A commodity market is a market that trades in primary rather than manufactured

products. Soft

commodities are

as wheat, coffee, cocoa and sugar.

Hard

agricultural
commodities

products
are

mined,

such
such

as gold and oil.Investors access about 50 major commodity markets worldwide with
purely financial transactions increasingly outnumbering physical trades in which goods

are delivered.
Futures contracts are the oldest way of investing in commodities. Futures are secured by
physical assets. Commodity markets can include physical trading and derivatives trading
using spot prices, forwards, futures, and options on futures. Farmers have used a simple
form of derivative trading in the commodity market for centuries for price risk

management.
A financial derivative is a financial instrument whose value is derived from a commodity
termed an underlier.Derivatives are either exchange-traded or over-the-counter (OTC).
An increasing number of derivatives are traded via clearing houses some with Central
Counterparty Clearing, which provide clearing and settlement services on a futures

exchange, as well as off-exchange in the OTC market.

Derivatives such as futures contracts, Swaps (1970s-), Exchange-traded Commodities
(ETC) (2003-), forward contracts have become the primary trading instruments in
commodity markets. Futures are traded on regulated commodities exchanges. Over-thecounter (OTC) contracts are "privately negotiated bilateral contracts entered into between

the contracting parties directly".

Exchange-traded funds (ETFs) began to feature commodities in 2003. Gold ETFs are
based on "electronic gold" that does not entail the ownership of physical bullion, with its

added costs of insurance and storage in repositories such as the London bullion market.
According to the World Gold Council, ETFs allow investors to be exposed to the gold
market without the risk of price volatilityassociated with gold as a physical commodity.

History
Commodity-based money and commodity markets in a crude early form are believed to have
originated in Sumer between 4500 BC and 4000 BC. Sumerians first used claytokens sealed in
a clay vessel, then clay writing tablets to represent the amountfor example, the number of
goats, to be delivered.These promises of time and date of delivery resemble futures contract.
Early civilizations variously used pigs, rare seashells, or other items as commodity money. Since
that time traders have sought ways to simplify and standardize trade contracts.
Gold and silver markets evolved in classical civilizations. At first the precious metals were
valued for their beauty and intrinsic worth and were associated with royalty. In time, they were
used for trading and were exchanged for other goods and commodities, or for payments of labor.
Gold, measured out, then became money. Gold's scarcity, unique density and the way it could be
easily melted, shaped, and measured made it a natural trading asset.
Beginning in the late 10th century, commodity markets grew as a mechanism for allocating
goods, labor, land and capital across Europe. Between the late 11th and the late 13th century,
English urbanization, regional specialization, expanded and improved infrastructure, the
increased use of coinage and the proliferation of markets and fairs were evidence of
commercialization.
The spread of markets is illustrated by the 1466 installation of reliable scales in the villages of
Sloten and Osdorp so villagers no longer had to travel to Haarlem or Amsterdam to weigh their
locally produced cheese and butter.
Indeed, the Amsterdam Stock Exchange, often cited as the first stock exchange, originated as a
market for the exchange of commodities. Early trading on the Amsterdam Stock Exchange often
involved the use of very sophisticated contracts, including short sales, forward contracts,
and options. "Trading took place at the Amsterdam Bourse, an open aired venue, which was
created as a commodity exchange in 1530 and rebuilt in 1608. Commodity exchanges
themselves were a relatively recent invention, existing in only a handful of cities."
In 1864, in the United States, wheat, corn, cattle, and pigs were widely traded using standard
instruments on the Chicago Board of Trade (CBOT), the world's oldest futures and options

exchange. Other food commodities were added to the Commodity Exchange Act and traded
through CBOT in the 1930s and 1940s, expanding the list from grains to include rice, mill
feeds, butter, eggs, Irish potatoes and soybeans.Successful commodity markets require broad
consensus on product variations to make each commodity acceptable for trading, such as the
purity of gold in bullion.
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.
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."
Reputation and clearing became central concerns, and states that could handle them most
effectively developed powerful financial centers.

