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Commodity market refers to physical or virtual transactions of buying and selling involving raw or primary commodities. A soft commodity generally refers to commodities harvested as products like wheat, coffee, cocoa, sugar, corn, wheat, soybean, and fruit traded in the commodity market. Hard commodities usually refer to commodities that are extracted such as (gold, rubber, oil).[1] While commodities may be grouped for regulation purposes etc., in large classes such as energy, agricultural including livestock, precious metals, industrial metals, other commodity markets, these are broken down into about a hundred primary commodities (soybean oil, recycled steel). Investors access about 50 major commodity markets worldwide uses growing numbers of exchanges with virtual transactions increasingly replacing physical trades.

A financial derivative in the commodity market is a financial instrument whose value is derived from a commodity as item or underlier. Derivatives trading employs various techniques to increase profit and manage risk.[2] Derivatives in the commodity market are assets that are either exchange-traded derivatives or over-the-counter (OTC) derivatives. With the increased diversity and complexity of commodities derivatives, new international institutions have emerged, such as clearing houses some with Central Counterparty Clearing, which provide clearing and settlement services on a futures exchange, as well as off-exchange in the OTC market.

Derivatives in the form of the futures contracts are the oldest and most direct way of investing in commodities. Commodity market derivatives are securitized by physical assets or commodities.[2] Commodity markets can include direct physical trading and derivatives trading in the form of spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management (p. 6).[3] In the basic agricultural futures contracts a farmer (the future seller) agrees with a counterparty, a future buyer to sell a set number of units of corn to a broker for a fixed future date at an agreed-upon quality and price and point of delivery. If the price of corn drops the farmer is protected from losses thereby reducing risk. If the price rises the farmer loses potential profit. Derivatives trading employs various techniques to increase profit and manage risk through hedging.[2]

One focus of this article is the relationship between simple commodity money and the more complex financial instruments of derivative trading,[2] such as futures contracts, Swaps (1970s-), Exchange-traded Commodities (ETC) (2003-), forward contracts. Futures are traded on regulated commodities exchanges. Over-the-counter (OTC) contracts in the commodity market are "privately negotiated bilateral contracts entered into between the contracting parties directly".[4] [5] Although investors assume that commodity market derivatives are securitized by the physical assets or commodities, gold for example, the actual exposure to the physical commodity of gold has changed significantly since the emergence of financial instruments such as exchange-traded funds (ETFs) in 2003. ETFs are based on electronic gold which does not entail the actual ownership of physical bullion, with its added costs of insurance and storage in bullion banks, such as the London bullion market. According to the World Gold Council, ETFs allow investors to be exposed to the gold market without the risk of price volatility associated with gold as a physical commodity.[6][7]

[notes 1]

History Edit

Commodity money and commodity markets in a crude early form are believed to have originated in Sumer between 4500 BC and 4000 BC. [[Sumerians first used clay tokens sealed in a clay vessel, then clay writing tablets to represent the amount of commodities—for example, the number of goats promised to be delivered.[8][9] These promises of time and date of delivery resemble futures contract.

Historically, dating from ancient Sumerian use of sheep or goats, 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.Script errorScript error[citation needed]

Complex gold and silver markets evolved in the classical civilizations.Script errorScript error[citation needed]

Since the late 10th century the commodity market as mechanism for the allocation of goods, labor, land, and capital gained ground in many parts of Europe. In the late 11th and the late 13th century, English urbanization, regional specialization, expanded and improved infrastructure, the increased use of coinage and the proliferation of markets and fairs were evidence and the result of the progress of commercialization.[10] The commercialization of medieval society and the medieval commodity markets were shaped by a number of institutions, social and political relations and the introduction of new technologies. For example, in 1466 reliable scales were installed in the villages Sloten and Osdorp so villagers no longer had to travel to Haarlem or Amsterdam to weigh their locally produced cheese and butter.[10] Modern commodity markets have their roots in the trading of agricultural products.Script errorScript error[citation needed]

In 19th-century United States, wheat, corn, cattle, and pigs were widely traded using standard instruments.Script errorScript error[citation needed]

Since 1936 futures and options on soybeans have been traded on the Chicago Board of Trade (CBOT). Other food commodities were added to the Commodity Exchange Act and traded through CBOT in the 1930s and 1940s, expanding the list from grains to include rice, mill feeds, butter, eggs, Irish potatoes and soybeans.[11] 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.Script errorScript error[citation needed]

