Agribusiness Library

1
Agribusiness Library
Lesson 060059
Commodity Exchanges and
Trade Centers part 1
2
Objectives

• 1. Explain the history of commodity exchanges.

3
Terms

• cash transactions
• clearinghouse
• forward contracts
• miniature contracts
• time contracts
• to-arrive contracts
• trade centers

4
What is the history of commodity exchanges?

• Futures trading began in the 17th century in
  Japan with the use of rice futures. Maintaining a
  year-round supply of seasonal products and
  agriculture crops was difficult, so futures
  trading became a well-known tool to solve these
  problems. In Japan, rice was stored in warehouses
  and would be available for future use.

5
What is the history of commodity exchanges?

• Warehouse holders would sell receipts against the
  stored rice. The rice tickets became a kind of
  general commercial currency. Rules were developed
  and were eventually similar to the current rules
  of American futures trading.

6
What is the history of commodity exchanges?

• A. Trade centers are locations where resources
  can be bought or traded. Historically, the first
  cities were located because they were able to
  provide people with necessary elements (e.g.,
  water, land, and protection) for survival.

7
What is the history of commodity exchanges?

• A. Trade Centers.necessary elements (contd)
• 1. Water is the first necessary element. If
  there is water available in the form of a
  flowing source or an underground source, people
  can access it easily. This allows people to
  have a constant source of water for
  transportation, cooking, and various other
  uses. Water is necessary for survival, so it is
  important to have a dependable source.

8
What is the history of commodity exchanges?

• A. Trade Centers.necessary elements (contd)
• 2. Accessible farmland was important in the
  early development of cities. To survive, a city
  must be able to feed its people. If farmers
  have nearby farmland, they will be able to
  produce food for cattle and people and
  distribute it easily.

9
What is the history of commodity exchanges?

• A. Trade Centers.necessary elements (contd)
• 3. Protection is another consideration. People
  need protection from the elements of nature, so
  they need to settle in an area that is
  naturally protected or that has the resources
  to build protective areas. Many cities were
  formed in hillsides and heavily wooded areas
  for this reason.

10
What is the history of commodity exchanges?

• B. As more cities were formed, the location of
  other trade centers became a consideration.
  New cities or trade centers were built in areas
  between established trade routes. As a result,
  the existing trading was available.
• 1. Early markets were based on cash
  transactions. Cash transactions are sales made
  when the product is delivered and paid for
  immediately. They were often referred to as
  spot transactions because the buyer was
  able to visually inspect the product before
  taking immediate possession.

11
What is the history of commodity exchanges?

• 2. As trading centers became more established,
  many changes started to occur. Time contracts
  (agreements between buyers and sellers to trade
  before the product could be delivered) were
  used.
• a. The price was usually negotiated in advance
  of delivery when using time contracts. Many of
  these sales transactions created problems
  because when the product was finally
  delivered, there were disputes about quality,
  quantity, price, and credit.

12
What is the history of commodity exchanges?

• 2. As trading centers became more established
  (contd)
• b. To solve these problems, rules were
  established and became codified bylaws in
  Europe in the 1300s. Current exchange settings
  continue to conduct business with strict codes
  to create fairness between buyers and sellers.

13
What is the history of commodity exchanges?

• 3. As more trading took place, more problems
  arose.
• a. Many of the trading centers did not have
  adequate storage and transportation for
  growing deliveries.
• b. During different seasons, certain products
  developed shortages because of growing seasons,
  resulting in increased prices. Without
  adequate storage space, it was hard to avoid.
  This situation encouraged the increased use of
  futures contracts. The two common types were
  to-arrive and forward.

14
What is the history of commodity exchanges?

• The two common types were to-arrive and forward.
• To-arrive contracts state that delivery will be
  in a few days with the title passing from the
  seller to the buyer.
• Forward contracts state that delivery will be in
  a few days, but the title is not passed until
  delivery occurs.

15
What is the history of commodity exchanges?

• 4. Storage of products became a big business.
  Many people built large storage facilities to
  store products and distribute them over a period
  of time. Because roads were being built,
  transportation was less of a problem, and
  distribution over a longer period of time
  helped to lower the price difference throughout
  the year.

16
What is the history of commodity exchanges?

• C. In 1848, the Chicago Board of Trade (CBT) was
  founded by 82 businessmen. They established
  rules to make traders accountable to the terms
  of the contracts being traded. The newly
  founded CBT also allowed a consistent place for
  people to trade. The New York Coffee, Cotton,
  and Produce Exchanges were started in the
  1870s and 1880s.

17
What is the history of commodity exchanges?

• 1. In 1871, the CBT was destroyed in the Great
  Chicago Fire. It is believed that modern day
  contracts were traded as early as 1859, but
  the records were destroyed in the fire.
• 2. The CBT started a concept that is still used
  today. To buy a contract, a portion of the
  value was paid to insure that buyers would not
  back out of their contracts. With this new
  concept in place, defaulting on contracts
  meant losing the deposit money and the
  possibility of being sued in court.

