Commodities for Every Portfolio: How You Can Profit from the Long-Term Commodity Boom

Chapter 2

From the Farmer to You: How the Futures Markets Work

Reason is the main resource of man in his struggle for survival.

—Ludwig Von Mises

While the commodity futures markets might be new and exotic to most investors, they are by no means new to the financial world. Commodity futures have been around for hundreds of years, providing price stability for goods, a central exchange for trade, and investment opportunities for both hedgers and speculators. Understanding the history and characteristics of the commodity futures market is important if you are looking to fully grasp the dynamics of this bull market. This chapter focuses on the history, makeup, and opportunities that exist in the futures market.

A Brief History of the Commodity Futures Market

Most investors will be surprised to learn that the first recognized commodity futures contract actually began over 300 years ago, near Osaka, Japan. The Dojima Rice Exchange was established in 1697 with the purpose of stabilizing the price of rice, since the country was constantly at war. Not knowing what the price of rice would be several months down the line, merchants and farmers established standardized contracts between each other, known as rice coupons. Each coupon represented a specific quality and quantity of rice that could be redeemed at a local warehouse for a certain price. Farmers were now able to know how much they would get for their crop, and merchants would be able to count on paying a certain amount for the rice, ...