and Early Bronze Age....

ian use of sheep or goats, other peoples using pigs, rare seashells, or other items as commodity money

Commodity money

Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....

, people have sought ways to standardize and trade contracts in the delivery of such items, to render trade itself more smooth and predictable.

Commodity money and commodity markets in a crude early form are believed to have originated in Sumer

Sumer

Sumer was a civilization and historical region in southern Mesopotamia, modern Iraq during the Chalcolithic and Early Bronze Age....

 where small baked clay tokens in the shape of sheep or goats were used in trade. Sealed in clay vessels with a certain number of such tokens, with that number written on the outside, they represented a promise to deliver that number. This made them a form of commodity money - more than an I.O.U.

IOU (debt)

An IOU is usually an informal document acknowledging debt. An IOU differs from a promissory note in that an IOU is not a negotiable instrument and does not specify repayment terms such as the time of repayment. IOUs usually specify the debtor, the amount owed, and sometimes the creditor...

 but less than a guarantee by a nation-state or bank. However, they were also known to contain promises of time and date of delivery - this made them like a modern futures contract

Futures contract

In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...

. Regardless of the details, it was only possible to verify the number of tokens inside by shaking the vessel or by breaking it, at which point the number or terms written on the outside became subject to doubt. Eventually the tokens disappeared, but the contracts remained on flat tablets. This represented the first system of commodity accounting.

Classical civilizations built complex global markets trading gold or silver for spices, cloth, wood and weapons, most of which had standards of quality and timeliness. Considering the many hazards of climate, piracy, theft and abuse of military fiat

Military fiat

Military fiat is a process whereby a decision is made and enforced by military means without the participation of other political elements. The Latin term fiat, translated as "let it be," suggests the autocratic attitude ascribed to such a process...

 by rulers of kingdoms along the trade routes, it was a major focus of these civilizations to keep markets open and trading in these scarce commodities. Reputation and clearing became central concerns, and the states which could handle them most effectively became very powerful empires, trusted by many peoples to manage and mediate trade and commerce.

Size of the market

The trading of commodities consists of direct physical trading and derivatives trading. Exchange traded commodities have seen an upturn in the volume of trading since the start of the decade. This was largely a result of the growing attraction of commodities as an asset class and a proliferation of investment options which has made it easier to access this market.

The global volume of commodities contracts traded on exchanges increased by a fifth in 2010, and a half since 2008, to around 2.5 billion million contracts. During the three years up to the end of 2010, global physical exports of commodities fell by 2%, while the outstanding value of OTC commodities derivatives declined by two-thirds as investors reduced risk following a five-fold increase in value outstanding in the previous three years.
Trading on exchanges in China and India has gained in importance in recent years due to their emergence as significant commodities consumers and producers. China accounted for more than 60% of exchange-traded commodities in 2009, up on its 40% share in the previous year.

Commodity assets under management more than doubled between 2008 and 2010 to nearly $380bn. Inflows into the sector totalled over $60bn in 2010, the second highest year on record, down from the record $72bn allocated to commodities funds in the previous year. The bulk of funds went into precious metals and energy products. The growth in prices of many commodities in 2010 contributed to the increase in the value of commodities funds under management.

Spot trading

Spot trading is any transaction where delivery either takes place immediately, or with a minimum lag between the trade and delivery due to technical constraints. Spot trading normally involves visual inspection of the commodity or a sample of the commodity, and is carried out in markets such as wholesale markets

Wholesale marketing

The consumption and production of marketed food are spatially separated. Production is primarily in rural areas whilst consumption is in urban areas. Agricultural marketing is the process that overcomes this separation, allowing produce to be moved from an area of surplus to one of need...

. Commodity markets, on the other hand, require the existence of agreed standards so that trades can be made without visual inspection.