18
What is the history of commodity exchanges?

• 3. In 1926, the CBT established a clearinghouse
  for futures trades. The clearinghouse is a
  third party between traders that insures
  performance from all involved parties. Since
  the clearinghouse was established, no contracts
  have caused any trader to lose money because of
  the default of another contracting party.

19
What is the history of commodity exchanges?

• 4. Early on, the CBT dealt with the trading of
  grains (e.g., oats, wheat, and corn). After
  World War II, many other contracts were added.
  Iced broilers, gold, and silver were traded
  along with the grains. In 1975, the first
  mortgage interest rate contracts were traded.
• 5. Currently, the CBT has contracts for gold,
  silver, U.S. Treasury bonds, U.S. Treasury
  notes, wheat, corn, oats, rough rice, and
  others. Anyone who can put a deposit down for
  part of the contract price is able to buy and
  sell at the CBT.

20
What is the history of commodity exchanges?

• D. The Chicago Mercantile Exchange (CME) began
  as the Chicago Butter and Egg Board in 1898.
  In 1919, the name was changed to the Chicago
  Mercantile Exchange.
• 1. The first butter and egg contracts were
  traded there in 1919. Live cattle and hogs
  were added in 1964 and 1966, respectively.
  Many other contracts have been traded,
  including onions, potatoes, and scrap iron.

21
What is the history of commodity exchanges?

• 2. In 1972, the CME formed the International
  Monetary Market to trade foreign currencies
• a. As the exchange rates fluctuate in an
  uncertain world economy, international
  investors use the trading of foreign
  currencies for protection and profit.
• b. Some currencies the CME trades are the
  Japanese yen, Brazilian real, French
  franc, and the Mexican peso.

22
What is the history of commodity exchanges?

• E. Midamerica Commodity Exchange (MCE) After
  the Civil War ended in 1868, the MCE was
  started. It specialized in miniature contracts
  contracts like other exchanges trade only
  smaller. For instance, instead of trading a
  corn contract for 5,000 bushels at another
  exchange, someone could trade for 1,000
  bushels. The MCE merged with the CBT in 1986.

23
What is the history of commodity exchanges?

• F. Minneapolis Grain Exchange (MPLS) The MPLS
  was organized in 1881 to trade spring wheat
  futures and options. It is also a large cash
  wheat market. It currently trades barley, white
  wheat, spring wheat, white shrimp, and black
  tiger shrimp.

24
What is the history of commodity exchanges?

• G. Kansas City Board of Trade (KCBT) The KCBT
  was formed in 1856. It started the first stock
  index futures and also trades western natural
  gas.
• H. New York Mercantile Exchange (NYME) The
  NYME was founded in 1872. It has been the
  major force in developing energy-based futures
  and options. It trades platinum, silver,
  crude oil, unleaded gasoline, propane,
  electricity, and others.

25
What is the history of commodity exchanges?

• I. New York Cotton, Citrus, Finex, and NYFE
  Exchange (NYCE) The NYCE was formed in 1870.
  The citrus trading was added in 1966 to trade
  frozen orange juice concentrate. In 1985,
  financial futures and options were added.

26
What is the history of commodity exchanges?

• J. The New York Coffee, Sugar, and Cocoa
  Exchange (CSCE) The CSCE was started in 1882.
  Sugar was added in 1914, and it merged with the
  New York Cocoa Exchange in 1979. Current
  trading includes sugar, coffee, cocoa, milk,
  cheese, butter, and others.

27
Review

• What were the main resources at the first trade
  centers?
• What is a time contract and why was it needed?
• What is a clearinghouse? Who established the
  first clearinghouse for futures trades?
• What was the major force in developing
  energy-based futures and options?

28
Agribusiness Library
Lesson 060059
Commodity Exchanges and
Trade Centers part 2
29
Objectives

• 2. Identify and describe the major commodity
  exchanges in the United States and around the
  world.
• 3. Distinguish between speculators and hedgers,
  and define related terms.
• 4. Describe and demonstrate hand signals used on
  commodity trading floors.

30
Terms

• day traders
• electronic traders
• floor brokers
• floor traders
• hedgers
• open outcry
• positions traders
• scalpers
• speculators

31
What are some of the major commodity exchanges?

• The largest exchange in the world was formed in
  2007 when The Chicago Mercantile Exchange (CME)
  and The Chicago Board of Trade (CBOT) merged.
  This formed the CME Group Inc., which is now the
  worlds most diverse exchange. The global offices
  are in Chicago, New York, Houston, Washington
  D.C., London, Hong Kong, Singapore, Sydney, and
  Tokyo.

32
What are some of the major commodity exchanges?

• A. The CME trades futures on just about anything.
  Products from all major asset classes are
  available for futures trading foreign
  currencies, stock index products, interest rate
  and Treasury products, commodities, energy,
  metals, and weather and housing indexes. CME
  Globex is an electronic trading platform that
  offers trading continuously.

33
What are some of the major commodity exchanges?

• B. The New York Mercantile Exchange (NYMEX)
  became part of the CME Group Inc. during 2008
  and was to be fully integrated in 2009. The
  NYMEX was the worlds largest physical
  commodity future exchange. The New York
  Mercantile Exchange and Commodity Exchange
  (COMEX) were separate and had merged.

