Commodity Trading History

Commodities trading has been around for centuries, but the modern markets arose in the late 18th century when farming began to be modernized. Though the pace of trade and many of the detailed mechanisms has changed, the basics are still the same.

Growing wheat, for example, took several months then from planting to harvest to delivery. It still takes several months. A farmer might plant wheat in April and discover in June that the price someone is willing to pay for delivery in August has dipped over the past month.

For example, suppose on May 1st wheat to be delivered September 1st is selling for $4.00 per bushel. By June 1st, it has fallen to $3.80.

The farmer may believe the price will continue to fall. He offers a contract on his wheat to be delivered September 1st for $3.80 per bushel, locking in a price today at the current market level.

In exchange, he accepts a legal obligation to deliver the wheat on or before September 1st.

Fortunately for the farmer and others, some believe the price will in fact not fall but instead will rise by September 1st to $4.20 per bushel.

That kind of prediction is typically based on a very complicated analysis of current conditions, such as the total amount of acreage under plant, soil moisture levels, weather predictions for the coming months, political events and dozens of other variables.

No one knows the future price with certainty, that's why it's called speculation.

Come September 1st the farmer delivers his wheat and is paid $3.80 per bushel. If the price turns out then to be $4.20 per bushel, the speculator makes a healthy profit. If the price is, say $3.50 per bushel, the speculator has lost money.

That's commodities trading in a nutshell.