Forward contracts

A forward contract

Forward contract

In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed today. This is in contrast to a spot contract, which is an agreement to buy or sell an asset today. It costs nothing to enter a...

 is an agreement between two parties to exchange at some fixed future date a given quantity of a commodity for a price defined today. The fixed price today is known as the forward price

Forward price

The forward price is the agreed upon price of an asset in a forward contract. Using the rational pricing assumption, for a forward contract on an underlying asset that is tradeable, we can express the forward price in terms of the spot price and any dividends etc...

.

Futures contracts

A futures contract

Futures contract

In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...

 has the same general features as a forward contract but is transacted through a futures exchange.

Commodity and futures contracts are based on what’s termed forward contracts. Early on these forward contracts — agreements to buy now, pay and deliver later — were used as a way of getting products from producer to the consumer. These typically were only for food and agricultural products. Forward contracts have evolved and have been standardized into what we know today as futures contracts. Although more complex today, early forward contracts for example, were used for rice in seventeenth century Japan. Modern forward, or futures agreements, began in Chicago in the 1840s, with the appearance of the railroads. Chicago, being centrally located, emerged as the hub between Midwestern farmers and producers and the east coast consumer population centers.

In essence, a futures contract is a standardized forward contract in which the buyer and the seller accept the terms in regards to product, grade, quantity and location and are only free to negotiate the price.

Hedging

Hedging

Hedge (finance)

A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment.A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of...

, a common practice of farming cooperatives, insures against a poor harvest by purchasing futures contract

Futures contract

In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...

s in the same commodity. If the cooperative has significantly less of its product to sell due to weather or insects, it makes up for that loss with a profit on the markets, since the overall supply of the crop is short everywhere that suffered the same conditions.

Delivery and condition guarantees

In addition, delivery day, method of settlement and delivery point

Delivery point

In a postal system, a delivery point is a single mailbox or other place at which mail is delivered. It differs from a street address, in that each address may in fact have several delivery points, such as an apartment flat, office department, or other room...

 must all be specified. Typically, trading must end two (or more) business days prior to the delivery day, so that the routing of the shipment can be finalized via ship or rail, and payment can be settled when the contract arrives at any delivery point.

Standardization

U.S. soybean

Soybean

The soybean or soya bean is a species of legume native to East Asia, widely grown for its edible bean which has numerous uses...

 futures, for example, are of standard grade if they are "GMO or a mixture of GMO and Non-GMO No. 2 yellow soybeans of Indiana, Ohio and Michigan origin produced in the U.S.A. (Non-screened, stored in silo)," and of deliverable grade if they are "GMO or a mixture of GMO and Non-GMO No. 2 yellow soybeans of Iowa, Illinois and Wisconsin origin produced in the U.S.A. (Non-screened, stored in silo)." Note the distinction between states, and the need to clearly mention their status as GMO (Genetically Modified Organism

Genetically modified organism

A genetically modified organism or genetically engineered organism is an organism whose genetic material has been altered using genetic engineering techniques. These techniques, generally known as recombinant DNA technology, use DNA molecules from different sources, which are combined into one...

) which makes them unacceptable to most organic

Organic farming

Organic farming is the form of agriculture that relies on techniques such as crop rotation, green manure, compost and biological pest control to maintain soil productivity and control pests on a farm...

 food buyers.

Similar specifications apply for cotton, orange juice, cocoa, sugar, wheat, corn, barley, pork bellies

Pork belly

Pork belly is a boneless cut of fatty meat derived from the belly of a pig. Pork belly is popular in Asian cuisine, and forms a part of many traditional European dishes such as the Alsatian Choucroute garnie, the Swiss Berner Platte, and the German Schlachtplatte...

, milk, feedstuffs, fruits, vegetables, other grains, other beans, hay, other livestock, meats, poultry, eggs, or any other commodity which is so traded.

Regulation of commodity markets

In the United States, the principal regulator of commodity and futures markets is the Commodity Futures Trading Commission

Commodity Futures Trading Commission

The U.S. Commodity Futures Trading Commission is an independent agency of the United States government that regulates futures and option markets....

 but it is the National Futures Association

National Futures Association

The National Futures Association is an independent self-regulatory organization and watchdog of the commodities and futures industry in the United States. The NFA oversees and protects investors from fraudulent commodities and futures activities. The NFA also provides mediation and arbitration...

 that enforces rules and regulations put forth by the CFTC.