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."Script errorScript error[citation needed]

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.Script errorScript error[citation needed]

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.Script errorScript error[citation needed]

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.Script errorScript error[citation needed]

See also [12]

Commodity price indexEdit

In 1934 the Bureau of Labor Statistics began the computation of a daily Commodity price index which was available to the public as of 1940. By 1952 the Bureau of Labor Statistics issued a Spot Market Price Index which measured the price movements of "22 sensitive basic commodities whose markets are presumed to be among the first to be influenced by changes in economic conditions. As such, it serves as one early indication of impending changes in business activity."[13] A commodity index fund is a fund whose assets are invested in financial instruments based on or linked to a commodity index. In just about every case the index is in fact a Commodity Futures Index. The first such index was the CRB ("Commodity Research Bureau") Index, which began in 1958. Due to its construction it was not useful as an investment index. The first practically investable commodity futures index was the Goldman Sachs Commodity Index, created in 1991.[14] and known as the "GSCI". The next was the Dow Jones AIG Commodity Index. It differed from the GSCI primarily in the weights allocated to each commodity. The DJ AIG had mechanisms to periodically limit the weight of any one commodity and to remove commodities whose weights became too small. After AIG's financial problems in 2008 the Index rights were sold to UBS and it is now known as the DJUBS index. Other commodity indices include the Reuters / CRB index (which is the old CRB Index re-structured in 2005) and the Rogers Index.

Cash commodityEdit

Cash commodities or actuals refer to the actual physical commodity—e.g., wheat, corn, soybeans, crude oil, gold, silver—that someone is buying/selling/trading as distinguished from derivatives.[3]

Call optionsEdit

In a call option counterparties enter into a financial contract option where the buyer purchases the right but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). The seller (or "writer") is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee (called a premium) for this right.[15]

Electronic commodities tradingEdit

In traditional stock market exchanges such as the New York Stock Exchange (NYSE), most trading activity took place in the trading pits in face-to-face interactions between brokers and dealers in open outcry trading.[16] One of the technological advances that accelerated the transformation to electronics was the initiation in 1992 of the Financial Information eXchange (FIX) protocol which allowed for an international real-time exchange of information regarding market transactions. United States regulators, the U.S. Securities and Exchange Commission ordered all U.S. stock markets to convert from the fractional system to decimal system by April 2001. Metrification, conversion from the imperial system of measurement to the metrical, increased throughout the 20th century.[17] Eventually FIX-compliant interface was adopted globally by commodity exchanges through the FIX Protocol.[18] In 2001 the Chicago Board of Trade and the Chicago Mercantile Exchange (since merged into the CME group, the world's largest futures exchange company)[17] that handle commodities futures as opposed to stocks, launched their FIX-compliant interface.

By 2011 electronic trading had advanced from dealers using their computers to make transactions to computer determined trading with computers buying and selling without human dealer intermediation through the alternative trading system (ATS). By 2011 high frequency traders (HFT) algorithmic trading, had already almost phased out "dinosaur floor-traders".[16][notes 2]

Increased complexity of financial instruments and interconnectedness of global marketEdit

The robust growth of emerging market economies (EMEs), (like Brazil, Russia, India, and China) in the 1990s, "propelled commodity markets into a supercycle". The size and diversity of commodity markets expanded internationally along with the global middle class the acceleration of urbanization.[19]

In 2012, as emerging-market economies slowed down, commodity prices declined.[19] Commodity prices are however, about 25 percent above their historical averages in real terms. Since 2005 energy and metals' real prices have been well above their long-term averages. In 2012 real food prices were at their highest level since 1982.[19]

The price of gold bullion began to fall dramatically on Friday, April 12, 2013 and analysts frantically sought explanations. Rumors spread that the European Central Bank (ECB) would force Cyprus to sell its reserves of gold bullion in response to its financial crisis. Major banks such as Goldman Sachs began immediately to short gold bullion. Investors scrambled to liquidate their exchange-traded funds (ETFs)[notes 3] and margin call selling accelerated. George Gero, precious metals commodities expert at the Royal Bank of Canada (RBC) Wealth Management section reported that he has not seen selling of gold bullion as panicked as this in his forty years in commodity markets.[20]

The earliest commodity exchange-traded fund (ETFs), such as SPDR Gold Shares NYSE ArcaGLD and iShares Silver Trust NYSE ArcaSLV, actually owned the physical commodity (e.g., gold and silver bars). Similar to these are NYSE ArcaPALL (palladium) and NYSE ArcaPPLT (platinum). However, most Exchange Traded Commodities (ETCs) implement a futures trading strategy, which may produce quite different results from owning the commodity.

