Commodity markets: History
There is evidence that agricultural commodity markets, with possible futures contracts, existed in the ancient Middle East. However, during much of the more recent history of Europe, agricultural and mineral commodities were sold as they were produced. This was generally at the site of production or where the commodities were needed. It was only with the urbanization of the population and the ability of farmers to produce large crop surpluses that regional centers of trade became the focus of commodity economic activity.
In the United States, during the nineteenth century, midwestern agricultural production increased to such an extent that regional trading centers in cities such as Chicago and Kansas City were needed. On the East Coast, large amounts of agricultural and mineral commodities were needed in the New York City area, so that commodity exchanges developed there as well. Although the majority of transactions in the nineteenth century involved commodities already produced, forward contracts started becoming more common. These guaranteed the delivery of a set amount of the commodity to a specific person on a specific date.
Over time, this type of contract tended to disappear at the large exchanges. It was replaced by a futures contract, which differs from a forward contract in that the commodity goes to a generic delivery point. Grain, pork, and cotton were the earliest commodities to have large numbers of futures contracts written. Other agricultural items were added for futures trading, as benefits became apparent. As the United States became more industrialized, trading in natural resources such as oil, copper, and gold became important in the twentieth century. In the first decade of the twenty-first century, trading in energy commodities, such as oil, has grown appreciably. As with many financial areas, markets in the United States handle a larger percentage of commodity trades than any other country in the world.
During the late nineteenth and early twentieth centuries, certain exchanges came to dominate trade in specific commodities, so that smaller exchanges began to disappear. For example, the reliability of the Chicago Board of Trade for the purchase of high-quality grain allowed it to become the principal market for this commodity. By the end of the 1920’s, three-fourths of all futures contracts were for grain. While the amount of grain traded on the exchanges has not decreased, the number of other futures contracts has increased to such an extent that the relative value of the grain contracts has decreased substantially. Estimates of the percentages for goods trading on global commodity exchanges in the twenty-first century (as measured in dollars) gives the breakdown as: energy, 75 percent; industrial metals, 7 percent; precious metals, 2 percent; agriculture, 13 percent; and livestock, 3 percent.
Various commodities were tried at some exchanges, but not always with success. Thus, the Chicago Mercantile Exchange, which was originally the Butter and Egg Exchange, added several other farm commodities. Some commodities experienced small demand, while others were in demand but primarily on other exchanges, and still others met stiff resistance. The latter category included onions, which were traded until onion producers forced the end to futures contracts on their crops. At one point after World War II, the Chicago Mercantile Exchange had shrunk so much it was principally an egg exchange, with dim prospects for the future. During the mid-1960’s, new members sought out new trading opportunities, which allowed the exchange to survive.