Commodity Market

of a commodity trader involves facilitating the transfer of commodities from their source to end-users, who may use them as raw materials for further production, generating income.

The markets for gold and silver emerged in classical civilizations, where these precious metals were prized for their beauty and intrinsic value, often associated with royalty. Over time, they transitioned from objects of aesthetic value to mediums of exchange in trade, facilitating transactions for various goods, commodities, labor, and transportation.

Starting in the late 10th century, commodity markets emerged as a means of allocating goods, labor, land, and capital across European countries. From the late 11th to the late 13th century, English urbanization, regional specialization, improved infrastructure, increased coin usage, and the proliferation of markets and fairs demonstrated a growing trend of commercialization. Around 1180 AD, the county of Champagne in France hosted trade fairs, serving as meeting points for merchants and financiers from across Europe. These markets involved over-the-counter (OTC) derivatives, where trades occurred without a formalized exchange. In the Champagne fair, “fair letters” were used as a form of credit between buyers and sellers instead of traditional currency payments. The expansion of markets is exemplified by a 1466 instance where villagers could sell their locally produced cheese and butter directly via an exchange, eliminating the need to travel to Haarlem or Amsterdam for trade.

The Amsterdam Stock Exchange, recognized as the first stock exchange, initially served as a market for the exchange of commodities. Early trading on this exchange involved sophisticated contracts, including short sales, forward contracts, and options. The trading occurred at the Amsterdam Bourse, an open-air venue established as a commodity exchange in 1530 and reconstructed in 1608 to facilitate further trading. While commodity exchanges were a recent development, existing in only a few cities, Antwerp traders transitioned from purchasing commodities to utilizing trading bills of exchange. These bills allowed merchants to mitigate transportation risks associated with goods, marking the inception of a formal European financial market.

In 1700, Japan marked a significant milestone in early futures trading with the establishment of the Japan Rice Exchange. During the period of 1603-1867 in Japan, rice served as the first-ever commodity exchanged. Rice was stored in warehouses, known as kurayashiki, located around Nakanoshima by rice merchants for future consumption. These merchants sold receipts of the stored rice, referred to as “rice tickets” or vouchers, as promissory notes to exchange rice and raise funds. Over time, these rice tickets evolved into a versatile form of currency. As rice ticket trading became widespread, markets introduced standardized norms, laying the foundation for current US futures trading standards. In 1730, the Tokugawa shogunate allocated a spot market for trading rice bills and a futures market to trade authorized brands of rice in Dojima. This marked the official beginning of the Dojima Rice Exchange in Japan.

During that era, two rice trading markets emerged: the Shomai market and the Choaimai market. In the Shomai market, various rice grades were sold at spot prices and settled using rice vouchers. The rice was traded through books of accounts, and futures were based on rice grades for each season. In the Choaimai market, recorded books of accounts were settled by the clearinghouse, with traders establishing lines of credit with the house. Many of the trading rules

and practices that developed in Dojima continue to influence today’s global commodity, equity, and financial futures markets.

Commodities trading dates back to Mesopotamia in the late 1700s B.C., where trade and commerce were governed by the ruler’s code. King Hammurabi of Babylon inscribed comprehensive laws on stone slabs, known as the Code of Hammurabi. These laws covered nearly every aspect of trade at that time and laid the foundation for subsequent Babylonian and Assyrian trade regulations.

Established in April 1848, the Chicago Board of Trade (CBOT) is one of the oldest futures and options exchanges globally. Its formation was facilitated by the development of railroads and telegraph connections, linking Chicago’s agricultural center with cities like New York. Corn became the first traded futures contracts in the U.S., with agricultural products dominating CBOT trading for nearly a century. By 1864, standard contracts for wheat, corn, cattle, and pigs were widely traded. Over time, the list of commodities expanded to include rice, mill feeds, butter, eggs, Irish potatoes, soybeans, and more during the 1930s and 1940s, further solidifying CBOT’s position in the commodity exchange landscape.

Thriving commodity markets rely on a widespread agreement regarding the acceptable variations of each product for trading. This consensus often involves quality checks, such as ensuring the purity of gold in bullion. In classical civilizations, global markets were established for trading precious metals like gold or silver in exchange for various goods like spices, cloth, wood, and weapons. These markets adhered to standards of quality and timeliness for the traded commodities. By the 19th century, stock exchanges became pivotal tools, driving innovations in transportation, warehousing, and financing. These advancements played a crucial role in expanding interstate and international trade.

Established in 1856, the Kansas City Board of Trade (KCBOT) was originally established to function as a clearinghouse for grain merchants. Over time, it evolved into a prominent grain exchange, particularly focusing on hard red winter wheat. The prices determined at the KCBOT have become a global benchmark for wheat prices.

After corn and wheat, cotton became the next market to introduce futures contracts. In the 1870s, New York saw the emergence of forward contracts in cotton, leading to the establishment of the New York Cotton Exchange (NYCE). The Butter and Cheese Exchange, formed in 1882, was later renamed the New York Mercantile Exchange (NYMEX) in January 1882. In 1916, the Coffee Exchange joined forces with NYCE, creating the Coffee and Sugar Exchange and introducing the first sugar contracts. Over time, the Cocoa Exchange merged into the CSE (CSC Exchange), and in 2004, the NYCE and CSCE officially merged to form the NYBOT. The Intercontinental Exchange® (ICE) later acquired the NYBOT in 2007.

