Evolution Of The Commodity Trading Market

The primary reason why commodity trading market has evolved is because there was

a desperate need to make sure that there was a continuous supply of agricultural crop that was seasonal. Japanese merchants were known to store their warehouses with rice in particular so that they could use it in future. So that they could have a raised cash warehouse holder for the rice that was stored! The rice was also known as the rice ticket that later turned to be a general commercial currency that also helped in the standardization of the commodity trading in rice.

19th century Chicago was where the commodity trading concept came about and Chicago itself eventually turned to be a huge hub for the telegraph and the rice road. After noticing the benefits of commodity trading farmers and dealers too began getting into a commodity trading contract. The farmers and traders would enter into contracts that would help the farmer sell a particular produce (rice) at a future date at a price that was already agreed upon. As a result this kind of contract between farmers and dealers etc rose to popularity, and every farmer and dealer got into this kind of arrangement. However it grew so popular that the produce changed hands through contracts even before that particular produce was delivered. However this was a great risk, especially if the produce was not as expected or anticipated. The farmers found a way though this as well, and in case of adversity they would make arrangements that the produce was delivered though another farmer, however there would be slight modification to the contract. Over a period of time the contract was modified into a kind of instrument that would protect parties who faced adverse factors like damage to crops, unfavorable climate condition, and unexpected rise in price. This called for traders to enter into the future commodity trading markets who had no intention of buying or selling wheat or any other produce. They however formed a body that would help regulate rules and keep a strict supervision over the contracts.

After this the CBOT also known as the Chicago Board of Trade was established in 1848. Chicago was chosen since it was considered to be a common place where sellers and buyers could meet, negotiate and then move forward with the contacts. Later on similar regulatory bodies for other products like the USA Chicago board or trade and Chicago merchant exchange, Sugar and Cocoa exchange worldwide, The New York commodity trading exchange and New York Coffee etc were established.

by: Steve Nugent

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