Commodities are products traded solely on the basis of price. The products are undifferentiated products, goods or services that are not traded based on quality and features, just the price. Historically, commodities were items of value, of uniform quality in large quantities produced by different manufacturers. The points of any other producer were considered equivalent. Raw materials are defined by an underlying contract and standard, rather than the quality of the product.
Chicago is the birthplace of the first commodities market, way back in the 1840s. Farmers would bring their wheat on the market and exchange it for a good, hard cash. Futures developed from there. A farmer would contract with a dealer to a certain amount to produce him at a certain date at a fixed price. It was reassuring for both parties since the farmer knew what he was going to get paid and the dealer knew exactly what he was going to pay for these products.
This practice of trading commodities evolved over the years that followed. The farmer would decide not to sell the contract rights to another farmer, or is the dealer may decide that he did not want it no longer produce and then sell the contract to another dealer. Course included the supply and demand equation. If the harvests were poor, production would reach a much higher price and when the crops were abundant, a slimmed-down price prevails.
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