Oil

Building on the infrastructure and credit and settlement networks established for food and precious metal

Precious metal

A precious metal is a rare, naturally occurring metallic chemical element of high economic value.Chemically, the precious metals are less reactive than most elements, have high lustre, are softer or more ductile, and have higher melting points than other metals...

s, many such markets have proliferated drastically in the late 20th century. Oil was the first form of energy so widely traded, and the fluctuations in the oil markets are of particular political interest.

Some commodity market speculation is directly related to the stability of certain states, e.g., during the Persian Gulf War

Gulf War

The Persian Gulf War , commonly referred to as simply the Gulf War, was a war waged by a U.N.-authorized coalition force from 34 nations led by the United States, against Iraq in response to Iraq's invasion and annexation of Kuwait.The war is also known under other names, such as the First Gulf...

, speculation on the survival of the regime of Saddam Hussein

Saddam Hussein

Saddam Hussein Abd al-Majid al-Tikriti was the fifth President of Iraq, serving in this capacity from 16 July 1979 until 9 April 2003...

 in Iraq

Iraq

Iraq ; officially the Republic of Iraq is a country in Western Asia spanning most of the northwestern end of the Zagros mountain range, the eastern part of the Syrian Desert and the northern part of the Arabian Desert....

. Similar political stability concerns have from time to time driven the price of oil

Petroleum

Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...

.

The oil market is an exception. Most markets are not so tied to the politics of volatile regions - even natural gas tends to be more stable, as it is not traded across oceans by tanker as extensively.

Commodity markets and protectionism

Developing countries (democratic or not) have been moved to harden their currencies, accept International Monetary Fund

International Monetary Fund

The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

 rules, join the World Trade Organization

World Trade Organization

The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...

 (WTO), and submit to a broad regime of reforms that amount to a hedge against being isolated. China's entry into the WTO signalled the end of truly isolated nations entirely managing their own currency and affairs. The need for stable currency and predictable clearing and rules-based handling of trade disputes, has led to a global trade hegemony - many nations hedging on a global scale against each other's anticipated protectionism

Protectionism

Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...

, were they to fail to join the WTO.

There are signs, however, that this regime is far from perfect. U.S. trade sanctions against Canadian softwood lumber (within NAFTA) and foreign steel (except for NAFTA partners Canada and Mexico) in 2002 signalled a shift in policy towards a tougher regime perhaps more driven by political concerns - jobs, industrial policy

Industrial policy

The Industrial Policy plan of a nation, sometimes shortened IP, "denotes a nation's declared, official, total strategic effort to influence sectoral development and, thus, national industry portfolio." These interventionist measures comprise "policies that stimulate specific activities and promote...

, even sustainable forestry and logging practices.

Largest commodities exchanges

Exchange	Country	Volume per month $M
CME Group CME Group The CME Group bases prices for US gasoline on Brent Crude rather than West Texas Intermediate Crude , which many believe is responsible for artificially high gas prices for US consumers...	USA	19
Tokyo Commodity Exchange Tokyo Commodity Exchange The Tokyo Commodity Exchange is a non-profit organization, and regulates trading of futures contracts and option products of all commodities in Japan...	Japan	-
NYSE Euronext	USA
Dalian Commodity Exchange Dalian commodity exchange The Dalian Commodity Exchange is a Chinese futures exchange based in Dalian. It is a non-profit, self-regulating and membership legal entity established on February 28, 1993....	China
Multi Commodity Exchange Multi Commodity Exchange Multi Commodity Exchange is an independent commodity exchange based in India. It was established in 2003 and is based in Mumbai. The turnover of the exchange for the fiscal year 2009 was US$ 1.24 trillion, and in terms of contracts traded, it was in 2009 the world's sixth largest commodity exchange...	India
Intercontinental Exchange	USA, Canada, China, UK

See also

• Commodity risk
  Commodity risk
  Commodity risk refers to the uncertainties of future market values and of the size of the future income, caused by the fluctuation in the prices of commodities. These commodities may be grains, metals, gas, electricity etc...
  
