From Wikipedia, the free encyclopedia.
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.
See List of traded
commodities for some commodities and their trading units and places
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
another.
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
"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 any military 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.
Weather trading
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 Niño?"
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 genetic resources.
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.
See:currency
markets, stock markets, bond
markets, reinsurance
markets, commodity money, commodity
contract, futures, hedging
See also
External links
