Bottom Content goes here.
Wikipedia content requires these links.....
Wikipedia content is licensed under the GNU Free Documentation License.
Commodity markets define and trade contracts for delivery of any product or
service that can be characterized in an interchangeable way. They are
complex, and include a wide array of instruments to manage risk.
This article focuses on the history and current debates regarding global
commodity markets, and is not specific to the markets of any country in
particular. It discusses also concerns arising in political economy
regarding commodity markets, notably their safety, fairness, and ability to
guarantee clearance and closure. It covers physical product (food, metals,
electrons) markets but not the ways that services, including those of
governments, nor investment, nor debt, can be seen as a commodity. Articles
on reinsurance markets, stock markets, bond markets and currency markets
cover those concerns separately and in more depth. One focus of this article
is the relationship between simple commodity money and the more complex
instruments offered in the commodity markets.
What's in a contract
The modern commodity markets have their roots in the trading of agricultural
products. While wheat and corn, cattle and pigs, were widely traded using
standard instruments in the 19th century in the United States, other basic
foodstuffs as soybeans were only added quite recently in most markets. For a
commodity market to be established, there must be very broad consensus on
the variations in the product that make it acceptable for one purpose or
U.S. Soybean Futures, for example, are of standard grade if they are "GMO or
a mixture of GMO and Non-GMO No. 2 yellow soybeans of Indiana, Ohio and
Michigan origin produced in the U.S.A. (Non-screened, stored in silo)," and
of deliverable grade if they are "GMO or a mixture of GMO and Non-GMO No. 2
yellow soybeans of Iowa, Illinois and Wisconsin origin produced in the
U.S.A. (Non-screened, stored in silo)." Note the distinction between states,
and the need to clearly mention their status as "GMO" ("Genetically Modified
Organism") which makes them unacceptable to most "organic" food buyers.
Similar specifications apply for orange juice, cocoa, sugar, wheat, corn,
barley, "pork bellies" (pigs), milk, feedstuffs, fruits, vegetables, other
grains, other beans, hay, other livestock, meats, poultry, eggs, or any
other commodity which is so traded.
In addition, delivery day, method of settlement and delivery point must all
be specified. Typically, trading must end 2 (or more) business days prior to
the delivery day, so that the routing of the shipment (which for soybeans is
30,000 kilograms) can be finalized via ship or rail, and payment can be
settled when the contract arrives at any delivery point.
The economic impact of the development of commodity markets is hard to
over-estimate. 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." - Jerry Hodges
"Hedging", a common (and sometimes mandatory) practice of farming
cooperatives, insures against a poor harvest by purchasing futures in the
same commodity. If the cooperative has significantly less of its product to
sell due to weather or insects, it makes up for that loss with a profit on
the markets, since the overall supply of the crop is short everywhere that
suffered the same conditions.
Whole developing nations may be especially vulnerable, and even their
currency tends to be tied to the price of those particular commodity items
until it manages to be a fully developed nation. For example, one could see
the nominally fiat money of Cuba as being tied to sugar prices, since a lack
of hard currency paying for sugar means less foreign goods per peso in Cuba
itself. In effect, Cuba needs a hedge against a drop in sugar prices, if it
wishes to maintain a stable quality of life for its citizens.
Early history of commodity markets
Historically, dating from ancient Sumerian use of sheep or goats, or other
peoples using pigs, rare seashells, or other items as commodity money,
people have sought ways to standardize and trade contracts in the delivery
of such items, to render trade itself more smooth and predictable.
Commodity money and commodity markets in a crude early form are believed to
have originated in Sumeria where small baked clay tokens in the shape of
sheep or goats were used in trade. Sealed in clay vessels with a certain
number of such tokens, with that number written on the outside, they
represented a promise to deliver that number. This made them a form of
commodity money - more than an "I.O.U." but less than a guarantee by a
nation-state or bank. However, they were also known to contain promises of
time and date of delivery - this made them like a modern commodity contract.
