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Chicago Board of Trade BuildingFutures market
Commodity marketsare markets where raw or primary products are exchanged. These rawcommoditiesare traded on regulatedcommodities exchanges, in which they are bought and sold in.
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 marketsbond marketsandcurrency marketscover those concerns separately and in more depth. One focus of this article is the relationship between simplecommodity moneyand the more complex instruments offered in the commodity markets.
SeeList of traded commoditiesfor somecommoditiesand theirand places.
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.
Historically, dating from ancientSumerianuse of sheep or goats, or other peoples using pigs, rare seashells, or other items ascommodity 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 moneyand commodity markets in a crude early form are believed to have originated inSumerwhere 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 ofcommodity money- more than anI.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 modernfutures 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 commodityaccounting.
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 sellers 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 tocredit 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 ofmilitary fiatby 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.
Commodity and Futures contracts are based on whats 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, a common (and sometimes mandatory) practice of farming cooperatives, insures against a poor harvest by purchasingfutures contractsin 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.
Wholedeveloping nationsmay 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 fullydeveloped nation. For example, one could see the nominallyfiat moneyof Cuba as being tied tosugarprices, 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.
In addition, delivery day, method of settlement anddelivery pointmust all be specified. Typically, trading must end two (or more) business days prior to the delivery day, so that the routing of the shipment (which for soybeans is 30,000 kilograms or 1,102 bushels) can be finalized via ship or rail, and payment can be settled when the contract arrives at any delivery point.
U.S.soybeanfutures, 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 mostorganicfood buyers.
Similar specifications apply for 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.
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.
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.
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 offinancial 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.
Theunderlyingof futures contracts are no longer restricted tocommodities.
Building on the infrastructure and credit and settlement networks established for food andprecious metals, 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 theGulf War, speculation on the survival of the regime ofSaddam HusseininIraq. Similar political stability concerns have from time to time driven the price ofoil. Some argue that this is not so much a commodity market but more of anassassination marketspeculating 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, however, 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.
Developing countries(democratic or not) have been moved to harden their currencies, acceptIMFrules, join theWTO, and submit to a broad regime of reforms that amount to a hedge against being isolated. Chinas entry into theWTOsignalled 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 others anticipatedprotectionism, were they to fail to join theWTO.
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.
Commodity thinking is undergoing a more direct revival thanks to the theorists ofnatural capitalwhose products, some economists 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 in many nations.
Most types ofenvironmental economicsconsider the shift to measuring them inevitable, arguing that reframingpolitical economyto consider the flow of these basic commodities first and foremost, helps avoids use of anymilitary fiatexcept to protectnatural capitalitself, and basing credit-worthiness more strictly on commitment to preservingbiodiversityaligns the long-term interests ofecoregions, societies, and individuals. They seek relatively conservativesustainable developmentschemes that would be amenable tomeasuring well-beingover long periods of time, typically seven generations, in line with Native American thought.
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. 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 the following types of concerns:
Will a freeze hurt thecrop? Will there be a drought in the rn Belt? What are the chances that we will have a cold winter, drivingnatural gasprices higher and creating havoc in Florida orange areas? What is the status ofEl Niño?
Weather trading is just one example of negative commodities, units of which represent harm rather than good.
Economy is three fifths of ecology arguesMike Nickerson, one of many economic theorists who holds that natures productive services and waste disposal services are poorly accounted for. One way to fairly allocate the waste disposal capacity of nature iscap and trademarket 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 atmospheres 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 and it is questionable whether this is a capacity that depends on U.S. clout: TheKyoto Protocolestablished a similar market in global greenhouse gas emissions without U.S. support.
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 theanti-globalization movementopposes the commodification of currency, national sovereignty, and traditional cultures. The capacity to repay debt, as in the current globalcredit moneyregime anchored by theBank for International Settlements, does not in their view correspond to measurable benefits to humanwell-beingworldwide. They seek a fairer way for societies to compete in the global markets that will not require conversion ofnatural capitaltonatural resources, norhuman capitalto move todeveloped nationsin order to find work.
Some economic systems bygreen economistswould replace thegold standardwith abiodiversity standard. It remains to be seen if such plans have any merit other than as political ways to draw attention to the waycapitalismitself interacts with life.
While classical, neoclassical, and Marxist approaches toeconomicstend to treat labor differently, they are united in treating nature as a resource.
Thegreen economistsand the more conservativeenvironmental economicsargue 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 theIPCCcalculations 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.
Accepting this result, some 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 inmeasuring well-being, to assign a commercialvalue of life, and to the theory ofNatural 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 economistAmartya 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 thatsustainable developmentwas best defined as freeing human time. Sen wonThe Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobelin1999(sometimes incorrectly called the Nobel Prize in Economics) and based his book on invited lectures he gave at theWorld Bank.
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This page was last changed on 11 July 2018, at 12:47.