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Commodity markets (An Introduction)
The word commodity is a term with distinct meanings in business and in Marxian political economy. For the former, it is a largely homogeneous product, whereas for the latter, it refers generically to wares offered for exchange. Linguistically, the word commodity came into use in English in the 15th century, being derived from the French word "commodité" , meaning today's "convenience" in term of quality of services. The Latin root meaning is commoditas, referring variously to the appropriate measure of something; a fitting state, time or condition; a good quality; efficaciousness or propriety; and advantage, or benefit. The German equivalent is die ware, i.e. wares or goods offered for sale. The French equivalent is "produit de base" like energy, goods, industrial raw materials. Definition In the original and simplified sense, commodities were things of value, of uniform quality, that were produced in large quantities by many different producers; the items from each different producer are considered equivalent. It is the contract and this underlying standard that define the commodity, not any quality inherent in the product. One can reasonably say that food commodities, for example, are defined by the fact that they substitute for each other in recipes, and that one can use the food without having to look at it too closely. In classical political economy and especially Karl Marx's critique of political economy, a commodity is simply any good or service offered as a product for sale on the market. Some items are also seen as being treated as if they were commodities, e.g. human labour or labor power, works of art and natural resources, even though they may not be produced specifically for the market, or be non-reproducible goods. Marx's analysis of the commodity is intended to help solve the problem of what establishes the economic value of goods, using the labor theory of value. This problem was extensively debated by Adam Smith, David Ricardo and Karl Rodbertus-Jagetzow among others. Value and price are not equivalent terms in economics, and theorising the specific relationship of value to market price has been a challenge for both liberal and Marxist economists. Wheat is an example of a commodity. Wheat from many different farms is pooled. Generally, it is all traded at the same price; wheat from farm A is not differentiated from wheat from farm B. Some uniform standard of quality must necessarily be assumed. There may be various standards leading to different pools: one say for genetically modified wheat, and one for unmodified wheat. Failures to match the consumer's assessment of risk and usefulness for some purpose, can lead to lower prices or the necessity of dividing the market into different pools - a very major issue in agricultural policy. Characteristics of commodity In Marx's theory, a commodity has value, which represents a quantity of human labor. The fact that it has value implies straightaway that people try to economise its use. A commodity also has a use value, an exchange value and a price. It has a use value because, by its intrinsic characteristics, it can satisfy some human need or want, physical or ideal. By nature this is a social use value, i.e. the object is useful not just to the producer but has a use for others generally. It has an exchange value, meaning that a commodity can be traded for other commodities, and thus give its owner the benefit of others' labor (the labor done to produce the purchased commodity). Price is then the monetary expression of exchange-value (but exchange value could also be expressed as a direct trading ratio between two commodities without using money). According to the labor theory of value, product-values in an open market are regulated by the average socially necessary labour time required to produce them, and price relativities are ultimately governed by the law of value.
To understand the concept of a commodity, consider a chair. It is a commodity if the chair is a tradeable product of human work possessing a social use-value. By contrast, a fallen log of deadwood sat upon in the forest is not a commodity, as it was not produced by human work for the purpose of trade. A chair created by a hobbyist as a gift to someone is not a commodity. Nor is a chair a commodity (as a chair) if its only use would be as scrap firewood (unless one purchases a chair specifically to chop it up for fire wood). A chair that nobody could sit on has no use-value, and cannot be a commodity (unless it has an ornamental value, e.g. in a doll's house).
Commodity-trade historically begins at the boundaries of separate economic communities based otherwise on a non-commercial form of production. Thus, producers trade in those goods of which they have episodic or permanent surpluses to their own requirements, and they aim to obtain different goods with an equal value in return. Marx refers to this as "simple exchange" which implies what Frederick Engels calls "simple commodity production". At first, goods may not even be intentionally produced for the explicit purpose of exchanging them, but as a regular market for goods develops and a cash economy grows, this becomes more and more the case, and more and more production becomes integrated in commodity trade. Even so, in simple commodity production, not all inputs and outputs of the production process are necessarily commodities or priced goods, and it is compatible with a variety of different relations of production ranging from self-employment and family labour to serfdom and slavery. Typically, however, it is the producer himself who trades his surpluses. However, as the division of labour becomes more complex, a class of merchants emerges which specialises in trading commodities, buying here and selling there, without producing products themselves, and parallel to this, property owners emerge who extend credit and charge rents. This process goes together with the increased use of money, and the aim of merchants, bankers and rentiers becomes to gain income from the trade, by acting as intermediaries between producers and consumers. Modern Capitalism however is a mode of production based on generalised commodity production (Marx's German term is verallgemeinerte Warenproduktion), a universal market (see also capitalist mode of production). This means that both the inputs and the outputs of most production in society have become priced, tradeable goods (including the means of production and human labour power), and that what and how much is produced is largely determined by the response of producers to the "state of the market". Production is now explicitly engaged in for the purpose of market sales only, which implies both that its whole organisation is reshaped for this aim, and that people can meet their own needs by purchases in the market (rather than producing goods for their own consumption).