Commodity price index

In 1934, the US Bureau of Labor Statistics began the computation of a daily Commodity

price index that became available to the public in 1940.

By 1952, the Bureau of Labor Statistics issued a Spot Market Price Index that measured
the price movements of "22 sensitive basic commodities whose markets are presumed to
be among the first to be influenced by changes in economic conditions. As such, it serves
as one early indication of impending changes in business activity.

Commodity index fund

A commodity index fund is a fund whose assets are invested in financial instruments
based on or linked to a commodity index. In just about every case the index is in fact a

Commodity Futures Index.

The first such index was the Commodity Research Bureau (CRB) Index, which began in
1958. Its construction made it un useful as an investment index. The first practically
investable commodity futures index was the Goldman Sachs Commodity Index, created

in 1991,and known as the "GSCI".

The next was the Dow Jones AIG Commodity Index. It differed from the GSCI primarily
in the weights allocated to each commodity. The DJ AIG had mechanisms to periodically
limit the weight of any one commodity and to remove commodities whose weights

became too small.

After AIG's financial problems in 2008 the Index rights were sold to UBS and it is now
known as the DJUBS index. Other commodity indices include the Reuters / CRB index
(which is the old CRB Index as re-structured in 2005) and the Rogers Index.

Cash commodity
Cash commodities or "actuals" refer to the physical goodse.g., wheat, corn, soybeans, crude
oil, gold, silverthat someone is buying/selling/trading as distinguished from derivatives.[3]

Call option
In a call option counterparties enter into a financial contract option where the buyer purchases
the right but not the obligation to buy an agreed quantity of a particular commodity or financial
instrument (the underlying) from the seller of the option at a certain time (the expiration date) for
a certain price (the strike price). The seller (or "writer") is obligated to sell the commodity or
financial instrument should the buyer so decide. The buyer pays a fee (called a premium) for this
right.

Electronic commodities trading

In traditional stock market exchanges such as the New York Stock Exchange (NYSE),
most trading activity took place in the trading pits in face-to-face interactions between

brokers and dealers in open outcry trading.

In 1992 the Financial Information eXchange (FIX) protocol was introduced, allowing

international real-time exchange of information regarding market transactions.

The U.S. Securities and Exchange Commission ordered U.S. stock markets to convert

from the fractional system to a decimal system by April 2001.

Metrification, conversion from the imperial system of measurement to the metrical,

increased throughout the 20th century.

Eventually FIX-compliant interfaces were adopted globally by commodity exchanges

using the FIX Protocol.

In 2001 the Chicago Board of Trade and the Chicago Mercantile Exchange (later merged
into the CME group, the world's largest futures exchange company) launched their FIX-

compliant interface.
By 2011, the alternative trading system (ATS) of electronic trading featured computers
buying and selling without human dealer intermediation. High-frequency trading (HFT)
algorithmic trading, had almost phased out "dinosaur floor-traders".

Contracts in the commodity market

A Spot contract is an agreement where delivery and payment either takes place
immediately, or with a short lag.
Physical trading normally involves a visual inspection and is carried out in
physical markets such as a farmers market.
Derivatives markets on the other hand, require the existence of agreed standards so that
trades can be made without visual inspection.

