Commodity market
[clarification needed] Farmers have used a simple form of derivative trading in the commodities market for centuries for price risk management.
Gold's scarcity, its unique density and the way it could be easily melted, shaped, and measured made it a natural trading asset.
[14] Beginning in the late 10th century, commodity markets grew as a mechanism for allocating goods, labor, land and capital across Europe.
"Trading took place at the Amsterdam Bourse, an open aired venue, which was created as a commodity exchange in 1530 and rebuilt in 1608.
[18] 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.
[19] 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.
"[20] Reputation and clearing became central concerns, and states that could handle them most effectively developed powerful financial centers.
Cash commodities or "actuals" refer to the physical goods—e.g., wheat, corn, soybeans, crude oil, gold, silver—that someone is buying/selling/trading as distinguished from derivatives.
Rumors spread that the European Central Bank (ECB) would force Cyprus to sell its gold reserves in response to its financial crisis.
At the time Russian Prime Minister Dmitry Medvedev warned that Russia could sink into recession.
Derivatives markets, on the other hand, require the existence of agreed standards so that trades can be made without visual inspection.
Similar specifications apply for cotton, orange juice, cocoa, sugar, wheat, corn, barley, pork bellies, milk, feed stuffs, fruits, vegetables, other grains, other beans, hay, other livestock, meats, poultry, eggs, or any other commodity which is so traded.
Standardization has also occurred technologically, as the use of the FIX Protocol by commodities exchanges has allowed trade messages to be sent, received and processed in the same format as stocks or equities.
[27] Derivatives evolved from simple commodity future contracts into a diverse group of financial instruments that apply to every kind of asset, including mortgages, insurance and many more.
Such forward contracts began as a way of reducing pricing risk in food and agricultural product markets.
In futures contracts the buyer and the seller stipulate product, grade, quantity and location and leaving price as the only variable.
[34] Chicago, centrally located, emerged as the hub between Midwestern farmers and east coast consumer population centers.
ETCs were introduced partly in response to the tight supply of commodities in 2000, combined with record low inventories and increasing demand from emerging markets such as China and India.
[38] Prior to the introduction of ETCs, by the 1990s ETFs pioneered by Barclays Global Investors (BGI) revolutionized the mutual funds industry.
This provides exposure to the commodity, but subjects the investor to risks involved in different prices along the term structure, such as a high cost to roll.
Precious metals currently traded on the commodity market include gold, platinum, palladium and silver which are sold by the troy ounce.
[54] On 21 July 2010, United States Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act with changes to the definition of agricultural commodity.
[55] In February 2013, Cornell Law School included lumber, soybeans, oilseeds, livestock (live cattle and hogs), dairy products.
Agricultural commodities can include lumber (timber and forests), grains excluding stored grain (wheat, oats, barley, rye, grain sorghum, cotton, flax, forage, tame hay, native grass), vegetables (potatoes, tomatoes, sweet corn, dry beans, dry peas, freezing and canning peas), fruit (citrus such as oranges, apples, grapes) corn, tobacco, rice, peanuts, sugar beets, sugar cane, sunflowers, raisins, nursery crops, nuts, soybean complex, aquacultural fish farm species such as finfish, mollusk, crustacean, aquatic invertebrate, amphibian, reptile, or plant life cultivated in aquatic plant farms.
Palm oil is traded on the Malaysian Ringgit (RM), Bursa Malaysia in units of 1 kg priced in U.S. cents.
Polypropylene and Linear Low Density Polyethylene (LL) did trade on the London Metal Exchange in units of 1,000 kg priced in USD but was dropped in 2011.
Fossil fuels and other commodities have been major drivers of inflationary periods, including the 2021-2022 inflation spike exacerbated by the Russian Invasion of Ukraine.
[59][60] Gernot Wagner argues that commodites are undesirable energy sources because of inflationary periods that come with commodity prices.
[65] The European Parliament adopted a revised version of Mifid II on 26 October 2012 which include "provisions for position limits on commodity derivatives", aimed at "preventing market abuse" and supporting "orderly pricing and settlement conditions".
[67] In March 2012, EP Member Markus Ferber suggested amendments to the European Commission's proposals, intended to strengthen restrictions on high-frequency trading and commodity price manipulation.
