Global Commodity Markets

Global Commodity Markets

Globally, there are futures trading exchanges in over twenty countries that include France, Singapore, Japan, Canada, England, India, Australia and New Zealand. The largest commodity exchange in USA is Chicago Board of Trade, The Chicago Mercantile Exchange, the New York Commodity Exchange, the New York Mercantile Exchange, and New York Coffee, and Sugar and Cocoa Exchange.

The main commodity exchanges in the world cover:

• New York Mercantile Exchange (NYMEX)
• London Metal Exchange (LME)
• Chicago Board of Trade (CBOT)
• New York Board of Trade (NYBOT)
• Kansas Board of Trade
• Winnipeg Commodity Exchange, Manitoba
• Dalian Commodity Exchange, China
• Bursa Malaysia Derivatives exchange
• Singapore Commodity Exchange (SICOM)
• Chicago Mercantile Exchange (CME), US
• London Metal Exchange
• Tokyo Commodity Exchange (TOCOM)
• Shanghai Futures Exchange
• Sydney Futures Exchange
• London International Financial Futures and Options Exchange (LIFFE)
• Dubai Gold & Commodity Exchange (DGCX)
• Dubai Mercantile Exchange (DME)

Commodity exchanges over the world have evolved over time. Most of the exchanges we have today were incorporated during the late 19th and early 20th century. The first of these exchanges was in Chicago (US) called the Chicago Board of Trade (CBOT). In order to curb risk, the derivatives instruments came into effective practice during the 1970-80’s. This helped the expansion the commodity exchange and trading.

Through the ages, the evolution of the exchanges has been fuelled by the needs of businessmen and farmers. The objective was to gather buyers and sellers at a centralised location to ease the process of buying and selling commodities.

The exchange started our well in the US during the 1800s. Soon, however, there was a surplus of commodities at harvest time in some years and severe shortages during years of crop failure. The difficulties in transportation and the lack of proper storage facilities further aggravated the problem of demand and supply imbalance. The uncertain market conditions led farmers and merchants to enter contracts for forward delivery.

Corn was one of the first contracts to be traded on in 1851. The popularity and expansion of this commodity lead to approximately 82 merchants to form the Chicago Board of Trade (CBOT). The forward contracts did very well in the initial years but due to certain drawbacks such as dearth of standardization and non-fulfilment of commitments, the Board took initiatives to formalize trading in 1865.

Once formalization to place, the futures market began efficient methods of managing counter-party and price risks. The clearing house became the responsible for the performance of contracts and margin collections. As more trading started taking place, the trading practices also got refined leading to clear and established rules and regulations for the clearing and settlement houses.

In the early 1900s, new types of exchanges began appearing that were not based on agricultural products. These were instruments derived from financial products. Its significance grew at this time as the Bretton Woods System of fixed exchange rates had just ended in the 1970s. To hedge against risk, currency derivatives were introduced followed by other types of derivatives such as stock index futures.

Apart from the United States, one of the oldest exchanges is found in Argentina. Setup in 1854, The Buenos Aires Grain Exchange saw the early use of commodity risk-management instruments. This increased government intervention and policies impeded the development of futures markets. The government was unsuccessful in stabilizing the prices. After the 1980s, the country adopted liberalisation and globalisation policies that have help the revival of the commodity market in these countries.

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