A Brief History of Commodities

Before the North American futures market originated some 150 years ago, farmers would grow their crops and then bring them to market in the hope of selling their commodity of inventory. But without any indication of demand, supply often exceeded what was needed, and unpurchased crops were left to rot in the streets. Conversely, when a given commodity such as Soybeans were out of season, the goods made from it became very expensive because the crop was no longer available, lack of supply.

In the mid-19th century, grain markets were established and a central marketplace was created for farmers to bring their commodities and sell them either for immediate delivery (spot trading) or for forward delivery. The latter contracts, forwards contracts, were the fore-runners to today's futures contracts. In fact, this concept saved many farmers from the loss of crops and helped stabilize supply and prices in the off-season.

Today's commodity market is a global marketplace not only for agricultural products, but also currencies and financial instruments such as Treasury bonds and securities securities futures. It's a diverse marketplace of farmers, exporters, importers, manufacturers and speculators. Modern technology has transformed commodities into a global marketplace where a Kansas farmer can match a bid from a buyer in Europe.

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