With global commodity prices falling, including crude oil at $100 a barrel, Russian Prime Minister Dmitry Medvedev warned that Russia could sink into recession. He argued that "We live in a dynamic, fast-developing world. It is so global and so complex that we sometimes cannot keep up with the changes". Analysts have claimed that Russia's economy is overly dependent on commodities. [21]

Contracts in the commodity marketEdit

A Spot contract is an agreement where delivery and payment either takes place immediately, or with a minimum lag between the trade and delivery due to technical constraints. Physical trading normally involves visual inspection of the commodity or a sample of the commodity, and is carried out in physical markets such as a farmers market. Derivatives markets, on the other hand, require the existence of agreed standards so that trades can be made without visual inspection.

StandardizationEdit

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 food buyers.

Similar specifications apply for cotton, orange juice, cocoa, sugar, wheat, corn, barley, pork bellies, milk, feedstuffs, fruits, vegetables, other grains, other beans, hay, other livestock, meats, poultry, eggs, or any other commodity which is so traded.

Standardization has also occurred technologically, as the use of the FIX Protocol by commodities exchanges has allowed trade messages to be sent, received and processed in the same format as stocks or equities. This process began in 2001 when the CME Group Inc. (Chicago Mercantile Exchange), the world's largest futures exchange company, launched a FIX-compliant interface and has now been adopted by commodity exchanges around the world.[18]

DerivativesEdit

Derivatives are financial instruments used as risk management tools and/or as a means to increase profits.[2] Derivatives have evolved from simple future contracts into highly complex financial instruments.[2] Futures contracts, Swaps (1970s-), Exchange-traded Commodities (ETC) (2003-), forward contracts, etc. are examples of derivatives. They can be traded through formal exchanges or through Over-the-counter (OTC). Commodity market derivatives unlike credit default derivatives for example, are securitized by the physical assets or commodities.[2]

Forward contractsEdit

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. Early on these forward contracts were used as a way of getting products from producer to the consumer. These typically only applied to food and agricultural products.

Futures contractEdit

Futures contracts for agricultural commodities are the oldest, having been traded in the United States alone for more than 150 years[22]

Hedging, a common practice of farming cooperatives, insures against a poor harvest by purchasing futures contracts 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.

A futures contract has the same general features as a forward contract but is standardized and transacted through a futures exchange. 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.[23]

SwapsEdit

Since the 1970 trading in futures contracts expanded rapidly beyond traditional physical and agricultural commodities into a vast array of financial instruments. In the 1970s Swaps were introduced and their growth in value exploded.[24][25]

Exchange-traded commodities (ETCs)Edit

Exchange Traded Commodities (ETC) were introduced as a financial instrument in 2003. At first only professional institutional investors had access but online exchanges have made some ETC markets open to almost anyone. ETCs were introduced partly in response to the tight supply of commodities in 2000, combined with record low inventories and increasing demand from emerging markets such as China and India. Exchange Traded Commodities transformed the commodity market.[26]

Gold has gone from being a currency to an asset for thousands of years to becoming the first commodity to become securitised through an Exchange Traded Funds (ETF) in the early 1990s but it was not available for trade until 2003.[26]

Prior to the introduction of Exchange Traded Commodities, by the 1990s Exchange Traded Funds (ETF) pioneered by Barclays Global Investors (BGI) (now owned by BlackRock) revolutionized the mutual funds industry.[26] By the end of December 2009 Barclays Global Investors (BGI) assets hit an all-time high of $1tln ($1,032bln).[27]

Commodity ETFs (ETCs or CETFs) invest in commodities, such as precious metals and futures. Among the first commodity ETFs were gold exchange-traded funds, which have been offered in a number of countries. The idea of a Gold ETF was first officially conceptualised by Benchmark Asset Management Company Private Ltd in India when they filed a proposal with the SEBI in May 2002.[28] The first gold exchange-traded fund was Gold Bullion Securities launched on the ASX in 2003, and the first silver exchange-traded fund was iShares Silver Trust launched on the NYSE in 2006. As of November 2010 a commodity ETF, namely SPDR Gold Shares, was the second-largest ETF by market capitalization.[29]