DERIVATIVES:Derivatives evolved from simple commodity future contracts into a diverse group of financial
instruments that apply to every kind of asset, including mortgages, insurance and many more.
Futures contracts, Swaps (1970s-), Exchange-traded Commodities (ETC) (2003-), forward
contracts, etc. are examples. They can be traded through formal exchanges or through Over-thecounter (OTC). Commodity market derivatives unlike credit default derivatives for example, are
secured by the physical assets or commodities.[2]

Forward contracts
A forward contract is an agreement between two parties to exchange at some fixed future date a
given quantity of a commodity for a price defined when the contract is finalized. The fixed price
is known as the forward price. Such forward contracts began as a way of reducing pricing risk in
food and agricultural product markets, because farmers knew what price they would receive for
their output.Forward contracts for example, were used for rice in seventeenth century Japan.
Futures contract
Future contracts are standardized forward contracts that are transacted through an exchange. In
futures contracts the buyer and the seller stipulate product, grade, quantity and location and
leaving price as the only variable.
Swaps
A Swap is a derivative in which counterparties exchange the cash flows of one party's financial
instrument for those of the other party's financial instrument. They were introduced in the 1970s.

 Exchange-traded commodities (ETCs)

Exchange-traded commodity is a term used for commodity exchange-traded funds (which are
funds) or commodity exchange-traded notes (which are notes). These track the performance of
an underlying commodity index including total return indices based on a single commodity. They
are similar to ETFs and traded and settled exactly like stock funds. ETCs have market
maker support with guaranteed liquidity, enabling investors to easily invest in commodities.
Over-the-counter (OTC) commodities derivatives
Over-the-counter (OTC) commodities derivatives trading originally involved two parties,
without an exchange. Exchange trading offers greater transparency and regulatory protections. In
an OTC trade, the price is not generally made public. OTC are higher risk but may also lead to
higher profits.

Commodities exchange
A commodities exchange is an exchange where various commodities and derivatives are traded.
Most commodity markets across the world trade in agricultural products and other raw materials
and contracts based on them. These contracts can include spot prices, forwards, futures and
options on futures.

Exchange

Country

CME Group

USA

Tokyo Commodity Exchange

Japan

Euronext

France, Belgium, Netherlands, Portugal,

UK

Dalian Commodity Exchange China

Multi Commodity Exchange

India

Intercontinental Exchange

USA, Canada, China, UK

Africa Mercantile Exchange

Kenya, Africa

Uzbek Commodity Exchange

Tashkent, Uzbekistan

Abuja Securities and Commodities Exchange

Africa Mercantile Exchange

Bhatinda Om & Oil Exchange Bathinda

Brazilian Mercantile and Futures Exchange

Chicago Board of Trade

Chicago Mercantile Exchange

Commodity Exchange Bratislava, JSC

Dalian Commodity Exchange

Dubai Mercantile Exchange

Dubai Gold & Commodities Exchange

Euronext.liffe

Ethiopia Commodity Exchange

Hong Kong Mercantile Exchange

Indian Commodity Exchange

Intercontinental Exchange

Iranian Oil Bourse

Kansas City Board of Trade

London Metal Exchange

Minneapolis Grain Exchange

Multi Commodity Exchange

National Commodity and Derivatives Exchange

National Multi-Commodity Exchange of India Ltd

National Food Exchange

National Spot Exchange

New York Mercantile Exchange

New York Board of Trade

Rosario Board of Trade

Tokyo Commodity Exchange

Winnipeg Commodity Exchange

Traded commodity classes

Top traded commodities
Rank Commodity

Value in US$ ('000)

Date

of

information
1

Mineral fuels, oils, distillation products, etc.

$2,183,079,941

2012

Electrical, electronic equipment

$1,833,534,414

2012

Machinery, nuclear reactors, boilers, etc.

$1,763,371,813

2012

Vehicles other than railway, tramway

$1,076,830,856

2012

Plastics and articles thereof

$470,226,676

2012

Optical, photo, technical, medical, etc. apparatus

$465,101,524

2012

Pharmaceutical products

$443,596,577

2012

Iron and steel

$379,113,147

2012

Organic chemicals

$377,462,088

2012

10

Pearls, precious stones, metals, coins, etc.

