Know about a Commodity market

By | June 21, 2009

Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in uniform contracts. This article focuses on the history and current debates regarding global commodity markets. It covers physical product (food, metals, and electricity) markets but not the ways that services, together with those of governments, nor investment, nor debt, can be seen as a commodity. Articles on reinsurance markets, stock markets, bond markets and currency markets cover those concerns independently and in more depth. One focus of this article is the relationship between easy commodity money and the more complex instruments offered in the commodity markets.

The modern commodity markets have their roots in the trading of agricultural products. While wheat and corn, cattle and pigs, were extensively traded using normal instruments in the 19th century in the United States, other basic products such as soybeans were only added quite recently in most markets. For a commodity market to be established there have to be very wide consensus on the variations in the product that make it adequate for one purpose or another. The economic impact of the development of commodity markets is hard to over-estimate. Through the 19th century “the exchanges became effective spokesmen for, and innovators of, improvements in transportation, warehousing, and financing, which smooth the way to extended interstate and international trade.” Historically, dating from ancient Sumerian use of sheep or goats, or other peoples using pigs, rare seashells, or other items as commodity money, people have required ways to standardize and trade contracts in the delivery of such items, to provide trade itself more smooth and conventional.

Commodity money and commodity markets in a crude early on form are believed to have originated in summer 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 guarantee to deliver that number. This made them a form of commodity money more than an “I.O.U.” but less than an assurance 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 contemporary futures agreement. in spite of 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.