However, generally commodity ETFs are index funds tracking non-security indices. Because they do not invest in securities, commodity ETFs are not regulated as investment companies under the Investment Company Act of 1940 in the United States, although their public offering is subject to SEC review and they need an SEC no-action letter under the Securities Exchange Act of 1934. They may, however, be subject to regulation by the Commodity Futures Trading Commission.[30][31]

Exchange-traded commodities (ETCs) are investment vehicles (asset backed bonds, fully collateralised) that track the performance of an underlying commodity index including total return indices based on a single commodity. Similar to ETFs and traded and settled exactly like normal shares on their own dedicated segment, ETCs have market maker support with guaranteed liquidity, enabling investors to gain exposure to commodities, on-exchange, during market hours.

The earliest commodity ETFs, such as SPDR Gold Shares NYSE ArcaGLD and iShares Silver Trust NYSE ArcaSLV, actually owned the physical commodity (e.g., gold and silver bars). Similar to these are NYSE ArcaPALL (palladium) and NYSE ArcaPPLT (platinum). However, most ETCs implement a futures trading strategy, which may produce quite different results from owning the commodity.

Commodity ETFs trade provide exposure to an ever-increasing range of commodities and commodity indices, including energy, metals, softs and agriculture. In the case of many commodity funds, oil for example, they simply roll so-called front-month futures contracts from month to month. This does give exposure to the commodity, but subjects the investor to risks involved in different prices along the term structure, such as a high cost to roll.[6][7] 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.

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.

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.

Over-the-counter (OCD) commodities derivatives Edit

Over-the-counter OCD) commodities derivatives trading was originally done directly between two parties, without any supervision of an exchange. It is contrasted with exchange trading, which occurs via these facilities. In an OTC trade, the price is not necessarily made public information. The OTC market was not as limiting as the derivatives traded through organized market exchange. OTC are higher risk but may also lead to higher profits. The OTC derivative market is significant in the commodities asset class.[32]

From 2007 to the end of 2010, global physical exports of commodities fell by 2%, while the outstanding value of OTC over the counter (OTC) commodities derivatives declined by two-thirds as investors reduced risk following a five-fold increase in value outstanding in the previous three years.

under management more than doubled between 2008 and 2010 to nearly $380 billion. Inflows into the sector totaled over $60 billion 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.[33]

Commodities exchangeEdit

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 (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts can include spot prices, forwards, futures and options on futures. Other sophisticated products may include interest rates, environmental instruments, swaps, or ocean freight contracts.

Commodities exchanges usually trade futures contracts on commodities, such as trading contracts to receive something, say corn, in a certain month. A farmer raising corn can sell a future contract on his corn, which will not be harvested for several months, and guarantee the price he will be paid when he delivers; a breakfast cereal producer buys the contract now and guarantees the price will not go up when it is delivered. This protects the farmer from price drops and the buyer from price rises.

Speculators and investors also buy and sell the futures contracts in attempt to make a profit and provide liquidity to the system. However, due to the financial leverage provided to traders by the exchange, commodity futures traders face a substantial risk.[3]

Traded Commodity Classes Edit

Top traded commodities (exports)Edit

Rank Commodity Value in US$('000) Date of
information
1 Mineral fuels, oils, distillation products, etc. $2,183,079,941 2012
2 Electrical, electronic equipment $1,833,534,414 2012
3 Machinery, nuclear reactors, boilers, etc. $1,763,371,813 2012
4 Vehicles other than railway, tramway $1,076,830,856 2012
5 Plastics and articles thereof $470,226,676 2012
6 Optical, photo, technical, medical, etc. apparatus $465,101,524 2012
7 Pharmaceutical products $443,596,577 2012
8 Iron and steel $379,113,147 2012
9 Organic chemicals $377,462,088 2012
10 Pearls, precious stones, metals, coins, etc. $348,155,369 2012

Source: International Trade Centre[34]

Building on the infrastructure and credit and settlement networks established for food and precious metals, many such markets have proliferated drastically in the late 20th century.