Regardless of the details, it was only possible to verify the number of
tokens inside by shaking the vessel or breaking it. At which point, the
number or terms written on the outside originally became subject to doubt.
Eventually the tokens disappeared, but the contracts remained on flat
tablets. This represented the first system of commodity accounting.
Delivery and condition guarantees
However, the commodity status of living things is always subject to doubt -
it was hard to validate the health or existence of sheep or goats. Excuses
for non-delivery were not unknown, and there are recovered Sumerian letters
that complain of sickly goats, sheep that had already been fleeced, and etc..
Such concerns persist to the present day - the concept of an interchangeable
deliverable or guaranteed delivery is always to some degree a fiction. Trade
in commodities is like trade in any other physical product or service. No
magic of the commodity contract itself makes "units" of the product totally
uniform nor gets it to the delivery point safely and on time.
To keep commodity markets operating, some potential is always required - to
requlate at least enough to ensure that delivery happens and non-delivery is
noted as part of the seller's reputation.
Reputation and clearing
If a seller's reputation was good, individual "backers" or "bankers" could
decide to take the risk of "clearing" a trade. The observation that trust is
always required between market participants later led to credit money. But
until relatively modern times, communication and credit were primitive.
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. Considering the many hazards of climate, piracy, theft and
abuse of military fiat by rulers of kingdoms along the trade routes, it was
a major focus of these civilizations to keep markets open and trading in
these scarce commodities. Reputation and clearing became central concerns,
and the states which could handle them most effectively became very powerful
empires, trusted by many peoples to manage and mediate trade and commerce.
Commodity and empire
Europe did not establish a central banking system until the Knights Templar
in the 13th century. A series of commodity markets prevailed in medieval
Europe throughout that time, as wheat and cheese and iron and wood were
traded in more local markets. The gold standard acquired its pre-eminence to
back trade, as it did not depend on the constantly-shifting medieval feudal alliances.
Modern commodity markets
Despite the shift to fiat money, and credit money, direct commodity trade
and barter has always remained active in the background in some form or
another, and seems to have been revived due to global capitalism, wherein
nearly every currency is widely traded as a commodity.
Traditionally, "money-changing" or "banking" was one of the prime functions
of commodity markets. The key difference between the ancient and modern
commodity markets appears to be degree to which banking and clearing has
been separated and regulated by consent of many governments which have
surrendered some national sovereignty to enable the Bank for International
Settlements, for instance, to back currencies in global trade, establish
common risk and reserve standards, and, in the words of its chairman Andrew
Crockett, "hardwire the credit culture". With credit concerns minimized or
at least standardized, the commodity markets can then trade equity in
enterprises as a "stock market", national currencies in a "money market",
and everything else in a "commodity market" of its own.
Oil and fiat
Building on the infrastructure and credit and settlement networks
established for food and precious metals, many such markets have
proliferated drastically in the late 20th century. Oil was the first form of
energy so widely traded, and the fluctuations in the oil markets are of
particular political interest.
In part this is because transport, agricultural equipment, and protections
of supplies by states' military fiat remain critical to trade, and all of
this tends to run on oil. At times this leads to some rather ghoulish forms
of trade, which demonstrate the interdependence of oil and military matters:
Some commodity market speculation is directly related to the stability of
certain states, e.g. during the Gulf War, speculation on the survival of the
regime of Saddam Hussein in Iraq. Similar political stability concerns have
from time to time driven the price of oil. Some argue that this is not so
much a commodity market but more of an assassination market speculating on
the survival (or not) of Saddam or other leaders whose personal decisions
may cause oil supply to fluctuate by military action.
The oil market is, however, an exception. Most markets are not so tied to
the politics of volatile regions - even natural gas tends to be more stable,
as it is not traded across oceans by tanker.
Starting a commodity market
Cotton, kilowatts of electricity, board feet of wood, long distance minutes,
royalty payments due on artists' works, and other products and services have
been traded on markets of varying scale, with varying degrees of success.