Founded in 1881, the MGEX served as a marketplace for millers, processors, and producers, focusing on Hard Red Spring Wheat (HRSW), known for its high protein content used in various food products. The Hard Red Spring Wheat Index (HRSI) and Hard Red Winter Wheat Index (HRWI) primarily represent the wheat varieties planted in the Northern Plains of the United States and the Canadian Prairies. MGEX also facilitated trading for other agricultural goods like Soft Red Winter Wheat Index (SRWI), National Corn Index (NCI), and National Soybean Index (NSI). On December 19, 2008, MGEX discontinued open outcry and OTC trading floor operations but transitioned to an electronic trading platform, continuing its daily operations.

The Future Trading Act of 1921 regulated futures trading in grains like corn, wheat, oats, and rye. In response, the US government enacted the Grain Futures Act on September 21, 1922, to oversee commodity futures trading, ensuring transparency and curbing market manipulation. In 1933, COMEX was established as a prominent exchange for metal trading. Over the 1970s, COMEX transformed into a key exchange for trading precious metals like gold, silver, and copper futures, with prices determined by market forces of supply and demand.

Since 1936, the Commodity Exchange Act was amended to include livestock and products like live cattle and pork bellies as regulated commodities. In 1974, the Commodity Futures Trading Commission (CFTC) Act was enacted. Post-1990, Commodity Index Funds were introduced, distinct from pure commodity funds, focusing on raw materials. By 1999, trading in commodity markets transitioned from open outcry to electronic trading. The Chicago Board of Trade and the Chicago Mercantile Exchange launched their FIX-compliant interface in 2001.

In 2002, a supercycle marked a period of exceptionally high demand challenging producers to meet it, leading to an exponential rise in prices lasting for years, even a decade. The surge was driven by increased energy consumption and demand for fertilizer-rich agricultural commodities, such as edible oil, grains, and meats, particularly from China and other emerging economies. From 2001 to 2008, copper, thermal coal, iron ore, and crude oil saw price increases between 350% and 600%, with nickel prices rising sevenfold. Food prices, according to the UN Food and Agricultural Organization, also surged by 50% during this phase.

The sovereign debt crisis in 2008 and early 2009 triggered a sharp downward spiral in prices, affecting the housing market, lending, and global trade. The sub-prime lending crisis caused the housing bubble to burst, leading to a significant decline in various markets. However, from late 2009 to mid-2010, prices started to rise again as demand recovered. The commodities supercycle reached its peak in 2011, driven by robust demand from emerging countries and limited supply growth.

A commodity market is a trading platform primarily focused on agricultural products, distinguishing between hard commodities like gold and oil, which are mined. These markets involve both physical trading and derivatives trading, utilizing spot prices, forwards, futures, and options. Farmers have employed derivatives trading in commodity markets for centuries as a straightforward method for price risk management.

A financial derivative is a financial instrument whose value is derived from an underlying physical commodity. Derivatives can be traded either on exchanges or over-the-counter (OTC). The growing demand for derivatives has led to an increase in trading through clearing houses, some of which offer central counterparty clearing. These clearing houses provide clearing and settlement services both on futures exchanges and off-exchange in the OTC market.

Let’s explore the Indian stock market

Futures trading in India began with the Cotton Trade Association in 1875. Subsequently, derivatives trading expanded to include oilseeds in Bombay around 1900, raw jute and jute goods in Calcutta in 1912, highly liquid wheat trading in Hapur in 1913, and the trading of bullion (precious metals) in Bombay around 1920. In 1952, the Parliament enacted the Forward Contracts (Regulation) Act, regulating commodity contracts nationwide. This legislation prohibited options trading in goods and cash settlement of forward trades. According to the act, only associations/exchanges granted recognition from the government could organize forward trading in regulated commodities.

In the 1970s, derivatives trading, including futures contracts, currency or commodity swaps, gained prominence. Exchange-traded commodities (ETC) emerged in 2003, and forward contracts have become the primary trading instruments in commodity markets. Over the past decade, the volume of commodity contracts traded has more than tripled, with commodities trading on standard electronic platforms also doubling. However, global political issues, economic crises, trade wars, rapid technological changes, and the ongoing pandemic have introduced heightened volatility to commodity markets.

Types of Commodity Products

Futures Are Available On The Following Commodities At Present in India

BULLION: Gold, Goldmini, Goldginea, Goldpetal, Silver, Silvermini, Silvermicro
ENERGY : Crude Oil, Natural Gas
BASE METALS : Aluminium, Copper, Lead, Nickel, Zinc and Steel
INDEX: Mcxbulldex, Mcxenrgdex and Mcxmetldex

AGRO COMMODITIES

FIBRE : Kapas, Cotton
SPICES : Black Pepper, Cardamom, Coriander (Dhaniya), Jeera, Red Chilli and Turmeric (Curcuma longa)
OIL & OIL SEEDS : Castor seeds, Crude Palm Oil, Cotton seed, Castor Oil, Cotton Seed Oil Cake (Cocudakl), Gur, Guargum Seeds, Mentha Oil, Refined Soy Oil, Soy Seeds, Sesam Seeds and Soymeal,
CEREALS, PULSES & OTHERS: Bajra, Barley, Chana, Maize, Paddy (Basmati Rice), Rubber, Sugar and Wheat