Energy commodity marketEdit

According to this List of traded commodities energy commodities include but are not limited to crude oil particularly West Texas Intermediate WTI crude oil and Brent crude oil, natural gas, heating oil, ethanol and Purified Terephthalic Acid.

Petroleum products in the commodity market of particular politic interestEdit

See also Fuel hedging

Crude OilEdit

See also Chronology of world oil market events (1970-2005)

For many years West Texas Intermediate (WTI) crude oil, a light, sweet crude oil, was the world’s most-traded commodity. West Texas Intermediate is a grade of crude oil used as a benchmark in oil pricing. It is the underlying commodity of Chicago Mercantile Exchange's oil futures contracts. The price of WTI is often referenced in news reports on oil prices, alongside the price of Brent crude from the North Sea. WTI is lighter and sweeter than Brent, and considerably lighter and sweeter than Dubai or Oman.[35]

From April through October 2012 Brent crude oil futures contracts exceeded those for WTI, the longest streak since at least 1995.[36]

Crude oil can be light can be heavy Oil was the first form of energy to be 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 have driven the price of oil. 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.

Traded commodities include crude oils such as West Texas Intermediate WTI crude oil traded in units of 1.000 bbl (42,000 U.S. gal through NYMEX under the trading symbol CL and through IntercontinentalExchange (ICE) under the trading symbol WTI. Brent crude oil is traded in units of 1,000 bbl (42,000 U.S. gal through IntercontinentalExchange (ICE) under the trading symbol B. Gulf Coast Gasoline is traded through NYMEX in units of 1,000 bbl (42,000 U.S. gal) with the trading symbol of LR. RBOB Gasoline (reformulated gasoline blendstock for oxygen blending) is traded through NYMEX in units of 1000 bbl (42,000 U.S. gal) with the trading symbol of RB. Propane is traded through NYMEX, a subsidiary of IntercontinentalExchange since early 2013, in units of 1000 bbl (42,000 U.S. gal) with the trading symbol of PN.

Natural gasEdit

Natural gas is traded through NYMEX a subsidiary of IntercontinentalExchange (ICE) in units of 10,000 mmBTU with the trading symbol of NG. Heating Oil is traded through NYMEX, a subsidiary of IntercontinentalExchange, in units of 1,000 bbl (42,000 U.S. gal) with the trading symbol of HO.

OthersEdit

Purified Terephthalic Acid (PTA) is traded through ZCE in units of 5 tons with the trading symbol of TA. Ethanol is traded at CBOT in units of 29,000 U.S. gal AC (Open Auction) ZE (Electronic)

MetalsEdit

Precious metalsEdit

Precious metals currently traded on the commodity market include but are not limited to gold, platinum, palladium and silver which are sold by the troy ounce. One of the main exchanges for these precious metals is COMEX.

According to the World Gold Council, investments in gold are the primary driver of growth in the industry. Gold is easily authenticated and long lasting. Gold has price volatility because it is affected by large flows of speculative money.[37]

Industrial metalsEdit

According to this List of traded commodities industrial metals currently sold on the commodity market include but are not limited to copper, aluminium, which are sold by the metric ton through the London Metal Exchange and New York Metal Exchange. The London Metal Exchange also trades in lead, tin, aluminium alloy, nickel, cobalt, molybdenum which is sold by the metric ton. Rotterdam Metal exchange trades recycled steel by the metric ton. In 2007, steel began being traded as a commodity in the London Metal Exchange.

Agricultural commoditiesEdit

See also Agricultural commodities and price hedging Agricultural commodities, the staples of everyday life were the earliest to be traded on forward and future markets. Futures contracts for agricultural commodities have been traded in the U.S. for more than 150 years and in the United States were under Federal regulation since the 1920s.[38] Although agricultural commodities include grains, food and fiber as well as livestock and meat, various regulatory bodies define agricultural products. In July 21, 2010, United States Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act in which changes were made to the definition of agricultural commodity in regards to market regulations. The general operational definition used by Dodd-Frank Wall Street Reform includes "[a]ll other commodities that are, or once were, or are derived from, living organisms, including plant, animal and aquatic life, which are generally fungible, within their respective classes, and are used primarily for human food, shelter, animal feed, or natural fiber.” Three other categories were explained and listed.[39]

