History of Commodity Trading
The history of commodity trading as we know it today is intertwined with the history of futures markets. These first appeared to protect agricultural producers as well as consumers against financial risks that came together with harvesting and selling agriculture products.
In the 1840s, railroad expansion towards the East as well as the development of telegraph lines turned Chicago into a main trade center. The same period saw the invention of McCormick reaper which bolstered the production of wheat. Farmers would come to Chicago to sell their wheat to dealers who then distributed it throughout the country. Since there were few storage options in the city and there were no set regulations to control the quality and thus the price of the grain, farmers were highly dependent on the dealers' good will.
With the establishment of the Chicago Board of Trade, the world's first official futures exchange, 1848 marked a turning point in the history of commodity trading. Farmers and dealers could exchange cash for wheat. The futures contracts developed as both parties committed in a written contract to respectively deliver and buy grain. The first of what was then called "to arrive contracts" were flour, timothy seed and hay, which came into use in 1849."
Those contracts also served as collaterals to borrow money from banks. Dealers soon started to sell their contracts to other dealers and farmers passed their orders on to other agriculture producers. It was not long before speculators also entered the commodity trading market, hoping to make substantial profits from buying and selling at a higher price.
In 1898, the Chicago Butter and Egg Board in 1898 was founded for the trade of eggs and butter. It later became the major futures exchange in the U.S., known today as the Chicago Mercantile Exchange. Other commodities such as the National Raw Silk Exchange, the Rubber Exchange of New York and the National Metal Exchange appeared in the following decade. Modern day exchanges are the fruit of the merger of these first commodity exchanges.
The Commodity Exchange Act
In 1936, the U.S. Government passed the Commodity Exchange Act to regulate futures and commodities trading. Like its predecessor, the Grain Futures Act of 1922, the Commodity Exchange Act was designed to avoid cornering agriculture markets and reduce speculation and stabilize prices. The Commodity Futures Trading Commission (CFTC) was founded in 1974 for further regulation. This independent body had exclusive jurisdiction over commodity options and futures.
It also introduced under the term of "commodity" other goods as well as "services, rights, and interests in which contracts for future delivery are presently or in the future dealt in." (To learn more about the definition of commodities, see our What Are Commodities section.) The CFTC sets daily price ranges to contain price volatility. It created a self-regulatory body in 1982, the National Futures Association (NFA), which acts as an overseer for the futures and commodities industry and as a mediator for consumer complaints.