Commodity Market Characteristics
The strict dictionary definition of a commodity is “any product which is bought or sold.” The word commodity has also come to refer specifically to agricultural products and raw materials important to the global economy. Most of these products are sold by producers to users directly, but many of them are also handled by institutions called commodity exchanges. Commodity exchanges are important in the economies of many nations. They help stabilize prices and ensure a steady flow of goods. They can do this because, besides being commercial institutions where goods are bought and sold, they are clearinghouses of information on market conditions in all parts of the world. Despite these benefits, the exchanges themselves, however, do …show more content…
When it was founded in 1848, it was a grain market dealing only in wheat and corn. Today, the types of commodities handled by exchanges is much greater: live cattle and pigs, coffee, cocoa, cotton, eggs, pork, wood, soybeans, sugar, foreign money, mortgage interest rates, gold, copper, platinum, silver, and more. Altogether, there are about 50 different commodities handled on more than a dozen exchanges in the United States and Europe alone. Trading in …show more content…
Commodity exchanges might more correctly be called “futures contracts exchanges” because that is the business in which they are engaged. Futures contracts are contracts for delivery of a specific quantity and quality of product at a given date. All contracts for a commodity have a specific contract size. For example, wheat contracts are for 5,000 heads of wheat, while pork contracts are for 38,000 pounds. Contracts may be bought for multiples of these amounts, but they cannot be bought for fractions of an amount. For example, a trader can buy wheat contracts for 5,000, 15,000, or 70,000 heads of grain but not for 17,500 or 36,000 heads. All futures contracts mature in a stated month. Traders must therefore specify month as well as commodity in their contracts: March wheat, December corn, or May wood. The reasons for selecting certain months over all others vary from one exchange to another and from commodity to
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