A Commodity Market
A Commodity Market is a market wherein mainly raw materials, which haven’t been processed by humans or undergone manufacturing processes, are traded, and not products.
The goods are traditionally categorized into “soft commodities -“agricultural goods such as grains, coffee, cocoa, fruit and sugar, and “hard commodities”- metals and other mined materials, and oil states IronFX.
The commodity market is active in some 50 commodity exchanges around the world and the number of cash deals made therein is greater than the number of deals made wherein the physical goods are supplied to the buyer.
Futures contracts are the most ancient means of trade for investing in goods. Physical assets are used as securities for futures contracts. The trading venue for commodities (Commodities Exchange) can include the trade of actual goods and the trade of derivatives, spot contracts, futures contracts, and options on futures contracts. For hundreds of years, farmers made use of a simpler version of derivative trades on the commodity market to purchase risks, explains IronFX.
Starting in the 10th century, commodity markets grew as a means of allotting goods, workforces, and land in Europe. The first exchange where the regular trade of commodities was conducted was the Amsterdam Bourse. The Amsterdam Bourse was started in 1530 as a merchandise exchange in the town square, and in 1608, trading was moved indoors. In 1864, organized stock trade of grains, corn, beef, and pork was conducted on the commodity market in Chicago.
In the 1930s and 1940s, legislation was passed, regulating the exchange of goods in the United States, and trade expanded to include rice, animal feed, butter, eggs, potatoes, and soy. The condition for the existence of a successful commodity market is a consensus with regards to the nature of the goods exchanged therein and their qualities, such as, for example, the purity level of the gold bars.
Futures contracts for goods are the first financial derivatives in the world, states IronFX.
In ancient China and Japan, such a market started already in the 16th century – when traders and farmers made hedge transactions over agricultural goods such as silk and rice. A century later, farmers in Europe adopted the method.
Futures contracts were first regulated in the state of New York in the USA, but the first contract exchange (CBOT) was established in Chicago in 1848 by 82 local dealers who dealt in the exchange of grains.
The regulation of futures contract trade attracted many speculators to this field, who took advantage of the new opportunity: the option of profiting from price changes in goods without needing to purchase and store them.
Over time and with the success of futures contract exchanges, the Chicago Board of Trade and others in the US began issuing futures contracts for other goods: coffee, sugar, wheat, oats, cocoa, cotton, and more.
Of course, the prices of the goods are influenced by global supply and demand, but political developments, trade agreements, changes in currencies, war, and weather damage can also shock commodity markets from time to time, explains IronFX.
Contracts for agricultural goods are divided into two groups: grains, which include corn, wheat, oats and soy among others, and tropical goods, including sugar, coffee, cotton, and cocoa.
Agricultural goods are traded mainly on the Chicago Board of Trade (CBOT), and goods imported from tropical countries (coffee, cocoa, cocoa, sugar) are traded on the New York Mercantile Exchange (Nymex) in Brazil and London, states IronFX.