  
• Fuel price risk management
  Fuel price risk management
  A specialization of both financial risk management and oil price analysis – and similar to conventional risk management practice – fuel price risk management is a continual cyclic process that includes risk assessment, risk decision making, and the implementation of risk controls...
  
  
• Agricultural marketing
  Agricultural marketing
  Agricultural marketing covers the services involved in moving an agricultural product from the farm to the consumer. Numerous interconnected activities are involved in doing this, such as planning production, growing and harvesting, grading, packing, transport, storage, agro- and food processing,...
  
  
• Commodities exchange
  Commodities exchange
  A commodities exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials and contracts based on them...
  
  
• Currency market
• Stock market
  Stock market
  A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
  
  
• Bond market
  Bond market
  The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and...
  
  
• Gold exchange-traded fund
  Gold exchange-traded fund
  Gold exchange-traded products are exchange-traded funds , closed-end funds and exchange-traded notes that aim to track the price of gold. Gold exchange-traded products are traded on the major stock exchanges including Zurich, Mumbai, London, Paris and New York. , physically backed funds held...
  
  
• Futures exchange
  Futures exchange
  A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of...
  
  
• Commodity money
  Commodity money
  Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....
  
  
• Futures contract
  Futures contract
  In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
  
  
• Hedging
  Hedge (finance)
  A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment.A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of...
  
  
• Commodity
  Commodity
  In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
  
  
• Spread trade
  Spread trade
  In finance, a spread trade is the simultaneous purchase of one security and sale of a related security, called legs, as a unit. Spread trades are usually executed with options or futures contracts as the legs, but other securities are sometimes used...
  
  
• List of traded commodities
• Trader (finance)
  Trader (finance)
  A trader is someone in finance who buys and sells financial instruments such as stocks, bonds, commodities and derivatives. A broker who simply fills buy or sell orders is not a trader, as they are merely executing instructions given to them. According to the Wall Street Journal in 2004, a managing...
  
  
• Paper trading
  Paper trading
  Paper trading is a simulated trading process in which would-be investors can 'practice' investing without committing real money....
  
  
• International commodity agreement
  International commodity agreement
  An international commodity agreement is an undertaking by a group of countries to stabilize trade, supplies, and prices of a commodity for the benefit of participating countries. An agreement usually involves a consensus on quantities traded, prices, and stock management...
  
  

Commodity exchanges

• Abuja Securities and Commodities Exchange
  Abuja Securities and Commodities Exchange
  The Abuja Securities and Commodities Exchange is one of two principal stock exchanges in Nigeria. It is located in Abuja, the country's capital, and it was founded in 1998....
  
  
• Africa Mercantile Exchange
  Africa Mercantile Exchange
  The AfMX is a Nairobi-based Commodity futures and options exchange. It is the first fully diversified commodities exchange in Africa in terms of Product portfolio....
  
  
• Bhatinda Om & Oil Exchange Bathinda
• Brazilian Mercantile and Futures Exchange
• Chicago Board of Trade
  Chicago Board of Trade
  The Chicago Board of Trade , established in 1848, is the world's oldest futures and options exchange. More than 50 different options and futures contracts are traded by over 3,600 CBOT members through open outcry and eTrading. Volumes at the exchange in 2003 were a record breaking 454 million...
  
  
• Chicago Mercantile Exchange
  Chicago Mercantile Exchange
  The Chicago Mercantile Exchange is an American financial and commodity derivative exchange based in Chicago. The CME was founded in 1898 as the Chicago Butter and Egg Board. Originally, the exchange was a non-profit organization...
  
