If you will go to the market, you will find hundreds to thousands of different items sold everyday. You can purchase raw foods such as fresh meat and fish, various household items, clothes, pairs of shoes, and other products by paying a particular amount of money. Once you have obtained the item that you want and the seller received a certain amount of money from you, both of you constituted a trade.
In economics, trade is defined as the voluntary exchange of goods or services within an agreed exchange rate. The amount of money that you paid to the vendor in exchange for the item you want to obtain determines the agreed exchange rate of that item between you and the seller. In other words, the involvement of money (paper money or credit) as the trading medium further simplified the trade by establishing an agreed rate where the items will be traded.
Trade exists for various reasons. Because of the partition of labor and specialization, most individuals focused on the small aspect of production and later on trading their products for other products produced by other regions. Whatever reason it may be, the existence of trade greatly contributes to the development of the economy of a particular area or region.
In addition, trade is already an integral part of the history, where it is believed to have taken place throughout the recorded human history. Long before the invention of modern-day currency as the trading medium, trade is conducted on different parts of the world, particularly in the cradle of early civilizations. There is said to be an evidence of trade during the Stone Age.
Furthermore, various long-range trade routes are established in the 3rd Millennium, B.C wherein the Sumerians (one of the natives of Mesopotamia) traded with the Harappan civilizations situated in the Indus Valley. Phoenicians were considered to be sea traders, where they have routes across the Mediterranean Sea and established trade colonies on some parts of the European continent.
Thus, it leads to the existence of various trading markets at present. There you have the stock market, the foreign currency market, and other markets that offer trade of different items. One of the most popular markets, especially for most of producers, is the commodities trading market.
You will be able to understand commodities trading better if you know well what is being traded. In commodities trading, commodities are commonly traded. According to Karl Marx, a commodity is “any external object or thing, which through its qualities satisfies human needs of whatever kinds”. When he speaks of commodities, he always points out the “physical properties” of the commodity, which he associates with the use value of that object.
Therefore, commodities trading is the trade of various commodities and derivative products. Aside from the physical trade of the products, it is also the trade of the futures contract (the purchase or selling of an object at a particular date in the future within an agreed price) of the commodity to be traded.
Commodities trading works this way: For instance, you are a rice farmer. You can sell a future contract on your rice which will not be harvested for several months. You will be given an assurance that you will be paid for the agreed price of your product when you have delivered to your client. In the same manner, your client will purchase the futures contract now and will be given a guarantee that the price of your rice will not increase when it is delivered.
In other words, both of you will benefit from the commodities trading—it will protect you from any price drop that can happen and your client from any possible price increase of the commodity he wants to obtain in the future. Commodities trading is simply a guarantee and protection for any market instability that may happen in the near future.