Commodity market 48190 225992861 2008-07-16T10:40:22Z 195.200.21.90 /* Size of market */ {{Unreferenced|date=May 2008}} {{Financial markets}} [[Image:Chicago bot.jpg|thumb|right|250px|[[Chicago Board of Trade]] Futures market]] '''Commodity markets''' are markets where raw or primary products are exchanged. These raw commodities are traded on regulated [[commodities exchange]]s, in which they are bought and sold in standardized contracts. This article focuses on the history and current debates regarding global [[commodity]] 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]]s, [[bond market]]s and [[currency market]]s cover those concerns separately and in more depth. One focus of this article is the relationship between simple [[commodity money]] and the more complex instruments offered in the commodity markets. See '''[[List of traded commodities]]''' for some [[commodities]] and their [[trade|trading]] [[Units of measurement|unit]]s 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 over-estimate. 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 [[Sumerian]] use of sheep or goats, or other peoples using pigs, rare seashells, or other items as [[commodity 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]] 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.]]" 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]]. 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]]. However, the Commodity status of living things is always subject to doubt - it was hard to validate the health or existence of sheep or goats. Excuses for non-delivery were not unknown, and there are recovered Sumerian letters that complain of sickly goats, sheep that had already been fleeced, etc. If a seller's reputation was good, individual "backers" or "bankers" could decide to take the risk of "clearing" a trade. The observation that trust is always required between market participants later led to [[credit money]]. But until relatively modern times, communication and credit were primitive. 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]] 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 market== The trading of commodities consists of direct physical trading and derivatives trading.The commodities markets have seen an upturn in the volume of trading in recent years. In the five years up to 2007, the value of global physical exports of commodities increased by 17% while the notional value outstanding of commodity OTC derivatives increased more than 500% and commodity derivative trading on exchanges more than 200%. The notional value outstanding of banks’ OTC commodities’ derivatives contracts increased 27% in 2007 to $9.0 trillion. OTC trading accounts for the majority of trading in gold and silver. Overall, precious metals accounted for 8% of OTC commodities derivatives trading in 2007, down from their 55% share a decade earlier as trading in energy derivatives rose. Global physical and derivative trading of commodities on exchanges increased more than a third in 2007 to reach 1,684 million contracts. Agricultural contracts trading grew by 32% in 2007, energy 29% and industrial metals by 30%. Precious metals trading grew by 3%, with higher volume in New York being partially offset by declining volume in Tokyo. Over 40% of commodities trading on exchanges was conducted on US exchanges and a quarter in China. Trading on exchanges in China and India has gained in importance in recent years due to their emergence as signficant commodities consumers and producers. <ref>[http://www.ifsl.org.uk/upload/CBS_Commodities_2008.pdf Commodities Trading City Business Series]</ref> == Investment Returns == This is a much-debated topic within academia. It is generally agreed that commodities have an expected return of 5% in real terms which is based on the risk premium for 116 different commodities weighted equally since 1888 (Source Report 219171-Wharton Business School). It is common for investment professionals to mistakenly claim there is no risk premium in commodites. == Spot trading == Spot trading is any transaction where delivery either takes place immediately, or if there is a minimum lag, due to technical constraints, between the trade and delivery. Commodities constitute the only spot markets which have existed nearly throughout the history of humankind. == Forward contracts == A [[forward contract]] 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]]. == Futures contracts == A futures contract 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. === Hedging === "[[Hedging]]", a common (and sometimes mandatory) practice of farming cooperatives, insures against a poor harvest by purchasing [[futures contract]]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. Whole [[developing nations]] may be especially vulnerable, and even their currency tends to be tied to the price of those particular commodity items until it manages to be a fully [[developed nation]]. For example, one could see the nominally [[fiat money]] of Cuba as being tied to [[sugar]] prices, since a lack of hard currency paying for sugar means less foreign goods per peso in Cuba itself. In effect, Cuba needs a hedge against a drop in sugar prices, if it wishes to maintain a stable quality of life for its citizens. === Delivery and condition guarantees === In addition, delivery day, method of settlement and [[delivery point]] 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]] 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]]") which makes them unacceptable to most "[[organic farming|organic]]" food buyers. Similar specifications apply for cotton, orange juice, cocoa, sugar, wheat, corn, barley, [[pork belly|pork bellies]], milk, feedstuffs, fruits, vegetables, other grains, other beans, hay, other