The first futures trading exchange was the Dojima Rice Exchange, established in Japan in 1730 to trade rice futures. Western commodity futures markets began trading in England in the 16th century, but the country’s first official commodity exchange, the London Metals and Market Exchange, was not established until 1877.
Commodity markets were created to reduce the risks borne by both producers and wholesalers. Farmers received a price guarantee upfront and the money to carry them through to harvest. Wholesalers were assured of an adequate supply of the product they needed at a set price when they needed it. Both parties took a certain risk that if they had waited they could have gotten a better deal.
That original purpose hasn’t entirely disappeared, but today’s futures trading is an asset class in itself, and most buyers have no intention of accepting delivery of a ton of wheat or a herd of cows.
Investopedia / Ellen Lindner
Futures trading in USA
The United States received its earliest official commodity exchange in the West in 1848. The Chicago Board of Trade (CBOT) was formed as a railroad, and the telegraph service provided fast connections from Chicago’s agricultural marketplace to New York and other cities in the eastern United States
The first futures contracts traded in the US were corn. Wheat and soybean markets followed. These three core commodities continue to account for the bulk of trading on the CBOT.
The next major market for futures trading was the cotton market. Cotton futures contracts were traded in New York in the 1850s, eventually leading to the formation of the New York Cotton Exchange (NYCE) in 1870.
Futures contracts for other products that have evolved over time, including cocoa, orange juice and sugar. The growth in US beef production led to the creation of beef and pork futures markets.
Modern futures markets
In the 1970s, futures trading markets experienced a major expansion.
The Chicago Mercantile Exchange (CME) began trading foreign currency futures contracts. The Chicago Board of Trade (CBOT) traded T-Bonds. The New York Mercantile Exchange (NYMEX) began trading various financial futures contracts, including crude oil and natural gas. The Commodities Exchange (COMEX) enabled futures trading in gold, silver and copper, and later added platinum and palladium when gold was no longer pegged to the US dollar.
The rapid expansion of financial futures trading led to the creation of futures contracts on the Dow Jones and S&P 500 stock indices.
Although there are now futures trading exchanges around the world, the US exchanges remain the most traded, in large part because two of the most heavily traded markets are the US bond market and the wheat market.
When did futures markets start in the US?
Futures markets were established in the USA in the 19th century. The railroad and telegraph system enabled the creation of central hubs for agricultural trade in the Midwest, where much of the country’s food supply was grown, and in the eastern states, where the financial and business centers were located.
The result was a more efficient way to buy and sell groceries in wholesale quantities for retail delivery to consumers.
What commodities are bought and sold in the futures markets?
In the US, the big three are and have been corn, wheat and soybeans.
But the futures markets proved adaptable for many types of products, from precious metals to oil to timber.
Financial futures are a later addition. These include, but are not limited to, stock futures, currency futures and interest rate futures.
In other countries, the most important raw materials are natural outgrowths of their economic strength. In Australia it is wool. In Malaysia it is palm oil.
What are commodities?
Commodities can be defined as raw materials needed to manufacture finished goods. By definition, a commodity is fungible. That is, there is no way of distinguishing a product from one manufacturer from the same product offered by another manufacturer. An ounce of gold is an ounce of gold.
The final result
Futures markets have evolved as a way for farmers and wholesalers to strike a deal that benefits both, despite the volatile and uncertain nature of farming. They started out as wholesale markets, but over time they evolved into vehicles for investors.
Today’s futures markets are global and fully electronic. Of course, wholesalers still buy futures contracts, but many of today’s futures buyers have no intention of owning the commodities they want to buy.
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