In February 2013 Cornell Law School defined agricultural products as including lumber, soybeans, oilseeds, livestock (live cattle and hogs), dairy products. Agricultural commodity can include lumber (timber and forests), grains excluding stored grain (wheat, oats, barley, rye, grain sorghum, cotton, flax, forage, tame hay, native grass), vegetables (potatoes, tomatoes, sweet corn, dry beans, dry peas, freezing and canning peas), fruit (citrus such as oranges, apples, grapes) corn, tobacco, rice, peanuts, sugar beets, sugar cane, sunflowers, raisins, nursery crops, nuts, soybean complex, aquacultural fish farm species such as finfish, mollusk, crustacean, aquatic invertebrate, amphibian, reptile, or plant life cultivated in aquatic plant farms.[40] [41]

In 1900 corn acreage was double that of wheat in the United States. But from the 1930s through the 1970s soybean acreage, the miracle bean, surpassed that of corn. Early in the 1970s grain and soybean prices, which had been relatively stable, "soared to levels that were unimaginable at the time." There were a number of factors affecting prices including the "surge in crude oil prices caused by the Arab Oil Embargo in October 1973 (US inflation reached 11% in 1975)."[42]

DiamondsEdit

By 2012 diamond was the last uncommoditized commodity. For a number of reasons institutional investors were repelled by the bad image of "blood diamonds", the monopoly on the diamond market and the lack of uniform standards for diamond pricing. However this is changing and in 2012 the Securities and Exchange Commission (SEC) reviewed a proposal to create the "first diamond-backed exchange-traded fund" which would trade on-line to anyone in units of one-carat diamonds with a storage vault and delivery point in Antwerp, Belgium home of the Antwerp Diamond Bourse. The exchange fund was backed by a company based in New York called IndexIQ. IndexIQ introduced 14 exchange-traded funds to market since 2008.[37] In February 2013 [43][notes 4]

According to Citigroup analysts, the annual production of polished diamonds is about $18 billion. Like gold, diamonds are easily authenticated and long lasting. Diamond prices have been more stable as De Beers, the global diamond giant once held almost 90 per cent (by 2013 they held 40 per cent) of the market share of production. Investment professionals capable of large flows of speculative money and therefore price destabilization, would typically avoid monopolies that can control market price.[37]

Other commodity marketsEdit

According to this List of traded commodities rubber is traded on the Singapore Commodity Exchange in units of 1 kg priced in U.S. cents. Palm oil is traded on the Malaysian Ringgit (RM), Bursa Malaysia in units of 1 kg priced in U.S. cents. Wool is traded on the AUD in units of 1 kg. Polypropylene is traded on the London Metal Exchange in units of 1,000 kg priced in $USD. Linear Low Density Polyethylene (LL) is traded on the London Metal Exchange in units of 1000 kg priced in $USD.

Commodities exchanges Edit

Largest commodities exchanges
Exchange Country Volume per month $M
CME GroupUSA19[44]
Tokyo Commodity ExchangeJapan -
NYSE EuronextUSA-
Dalian Commodity ExchangeChina-
Multi Commodity ExchangeIndia-
Intercontinental ExchangeUSA, Canada, China, UK-
Africa Mercantile ExchangeKenya, Africa-
Uzbek Commodity ExchangeTashkent, Uzbekistan-

Regulatory bodies and policiesEdit

United StatesEdit

In the United States, the principal regulator of commodity and futures markets is the Commodity Futures Trading Commission but it is the National Futures Association that enforces rules and regulations put forth by the CFTC. The National Futures Trading Association, formed in 1976, is the futures industry's self-regulatory organization. The NFA's first regulatory operations began in 1982 and falls under the Commodity Exchange Act of the Commodity Futures Trading Commission Act.[45]

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, to reform the U.S. financial market regulations, was put in place in response to the 2008 food and financial crises. The Dodd-Frank called for "strong measures to limit speculation in agricultural commodities" calling upon the Commodity Futures Trading Commission (CFTC) to further limit positions and to regulate over-the-counter trades.[46]

European UnionEdit

Markets in Financial Instruments Directive (MiFID), the cornerstone of the European Commission's Financial Services Action Plan that regulate operations of the EU financial service markets, was reviewed in 2012 by the European Parliament and the Economic and Financial Affairs Council (ECOFIN).[47] The European Parliament adopted a revised version of Mifid II on October 26, 2012 which include "provisions for position limits on commodity derivatives", aimed at "preventing market abuse" and supporting "orderly pricing and settlement conditions".[48]

