Trading commodities

Trading in commodities
Active commodity markets with specific rules and regulations existed in Egypt, China and India as far back as 1200 BC. By the 14th century in Europe, the concept of a commodity transaction had become established as involving an agreement, a transfer, a payment and a warranty. Studies of early markets, including rice trading in Osaka in the 17th century, equity trading in Amsterdam in the 17th century and wheat trading in Chicago in the 19th century all suggest that a commodity must be carefully defined before trading can begin. Once that is done, a spot market will develop, followed by forward, futures and options markets.

The definition of a commodity has changed with time. In the 12th century, it was understood to be a standardized bulk primary agricultural or metal product that could be stored. By the later part of this century, the success of commodities such as soybean oil and frozen orange juice eliminated the word primary from the definition. The success of futures markets for live pigs and cattle then eliminated the idea of storability. Currency markets eliminated the concept of bulk and expanded the definition of commodity to include a medium of exchange. When the interest rate futures market came into being, commodities were expanded to include financial instruments. With the emergence of a market for sulphur dioxide (SO2) emission credits, commodities now include emission permits.

Many developing countries, and in particular most of those with weak growth performance, remain highly dependent on commodities for their trade, production income and employment. Commodities continue to provide an important source of foreign exchange earnings for developing countries: they have a high value-added potential; and agricultural commodities are an important source of employment and offer scope for anti-poverty campaigns. Agriculture inter alia acts as a buffer against economic problems and allows the return to rural areas of urban unemployed, as in the current crisis. Commodity-based diversification therefore offers a major opportunity for change in line with existing comparative advantages. The important role played by commodity protocols in the socio-economic development of certain developing countries should be highlighted.

Commerce Trade
Industry Commodities
Type Classification:
B: Basic universal strategies