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Trading History: History of Commodities Trading

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  • Trading History: History of Commodities Trading


    History of Commodities Trading

    Commodities trading is as old as civilization itself.

    Modern commodities trading typically refers to trading futures contracts, derivatives, and other financial products. In ancient history, however, commodities trading was as simple as trading wheat for copper (yes, just like in Settlers of Cataan).

    What’s the history of commodities trading? Where did it come from and where did it originate? Today, we’re looking at a complete history of commodities trading from the beginning of civilization to the present day. Commodity Markets Are As Old As Civilization

    Sumer is thought to be the world’s oldest civilization. So when we say that commodity markets were found in Sumer between 4500 and 4000 BCE, we’re saying that commodities trading is as old as human civilization itself.

    In Sumer (which is in modern day Iraq), citizens would use clay tokens sealed in a clay vessel as an medium of exchange for goats. Clay writing tablets indicated the number of clay tokens inside each sealed vessel, and the merchant would deliver the specified number of goats (Source).

    The fact that the clay tablets included the amount, time, and date tells us that they were the earliest form of commodity futures contracts. In other civilizations, we have similar examples where pigs, seashells, and other common items were used as “commodity money”. Over the centuries, traders continuously improved on that system, eventually leading to gold and silver trading markets in classical civilizations.
    Gold and Silver Trading as a Commodity

    Goats and pigs might have been the earliest commodities traded, but by the time classical civilizations arose, people were using gold and silver as a medium of exchange.

    Today, we take it for granted that gold and silver hold value. That’s been the case throughout most of human history – but for different reasons.

    In the early days of civilization, for example, gold and silver were valued for their beauty. This quality attracted the attention of royalty, and soon enough, gold and silver were associated with royalty and had intrinsic worth.

    As the centuries passed, gold and silver naturally evolved into a medium of exchange on their own. They were used to pay for goods and commodities, for example, or to pay for someone’s labor. A specific amount of gold would be measured out, and gold became an early form of money.

    Gold could easily be melted, shaped, and measured. It was also scarce throughout most of the world. These qualities made it a natural trading asset.

    Gold was one of the first forms of commodity trading in history. Commodity Markets in Medieval Europe

    Commodity markets grew throughout medieval Europe. At the time, they were the best way to distribute goods, labor, land, and capital across the region. Merchants would accept gold in exchange for goods. They could then use this gold throughout most of the world.

    As time passed, regions began to make their own forms of coinage. By the late medieval times, reliable scales had been invented that allowed villagers to easily weight different forms of coinage. Instead of traveling to urban centers like Amsterdam to weigh coins or goods, villagers could travel locally.

    By the 1500s, stock exchanges started to emerge – including the Amsterdam Stock Exchange. The Amsterdam Stock Exchange in 1530

    The Amsterdam Stock Exchange is often called the world’s first stock exchange. However, before it was a stock exchange, it operated as a market for the exchange of commodities.

    Traders on the Amsterdam Stock Exchange participated in the purchase and sale of sophisticated financial products (at least, they were sophisticated for the time), including short sales, forward contracts, and options.

    Over the 1500s and 1600s, a growing number of cities would add their own commodity exchanges where they sold similar products.

    Said one historian about the 1500s commodity trading industry, “Commodity exchanges themselves were a relatively recent invention, existing in only a handful of cities.” The Chicago Board of Trade in 1864

    America got into the commodities trading action in 1864 with the invention of the Chicago Board of Trade (CBOT). That exchange used wheat, corn, cattle, and pigs as standard instruments.

    The CBOT is often called the world’s oldest futures and options exchange – although there’s some controversy over whether or not early trading on the Amsterdam Stock Exchange constituted a similar sort of trade.

    The CBOT would expand its commodity trading in the 1930s through the Commodity Exchange Act. The Act added new items to the list, including rice, mill feeds, butter, eggs, soybeans, and potatoes.