34
What are some of the major commodity exchanges?

• C. Trading takes place at several locations
  around the world. The world of trading is
  rapidly changing with new electronic movements.
  However, there are a few minor exchanges
  compared to the CME Group Inc.
• 1. The Winnipeg Commodity Exchange is in Canada.
  In 1999, it was the 41st largest futures and
  options exchange in the world.

35
What are some of the major commodity exchanges?

• C. Trading takes place at several locations
  (contd)
• 2. Initiatives in Mexico to develop an exchange
  have been introduced. However, no organized
  commodity futures exchange has yet been
  created.

36
What are some of the major commodity exchanges?

• C. Trading takes place at several locations
  (contd)
• 3. The Tokyo Commodity Exchange Inc. (TOCOM) is
  the largest exchange in Japan. This exchange
  group has undergone major consolidation
  throughout the past 10 years.

37
What are some of the major commodity exchanges?

• C. Trading takes place at several locations
  (contd)
• 4. The London Commodity Exchange (LCE) merged
  with London International Financial Futures
  Exchange (LIFFE) in 1996. Currently, both are
  a part of the NYSE Euronext Group.
• a. The NYSE Euronext was created in 2007 with a
  merger between the NYSE Group (parent of the
  New York Stock Exchange) and Euronext.
• b. The NYSE Euronext provides exchanges in five
  countries. It offers trading,
  clearing/settlement in cash equities, equity
  interest, commodities, and currency/bonds.

38
What are some of the major commodity exchanges?

• D. The Commodity Futures Trading Commission
  (CFTC) was formed in 1974 to regulate all
  trading. It insures that business is legal and
  professionally carried out with all the
  exchanges.
• 1. The Commodity Futures Trading Commission is
  regulated by the Department of Agriculture.
• 2. It regulates the futures exchanges, brokerage
  firms, money managers, and commodity advisors.

39
What is the difference between speculators and
hedgers? What are some of the
related terms?

• The participants within futures and options
  trading are important to understand. The
  following is a brief description of the wide
  variety of participants

40
What is the difference between speculators and
hedgers? What are some of the
related terms?

• A. Hedgers can be agriculture producers or
  processors, mining companies, banks, and
  others who use futures or options as an
  alternative for buying or selling the actual
  commodity. Hedgers buy or sell contracts to
  offset risk associated with the changing prices
  within the cash market. These participants, a
  hog producer, a grain farmer, or a food
  processing company will manage price risk
  while having the ultimate goal as long-term
  price certainty.

41
What is the difference between speculators and
hedgers? What are some of the
related terms?

• B. Speculators can be investors, hedge-fund
  managers, banks, and others who accept price
  risk. They try to make money by buying and
  selling futures and options. Speculators try to
  predict what the markets will do (go up or
  down), the movement of the market, and the
  price direction. Speculators also provide the
  market liquidity.

42
What is the difference between speculators and
hedgers? What are some of the
related terms?

• B. The speculator group has grown and changed
  due to the introduction of electronic trading,
  which allows for more of a diverse population
  of traders instead of the traditional high
  net-worth individuals. The different types of
  speculators are the following
• 1. Position traders are individuals who hold on
  to a position for several days or weeks and
  tend to have an opinion about the general price
  trends.

43
What is the difference between speculators and
hedgers? What are some of the
related terms?

• B. The different types of speculators (contd)
  2. Day traders are individuals who close out
  positions by the end of the trading day. This
  allows for no overnight margin calls.
• 3. Scalpers are the traders who hold on to
  positions for a short time. This time period
  can be within a few minutes or even seconds,
  which has become a trend due to the increase of
  electronic traders.

44
What is the difference between speculators and
hedgers? What are some of the
related terms?

• C. Floor traders are speculators who are buying
  and selling contracts on the floor.
• D. Floor brokers are people who serve as agents
  for customers.
• E. Electronic traders are individuals who rely on
  the information provided electronically to buy
  or sell futures and options.

45
What common hand signals are used on the
commodity trading floor?

• A few common hand signals are used in trading by
  floor traders. These signals allow traders to
  communicate during open outcry (trading is done
  publicly, so each trader has a fair chance to
  buy and sell).

46
What common hand signals are used on the
commodity trading floor?

• A. To buy contracts, the hand should be in a
  position with the palms shown inward and the
  number of fingers shown indicating how many
  contracts are desired for purchase. For example,
  three fingers should be shown with the palm of
  the hand in to buy three contracts.

47
What common hand signals are used on the
commodity trading floor?

• B. To sell contracts, the hand should be in a
  position with the palms shown outward and the
  number of fingers shown indicating how many
  contracts are desired for purchase. For
  instance, four fingers should be shown with the
  palm of the hand out to sell four contracts.

48
What common hand signals are used on the
commodity trading floor?

• C. If the price needs to be shown, the floor
  trader will exhibit his or her fingers in a
  sideways motion.

49
Review

• What is the largest exchange in the world? When
  was it created?
• When and why was the Commodity Futures Trading
  Commission developed?
• How has electronic trading changed the
  speculator group?
• Demonstrate the hand signals learned in this
  lesson.