The 7 basic forms of commodity trade can be summarised as follows:
The reifying effects of universalised trade in commodities, involving a process Marx calls "commodity fetishism," mean that social relations become expressed as relations between things; for example, price relations. Markets mediate a complex network of interdependencies and supply chains emerging among people who may not even know who produced the goods they buy, or where they were produced. Since no one agency can control or regulate the myriad of transactions that occur (apart from blocking some trade here, and permitting it there), the whole of production falls under the sway of the law of value, and economics becomes a science aiming to understand market behaviour, i.e. the aggregate effects of a multitude of people interacting in markets. How quantities of use-values are allocated in a market economy depends mainly on their exchange value, and this allocation is mediated by the "cash nexus". In Marx's analysis of the capitalist mode of production, commodity sales increase the amount of exchange-value in the possession of the owners of capital, i.e., they yield profit and thus augment their capital (capital accumulation). Capitalists as businesspeople are interested in use-values primarily from the point of view of their money-making potential, i.e. their exchange-value; any useful object may in principle become an object of exchange and profit-making, although that may in practice take quite some doing. In simple terms, the primary concern of businesspeople here is commercial: the money they can obtain from owning or selling the commodity. But if an increase in capital-value is to be realised, it is essential that sales of commodities occur. Consequently, the accumulation of capital must go together with the expansion of market sales of commodities. In that sense, businesspeople cannot be indifferent to the use-values in which they trade.
In considering the unit cost of a capitalistically produced commodity (in contrast to simple commodity production), Marx claims that the value of any such commodity is reducible to three components equal to:
These components reflect respectively labour costs, the cost of materials and operating expenses including depreciation, and generic profit. In capitalism, Marx argues, commodity values are commercially expressed as the prices of production of commodities (cost-price + average profit). Prices of production are established jointly by average input costs and by the ruling profit margins applying to outputs sold. They reflect the fact that production has become totally integrated into the circuits of commodity trade, in which capital accumulation becomes the dominant motive. But what prices of production simultaneously hide is the social nature of the valorisation process, i.e. how an increase in capital-value occurs through production. Likewise, in considering the gross output of capitalist production in an economy as a whole, Marx divides its value into these three components. He argues that the total new value added in production, which he calls the value product, consists of the equivalent of variable capital, plus surplus value. Thus, the workers produce by their labor both a new value equal to their own wages, plus an additional new value which is claimed by capitalists by virtue of their ownership and supply of productive capital. By producing new capital in the form of new commodities, Marx argues the working class continuously reproduces the capitalist relations of production; by their work, workers create a new value distributed as both labour-income and property-income. If, as free workers, they choose to stop working, the system begins to break down; hence, capitalist civilisation strongly emphasizes the work ethic, regardless of religious belief. People must work, because work is the source of new value. Most types of environmental economics consider the shift to measuring them inevitable, arguing that reframing political economy to consider the flow of these basic commodities first and foremost, helps avoids use of any military fiat except to protect "natural capital" itself, and basing credit-worthiness more strictly on commitment to preserving biodiversity aligns the long-term interests of ecoregions, societies, and individuals. They seek relatively conservative sustainable development schemes that would be amenable to measuring well-being over long periods of time, typically "seven generations", in line with Native American thought. Examples
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. Some argue that this is not so much a commodity market but more of an assassination market speculating on the survival (or not) of Saddam or other leaders whose personal decisions may cause oil supply to fluctuate by military action. The oil market is, however, an exception. Most markets are not so tied to the politics of volatile regions - even natural gas tends to be more stable, as it is not traded across oceans by tanker.
"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? What is the status of El Niño?"
"Economy is three fifths of ecology" argues Mike Nickerson, one of many economic theorists who holds 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 United States, e.g. SO2. This is in effect a "negative commodity", a right to throw something away. In this market, the atmosphere's capacity to absorb certain amounts of pollutants is measured, divided into units, and traded amongst various market players. Those who emit more SO2 must pay those who emit less. Critics of such schemes argue that unauthorized or unregulated emissions still happen, and that "grandfathering" schemes often permit major polluters, such as the state governments' own agencies, or poorer countries, to expand emissions and take jobs, while the SO2 output still floats over the border and causes death. In practice, political pressure has overcome most such concerns and it is questionable whether this is a capacity that depends on U.S. clout: The Kyoto Protocol established a similar market in global greenhouse gas emissions without U.S. support.
