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Commodity markets define and trade contracts for delivery of any product or service that can be characterized in an interchangeable way. They are complex, and include a wide array of instruments to manage risk.
This article focuses on the history and current debates regarding global commodity markets, and is not specific to the markets of any country in particular. It discusses also concerns arising in political economy regarding commodity markets, notably their safety, fairness, and ability to guarantee clearance and closure. It covers physical product (food, metals, electrons) 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. 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 trading units and 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 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.
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 orange juice, cocoa, sugar, wheat, corn, barley, "pork bellies" (pigs), milk, feedstuffs, fruits, vegetables, other grains, other beans, hay, other livestock, meats, poultry, eggs, or any other commodity which is so traded.
In addition, delivery day , method of settlement and delivery point must all be specified. Typically, trading must end 2 (or more) business days prior to the delivery day, so that the routing of the shipment (which for soybeans is 30,000 kilograms) can be finalized via ship or rail, and payment can be settled when the contract arrives at any delivery point.
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." - Jerry Hodges
" Hedging", a common (and sometimes mandatory) practice of farming cooperatives, insures against a poor harvest by purchasing futures 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 moneyNote that this article has no references to the Italian car manufacturers. Fiat money or fiat currency (usually paper money) is a type of currency whose only value is that a government made a fiat (i. decreed) that the money is a legal method of exchange. of Cuba as being tied to sugarThis article deals with sugar as food and as an important, widely traded commodity; the word also has other uses; see Sugar (disambiguation A sugar is a form of carbohydrate; the most commonly used sugar is a white crystalline solid, sucrose; used to alte 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.
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