The history of commodities contracts also dates back to ancient times. The trade networks of the Phoenicians, the Greeks, the Romans, and the Byzantines, included purchases for immediate (spot) and future (forward) receipt of goods. Their markets and their forms first started from agricultural products and precious metals and later from raw materials. This fact follows the history of trade from rural societies to mercantilism, colonial development, and industrialization of economies.
In the US in the early 1800s, agricultural products – mainly cereals – were imported from Midwest Farms in Chicago for storage until their shipment to the east coast.
Because agricultural products are vulnerable, the quality of stored items will usually deteriorate over time. While the products were stored, the purchase prices would change occasionally, thus creating the first contract for a future price. This futures contract allowed a buyer to pay for the goods before receipt. Commodity contracts had evolved in parallel with natural commodity trading to support price risk management. Traders used futures contracts to hedge against adverse price fluctuations while transporting goods from producer to consumer.
The secondary markets of future contract fulfillment existed in Mesopotamia and Japan thousands of years ago when farmers needed to be protected from bad weather situations. They achieved this by setting a future price for their crops. The production of commodities was influenced by endogenous and exogenous factors each often different for the three main market segments (cereals, metals, and energy). The demand for each commodity category and the factors that affect them varies. Often times it changes at different rates and intensities.
There are eight main categories of commodity products:
- Coal
- Grains
- Iron ore
- Bauxite/Alumina
- Fertilizers
- Cement
- Forrest products – Timber
- Steel products
In the modern commodity market, both the offer and demand for each commodity are determined by a variety of factors. Of course, the shipping companies are not unaffected. As they choose to invest in transport ships to import and export any goods, their investment depends on the type of ship, the route that will be active, and the technology that it will carry (geared, fuel, engine) to adapt to the ports they work for.
To sum up the brief historical overview, at that time commodity contracts were a revolutionary addition to the marketplace and it has transformed the whole trading market over the years.
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