Markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are traded in standardized Contracts. Commodities may include physical products like agricultural products (like soybeans, wheat, corn, cattle, pigs etc), precious and other metals, electricity and other energy related commodities etc 

The modern commodity markets have their roots in the trading of agricultural products, which started in the US in the 19 th century. Through the 19th century the exchanges became innovators of improvements in transportation, warehousing, and financing, which paved the way to expanded national and international trade.

Commodity money and commodity markets in an early form have originated in Sumer where small baked clay tokens in the shape of sheep or goats were used in trade. Coins sealed in clay represented a promise to deliver a fixed number of animals or crops. This made them a commodity money, which was more than an "I.O.U." but less than a guarantee by a nation-state or bank. These coins contained also promises of time and date of delivery, which made them similar to modern futures contracts.

Classical civilizations built complex global markets trading gold or silver for spices, cloth, wood and weapons, most of which had standards of quality and timeliness. Considering the many hazards of climate, piracy, theft and abuse of military fiat by rulers of kingdoms along the trade routes, it was a major focus of these civilizations to keep markets open and trading in these scarce commodities. Reputation and clearing became central concerns, and the states which could handle them most effectively became very powerful empires.

Commodity and Futures contracts are based on what’s termed "Forward" Contracts. Early on these "forward" contracts (compare derivatives) were used as a way of getting products from producer to consumer. These typically were only for food and agricultural Products.

Forward contracts have been standardized into futures contracts. Although more complex today, early “Forward” contracts for example, were used for rice in seventeenth century Japan. Modern "forward", or futures agreements, began in Chicago in the 1840s, with the appearance of the railroads, Chicago being centrally located emerged as the hub between Midwestern farmers and producers and the east coast consumer population centers.

Hedging

a common practice of farming cooperatives, insures against a poor harvest by purchasing futures in the same commodity. If the cooperative has significantly less of its product to sell due to weather or insects, it makes up for that loss with a profit on the markets, since the overall supply of the crop is short everywhere that suffered the same conditions. (compare hedging)

Standardization

U.S. soybean futures, for example, are of standard grade if they are "GMO or a mixture of GMO and Non-GMO No. 2 yellow soybeans of Indiana, Ohio and Michigan origin produced in the U.S.A, and of deliverable grade.

Similar specifications apply for orange juice, cocoa, sugar, wheat, corn, barley, pork bellies, milk, feedstuffs, fruits, vegetables, other grains, other beans, hay, other livestock, meats, poultry, eggs, or any other commodity which is so traded.

The concept of an interchangeable deliverable or guaranteed delivery is always to some degree a fiction. Trade in commodities is like trade in any other physical product or service. No magic of the commodity contract itself makes "units" of the product totally uniform nor gets it to the delivery point safely and on time.

Regulation of commodity markets

Generally, governments must provide a common regulatory or insurance standard and some release of liability, or at least a backing of the insurers, before a commodity market can begin trading. This is a major source of controversy in for instance the energy market, where desirability of different kinds of power generation varies drastically. In some markets, e.g. Toronto, Canada, surveys established that customers would pay 10-15% more for energy that was not from coal or nuclear, but strictly from renewable sources such as wind.

However, if there are two or more standards of risk or quality, as there seem to be for electricity or soybeans, it is relatively easy to establish two different contracts to trade in the more and less desirable deliverable separately. If the consumer acceptance and liability problems can be solved, the product can be made interchangeable, and trading in such units can begin.

Since the detailed concerns of industrial and consumer markets vary widely, so do the contracts, and "grades" tend to vary significantly from country to country. A proliferation of contract units, terms, and futures contracts have evolved, combined into an extremely sophisticated range of financial instruments.

Commodity markets

Building on the infrastructure and credit and settlement networks established for food and precious metals, many such markets have proliferated drastically in the late 20th century. Oil was the first form of energy so widely traded, and the fluctuations in the oil markets are of particular political interest.

In part this is because transport, agricultural equipment, and protections of supplies remain critical to trade, and all of this tends to run on oil.

Some commodity market speculation is directly related to the stability of certain states, e.g. during the Gulf War, speculation on the survival of the regime of Saddam Hussein in Iraq. Similar political stability concerns have from time to time driven the price of oil..

Developing countries have been moved to harden their currencies, accept IMF rules, join the WTO and submit to a broad regime of reforms that amount to a "hedge" against being isolated. China's entry into the WTO signalled the end of truly isolated nations entirely managing their own currency and affairs. The need for stable currency and predictable clearing and rules-based handling of trade disputes, has led to a global trade hegemony.

There are signs, however, that this regime is far from perfect. U.S. trade sanctions against Canadian softwood lumber and foreign steel in 2002 signalled a shift in policy towards a tougher regime perhaps more driven by political concerns - jobs, industrial policy, even sustainable forestry and logging practices.

Non-conventional commodities

Commodity thinking is undergoing a more direct revival thanks to the theorists of “natural capital” whose products are the only genuine commodities air, water, and calories we consume being mostly interchangeable when they are free of pollution or disease. Whether we wish to think of these things as tradeable commodities rather than birthrights has been a major source of controversy in many nations.

Weather trading

However, this is not the only way in which commodity thinking interacts with ecologists' thinking. Hedging began as a way to escape the consequences of damage done by natural conditions. It has matured not only into a system of interlocking guarantees, but also into a system of indirectly trading on the actual damage done by weather, using "weather derivatives". For a price, this relieves the purchaser of the following types of concerns:

"Will a freeze hurt the Brazilian coffee crop? Will there be a drought in the U.S. corn belt? What are the chances that we will have a cold winter, driving natural gas prices higher and creating havoc in Florida orange areas? etc.

Emissions trading

Weather trading is only one example of "negative commodities" According to some experts economy is three fifths of ecology. who hold that nature's productive services and waste disposal services are poorly accounted for. One way to fairly allocate the waste disposal capacity of nature is "cap and trade" market structure that is used to trade toxic emissions rights in the US. This is in effect a "negative commodity", a right to throw something away.

Critics of such schemes argue that unauthorized or unregulated emissions still happen, and that these kind of commodities tradings often permit major polluters, to expand emissions.

In practice, political pressure has overcome most such concerns

Other schemes

There are other schemes also like time based money, a means of commodifying human labor time on a local level, and the Global Resource Bank, a proposal to manage global resources outside national jurisdiction for global benefit. This would include air, water and genetic resources.

Newer, schemes under consideration by green economists would replace the "gold standard" with a "biodiversity standard". It remains to be seen if such schemes have any merit other than as political ways to draw attention to the way capitalism itself interacts with life.

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