A very substantial part of the anti-globalization movement opposes the commodification of currency, national sovereignty, and traditional cultures. The capacity to repay debt, as in the current global credit money regime anchored by the Bank for International Settlements, does not in their view correspond to measurable benefits to human well-being worldwide. They seek a fairer way for societies to compete in the global markets that will not require conversion of natural capital to natural resources, nor human capital to move to developed nations in order to find work. The United Nations, seeking to respond to such concerns, suggested three schemes to overcome these inequities: UNILETS was a simple extension of LETS community money, that would let a community interact with the hard currency of its nation and other nations more as a whole, with less ability for global currency fluctuations to affect local trade and power relations 'within' communities, while clearing via UNILETS would provide a more vigorous competition 'between' communities with different LETS schemes. In effect, this would drive currency markets down into the local level, and permit communities, even villages, to build up substantial local advantages, protecting uniquely well positioned enterprises, in a microcosm of the way that the developed nations protected key industries (autos, steel) as they rose.
Other, 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.
The green economists and the more conservative environmental economics argue that not only natural ecologies, but also the life of the individual human being is treated as a commodity by the global markets. A good example is the IPCC calculations cited by the Global Commons Institute as placing a value on a human life in the developed world "15x higher" than in the developing world, based solely on the ability to pay to prevent climate change.
Accepting this result, some argue that to put a price on both is the most reasonable way to proceed to optimize and increase that value relative to other goods or services. This has led to efforts in measuring well-being, to assign a commercial "value of life", and to the theory of Natural Capitalism - fusions of green and neoclassical approaches - which focus predictably on energy and material efficiency, i.e. using far less of any given commodity input to achieve the same service outputs as a result. Indian economist Amartya Sen, applying this thinking to human freedom itself, argued in his 1999 book "Development as Freedom" that human free time was the only real service, and that sustainable development was best defined as freeing human time. Sen won The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1999 (sometimes incorrectly called the "Nobel Prize in Economics") and based his book on invited lectures he gave at the World Bank.
Markets for trading commodities can be very efficient, particularly if the division into pools matches demand segments. These markets will quickly respond to changes in supply and demand to find an equilibrium price and quantity. Commodities exchanges include:
The economic impact of the development of commodity markets is hard to over-estimate. Through the 19th century "the exchanges became effective spokesmen for, and innovators of, improvements in transportation, warehousing, and financing, which paved the way to expanded interstate and international trade."
Commodity money and commodity markets in a crude early form are believed to have originated in Sumer where small baked clay tokens in the shape of sheep or goats were used in trade. Sealed in clay vessels with a certain number of such tokens, with that number written on the outside, they represented a promise to deliver that number. This made them a form of commodity money - more than an "I.O.U." but less than a guarantee by a nation-state or bank. However, they were also known to contain promises of time and date of delivery - this made them like a modern futures contract. Regardless of the details, it was only possible to verify the number of tokens inside by shaking the vessel or breaking it. At which point, the number or terms written on the outside originally became subject to doubt. Eventually the tokens disappeared, but the contracts remained on flat tablets. This represented the first system of commodity accounting. However, the Commodity status of living things is always subject to doubt - it was hard to validate the health or existence of sheep or goats. Excuses for non-delivery were not unknown, and there are recovered Sumerian letters that complain of sickly goats, sheep that had already been fleeced, etc. If a seller's reputation was good, individual "backers" or "bankers" could decide to take the risk of "clearing" a trade. The observation that trust is always required between market participants later led to credit money. But until relatively modern times, communication and credit were primitive. 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, trusted by many peoples to manage and mediate trade and commerce.
Whole developing nations may be especially vulnerable, and even their currency tends to be tied to the price of those particular commodity items until it manages to be a fully developed nation. For example, one could see the nominally fiat money of Cuba as being tied to sugar prices, since a lack of hard currency paying for sugar means less foreign goods per peso in Cuba itself. In effect, Cuba needs a hedge against a drop in sugar prices, if it wishes to maintain a stable quality of life for its citizens.
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.
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. These are more than one-to-one representations of units of a given type of commodity, and represent more than simple futures contracts for future deliveries. These serve a variety of purposes from simple gambling to price insurance. The underlying of futures contracts are no longer restricted to commodities. Commodity markets and protectionism There are signs, however, that this regime is far from perfect. U.S. trade sanctions against Canadian softwood lumber (within NAFTA) and foreign steel (except for NAFTA partners Canada and Mexico) 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.
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