One issue that presents major difficulty for creators of such instruments is
the liability accruing to the purchaser:
Unless the product or service can be guaranteed or insured to be free of
liability based on where it came from and how it got to market, e.g.
kilowatts must come to market free from legitimate claims for smog death
from coal burning plants, wood must be free from claims that it comes from
protected forests, royalty payments must be free of claims of plagiarism or
piracy, it becomes impossible for sellers to guarantee a uniform delivery.
Generally, governments must provide a common regulatory or insurance
standard and some release of liability, or at least a backing of the
insurers, before a commodity market can begin trading. This is a major
source of controversy in for instance the energy market, where desirability
of different kinds of power generation varies drastically. In some markets,
e.g. Toronto, Canada, surveys established that customers would pay 10-15%
more for energy that was not from coal or nuclear, but strictly from
renewable sources such as wind.
Proliferation of contracts, terms, and derivatives
However, if there are two or more standards of risk or quality, as there
seem to be for electricity or soybeans, it is relatively easy to establish
two different contracts to trade in the more and less desirable deliverable
separately. If the consumer acceptance and liability problems can be solved,
the product can be made interchangeable, and trading in such units can begin.
Since the detailed concerns of industrial and consumer markets vary widely,
so do the contracts, and "grades" tend to vary significantly from country to
country. A proliferation of contract units, terms, and futures have evolved,
combined into an extremely sophisticated range of financial instruments.
These are more than one-to-one representations of units of a given type of
commodity, and represent more than simple "futures", future deliveries.
These serve a variety of purposes from simple gambling to price insurance:
Commodity markets and protectionism
Concerns like this have driven developing nations (democratic or not) to
harden their currencies, accept IMF rules, join the WTO, and submit to a
broad regime of reforms that amount to a "hedge" against being isolated.
China's entry into the WTO signalled the end of truly isolated nations
entirely managing their own currency and affairs. The need for stable
currency and predictable clearing and rules-based handling of trade
disputes, has led to a global trade hegemony - many nations "hedging" on a
global scale against each other's anticipated "protectionism", were they to
fail to join the WTO.
There are signs, however, that this regime is far from perfect. U.S. trade
sanctions against Canadian software lumber (within NAFTA) and foreign steel
(except for NAFTA partners Canada and Mexico) in 2002 signalled a shift in
policy towards a tougher regime perhaps more driven by political concerns -
jobs, industrial policy, even sustainable forestry and logging practices.
Nature's commodity outputs
Commodity thinking is undergoing a more direct revival thanks to the
theorists of "natural capital" whose products, some economists argue, are
the only genuine commodities - air, water, and calories we consume being
mostly interchangeable when they are free of pollution or disease. Whether
we wish to think of these things as tradeable commodities rather than
birthrights has been a major source of controversy in many nations.
Most types of environmental economics consider the shift to measuring them
inevitable, arguing that reframing political economy to consider the flow of
these basic commodities first and foremost, helps avoids use of anymilitary
fiat except to protect "natural capital" itself, and basing
credit-worthiness more strictly on commitment to preserving biodiversity
aligns the long-term interests of ecoregions, societies, and individuals.
They seek relatively conservative sustainable development schemes that would
be amenable to measuring well-being over long periods of time, typically
"seven generations", in line with Native American thought.
However, this is not the only way in which commodity thinking interacts with
ecologists' thinking. Hedging began as a way to escape the consequences of
damage done by natural conditions. It has matured not only into a system of
interlocking guarantees, but also into a system of indirectly trading on the
actual damage done by weather, using "weather derivatives". For a price,
this relieves the purchaser of the following types of concerns:
"Will a freeze hurt the Brazilian coffee crop? Will there be a drought in
the U.S. Corn Belt? What are the chances that we will have a cold winter,
driving natural gas prices higher and creating havoc in Florida orange
areas? What is the status of El Ni–o?"
Other forms of negative commodities
Weather trading is just one example of "negative commodities", units of
which represent harm rather than good.