$348,155,369

2012

Source: International Trade Centre

Energy
Energy commodities include crude oil particularly West Texas Intermediate (WTI) crude oil
and Brent crude oil, natural gas, heating oil, ethanol and purified terephthalic acid.Hedging is a
common practice for these commodities.
Others
Purified terephthalic acid (PTA) is traded through ZCE in units of 5 tons with the trading symbol
of TA. Ethanol is traded at CBOT in units of 29,000 U.S. gal under trading symbols AC (Open
Auction) and ZE (Electronic).

Metals
Precious metals

GOLD
PLATINUM,
PALLADIUM
SILVER

One of the main exchanges for these precious metals is COMEX.

According to the World Gold Council, investments in gold are the primary driver of industry
growth. Gold prices are highly volatile, driven by large flows of speculative money.

Industrial metals
Industrial metals are sold by the metric ton through the London Metal Exchange and New York
Mercantile Exchange.

COPPER
ALUMINIUM
LEAD
TIN
ALUMINIUM ALLOY
NICKEL
COBALT
MOLYBDENUM

In 2007, steel began trading on the London Metal Exchange.

Agriculture
Agricultural commodities include grains, food and fiber as well as livestock and meat, various
regulatory bodies define agricultural products.
In February 2013, Cornell Law School included

Lumber
Soybeans
Oilseeds
Livestock (live cattle and hogs)
Dairy products

Agricultural commodities can include lumber (timber and forests), grains excluding stored grain
(wheat, oats, barley, rye, grain sorghum, cotton, flax, forage, tame hay, native grass), vegetables
(potatoes, tomatoes, sweet corn, dry beans, dry peas, freezing and canning peas), fruit (citrus
such as oranges, apples, grapes) corn, tobacco, rice, peanuts, sugar beets, sugar cane, sunflowers,
raisins, nursery crops, nuts, soybean complex, aquacultural fish farm species such as finfish,
mollusk, crustacean, aquatic invertebrate, amphibian, reptile, or plant life cultivated in aquatic
plant farms.

Diamonds

As of 2012, diamond was not traded as a commodity. Institutional investors were repelled
by campaign against "blood diamonds", the monopoly structure of the diamond market

and the lack of uniform standards for diamond pricing.

In 2012 the SEC reviewed a proposal to create the "first diamond-backed exchangetraded fund" that would trade on-line in units of one-carat diamonds with a storage vault

and delivery point in Antwerp, home of the Antwerp Diamond Bourse.

The exchange fund was backed by a company based inNew York called IndexIQ.

IndexIQ had already introduced 14 exchange-traded funds since 2008.[43][49][notes 4]

According to Citigroup analysts, the annual production of polished diamonds is about
$18 billion.

Other commodity markets

Rubber trades on the Singapore Commodity Exchange in units of 1 kg priced in US

cents.
Palm oil is traded on the Malaysian Ringgit (RM), Bursa Malaysia in units of 1 kg priced

in US cents.
Wool is traded on the AUD in units of 1 kg.
Polypropylene and Linear Low Density Polyethylene (LL) did trade on the London Metal
Exchange in units of 1,000 kg priced in USD but was dropped in 2011.

Regulatory
United States:In the United States, the principal regulator of commodity and futures markets are

Commodity Futures Trading Commission (CFTC)

The National Futures Association

European Union:

Markets in Financial Instruments Directive (MiFID)

Economic and Financial Affairs Council (ECOFIN).
European Securities and Markets Authority (Esma),

India:

The regulatory body is Forward Markets Commission (FMC) which was set up in

1953.
As of September 2015 FMC is merged with the Securities and Exchange Board of
India, SEBI.

Trading systems: Software for managing trading systems has been available for several decades in various
configurations. This includes software as a service. So-called Energy Trading Risk
Management

(ETRM)

includes

software

such

as Triple

Point

Technology, SolArc, OpenLink and Agiboo.

One of the more popular soft commodity solutions is called Just Commodity, based in
Singapore this application caters to a large number of palm oil, edible oil, sugar and
wheat trading businesses.