    Adding commodities to the exchange wasn’t always an easy process. When commodities are being bought and sold through a market, there needs to be some agreement about what that “product” actually is. What’s the difference between a standard soybean and a cheap soybean? What kind of measurements does a cow need to have in order to be considered a cow?

    Successful commodity markets required a broad consensus on product variations. This has consistently been one of the biggest struggles for commodity markets throughout history – including important matters of discussion like how much gold is required to make gold bullion.

    Even classical civilizations struggled with definitions. Many of these civilizations later set rules governing trading gold or silver for spices, cloth, wood, weapons, and other goods. The Commodity Price Index of 1934

    Starting in 1934, the US government decided to create something called the Commodity Price Index. That index tracked “22 sensitive basic commodities whose markets are presumed to be among the first to be influenced by changes in economic conditions.”

    The Act also added that “As such, [the index] serves as one early indication of impending changes in business activity.”

    The Commodity Price Index would eventually become available to the public in 1940. It consisted of a computation of the 22 commodity prices listed above. Most countries around the world today have their own version of the commodity price index.

    Today, the American Bureau of Labor Statistics produces the commodity price index, which is actually classed as part of the Producer Price Index (PPI) report. You can view all of the reports here.

    The downloadable reports go into specific detail about commodity prices. You can view price indexes for specific items like table grapes, wine grapes, and juice grapes, for example (each of which is measured differently) all the way down to slaughter chickens, slaughter turkeys, and slaughter ducks. There are over 3500 items mentioned on the commodities list in total. The Unpredictability of Commodity Markets Leads to Futures Markets

    One of the common traits across commodities markets is the use of futures, forward contracts, and hedging, all of which are popular among commodities exchanges.

    It’s easy to see why commodity markets need these types of financial products: it’s because they’re unpredictable!

    A forward contract, or future, lets you avoid market volatility by selling future commodities at a fixed price today. By locking into one price today, you avoid the risk associated with commodities markets.

    The airline industry is an active player in the commodity futures market. Fuel is one of an airline’s biggest expenses, and airlines must secure massive amounts of fuel at stable prices. They can’t afford to have ticket prices fluctuate wildly every time oil goes up in price.

    That’s why airlines “hedge” by purchasing fuel at fixed rates. This allows them to avoid the market volatility associated with crude and gasoline.

    On the one hand, airlines lose money if oil goes down within the next year. But on the other hand, they save money if oil goes up in the price. At the end of the day, airlines want to pay a stable price for oil, and that’s why futures and forward contracts are such a crucial part of the commodity markets.
    Commodity Exchanges Opened Across America During the 20th Century

    Chicago, as the hub of transportation and agriculture in the Midwest, was a natural place for commodity exchanges to emerge in America.

    However, over the 20th century, commodity exchanges emerged all across America, including in Minneapolis, Milwaukee, St. Louis, Kansas City, and other Midwest cities. Commodity markets also opened in New York, New Orleans, Memphis, San Francisco, and others.

    Nevertheless, Chicago continued to be the hub of commodities future trading throughout America. None of the newcomers were able to displace Chicago’s position atop the commodity futures trading throne. Types of Futures and Commodities Markets Available Today

    • Chicago Mercantile Exchange (CME): Energy, precious metals, industrial metals, livestock, and financials
    • Chicago Board of Trade (CBOT): Agriculture and livestock
    • New York Mercantile Exchange (NYMEX): Energy and precious metals
    • New York Board of Trade (NYBOY): Agriculture
    • BM&F Bovespa (Including the Brazilian Mercantile and Futures Exchange): Agriculture and financials
    • London Metal Exchange (LME): Industrial metals
    • Australian Stock Exchange (ASE): Energy, environmental, financial, agriculture
    • NYSE Euronext (ASE): Energy, environmental, financial, and agriculture (based in France)
    • Tokyo Commodities Exchange (TOCOM): Energy, precious metals, industrials metals, and rubber
    • Korea Exchange (KRS): Financials and precious metals

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