"Economy is three fifths of ecology" argues Mike Nickerson, one of many
economic theorists who holds that nature's productive services and waste
disposal services are poorly accounted for. One way to fairly allocate the
waste disposal capacity of nature is "cap and trade" market structure that
is used to trade toxic emissions rights in the United States, e.g. SO2. This
is in effect a "negative commodity", a right to throw something away.
In this market, the atmosphere's capacity to absorb certain amounts of
pollutants is measured, divided into units, and traded amongst various
market players. Those who emit more SO2 must pay those who emit less.
Critics of such schemes argue that unauthorized or unregulated emissions
still happen, and that "grandfathering" schemes often permit major
polluters, such as the state governments' own agencies, or poorer countries,
to expand emissions and take jobs, while the SO2 output still floats over
the border and causes death.
In practice, political pressure has overcome most such concerns - but it
remains to be seen whether this is a capacity that depends on U.S. clout.
The Kyoto Protocol, which attempted to establish the rudiments of a similar
market in global greenhouse gas emissions, failed without U.S. support.
Community as commodity?
This highlights one of the major issues with global commodity markets of
either the positive or negative kind. A community must somehow believe that
the commodity instrument is real, enforceable, and well worth paying for.
A very substantial part of the anti-globalization movement opposes the
commodification of currency, national sovereignty, and traditional cultures.
The capacity to repay debt, as in the current global credit money regime
anchored by the Bank for International Settlements, does not in their view
correspond to measurable benefits to human well-being worldwide. They seek a
fairer way for societies to compete in the global markets that will not
require conversion of natural capital to natural resources, nor human
capital to move to developed nations in order to find work.
The United Nations, seeking to respond to such concerns, suggested three
schemes to overcome these inequities: UNILETS was a simple extension of LETS
community money, that would let a community interact with the hard currency
of its nation and other nations more as a whole, with less ability for
global currency fluctuations to affect local trade and power relations
'within' communities, while clearing via UNILETS would provide a more
vigorous competition 'between' communities with different LETS schemes.
In effect, this would drive currency markets down into the local level, and
permit communities, even villages, to build up substantial local advantages,
protecting uniquely well positioned enterprises, in a microcosm of the way
that the developed nations protected key industries (autos, steel) as they rose.
A working hour, a breath of air?
The other two schemes were more conventional commodity approaches:
time-based money, a means of commodifying human labor time on a local level,
and the Global Resource Bank, a proposal to manage global resources "outside
national jurisdiction" for global benefit. This would include air, water and
Other, newer, schemes under consideration by green economists would replace
the "gold standard" with a "biodiversity standard". It remains to be seen if
such schemes have any merit other than as political ways to draw attention
to the way capitalism itself interacts with life.
Is human life a commodity?
While classical, neoclassical, and Marxist approaches to economics tend to
treat labor differently, they are united in treating nature as a resource.
The green economists and the more conservative environmental economics argue
that not only natural ecologies, but also the life of the individual human
being is treated as a commodity by the global markets. A good example is the
IPCC calculations cited by the Global Commons Institute as placing a value
on a human life in the developed world "15x higher" than in the developing
world, based solely on the ability to pay to prevent climate change.
Is free time a commodity?
Accepting this result, some argue that to put a price on both is the most
reasonable way to proceed to optimize and increase that value relative to
other goods or services. This has led to efforts in measuring well-being, to
assign a commercial "value of life", and to the theory of Natural Capitalism
- fusions of green and neoclassical approaches - which focus predictably on
energy and material efficiency, i.e. using far less of any given commodity
input to achieve the same service outputs as a result.
Indian economist Amartya Sen, applying this thinking to human freedom
itself, argued in his 1999 book "Development as Freedom" that human free
time was the only real service, and that sustainable development was best
defined as freeing human time. Sen won The Bank of Sweden Prize in Economic
Sciences in Memory of Alfred Nobel in 1999 (sometimes controversially called
the "Nobel Prize in Economics") and based his book on invited lectures he
gave at the World Bank.