What are Commodity Exchanges

Various commodities and derivatives products are traded within a commodities exchange.  These market investments trade in raw materials such as cotton, coffee, oil metals, and agricultural products and contracts.  The contracts include futures, futures on options, forwards, and spot prices.  Commodities exchanges tend to be incorporated non-profit associations, and they determine and enforce rules and procedures for the trading of commodities and related investments, which also includes commodity futures.  Commodities exchanges generally trade future contacts on commodities.

For example, a farmer raising wheat will sell a future contract on the wheat that has yet to be harvested.  The farmer will guarantee that the wheat will be sold for a fixed price so that a bread company can buy the contract even before the harvest, thus protecting the farmer and buyer should the market value of the wheat change.

Commodities Market Explosion
Commodity markets are where raw or primary products are exchanged. These commodities are traded on the aforementioned commodity exchanges, where they are bought and sold in standardized contracts. The commodities markets have had an upturn in trading investments in the 2000s.  From 2002-2007, the value of global physical exports of commodities rose 17%; during that same time, the value of commodity derivate trading on exchanges rose 200%.  Over-the-counter trading, which is where two parties directly trade stocks, bonds, derivatives, or commodities, derivatives has increased more than 500% in that time period as well.  The over-the-counter commodities’ derivatives markets, trading mostly in gold and silver, increased 27% during the 2002-2007 period, as precious metals fell to only 8% of such commodities derivatives trading.

Commodity markets are clearly being explored presently as they give the investors a potential large payout despite the risk.  In 2007, global derivative and physical trading of commodities on exchanges shot up to 1,684 million contracts, an increase of over 33% from 2002.  Industrial metals increased 30%, energy at 29%, and agricultural at 30% during the period, while precious metals only grew 3%.

To some degree, this explosion in commodities trading correlates with the economies and open markets of China and India.  As these countries have become significant consumers and producers, the commodities market has seen a major increase.  Other countries such as Vietnam and Israel are growing into economic successes, which in turn have led to this explosion in agricultural commodities due to large exports from those nations.  Many argue that the 2008 global boom in commodity prices – for everything from coal to corn – came from a combination of demand by China and India and unrestrained speculation in forward markets.

Because this commodities bubble popped in the latter months of 2008, many anticipate that farmers will face large drops in crop prices; steel commodities have also tumbled due to the lower demand.  This reversal in commodities’ fortunes accelerated in 2009 as oil prices and soybeans, once safe investment for commodities traded, have experienced erratic performance.  Sugar, however, has been a strong gainer, in part due to a somewhat more limited supply than other commodities.