Let’s discuss commodities; with the latest Enron situation, it is important to understand the way things work. A commodity is anything useful, especially a transportable agricultural product or mining product. This comes from the Latin word “commoditas” meaning roughly advantage, convenience. So then what is a commodity? Well we consider Gold, Silver, wheat, corn, pork bellies, coffee, etc all commodities. If you look in the back of the WSJ or Investors Business Daily you will see a listing of all the commodities traded on the commodities exchange. Enron made some errors no doubt, but let’s not judge all commodity markets in haste.
Commodity trading works best when there is a stable instrument of trade. Sometimes the instrument of trade is actually the commodity. If you looked most countries of the world today you would find that there are three basic instruments of trade; money, as in currency, precious metals and gems, drugs; like cocaine, opium, and arms, like grenade launchers, RPGs, bullets, machine guns, WMD, tanks, and surface to air handheld rockets. Yes, this can have horrible human rights issues, but we are discussing this from a theoretical standpoint, not condemning the obvious problems with mankind.
Many countries without a stabilized currency are trading everything in arms and drugs. Even human sex slaves and other unfortunate means; a travesty, which cannot be argued. The commodity trading of cultural products is of necessity to stabilize prices and to feed the world and help in the planning and allocation of funds for future needs. If a farmer cannot make an honest living farming a field then microeconomics tells us that eventually he’ll exit the marketplace. When there is a need for a product such as corn, sugar, oil, etc. and that need is so important to the people buying it, then they will be willing to pay in advance a certain price for it, so they can guarantee they will get it. For instance Kellogg’s needs sugar to fulfill the needs of their customers who will buy pop tarts. If they do not get the sugar the cannot produce the pop tarts. Everyone loves pop tarts, but if Kellogg has sugar than they cannot make the pop tarts to sell you at Wal-Mart. Kelloggs can due to commodities markets buy in advance and at a known price prior to the harvest of the sugar necessary to produce my Brown Sugar Cinamon Pop Tarts. Think about it.