The need of commodities in trading

Commodity markets are markets where raw or unfinished products are exchanged. These raw commodities are dealt on regulated commodities exchanges in which they are purchased and sold as per the standardized contracts.

This article emphasizes on the past and current arguments regarding global commodity markets. It covers physical products such as food, metals, electricity but not particularly about those services, including the stock markets, bond markets and currency markets that need to be addressed separately as issues in more depth.

The focus of this article is more on the relationship between money involved with simple commodities and the more complex instruments that are offered in the commodity markets.

The modern commodity markets have their traditional roots in the trading of agricultural products. Wheat, corn, cattle and pigs were widely used as standard trading instruments in the 19^th century in the USA. Other basic food materials such as soybeans were added only recently in most markets.

For a commodity market to be established there must be a broad consensus on the variety in the product that make it acceptable for different purposes.

The economic impact in the development of the commodity markets is hard to overestimate. Throughout the 19^th century, the exchanges became effective spokesmen for and innovators of improvements in the transport system, warehousing and financing which paved the way to expand the international trade.

Since the ancient Sumerian use of sheep or goats, people used pigs, rare seashells or other various items as commodity money, people have found different ways to standardize and then trade contracts in deliveries of such items to render trade to make it smooth and predictable.

Commodity money and the commodity markets in a crude early from are  believed  to have been originated in Sumer where small baked clay  tokens in shapes of sheep, goats, were used in different forms of trade.

Sealed in various clay vessels a number was written outside that represented a promise to deliver that particular number. This made them a form of commodity money.  – More than a I.O.U but less than a guarantee of the total number that was outside but  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 futures contract. Regardless of the details, it was only possible to verify the number of tokens inside by shaking the vessel or by breaking it, at which point the number or terms written on the outside became subject to doubt.