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.
Four Categories of Commodities Trading
Throughout history, there have been four main categories of commodities trading, including all of the following:
- Energy Commodities (Like crude oil, natural gas, and gasoline)
- Metal Commodities (Like gold, silver, and platinum)
- Livestock and Meat Commodities (Like pork bellies, live cattle, and feeder cattle)
- Agricultural Commodities (Like corn, soybeans, wheat, rice, cocoa, coffee, cotton, and sugar)
As commodity markets have expanded, the need for other commodities and futures categories has emerged. We’ll talk about those alternative categories down below.
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.
Commodity Index Funds
Starting in the 1990s, a new commodity-based financial product called a Commodity Index Fund became available. A commodity index fund is a fund where the assets are invested into financial instruments based on – or linked to – a commodity index.
Today, some of the biggest and most popular commodity index funds include Oppenheimer, Pinco Real Return Strategy Fund, Barclays, and the iShares S&P GSCI Commodity Indexes Fund.
There’s also a separate type of commodity fund that holds real physical assets (such as oil refineries, farms, or forests). The Chase Physical Commodity Index is one such fund.
What Affects Commodity Prices?
Commodity trading can be risky business – especially if you don’t understand how commodity prices are affected.
Today, commodity prices vary widely. As you can imagine, certain commodities are more vulnerable to fluctuations than others. Agricultural commodities, for example, can be volatile during the summer months depending on weather events.
Commodity prices can be affected by unusual weather, natural disasters, epidemics, man-made events, and countless other circumstances. The unpredictability – and lack of control – of these events is why many people feel commodities markets are unpredictable.
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.
Modern Commodity and Future Categories
Up above, we talked about how commodities are typically separated into categories like energy, precious metals, livestock, and agriculture. Modern commodity exchanges, however, require a few additional categories. Here are the common commodities and futures used today (specifically in the United States):
- Agriculture: Corn, oats, soybeans, rice, soybean meal, soybean oil, wheat, orange juice
- Livestock: Hogs, frozen pork bellies, live cattle, feeder cattle
- Energy: Crude oil, heating oil, ethanol, natural gas, gasoline, propane, uranium, electricity
- Precious Metals: Gold, platinum, palladium, silver
- Industrial Metals: Aluminum, steel, copper
- Financial (Equities): US Treasury Bond futures, US Treasury bill futures, indexes, currencies
- Soft Commodities: Sugar, cocoa, coffee, cotton
- Pulp: Lumber
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.
Commodity Trading and the Internet
How has commodity futures trading changed in the 21st century with the invention of the internet?
The addition of online trading systems has led to a heightened interest in commodities and futures – although the same can be said with virtually every other asset.
Today, traders make entire careers out of futures trading, and commodities and futures markets have expanded to address this growth.
Futures markets can be found all over the world, with different futures markets specializing in different goods. While the Chicago Mercantile Exchange is the world’s largest, there are countless others that specialize in different aspects of the industry.
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
There are also niche futures and commodities markets, like the Minneapolis Grain Exchange (MGEX), which was launched all the way back in 1881 by the Minneapolis Chamber of Commerce. To this day, the MGEX is the only place where you can exchange futures contracts on hard red spring wheat. It remains a popular grain futures clearinghouse to this day and averages about one million contract trades a year.
Commodity Futures Exchanges in Third World Countries
As the developing world continues to grow, commodity futures markets are inevitably appearing throughout these countries.
Starting in 2002, India has had its own commodity futures exchange, for example, consisting of three nationwide multi-commodity indexes, including:
-National Commodity & Derivative Exchange (NCDEX)
-Multi Commodity Exchange (MCX)
-National Multi Commodity Exchange of India (NMCE)
According to KotakCommodities.com, the MCX today is the largest commodity futures exchange in India and holds a market share close to 70%. Meanwhile, the NCDEX holds a market share of 25%, followed by a 5% market share for NMCE.
India is an example of commodity futures markets you won’t find in other countries. The NMCE, for example, is popular for trading spices and plantation crops that you won’t find traded on other exchanges.
What Does the Future Hold for Commodities Trading?
In early history, commodities and futures trading primarily involved farmers and merchants. Today, commodities and futures markets are complex exchanges found across the world – including everywhere from the Chicago Board of Trade to the Tokyo Commodities Exchange.
Thanks to commodities trading, companies in commodity-heavy industries (like the airline industry) are able to hedge their bets against unexpected events. Instead of being subject to the changing price of oil, for example, airlines can remain stable throughout the years.
For these reasons – and countless others – commodities and futures markets play a crucial role in the global economy. They’re not going away anytime soon – so we still have plenty more history of commodities trading to write.