European Securities and Markets Authority (Esma), based in Paris and formed in 2011, is a "EU-wide financial markets watchdog". European Securities and Markets Authority will set the position limits on commodity derivatives as described in of the 2012 Markets in Financial Instruments Directive II (MifidII).[48]

The European Parliament (EP) voted in favour of stronger regulation of commodity derivative markets in September 2012 to "end abusive speculation in commodity markets" that were "driving global food prices increases and price volatility". In July 2012 "food prices globally soared by 10 percent" (World Bank 2012) Senior British MEP Arlene McCarthy called for "putting a brake on excessive food speculation and speculating giants profiting from hunger" ending immoral practices which "only serve the interests of profiteers".[49] In March 2012, MEP Markus Ferber suggested amendments to the European Commission's proposals, intended to strengthen restrictions on high-frequency trading and commodity price manipulation.[50]

Protectionism Edit

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

TechnologyEdit

An entire software as a service market called Energy Trading Risk Management (ETRM) has emerged for this market using software such as Triple Point Technology, SolArc, OpenLink and Agiboo.

See also commodity exchanges Edit

Regulatory Institutions and PoliciesEdit

Further readingEdit

  • Futures

Script error This 48 page handbook published in 2006 by the National Futures Association, congressionally authorized, industry-wide, self-regulatory organization for the U.S. futures industry, provides accessible information aimed at potential investors explaining how the futures markets are regulated, registered firms, a glossary of terms, including sections on more detailed aspects of futures contracts: pricing:price discovery, daily price limits; market participants: (hedgers spectulators), basic trading strategies etc.

Managing risk by trading futures and options on futures contracts is a vital component of the global economy. Every business day tens of millions of futures contracts are traded on an increasingly broad spectrum of products, including agricultural commodities, oil, precious metals, equities, treasury bonds, financial indexes and foreign currencies.

NotesEdit

  1. This article covers physical product (food, metals, energy) 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 markets, bond markets, and currency markets cover those concerns separately and in more depth.
  2. In July 2009, when a high-frequency trading platform with proprietary algorithmic trading code used by Goldman Sach to allegedly generate massive profits in the commodity market was stolen by Sergey Aleynikov there was widespread concern about the unintended economic consequences of HFT.
  3. Exchange Traded Funds revolutionized the mutual funds industry when they were introduced. Exchange Traded Commodities, sold first by pioneering investors group Barclays Global Investors (BGI) (now owned by BlackRock) revolutionized the commodity market. By the end of December 2009 Barclays Global Investors (BGI) assets hit an all-time high of $1 trillion ($1,032 billion).
  4. IndexIQ registered Adam S. Patti as Chief Executive Officer (CEO) and David Fogel as Chief Financial Officer and Executive Vice President in the City of Rye Brook, New York, on January 31, 2013 as representatives of IndexIQ Advisors LLC sponsoring the IQ Physical Diamond Trust.

References Edit

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  14. "The Food Bubble", Frederick Kaufman, Harper's, 2010 July
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  22. Futures Trading Act of 1921, Declared unconstitutional in Hill v. Wallace 259 U.S. 44 (1922), the Grain Futures Act of 1922 and Board of Trade of City of Chicago v. Olsen 262 U.S. 1 (1923).
  23. Garner, Carley. A Trader's First Book on Commodities. (New Jersey: FT Press, 2010): pg 19.
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  30. Michael Sackheim, Michael Schmidtberger & James Munsell, DB Commodity Index Tracking Fund: An Innovative Exchange-Traded Fund, Futures Industry (May/June 2006).
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  32. Jon Gregory. Counterparty credit risk. ISBN 978-0-470-68576-1. p. 7.
  33. Commodities Trading report
  34. http://www.trademap.org/open_access/Index.aspx?proceed=true&&tradetype=E&outputoption=byproduct&productclusterlevel=HS2
  35. Marius Vassiliou (2009). Historical Dictionary of the Petroleum Industry. Lanham, MD: Scarecrow Press. ISBN 0-8108-5993-9.
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  38. See the Futures Trading Act of 1921, Declared unconstitutional in Hill v. Wallace 259 U.S. 44 (1922), the Grain Futures Act of 1922 and Board of Trade of City of Chicago v. Olsen 262 US 1 (1923).
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