  
• Commodity Exchange Bratislava, JSC
• Dalian Commodity Exchange
  Dalian commodity exchange
  The Dalian Commodity Exchange is a Chinese futures exchange based in Dalian. It is a non-profit, self-regulating and membership legal entity established on February 28, 1993....
  
  
• Dubai Mercantile Exchange
  Dubai Mercantile Exchange
  The Dubai Mercantile Exchange is a commodity exchange based in Dubai currently listing its flagship futures contract, DME Oman Crude Oil Futures Contract...
  
  
• Dubai Gold & Commodities Exchange
• Euronext.liffe
• Hong Kong Mercantile Exchange
  Hong Kong Mercantile Exchange
  Hong Kong Mercantile Exchange is a new electronic commodities exchange established in Hong Kong for the trading of commodity futures, options and other financial derivatives. The exchange provides standardised, cleared, and exchange-traded products on a transparent pricing platform to the...
  
  
• Indian Commodity Exchange
• Intercontinental Exchange
• Iranian Oil Bourse
  Iranian oil bourse
  The Iranian Oil Bourse International Oil Bourse, Iran Petroleum Exchange Kish Exchange or Oil Bourse in Kish is a commodity exchange which opened on February 17, 2008. It was created by cooperation between Iranian ministries, the Iran Mercantile Exchange and other state and private institutions...
  
  
• Kansas City Board of Trade
  Kansas City Board of Trade
  The Kansas City Board of Trade , is an American commodity futures and options exchange regulated by the Commodity Futures Trading Commission...
  
  
• London Metal Exchange
  London Metal Exchange
  The London Metal Exchange is the futures exchange with the world's largest market in options, and futures contracts on base and other metals. As the LME offers contracts with daily expiry dates of up to three months from trade date, along with longer-dated contracts up to 123 months, it also...
  
  
• Minneapolis Grain Exchange
  Minneapolis Grain Exchange
  The Minneapolis Grain Exchange was formed in 1881 as a regional cash marketplace to promote fair trade and to prevent trade abuses in wheat, oats and corn....
  
  
• Multi Commodity Exchange
  Multi Commodity Exchange
  Multi Commodity Exchange is an independent commodity exchange based in India. It was established in 2003 and is based in Mumbai. The turnover of the exchange for the fiscal year 2009 was US$ 1.24 trillion, and in terms of contracts traded, it was in 2009 the world's sixth largest commodity exchange...
  
  
• National Commodity and Derivatives Exchange
• National Multi-Commodity Exchange of India Ltd
• National Food Exchange
• New York Mercantile Exchange
  New York Mercantile Exchange
  The New York Mercantile Exchange is the world's largest physical commodity futures exchange. It is located at One North End Avenue in the World Financial Center in the Battery Park City section of Manhattan, New York City...
  
  
• New York Board of Trade
  New York Board of Trade
  The New York Board of Trade , renamed ICE Futures US in September of 2007, is a wholly owned subsidiary of IntercontinentalExchange . It is a physical commodity futures exchange located in New York City. It originated in 1870 as the New York Cotton Exchange...
  
  
• Rosario Board of Trade
  Rosario Board of Trade
  The Rosario Board of Trade is a non-profit making association based in Rosario, in the Province of Santa Fe, Argentina. Founded on August 18, 1884, it serves as a forum for the conduct of trade negotiations in several markets including grain, oilseed, agricultural products and their by-products,...
  
  
• Steelbay
• Winnipeg Commodity Exchange
  Winnipeg Commodity Exchange
  The Winnipeg Commodity Exchange is the former name of a derivatives market based in Winnipeg, Manitoba, Canada now known as ICE Futures Canada. Futures and options contracts are electronically traded in western barley and canola ....
  
  
• National Spot Exchange
  National Spot Exchange
  National Spot Exchange is an Commodity Exchange in India, is a joint venture of Financial Technologies Ltd. and National Agricultural Cooperative Marketing Federation of India Limited . National Spot Exchange has commenced its Live trading operations in different commodities from Wednesday, the...