livestock, meats, poultry, eggs, or any other commodity which is so traded. The concept of an interchangeable deliverable or guaranteed delivery is always to some degree a fiction. Trade in commodities is like trade in any other physical product or service. No magic of the commodity contract itself makes "units" of the product totally uniform nor gets it to the delivery point safely and on time. == Regulation of commodity markets == Cotton, kilowatt-hours of electricity, board feet of wood, long distance minutes, royalty payments due on artists' works, and other products and services have been traded on markets of varying scale, with varying degrees of success. One issue that presents major difficulty for creators of such instruments is the liability accruing to the purchaser: Unless the product or service can be guaranteed or insured to be free of liability based on where it came from and how it got to market, e.g. kilowatts must come to market free from legitimate claims for smog death from coal burning plants, wood must be free from claims that it comes from protected forests, royalty payments must be free of claims of plagiarism or piracy, it becomes impossible for sellers to guarantee a uniform delivery. Generally, governments must provide a common regulatory or insurance standard and some release of liability, or at least a backing of the insurers, before a commodity market can begin trading. This is a major source of controversy in for instance the energy market, where desirability of different kinds of power generation varies drastically. In some markets, e.g. Toronto, Canada, surveys established that customers would pay 10-15% more for energy that was not from coal or nuclear, but strictly from renewable sources such as wind. In the United States, the principal regulator of commodity and futures markets is the [[Commodity Futures Trading Commission]]. === Proliferation of contracts, terms, and derivatives === However, if there are two or more standards of risk or quality, as there seem to be for electricity or soybeans, it is relatively easy to establish two different contracts to trade in the more and less desirable deliverable separately. If the consumer acceptance and liability problems can be solved, the product can be made interchangeable, and trading in such units can begin. Since the detailed concerns of industrial and consumer markets vary widely, so do the contracts, and "grades" tend to vary significantly from country to country. A proliferation of contract units, terms, and futures contracts have evolved, combined into an extremely sophisticated range of [[financial instruments]]. These are more than one-to-one representations of units of a given type of commodity, and represent more than simple futures contracts for future deliveries. These serve a variety of purposes from simple gambling to price insurance. The [[underlying]] of futures contracts are no longer restricted to [[commodities]]. === Oil === Building on the infrastructure and credit and settlement networks established for food and [[precious metal]]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]], speculation on the survival of the regime of [[Saddam Hussein]] in [[Iraq]]. Similar political stability concerns have from time to time driven the price of [[Petroleum|oil]]. Some argue that this is not so much a commodity market but more of an [[assassination market]] speculating on the survival (or not) of Saddam or other leaders whose personal decisions may cause oil supply to fluctuate by military action. 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 [[IMF]] rules, join the [[World Trade Organization|WTO]], and submit to a broad regime of reforms that amount to a "hedge" against being isolated. China's entry into the [[World Trade Organization|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]]", were they to fail to join the [[World Trade Organization|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, even sustainable forestry and logging practices. ==Non-conventional commodities== {{Essay-like|date=June 2008}} {{importance-sect}} === Nature's commodity outputs === Commodity thinking is undergoing a more direct revival{{Fact|date=June 2008}} thanks to the theorists of "[[natural capital]]" whose products, some economists{{Who|date=June 2008}} argue, are the only genuine commodities - air, water, and calories we consume being mostly interchangeable when they are free of pollution or disease. Whether we wish to think of these things as tradeable commodities rather than birthrights has been a major source of controversy{{Fact|date=June 2008}} in many nations. Most types of [[environmental economics]] consider the shift to measuring them inevitable{{Fact|date=June 2008}}, arguing that reframing [[political economy]] to consider the flow of these basic commodities first and foremost, helps avoids use of any [[military fiat]] except to protect "natural capital" itself, and basing credit-worthiness more strictly on commitment to preserving [[biodiversity]] aligns the long-term interests of [[ecoregions]], societies, and individuals. They seek relatively conservative [[sustainable development]] schemes that would be amenable to [[measuring well-being]] over long periods of time, typically "seven generations", in line with Native American thought.{{Fact|date=June 2008}} === Weather trading === However, this is not the only way in which commodity thinking interacts with ecologists' thinking. Hedging began as a way to escape the consequences of damage done by natural conditions{{Fact|date=June 2008}}. It has matured not only into a system of interlocking guarantees, but also into a system of indirectly trading on the actual damage done by weather, using [[weather derivatives]]. For a price, this relieves the purchaser of concerns such as whether a freeze will hurt the Brazilian coffee crop , whether there will be a drought in the U.S. [[Corn Belt]] and what the chances that we will have a cold winter are, driving [[natural gas]] prices higher and creating havoc in Florida orange areas. === Emissions trading === Weather trading is just one example of "negative commodities", units of which represent harm rather than good. "Economy is three fifths of ecology"{{Citequote}} argues [[Mike Nickerson]], one of many{{Who|date=June 2008}} economic theorists who holds that nature's productive services and waste disposal services are poorly accounted for. One way to fairly allocate the waste disposal capacity of nature is "[[cap and trade]]" market structure that is used to trade toxic emissions rights in the United States, e.g. SO2. This is in effect a "negative commodity", a right to throw something away. In this market, the atmosphere's capacity to absorb certain amounts of pollutants is measured, divided into units, and traded amongst various market players. Those who emit more SO2 must pay those who emit less. Critics of such schemes argue that unauthorized or unregulated emissions still happen, and that "grandfathering" schemes often permit major polluters, such as the state governments' own agencies, or poorer countries, to expand emissions and take jobs, while the SO2 output still floats over the border and causes death. In practice, political pressure has overcome most such concerns{{Fact|date=June 2008}} and it is questionable whether this is a capacity that depends on U.S. clout: The [[Kyoto Protocol]] established a similar market in global greenhouse gas emissions without U.S. support. === Community as commodity? === This highlights one of the major issues with global commodity markets of either the positive or negative kind. A community must somehow believe that the commodity instrument is real, enforceable, and well worth paying for. A very substantial part of the [[anti-globalization movement]] opposes the commodification of currency, national sovereignty, and traditional cultures. The capacity to repay debt, as in the current global [[credit money]] regime anchored by the [[Bank for International Settlements]], does not in their view correspond to measurable benefits to human [[measuring well-being|well-being]] worldwide. They seek a fairer way for societies to compete in the global markets that will not require conversion of [[natural capital]] to [[natural resources]], nor [[human capital]] to move to [[developed nations]] in order to find work. Some economic systems by [[green economists]] would replace the "[[gold standard]]" with a "[[biodiversity standard]]". It remains to be seen if such plans have any merit other than as political ways to draw attention to the way [[capitalism]] itself interacts with life. === Is human life a commodity? === While classical, neoclassical, and Marxist approaches to [[economics]] tend to treat labor differently, they are united in treating nature as a resource. The [[green economists]] and the more conservative [[environmental economics]] argue that not only natural ecologies, but also the life of the individual human being is treated as a commodity by the global markets. A good example is the [[IPCC]] calculations cited by the Global Commons Institute as placing a value on a human life in the developed world "15x higher" than in the developing world, based solely on the ability to pay to prevent climate change. === Is free time a commodity? === Accepting this result, some{{Who|date=June 2008}} argue that to put a price on both is the most reasonable way to proceed to optimize and increase that value relative to other goods or services. This has led to efforts in [[measuring well-being]], to assign a commercial "[[value of life]]", and to the theory of [[Natural Capitalism]] - fusions of green and neoclassical approaches - which focus predictably on energy and material efficiency, i.e. using far less of any given commodity input to achieve the same service outputs as a result. Indian economist [[Amartya Sen]], applying this thinking to human freedom itself, argued in his 1999 book "Development as Freedom" that human free time was the only real service, and that [[sustainable development]] was best defined as freeing human time. Sen won the [[Nobel Prize in Economics]] in [[1999]] and based his book on invited lectures he gave at the [[World Bank]]. ==See also== *[[Commodities exchange]] *[[Currency market]] *[[Stock market]] *[[Bond market]] *[[Futures exchange]] *[[Commodity money]] *[[Futures contract]] *[[Hedging]] *[[Commodity]] *[[Spread trade]] *[[List of traded commodities]] *[[Trader (finance)]] *[[Paper trading]] ===Commodity Exchanges=== *[[Brazilian Mercantile and Futures Exchange]] *[[Chicago Board of Trade]] *[[Chicago Mercantile Exchange]] *[[Euronext.liffe]] *[[Intercontinental Exchange]] *[[Dalian Commodity Exchange]] *[[Kansas City Board of Trade]] *[[London Metal Exchange]] *[[Minneapolis Grain Exchange]] *[[Multi Commodity Exchange]] *[[National Food Exchange]] *[[New York Mercantile Exchange]] *[[New York Board of Trade]] *[[Rosario Board of Trade]] *[[Winnipeg Commodity Exchange]] *[[Steelbay]] ===Supervising Commission=== * [[Commodity Futures Trading Commission]] * [http://www.nfa.futures.org National Futures Association] ==References== <div class="references-small"> <!--See http://en.wikipedia.org/wiki/Wikipedia:Footnotes for an explanation of how to generate footnotes using the <ref(erences/)> tags--> <references/> </div> [[Category:Commerce]] [[Category:Commodities market|*]] [[fr:Bourse de commerce]] [[id:Bursa komoditi]] [[simple:Commodity markets]] [[sv:Råvarubörs]]